On the other hand ...
6. Chinese tech-stock valuations are high—really, really high.
By some measures, Chinese stocks (especially in tech) are more overvalued than U.S. tech stocks were in 2000. Bloomberg reported as far back as April that Chinese technology stocks were trading at 220 times their reported profits, the highest in the world. That even crushed the 156 price-to-earnings ratio sported by U.S. tech stocks in March 2000, right before the bubble burst.
7. China has a ton of debt, and other asset bubbles.
China's debts are anywhere between 175 percent and 225 percent of its annual gross domestic product, Mesirow Financial chief economist Diane Swonk said. As an example, she noted that Thailand had debts of 180 percent of GDP before its late-'90s financial crisis. In Swonk's opinion, the worst-case scenario is that China's economy goes through a long process of repricing leveraged assets a la Japan.
Meanwhile, housing prices in China have dropped nearly everywhere in the last year, further threatening the finances of retail investors. Real estate is one reason noted short seller Jim Chanos has been bearish on China for years, along with the debt load he says could reach four times GDP.
8. Individual investors are huge in China's market.
Some reports estimate that individuals drive as much as 85 percent of stock trading in Shanghai. But underlying that action, the stock market mess has been fueled partly by the unraveling of margin debt and the crimping of margin lending. Merrill Lynch has pointed out that only a small percentage of the margin debt was extended between April, when the Shanghai market topped 4,000 for the first time, and when it hit its peak of 5,178.19 in June. Some traders blamed this past week's sharp drop on a sudden reduction of margin-loan availability, and at least some investors are due for margin calls by now.
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Margin lending has been a significant driver boosting Chinese shares, helping the Shanghai Composite clinch repeated seven-year highs earlier this year. Will Oswald, global head of fixed income, currencies and commodities research at Standard Chartered, told CNBC. "When you've got that type of leverage built up through margin accounts, it's a lot harder to stem the correction, but China is working on balancing between the moral hazard risks of supporting the market versus dislocated prices," Oswald told CNBC earlier this week.
Trading volumes in Shanghai have halved from their peaks in June, while margin debt, which had fueled a world-beating rally for China's stocks, declined to a four-month low, according to Bloomberg.
9. Lack of transparency hurts confidence.
China's "rescue squad," as it's called, went into action this past week. The China Securities Regulatory Commission said late Monday that the local government would increase purchases of stocks, while the central bank injected cash into money markets and hinted at further monetary easing. On late Tuesday the country's securities regulator said it was investigating share-dumping incidents that occurred Monday.
"Call it what you will; the aptly named 'rescue squad' have made their intentions clear and will continue to support the Chinese markets at any cost. The strength is seen in the 200-day moving average, and further investigations into Monday's price plunge will limit major downswings for the next few weeks," IG's market strategist Evan Lucas wrote to investors on Monday.
That stabilized Chinese stocks in the second half of the week. But volatility has been the norm for Chinese stocks in the past month. In early July, when the Chinese government halted initial public offerings and restricted short-selling, the Shanghai Composite rose by as much as it went down this past Monday—8 percent
There's a flip side to the Chinese government's intense support of the market—no one really knows how bad the underlying problem is. At times, more than half of stocks in Shanghai have been suspended from trading. One reason for this past Monday's drop was speculation that the government would stop propping up shares, Moody's Analytics argued. Traders are saying they don't know the correct price for different shares, because of all the intervention, and wonder what the government's actions may be hiding from view.
—By Tim Mullaney, special to CNBC.com