China's market plunge is just the beginning

Filed in archive markets on May 17, 2010

Worrying signs with China's Shanghai Composite Index plummeting 5%. The Index has fallen 20% over the last month and it's likely to keep heading south. The index crashed to 2559.93. That's its low point over the last year. But then, it peaked at 3471 last August and hit 5903 in October 2007.

How could this happen so quickly? Let's not be so naive, there are precedents for it. Take a look at the US and Europe three years ago.

The important thing about stock markets is that they are usually a sign of developments several months out. So the market is telling us something is not right which means China could be in serious trouble.

Investor Marc Faber, publisher of the Boom, Gloom & Doom Report has told Bloomberg that China might crash in the next nine to 12 months.

There are at least two reasons for this.

First is the property bubble. Vincent Fernando at Business Insider says the Chinese government's tightening up on the property market is starting to bite. Prices in Beijing have crashed, falling 31%. When people start losing money on property, that's likely to siphon away the capital supporting the stock market which means we can expect further stock market calamaties.

Then there is Europe. As BusinessWeek reports, Europe is China's biggest export destination, making up 20 percent of its total overseas sales and there are concerns in China that the European crisis will delay recovery, which in turn will affect Chinese exports.

This is not to say that China is in trouble. But the Shanghai Composite Index is warning us about danger signals which could turn out to be disastrous.