Tectonic shifts are occurring in the economy, financial markets, geopolitical strategy, and social policy. The ultimate test may well lie in managing the exceedingly complex interplay among these developments. Is China’s leadership up to the task, or has it bitten off too much at once?

As the Fed is paving way for the first rate hike in a decade, the world economy prepares for the greatest shift of capital flows in five years. Recent market turmoil in the U.S. and China heralds the transition.

Although the degree of depreciation could be determined by how the Chinese government weighs the advantages and disadvantages of RMB exchange-rate movement, market forces play a more important role, and investors must pay close attention to this.

The tremendous volatility of China’s markets has led to direct and indirect government involvement, which is ultimately a short-term fix. Beijing must re-commit to the opening of its financial markets and to a deepening of capital market reforms.

China’s current stock market volatility, though not necessarily desirable, represents a natural market correction from its June 12 peak. The economy has undergone a standard cycle of displacement, overtrading, monetary expansion, discredit, and revulsion, all in a matter of less than 12 months.

Quantitative easing (QE) is utilized by U.S. and European banks to manipulate asset prices and provide stimulus to asset-dependent economies. China’s market manipulation is no less blatant, but is distinct in its aim to promote new markets.

Despite the recent unprecedented slump in the stock market, the Chinese government’s strategy in developing the equity market has not changed, and Beijing will continue to foster a healthy development of the stock market through market-oriented reform policies. That means the surging trend in the Chinese stock market will continue in the second half of the year.

The government’s aggressive response in stabilizing “Uncle Xi’s bull market,” has highlighted the political nature and disconnect between the stock market and overall economic health. The government must decide whether to continue its efforts to open the capital account and liberalize the exchange rate.

The A-share market has been undergoing an unprecedented plunge since mid-June, with the benchmark Shanghai Composite Index having declined about 30% and the capitalization of listed companies having shrunk by about 20 trillion yuan (about $3.23 trillion).

Not so long ago, China’s A-share index lingered around 2,000. Before last week’s plunge, it closed at 5,200. In the short-term, the market will remain volatile, but just as China’s economy hasn’t emulated typical market fluctuations, its potential should prevail in the long term.