How to Make Sense of China’s Plummeting Stock Market

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from The New York Times,

While the eyes of the world have been on the crisis in Greece, China, a country with 123 times its population, has faced financial troubles of its own. A free fall in the Chinese stock market could threaten the prosperity of the world’s second-largest economy and have long-term effects of its own.

But the numbers suggest that the stock market collapse — it’s down 32 percent in four weeks — may be less a shocking turn of events and more an inevitable correction in a market that featured many of the classic signs of a financial bubble.

Stock investing has become a middle-class pastime in China in recent years, and it’s clear the Chinese government is nervous that a continued market rout will wipe out its citizens’ wealth and stoke discord. The Chinese government has pulled out a series of policy measures to try to avert the collapse: interest rate cuts; using government pension funds to prop up the market; announcing plans to investigate those betting on a market drop.

The data, though, suggest that the market declines thus far aren’t as outlandish as the Chinese government seems to think. The Shanghai composite index began an upward tear in late 2014, soaring 151 percent from the start of July last year to the June 12 high.

The chart shows how easy it is to frame market data in a way that sounds either scary or benign, depending on your inclination. “The Chinese stock market has dropped 32 percent in a month” is scary. “The Chinese stock market is up 70 percent over the last year” sounds great. Both are true.

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