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China's stock market splits from its economy

China’s economy is on the rocks – experiencing its slowest growth in more than two decades. The world’s second-largest economy grew 7.4% in 2014, the smallest expansion since 1990.

To put it another way – China’s economy has not grown this slowly since "Home Alone" was in theaters.

The news sent oil prices down but Chinese stocks rallied slightly– making up for a 7.7% drop experienced there on Monday when U.S. markets were closed for Martin Luther King Day. That sell-off was due not to a stumble in China’s economic growth, but a reaction to the Chinese government trying, once again, to curb speculation.

“They are playing wack-a-mole in China to dam down speculation, wild or otherwise,” said Yahoo Finance Editor-in-Chief Aaron Task. “They tried to tramp down speculation in real estate. So a lot of people said, ‘Ok, I’m going to take my money and go speculate in the stock market.' Then you have a huge rally in the stock market.”

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Chinese stocks were up some 50% in 2014, largely in the second half of the year. “Volatility and China go hand and hand,” said Task. “And I would think after a 50% gain in any market you would expect more volatility the following year.”

But in China, the volatility may be increased by a handful of factors. We all know Chinese growth is slowing – most Western portfolios have largely priced this in. But China’s economy is also transitioning to a consumer-driven marketplace. And that is creating issues.

Task explains the shift using a metaphor. “The Chinese government, they’re really good at saying, ‘We wanna build a dam over there,’ [and then] they build a dam. But in between, people get displaced; you have floods in places. The same thing’s going to happen with this even bigger transition in how their whole economy is structured.”

There is one last silver lining, though. A lot of the volatility in Chinese markets is isolated. Because Chinese stocks are largely closed off to the West, wild swings primarily impact Chinese companies and investors, but not the rest of the world.

So for now, turn on some Wilson-Phillips and old-school Madonna. A throwback to 1990 may not be the worst thing in the world. After all, flannel is back in style.

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