Since one of the strengths of any economy is buying power, and if a large number of consumers cut back because of a loss on their investments, that would hurt the economy.

That’s a good point, but if there is a significant reduction in consumer demand as a result of these residential losses, the Chinese government can pump some free or cheap cash into the economy to pick up consumer spending, and they shouldn’t have to worry too much about inflation because they would actually be counteracting some deflationary pressures.