Wednesday, September 02, 2009

China's Stocks Crash: Is The United States Next?

Shanghai Stock Exchange
In the past three weeks alone, China's formerly sizzling stock market has gone from bull market leader to bear market letdown. On August 30, the Shanghai Composite Index plummeted 6.7%, its largest one-day drop of 2009 so far. And, of the 89 global markets tracked by Bloomberg, the Shanghai index came in last place.

As for what caused the freefall, mainstream experts point their collective finger at one main factor: Growing fears that China's monetary officials will turn off their easy-money spigot. Here, this August 31 BusinessWeek stands in:

"Investors began selling on concerns that banks will cut back on lavish lending that had helped push shares up by more than 80% since that start of the year."

Here's the thing: the drunken lending habits of China's banks have been on the global Concern-O-Meter for quite some time now. And last I checked, its needle reading jumped from "Don't worry be happy" -- to -- "Be Afraid, Be Very Afraid" many months ago. To wit:

May 2009: China's deputy central bank governor seriously questions the "sustainability of the rapid growth in credit and its possible adverse impact," and a Wall Street Journal piece warns that China's stimulus spree is "pillaging bank balance sheets" as the quantity of loans vastly outweighs their quality.

June 2009: "China's Banks Are Warned About Loans" (WSJ). China Bank Regulatory Commission issues an internal directive to commercial banks to "tighten supervision of loans" and ensure those loans serve the needs of the "real economy" and not "financial speculation."

July 2009:"China Aims To Rein In Lending." (Associated Press) China's two largest lenders reveal they will "sharply slow credit growth."

Yet during that time, the mounting anti-lending rhetoric failed to take the wind out of the Shanghai Composite Index's sails. Prices rallied without resistance to new yearly highs until early August.

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So if the "fundamental" shoe doesn't fit, what's the real story here? Well, I'll make it really simple: the Shanghai Composite Index has plunged more than 20% from its 2009 high on August 4. And, in the days leading up to the market's reversal, China landed on the radar of several of EWI's subscription-based publications. For our analysts, the time had come to stage a full frontal attack and warn of a major turn in China's fortunes.

Here, the following catalogue of previous publications fills in the blanks:

August 2009 Elliott Wave Financial Forecast observes the unsustainable nature of China's latest stock market rise and writes: "China's debt bubble will succumb."

August 14 Asian Short Term Update: "All eyes continue to be on China as we ascertain whether or not an intermediate-term-top is in place."

August 14 Short Term Update: Presented the following close-up of China's main stock market and wrote: "A break of the trendline will be the next important tip" that a larger decline is underway.

Shanghai Composite

August 14 European Short Term Update: "Though not under our normal purview for ESTU, China has been the central source of liquidity...China's sharp decline may be a case of the pin meeting the balloon."

(Editors Note: As for the historic October 19, 2007 peak in the Shanghai Composite Index illustrated on the chart above, the September 2007 Elliott Wave Financial Forecast wrote: “The only bubble that continues to expand is that in the Chinese stock market. The following statistic suggests strongly, however, that its peak cannot be far off.”)

Whatever the market, our team of analysts take their coverage to the next level: From confronting current changes in trends to anticipating those changes before they occur.

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