Chinese stocks are cratering. Time to cinch your belt, shred the credit cards, and convert your 401(k) into Bitcoin?
As they say in Mandarin, suan le ba (or, roughly translated, "fugetaboutit"). Although financial markets in China continued to slide on Tuesday after suffering their biggest one-day drop since 2007 a day earlier, the bug afflicting equities in the People's Republic is unlikely to infect Americans' portfolios, or even seep that deeply into the global economy. Here's why:
1. It's hard to invest. Although China in recent years has made it easier for foreign investors to buy domestic shares, it's still a hard market to put your money in. Investors must trade through a broker in Hong Kong and are required to place their orders before local markets open. The government also caps how much outside capital can flow into or out of the nation's exchanges. As a result, foreigners hold less than 2 percent of Chinese stocks, according to Capital Economics.
2. What goes up must come down. Chinese stock prices have raced ahead of economic fundamentals over the last year. The Shanghai index had soared nearly 150 percent over the last year before starting to deflate in June. China's broader economy, while still healthy, is estimated by economists to be growing around 7 percent this year. The bubble in stock prices needs to pop sooner rather than later.
3. Many investors are still ahead. Yes, millions of Chinese have lost money as the air leaks from stocks. But it's unlikely that most are losing their shirts -- Shanghai's stock index is still up nearly 68 percent from a year ago.
4. China's stock market isn't China's economy. The equities swoon has undoubtedly hurt tens of millions of Chinese. Yet the stock market plays a much smaller role in the country's economy than stocks do in the U.S. -- less than 9 percent of Chinese households own stocks, compared with more than a third of families who participate in the market in the states.
5. Been there, crashed that. This isn't the first time that Chinese stocks have sprung a leak. In 2007, the market value of equities nearly quadrupled, shooting up roughly 384 percent from the previous year, before heading south. China's economy emerged largely unscathed.
Fears that a stock market crash in China could trigger a broader economic crisis in Asia aren't entirely unwarranted. A correction in stock prices can signal slowing growth or even a recession, while investor distress can spread to other sectors.
A wider decline in Chinese consumer confidence would have grave repercussions for the country, raising risks for investors around the world. Perhaps more threatening for China, domestic investors could lose faith in Beijing's management of the country's financial sector, and even cause political unrest.
It also remains to be seen what impact the downdraft in stocks could have on companies that do business in China. The iPhone is a hot-seller in China, for instance. But sales could slip if enough Chinese households get burned in the market.
For now, however, the crisis remains quarantined within China's notoriously choppy -- but small and isolated -- stock market.