China's stock market is in terrible shape, but it may not reflect the state of the Chinese economy.

National Economic Council director Larry Kudlow raised eyebrows Thursday when he said in a Cabinet meeting with President Donald Trump that China's economy "looks terrible."

But does it really? Most estimates for China's 2018 economic growth remain near 6.5 percent. That doesn't mean there aren't concerns. New U.S. tariffs on Chinese goods are making it more costly for companies there to operate, and China's central bank has recently been pumping money into its economy.

Kudlow simply may have looked at the Chinese stock market. The Shanghai exchange is down 25 percent from the high it hit at the end of January. He may have assumed that the decline reflects a dramatic deterioration in the Chinese economy.

That, some traders said, would be a mistake.

"I think our dear friend Larry Kudlow is off the mark," UBS' Art Cashin said on CNBC on Thursday. "In highly efficient full-production places like the U.S., the stock market is reflective somewhat to what the economy is doing. But there's almost a total disconnect in China," he said.

Nick Colas, who runs market analysis firm DataTrek Research, agreed. "The Chinese stock market actually tells us very little about the country's economic welfare and doesn't play anywhere near as dominant a role in the lives of its citizens as the US equity market does in America," he wrote in a recent note to clients.

Colas backed up his assertion by noting that the Shanghai Composite trades for less than half its October 2007 peak, yet China's economy in the 11 years since then has more than tripled to $13 trillion.

The Shanghai market staged a huge rally from 2014 into 2015, more than doubling in value, but again collapsed and is trading 45 percent lower since 2015.

"This decline has had no discernible impact on consumer spending or business investment over the last 3 years," Colas said.

Colas also cited a September 2017 Bloomberg article noting that retail investors account for 80 percent of the trading volume on the Shanghai exchange. Colas said those traders can cause individual stock prices to swing wildly on arbitrary and noneconomic information.

He agreed with Cashin's point that the Chinese stock market is not very efficient and does not necessarily reflect underlying economic realities.

Finally, Colas noted that the allocation of household wealth to stocks in China is relatively minuscule: 4 percent versus 23 percent in the U.S.

In China, households have far more of their wealth in cash (20 percent versus 4 percent in the U.S.) and real estate (65 percent versus 45 percent).

And what about the super rich? Colas noted that they tend to invest in private equity and venture capital rather than having their core holdings in stocks.

The fact that China's stock market does not necessarily reflect the state of China economy's has important policy implications: "Further declines in Chinese equities are unlikely to push the country's leaders into an unfavorable trade deal with the US," Colas said. "Stocks are just not a large enough part of household net worth there, and the country has a long history of growth despite equity market volatility."