JUST RELAX ABOUT CHINA'S STOCK MARKETS - FT.com

Two mornings every week, a friend of mine goes to a park in central Shanghai to practise T'ai-chi, the Chinese exercise regime sometimes known as meditation in motion. The group of mostly retired Chinese is led by an elderly gentleman who mixes strict punctuality with a certain eastern mysticism.

My friend was there on a cold February morning the day after the local stock exchange had fallen 9 per cent, spooking the rest of the world's markets. The group was halfway through their hour-long sequence of movements when the leader cut them abruptly short. "I have to leave early to get to my stockbrokers before the market opens," he announced. "Because today is a buying opportunity."

Everyone who lives in a Chinese city at the moment has a story to tell about the stock market craze and most have a similar theme: fascination with the sheer dynamism of the boom and fear at the occasional recklessness.

Having watched share prices quadruple in two years, more than 100,000 Chinese have been opening trading accounts every day in recent weeks as a new generation of middle-class Chinese has gained a taste for playing the market.

But in a nation where the urge to gamble is never far below the surface, the stock market has sometimes come to resemble a casino. People have taken out loans to speculate, while a few individuals have even pawned their houses to buy shares. The education ministry last week warned university students not to be distracted by investing. Eccentric investment theories abound: some are looking for shares with a price less than the cost of a kilo of pork, on the grounds that such a company must be a very good bargain indeed.

The 6.5 per cent drop in the market yesterday is a grim reminder of how this story could end: a collapse in the Shanghai market with the people who came in at the end of the party picking up the tab. So irrational is the exuberance in China that even Alan Greenspan, former chairman of the US Federal Reserve, is worried.

But will the damage stop there? In the early stages of the market boom, gung-ho Chinese speculators were considered a mild curiosity. Yet as the rally has gathered pace over the past month or so, some international investors have begun to fear the potential global fallout from Shanghai's excesses. They have started to ask what would be the impact from a crash not just on the Chinese economy but also on global iron ore consumption, Latin American trade surpluses and Treasury bill purchases.

The answer is, well, pretty much nothing at all. If the mainland market were to drop by a further 20-30 per cent, the Chinese economy would barely miss a beat.

For a start, there would be no domino effect of forced selling in one market pulling down others. Given the wall of capital controls that Beijing maintains for its currency, the mainland stock market is a parallel universe, detached in any real sense from other markets, with little money coming in to the country to invest in shares and little going out. Foreign investors have only a very modest exposure to mainland equities. Indeed, capital controls explain why share prices in Shanghai are so high: people have few other places to put their money.

Despite the recent boom, the stock market is still a relatively small part of the economy, even by the standards of emerging Asia. The massive investment surge in China has been financed largely from corporate profits, not from the capital markets, and would carry on at a relentless pace.

It is possible that consumption growth might be modestly held back, but retail spending was already surging before the market rally began. Most of the new funds have come from savings, not credit, and the Chinese still have $2,000bn in bank accounts to fall back on. Consumers can withstand a large correction.

The Shanghai market still has the power to scare the world – we saw that in February. In markets, if enough people think something is important then it is important, whatever the underlying logic. If global equities are overvalued and due a correction, investors do not need a good reason to start selling, just a popular one.

But for investors comfortable that strong global growth underpins the rise in share prices around the world, a collapse in Shanghai is an occasion to hold one's nerve and remain calm. Maybe even try some T'ai-chi.

The writer is the FT's Shanghai correspondent