What a fortnight. Two weeks ago my trader friend in Shanghai lost his cleaning lady. She was making so much playing the stock market, she had decided to throw in the dishcloth. That week more than 200,000 other people joined her in opening share-trading accounts.
By the end of May, Shanghai had risen 50 per cent this year, following a 130 per cent gain in 2006. Price/earnings ratios were in the 50s - classic indications of a bear market. But then the Chinese authorities suddenly decided to cool the overheating with a tripling of stamp duty. The index fell a frightening 8 per cent in just one day.
The bull interpretation of this in the City is that there is little impact on consumption in China. Two-thirds of the market remains in government hands, and most Chinese keep their savings in cash. This is no 1929: only 11 per cent of household wealth is tied up in stocks.
The case against international contagion is also strong. Foreign investment has recently been encouraged, but by the end of the first quarter, foreign-held assets amounted to a mere $12.6bn (£6.4bn) in a market worth more than 100 times that. Bulls were also arguing last week that China's role in the world economy is principally as a supplier of cheap goods; in terms of final demand, it is a small percentage - even as a proportion of Asian final demand, it is barely over 6 per cent.
This is all very well but it is wise to take a broader view. I recall in the early stages of the 1997-98 Asian crisis being told that individual countries were of little significance, but a domino effect swiftly followed. The dramatic moves in world bond markets at the end of last week may point to a general withdrawal of loose money from the world financial system, which is of great concern.
At least in the short term. The greatest bull argument must be that Chinese industrialisation is an unstoppable juggernaut of a global economic event, which any long-term investor has to ride. Compound economic growth of 10 per cent in a nation of 1.3 billion is breathtaking in its effects. China is experiencing now what the United States went through in the last half of the 19th century: stock market boom and busts were as regular as clockwork, but this didn't stop extraordinary economic development.
But, say the bears, America was different - it was a democracy. Will Hutton, in his The Writing on the Wall, argues that to extrapolate current economic growth rates is to ignore China's "desperate lack of enlightenment institutions" such as the rule of law, the independence of the judiciary, the freedom of the press and representative, accountable democracy. These institutions, he argues, are essential for China to continue to grow.
I fear Hutton has fallen for that classic "reform-or-die" thinking. In contrast, James Mann, a former Beijing correspondent, points to a possible third way - that in 30 years' time we may still see China emerge as the predominant world economic and political power, but still recognisably authoritarian and undemocratic.
We are so hung up on the last 200 years of successful Anglo-Saxon capitalism, we perhaps ignore some of the other workable models in history.
A previous dominant power was France, which in the 17th century was perhaps the world's largest economy and had the highest income per capita, with a high growth rate. It was a society that was certainly not democratic: a small elite held massive wealth and the majority lived in poverty. It may have ended in tears, but only after considerable time.
When asked what he thought the consequences of the French Revolution were, Chou En-lai, Chinese Premier from 1949 to 1976, said it was too early to tell. Well, we may also be surprised at how long the Chinese story of state-directed capitalism can continue. Try 200 years. Put that in your investment-risk model.Reuse content