The big question is not why China is being tested with the worst capital markets crisis since the communist giant embraced its version of "capitalism" - but rather why it has taken so long.

John Key's Government is taking a measured response to the current market turmoil in China.

It's a moot point that the very policies which China deployed at the time of the global financial crisis - such as making massive injections of liquidity through fiscal and monetary policies to hold at bay a domestic economic meltdown - ended up (in part) fuelling the country's property bubble and ultimately the rampant sharemarket.

Those policies also sustained the New Zealand economy as Chinese consumers paid well over domestic prices for safe Kiwi milk powder and infant formula products, and other Chinese companies took equity stakes in vulnerable blue chip companies that could not get investment after Lehman Brothers collapsed.

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If consumer demand for NZ agriculture products and for tourism experiences in New Zealand diminishes in the face of domestic uncertainty in China there will be a spillover effect.

Market "booms and busts" go hand in hand with the dismantling of command economies. Here in New Zealand investors went on a rollicking gallop when markets were liberalised in the mid-1980s, then came crashing to earth when prices plunged overnight in the global share market crash.

Chinese by the millions also took to share speculation, piling into a bubbling market that even weeks ago some commentators claimed was just starting its bull run.

Many had their "nest eggs" wiped out through the plunging markets. For them President Xi's "China Dream" is starting to look as if it will be merely that - a dream.

Now the party has slowed.

Hardest hit are the margin traders. They are having to sell assets - including homes - to raise cash to over their bets.

About US$3 trillion ($4.4 trillion) - the Shanghai Index lost 32 per cent of its value in just three and a half weeks - had been wiped before the markets firmed late in the week.

Xi Jinping has built an image of invincibility around his Administration. But we are now starting to get an insight into the limits of central power.

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Xi has made enemies in the rarefied heights of Chinese power. He had the support of the people as he brought down those who had corruptly abused their power.

But in a mass society like China it is important to maintain the confidence of the middle class that their years of sacrifice is not now in jeopardy.

This will not be the only major crisis that China's top brass face as they continue their rapid campaign to complete the liberalisation of the Chinese economy.

But among the volatility and uncertainty there is upside.

There is something marvellously irrational that allows the human spirit to become excited by the possibilities of gaining immense wealth fast by investing in a roaring sharemarket or property market.

It may be counter-intuitive but in many respects the rational approach is to invest in a market that is coming into full roar knowing that there is the possibility to make in mere months the wealth that might otherwise take a lifetime through sensible investing.

The boom and bust cycle is a short one. The trick is picking when to climb on board and when to take profits and get out.

Many of the Aucklanders and foreigners who have invested in the Auckland housing market get this. They have looked at the buying pressure and long-run investment trends and bought in. Some will be considering repatriating cash to meet their liquidity demands within China.

China - just like the US and countries like New Zealand who have been through market collapses - will ultimately come back.

But Xi will have to orchestrate well his evolving strategy so that his Administration stays in the box seat. The moves the central Government has implemented in the past week belong more to the command control era than the positioning Xi is seeking for China in the big game of international geopolitics.

Xi will find there is a limit to how much debt exposure the Chinese State can shoulder to keep markets floating.

His dilemma is the very steps he took to rid the Administration of those officials who had overstepped the mark has left him relatively isolated. He has sufficient power vested in him to give him the authority to quell dissent. But there are risks that domestic unrest will build.

For New Zealanders there is an element of deja vu. Back in the 1980s we also overstepped the bounds of what was sustainable. It was a sharp lesson. China will face similar lessons in coming years. But there is no reason to hit the panic button.