That's the Way the Fortune Crumbles

The U.S. mainstream media is only now waking up to potentially the biggest economic story of the year. It's not Greece leaving the euro, the costs of Obamacare, the unemployment rate, or the price of oil. The Chinese stock market has lost $3 trillion since 2012, perhaps a third of that amount in the past month. The Chinese government seems powerless to stop the fall:

The authorities have cut interest rates and transaction fees. They have directed mutual funds and state pension funds to buy stocks. Over the weekend they panicked and reversed course by suspending new initial public offerings, suddenly choking off a source of the new corporate funding they had been trying to create....

The continuing crisis is viewed, locally and globally, as a test of China’s control over the economy. The “Beijing put”—a perception that Chinese economy and markets are backstopped by the government—is under threat....

But if Beijing can’t stop the market’s tumble, there could be a sudden shift in the perception of exactly how far economic growth might fall under the weight of too much debt. If that floor crumbles and the Chinese economy spirals downward, it will make the drama surrounding Greece feel like a sideshow. China has been the largest contributor to global growth this decade; Greece’s economy is about the size as that of Bangladesh or Vietnam.

Millions of neophyte Chinese individual investors have entered the market, often buying on margin (borrowed money). When stocks fall, the loans are called, triggering more selling in a "death spiral" familiar to market observers.

U.S. investors should not feel sanguine about the limited China exposure in their portfolio. The Chinese government and wealthy individuals hold real estate, stocks, and other assets outside of China. If they are forced to sell such assets quickly to repay loans, the repercussions will be felt all around the world.