A Pop Without Punch; Last week's plunge on Shanghai's stock exchange made barely a ripple outside China. Here's why.

Byline: George Wehrfritz (With Sonia Kolesnikov-Jessop in Singapore and Jonathan Adams in Beijing)

By the time China's main stock exchange ended a four-day free fall last week, the paper wealth destruction was extraordinary. When share prices finally hit bottom, the financial-news service Bloomberg calculated, the combined losses on the Shanghai Stock Exchange exceeded $500 billion--roughly Taiwan's and Singapore's combined GDP last year. Yet most interesting was what did not happen next: a global stock sell-off. In fact, a 21 percent drop in the main stock exchange of the world's fourth largest economy made barely a ripple in Tokyo, Seoul, Hong Kong or Singapore (not to mention London or New York). The lesson: "The Chinese stock market is largely divorced from the rest of Asia," says Chua Hak Bin, an economist at Citigroup Global Markets in Singapore.

That's welcome news, if it indeed holds true. Many economists had started to argue, to the contrary, that China is emerging as a prime market mover. The world's fastest-growing major economy, the logic goes, China is now a key driver of global growth and, by extension, of global investor sentiment. That perspective was reinforced back on Feb. 27 when a 9 percent plunge in Shanghai triggered sharp falls in New York, London and Tokyo--suggesting a new and potentially volatile linkage between Asia's tempestuous dragon and the world's leading financial centers. So why, then, did global markets shrug off a much larger correction in Shanghai last week? "Markets are very efficient learning devices," says Tim Condon, chief economist for Asia at ING. "After the February episode, people studied China's stock markets, and the details were comforting."

For starters, analysts have come to realize that China's stock markets are still tangential to its real economy. Listed companies, the vast majority of which are controlled by the state, "only represent a very small percentage of companies that exist in China," says Arthur Kroeber, director of the consultancy Dragonomics Research in Beijing. Nor are they very widely held. Despite a rush of new retail investors into the market this year, average households now keep just 10 percent of their wealth in stocks, roughly a third of the average in the U.S. Even a full-blown market crash, Kroeber figures, would have scant impact on household wealth or spending. Citibank recently estimated that a 30 percent fall in Chinese stocks would slow GDP growth by 1.5 ...