Six Facts About China's Stock-Market Crash You Need To Know Now

Photo: Courtesy of Ann Lee.
More Chinese people have been investing in the economy than ever before. And, generally speaking, that is a good thing. Economists credit the growth of China's middle class — and thus, its increased participation in the market— as part of what has helped the country's stock exchange reach record heights. But that increased participation is also linked to the Chinese market's crazy fall that began in July and only seems to be getting worse.

The ins and outs of the crash are difficult even for economists to understand. At first, it seemed that the turmoil would remain in the purview of professional investors and people with tons and tons of money to spend. Now, there's talk of rollover to emerging markets, like Russia's or Brazil's.

What we want to know, of course, is how China's crash will affect what we have in our pockets. Is this crazy, headline-dominating downturn something we need to consider when we think about our personal finances for the foreseeable future?

Professor Ann Lee, a leading expert on the Chinese economy who has taught at New York University and China's Peking University, stepped in to help Refinery29 readers make sense of the mess.

The economy is what happens in everyday life.... What happens in the stock market is just a bunch of traders who decide what [price] they want to buy a stock at.

Ann Lee, New York University finance and economics professor
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Fact No. 1: The Chinese economy is not the same as the Chinese stock market.

"The economy is what happens in everyday life, in all of your transactions," Lee tells Refinery29. "You go out and you buy a cup of coffee from Starbucks — that's a transaction. Then you go and take the subway — that's another transaction. All these little transactions make up your economy and your economic growth.

"What happens in the stock market is just a bunch of traders who decide what [price] they want to buy a stock at. What they're basing their buying decisions on are just a lot of perceptions of what they think will happen in the future. Perceptions are merely perceptions. They aren't necessarily based on fact. Sometimes it's an accurate prediction, and sometimes it's not," she clarifies.

Fact No. 2: China's stock market is relatively new, and is unsophisticated in comparison to the United States' stock market.

Lee says that a big portion of participants in the Chinese stock market are "retail investors." Retail investors are people like you and me who open their own stock brokerage accounts, as opposed to those who manage money for a living. It's the difference between you and your uncle who works on Wall Street.

"A lot of retail investors are not sophisticated investors. They like to jump in if they think that they can make a quick buck. They don't know how to do discounted cash flows or read balance sheets necessarily... They probably use the Peter Lynch way of investing," Lee says.

A lot of retail investors are not sophisticated investors. They like to jump in if they think that they can make a quick buck.

Ann Lee, New York University finance and economics professor
For context, Lynch's philosophy refers to people who "invest in what they know," such as stores and companies that might appear to be successful, or appeal to their personal tastes.

When one retail investor sees another start selling, the first tends to panic and start to sell, too. "That's why you get these wild gyrations," Lee says.

Fact No. 3: For the first half of this year, the stock market in China was doing really well.

"There was a lot of optimism on Chinese companies in general," Lee says. She explains that many of these were high-tech internet companies that people expected to do enormously well, the way companies in Silicon Valley did in the 1990s.

Investors may have set their expectations too high; compared to what they imagined, the Chinese stock market underperformed.

Fact No. 4: When the stock market began to crash in July, the Chinese government tried to control it.

"The Chinese government did not want to see their market crash and burn," Lee tells Refinery29. In response, the government took several measures, including encouraging more firms to buy stocks and lifting limits on regulated funds (such as Social Security).

"They were doing what they can to try to stop the panic, but once panic sets in, it's difficult to stop it," Lee says. In July, Vox published a great explainer of China's big moves.

The Chinese government did not want to see their market crash and burn...but once panic sets in, it's difficult to stop it.

Ann Lee, New York University finance and economics professor
But the international community was hesitant to let China do its thing. Some analysts criticized the government for intervening too much, and stopped placing their trust in the Chinese markets. Others say the government didn't do enough, or made the wrong moves.

"It was almost like they were damned if they do, damned if they don't," Lee adds.

Fact No. 5: To get the stock market to go back up again, countries will have to allow China to develop their infrastructure.

When China did well, the rest of the world did well, too. Commodities-trading nations like Canada, Brazil, and Australia bolstered their economies by selling to China. At the same time, the growing Chinese middle class became an attractive market for American companies, which found new homes for their goods.

Now, Lee explains that China has pretty much outgrown itself.
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What you need is another China.

Ann Lee, New York University finance and economics professor
"What you need is another China," she says. "China basically proposed they could [accomplish] that [growth] if they could invest in the infrastructure of other countries."

Countries in Central and Southeast Asia, Africa, and Latin America that lack developed infrastructure are particularly attractive to China. But these countries have to want China's help. If they do, Lee explains, it could "cause another big economic growth cycle."

Fact No. 6: The average American does not need to freak out over a crashing Chinese stock market. A suffering Chinese economy, however, is a more worrisome story.

The Chinese stock market composes a pretty small, and somewhat niche, part of the global economy. Most people, and most big American institutions, don't deal in it.

"The fear is that if the Chinese stock market continues to be in a bear market" — a market in which stocks are falling — "and the other [countries'] financial markets also sink, this could be a drag on the Chinese economy," Lee explains.

"Then, it would start affecting U.S. companies, because a lot of U.S. companies sell to the Chinese consumer," she adds.

If Chinese consumers do not feel financially secure, they will not buy as many American products. That's when American companies (and their employees!) may begin to really feel the strain.

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