Cheered by a rally in US stocks and a domestic interest rate cut, Chinese stocks rebounded from five days of decline on Thursday, August 27, with the benchmark Shanghai Composite Index bouncing back above the symbolic 3,000-point mark and closing up 5.34 percent.

This comes after Shanghai stocks plunged more than 8 percent on Monday, August 24, the biggest single-day loss Chinese stocks have seen since the peak of the global financial crisis in 2007, sparking concerns about the state of the world's second-largest economy.

After a 7.4 percent GDP growth rate last year - the weakest annual expansion in 24 years - experts say the East Asian nation is struggling to meet its growth target of "about 7 percent" for 2015.

The slowdown in China - which now accounts for about 15 percent of the global economic output - is also being seen as a major factor behind the current volatility in the country's stock markets.

Nonetheless, Shang-Jin Wei, chief economist at the Manila-based Asian Development Bank (ADB), explains in a DW interview the disconnect between China's real economy and the country's stock markets, and why he believes claims of a Chinese economic collapse are overrated.

DW: Is China's economic growth collapsing?

Shang-Jin Wei: I wouldn't use the word "collapsing." While growth in China decelerated more than expected in the first half of 2015, the growth rate for the whole year could be a bit lower than 7 percent, but not too far from the authorities' target rate of "about 7 percent."

While growth in fixed investment and trade look weak, we also see some pickup in the retail sales and housing construction and transactions. Most importantly, labor markets remain healthy, as shown by the 7.2 million new urban jobs, particularly in services, in the first half of 2015, and continuously strong wage growth.

The employment data suggests that the label of a collapse of the Chinese economy is greatly exaggerated. Of course, to ensure continued growth, policy reforms aiming at improving productivity are both feasible and necessary.

Doesn't the recent turbulence in the Chinese stock market forecast troubles in the real economy?

The stock price movement and the real economy are not strongly connected. For example, when the real economy was growing strongly during 2010-2013, the stock prices were falling.

On the other hand, when the stock prices were going up in the first half of this year, the slowdown of real economy was taking place. The reason for this is not hard to understand. Firms listed on the stock exchange are not very representative of the universe of the Chinese firms.

While majority state-owned firms account for two-thirds of the listed firms in terms of market value, they account for no more than one-third of the Chinese GDP and even a smaller share of the Chinese employment.

In any case, the recent turbulence in the PRC’s stock market is likely to have limited impact on the real economy and private investment. The reasons for this are:

First, the stock price change in the data does not have much impact on consumption growth. Investment in stocks is only a small proportion of most households' financial assets as most households in the PRC rely on home purchases and bank deposits to accumulate wealth. Significant holding of stocks is perhaps relevant for relatively wealthy families. As such, possibly only consumption of luxury goods may be affected.

Second, the stock market correction is unlikely to have much impact on private investment. While the importance of equity issuance as a source of financing increased in 2014 from its low base, it was still only equivalent to 4 percent of total bank loans provided to the economy in 2014. While there are no new initial public offerings (IPOs) at the moment, this activity could pick up again soon.

But according to some analysts, Chinese stock markets will stabilize only when there is strong economic data coming out of the country. Why there is a perception among investors and some economists that China's growth has fallen sharply with some estimating the figure to be as low as 3.5 percent?

Emerging market stock prices in general tend to be more volatile than those of mature markets. Relative to the United States, the Chinese market has substantially more retail investors and fewer institutional investors.

While many institutional investors look at long-term fundamentals, which help to stabilize the market, most retail investors tend to focus on short-term gains and momentum trading, which tend to magnify the volatility. So volatility per se is not surprising.

Because exports and fixed asset investment are weak, if one wants to look for reasons to be pessimistic, one can find them. I would note that there are signs of resilience, too. Housing starts and real estate sales have shown a rebound. Retail sales are also relatively strong.

Exports will also improve when the developed markets recover more robustly. Most importantly, employment seems strong with still 7.2 million new urban jobs created, particularly in services, in the first half of 2015.

Chinese authorities have taken a number of measures to control the stock market plunge, the latest was a cut in the benchmark interest rate as well as the reserve requirement ratio for banks. Does the market still have some way to fall before we see a recovery, particularly as many believe Chinese stocks are extremely overvalued as evident in the shares' price-earnings (P/E) ratios?

The right level of stock prices is hard to pin down. While some Chinese companies have very high P/E ratios, the Shanghai stock market as a whole has a weighted P/E ratio of around 18.04 at the end of July 2015. By comparison, the US stock market has a P/E ratio of around 19.5 at the same point in time.

I would stress that I am not making forecasts about stock prices as one can qualify such a comparison in many ways. The authorities' desire to stabilize the market is understandable. Most countries want to avoid a large and potentially destabilizing crash.

That's why most countries have a circuit break rule in stock trading that would automatically suspend trading when price changes reach a threshold within a day. The rule is meant to give investors time to cool down and think rationally before making another move.

Of course, ultimately asset prices need to be determined by market forces. Securities regulators' primary job is to ensure that trading is fair for all investors, and to enforce rules against illegal behavior such as insider trading and market manipulation. It's not necessary to guarantee a particular level of stock prices.

Is it right for the government to promote stock ownership when the market is overpriced and there are fears of a bubble building up?

The set of instruments where people can put their savings is still relatively limited in China. Until recently, deposit interest rates also faced a ceiling. These factors also contributed to households' interest in the stock market. This points to us the importance of further reforms in the financial sector.

Aside from the reforms, financial literacy education and basic economics knowledge - especially for migrant workers and other low income households - can also help people better understand the risk in the financial markets and make wiser saving and financial investment decisions.

Shang-Jin Wei is chief economist at the Manila-based Asian Development Bank (ADB).