Why A Global Market Collapse Will Begin In China

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Most experts believe that, when a sharp drop in the global stock markets comes, and it will one day, the fall will begin in the US. It could be triggered by a slowing economy, falling corporate earnings, or trouble in the housing industry.

But, the S&P is up less than 15% this year, and there are not many stocks making 52-week highs. The market may be OK, but it appears to have at least a modest amount of risk built in.

Looking across the Pacific to China, the story is completely different. The Shanghai Composite made another new high overnight. It has more than doubled since the beginning of January.

Perhaps more impressive is the number of Chinese stocks hitting 52-week highs, even when they trade on US exchanges. Yesterday, China BAK Battery (CBAK) rose 20% in Nasdaq trading to make a new high. China Fire & Security (CFSG) made a new high on Nasdaq as well. So did China Fin Online (JRJC).

On the NYSE, nine of the 25 new highs reached yesterday where Chinese companies. These include huge operations China Telecom (CHA), China Unicom (CHU), China Mobile (CHL), PetroChina (PTR), China Petroleum (SNP), and China Life (LFC). These are not small, speculative stocks. Some of the shares in these large companies have almost tripled from their lows.

What is impressive is that the move up is not in one sector. It is spread across telecom, energy, finance, and industrial stocks.

China’s GDP is growing at 10% or so. A significant run-up in markets there is too be expected. But, there is plentiful evidence that the share price of many companies is out-stripping near-term potential.

A fall in global markets begins in China.

Douglas A. McIntyre