Chinese share market crash What happened?China's sharemarket nosedivedlast Monday, falling8.5 per centand forcingthe People's Bank of Chinato start buying a huge number of shares through the weektoprevent a full-scaleevacuation of shareholders.The sharemarkethad stabilised a little by Friday, finishing the weekdown 7.8 per cent.But the panic on Monday was so bad that a former adviser to British Prime Minister Gordon Brown urgedpeople to stock up on canned goods and bottled water.It's since been dubbed "Black Monday".It will be remembered,particularly by Chinese investors,as one of the worst days in the history of China's sharemarket, the moment when even authorities in Beijing were panicking.Advertisement Australia's sharemarket was caught up in the mayhem. The All Ordinaries Index lost 4 percent on Monday, prompting market watchers to predict another bloodbath on Tuesday.But the market surprisingly recovered 2.6 per cent, and addedanother 0.6 per cent on Wednesday.Treasurer Joe Hockey tried to calm fears,saying it was only a "correction" and not a bubble bursting.Overseas, things weren't so rosy. London's stock exchange dumped 7.4 per cent over Monday and Tuesday, and the Dow Jones fell 9.7 per cent over four days.While things had calmed a little by the end of the week, global investors are steeling themselves forthe next couple of weeks.Why did it happen?China's sharemarket has been in a giant bubble. In the 12 months to June it grew by a massive 120 per cent, to be like an over-inflated balloon. It has been fallingin fits and starts since then.Monday was one of thebiggest single-day falls in its history. Combined with the huge falls that have occurred since June, the cumulative losses on China's sharemarket this year are about 45 per cent.A range of pressures contributed to Monday's bloodbath.Firstly, China's recent currency devaluation triggered falls in the currencies of other Asian and emerging markets, and led to concerns about the health of China's economy. Why would the country want to devalue its currency if the economy was going well?Willem Buiter,global chief economistwith Citigroup andthe man who coined the term ''Grexit" to describe a possible Greek exit from the Eurozone, believes China is sliding into a recession. He also thinks China's authorities will be too slow to act to prevent it from happening. Many share his view, and that fear affected the sharemarket in a major way lastweek.Secondly, global investors have been worried that the US Federal Reserve will start raising rates soon. Investors have become used to near-zero interest rates. If US rates begin to rise, it could have a big effect on global share prices, including China's.Thirdly, the US sharemarket has weakened a little lately. That's encouraged a broader sell-off in China.As AMP Capital's Shane Oliver put it: "All these issues have combined and we have seen something of a negative feedback loop, with falls in Asian sharemarkets leading to falls in European, and then US shares, and this then feeding back into Asian shares."How serious is it?It's serious, but no one can say exactly how bad no one knows what the consequences will be for countries like Australia. It depends on whether things stabiliseor worsen.China's sharemarket is detached in a big way from its "real" economy, so events on its sharemarket don't necessarily reflect how its economy is performing.But we can't completely trust the data coming out of China, so we don't really know how strong or weak its economy is.The best we can say is that, at this moment, few Australians have been directly affected by the wipe-outbecause few Australians own Chinese shares. Foreigners own only 2 per cent of China's shares. The rest are owned by Chinese citizens, so they are the ones mostly getting hit.The thing we have to worry about is whether the damage on the sharemarket spills over into the "real"economy and starts affecting things like China's demand for Australia's raw commodities. Will China's demand for iron ore and coal begin to slacken? If so, that's when Australia's economy will suffer real negative flow-on effects.What does ittellus about the Chinese market?China's sharemarket is still relatively young; its investors are still learning what it means to buy and sell shares. They can get easily spooked by wild swings in prices so it makes their bourse notoriously volatile.China's authorities have to take a large part of the blame for the bubble. They've been doing everything they can to encourage Chinese mums and dads to begin investing in stocks, offering them all types of financial incentives. But the policy has led to a situation where Chinese share prices are now seriously detached from the country's economic fundamentals, shooting off into the nether-nether, beyond all reason.Is this just part of an ongoing correction or something more?It's hard to say.One school of thought says it's only a correction, because China's sharemarket couldn't keep growing at arapid pace, and that China's stocks are far too overvalued at the moment. They're right on the second point. They also say Chinese investors ought to hold their nerve and not get too fearful.But another school of thought says China's economy is heading into recession and the fallout from that of which the sharemarket crash is only a symptom will be muchworse than people realise.Mr Buiter says the only thing to preventa Chinese recession is a consumption-oriented fiscal stimulus programfunded by thecentral government and monetised by the People's Bank of China.His view? "Despite the economy crying out for it, the Chinese leadership is not ready for this."