Capital flight wrecks investor certainty.

Whether or not the Chinese government can calm global investors' fears remains to be seen. Previous direct interventions in the stock market are associated with positive effects. However, the direct interventions themselves do not resolve the underlying fundamentals and risks not only being a band-aid on a gushing wound but the cause of potential capital misallocation as well, as seen in Japan, which has also directly intervened in equity markets in the past.

Direct interventions in the foreign exchange market may be unsustainable, given the fundamental dislocations in monetary policy and economic conditions between China and the rest of the world. Even within Asia, data from LSEG Workspace shows out of 12 countries, China is the only one cutting interest rates.

China's challenge is to turn from a government-directed investment-driven economic growth model to a more balanced growth model from private sector investment and domestic consumption.

The more painful but sustainable solution would be to reduce the underlying policy risks. Implementing transparent regulations can instill confidence and address at least the policy-driven concerns behind the capital flight. The stability in regulatory frameworks can reassure foreign investors.