China's Stock Market Suffers Largest Drop In 8 Years

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The Shanghai Composite Index ended down 8-and-a-half percent today. In other words, stocks in Chinese equity markets plummeted. It's the worst one-day decline since early 2007. But the huge drop probably won't undermine U.S. markets or even have much of an effect on the Chinese economy, as NPR's John Ydstie explains.

JOHN YDSTIE, BYLINE: The plunge in China's stock market today is one more big stumble for a market that was hugely overvalued. Donald Straszheim, head of China research for Evercore ISI, a securities firm in New York, says it's important to remember the Chinese market had more than doubled in value in just a year.

DONALD STRASZHEIM: This was too far, too fast. It was a mania. All manias end badly. Everybody knew it was coming down.

YDSTIE: But it was coming down too fast for the Chinese government. After stocks dived about 30 percent in just a few weeks last month, the government intervened massively. It barred new stock issues and spent an estimated $200 billion or so buying shares. The market stabilized and even gained back some ground. But today, the plunge resumed. Nicholas Lardy, a China expert at the Peterson Institute for International Economics, says it's not clear why.

NICHOLAS LARDY: One possibility is the government discontinued intervening on Monday to see what the market would do, and the market fell. On the other hand, maybe they were still buying on a large scale and the market fell anyway. At this point, we simply don't know.

YDSTIE: Donald Straszheim says the good news is that the drop in Chinese stocks is unlikely to spark contagion that spreads to other major global markets.

STRASZHEIM: There are very few foreign investors in the China stock market.

YDSTIE: And there are no globally-interconnected financial firms like Lehman Brothers whose collapse might spread the pain. Straszheim says even the effect on China's real economy will be modest.

STRASZHEIM: I think that this is a relatively minor item in the China economy because equities are only about 10 percent of household wealth in China.

YDSTIE: And, says Nick Lardy, most Chinese firms get their funding from banks, not the stock market. That's not to say China's economy doesn't have problems. It does. But Lardy says they're related to a collapse in the real estate market, not the stock market. That real estate market collapse is slowing the real Chinese economy and hurting exports for some U.S. businesses.

LARDY: Heavy-equipment manufacturers, companies that are selling components going into buildings - elevator systems, heating and cooling systems - their market is very, very weak right now compared to two or three years ago. Companies selling into the consumer market, on the other hand, are doing quite well.

YDSTIE: For instance, Apple just reported a huge increase in sales in China. But Lardy says the slowdown related to China's real estate market is likely to continue for a year or more. As for the stock market, Lardy says Chinese officials showed a tolerance for a big correction back in 2007 when stocks lost 70 percent of their value. That was mostly a long, slow decline. If today's rapid selloff continues, he says the Chinese government will likely intervene forcefully to stop it. John Ydstie, NPR News, Washington. Transcript provided by NPR, Copyright NPR.