Comparisons with the 2008 banking crisis are being drawn. But the autumn of 2011, when markets suddenly focused on the sovereign debt problems in Southern Europe, may be a fairer comparison. The FTSE 100 fell 4.67 per cent on Monday - its joint-worst one-day performance since the winter of 2008-09, when such moves were no rarity. The other day when the index fell 4.67 per cent was in September 2011.
The same pattern can be observed in volatility indices. The so-called Vix index, which charts the expected 30-day volatility of the S&P 500 index based on derivatives trades, has leapt after a prolonged period of calm to levels similar to those seen in late 2011. But it remains well below the sustained peaks of 2008-09. Sentiment has turned seriously sour, but not yet on the scale of the US banking crisis.
Another parallel with both 2008 and 2011 is that the current panic is about debt and property. A study published by the McKinsey Global Institute in February estimates the level of total Chinese debt at $28.2 trillion - almost four times its 2007 level. Half of this debt is related directly or indirectly to real estate in the form of residential mortgages, borrowings by developers and construction firms, and cash raised by local governments for property development. So the current correction in the Chinese property market could have a similar impact on the Chinese financial system as the US subprime lending bust had on the US financial system.
The Chinese central government has the capacity to bail out its financial sector, but it's not clear it wants to. The same issues of moral hazard - bail-outs encourage further risk-taking - are at play as we have seen in recent UK banking regulations and negotiations between Greece and Germany. The crucial point is that markets are frightened at the moment not because China has a lot of debt and falling property prices - this is well established - but because the Chinese government no longer seems prepared to support either its currency or its stock market. The implication is that it may not stand behind its financial system as whole-heartedly as everyone assumed.
Why does this matter to UK investors? The obvious reason is that the UK stock market is disproportionately weighted to commodity companies, which are suffering due to China's construction slump. For the wider UK economy, however, low commodity prices are a good thing. The bigger question is whether China's problems will undermine rising UK business and consumer confidence, as the eurozone problems did in 2011.
Of course, nobody knows. Confidence is the elusive factor that makes economics so unpredictable. But personally I would be surprised if China's financial crisis - if that is what is emerging - became a major real-economy issue in the UK. China is the second biggest economy in an increasingly globalised world, to be sure. But, except in commodity markets, it is still an exporter of goods, not an importer. Indeed, in the second quarter it accounted for less than 5 per cent of UK exports, compared with 18 per cent for the US and 10 per cent for Germany.
One interpretation of the recent market falls - the FTSE 100 is now down 13 per cent since its euphoric reaction to the May general election result - is that investors and traders were looking for an excuse to take profits. That seems reasonable. The current bull market is in its seventh year, and stocks are expensive. The average forward PE ratio in the FTSE 100 is 15, compared with a 10-year average of 12 - and that's without stripping out the depressed commodity sector.
At the same time, the Chinese slowdown only adds to the deflationary pressures in the global economy that are keeping interest rates at extreme lows. Shares rebounded on Tuesday as China's central bank cut its benchmark rate to 4.6 per cent and Wall Street pushed back its expectations of the first US rate rise yet again. The interests of monetary policy makers and investors remain aligned. As long as they do, the paradox of weakening global growth and strengthening stocks seems likely to live on.
