Monday, July 9, 2012
Regular Stansberry & Associates readers know that China is at the center of a huge debate.
Some very smart people – like master short-seller Jim Chanos and top hedge-fund manager Hugh Hendry – say the country is a powder keg of government-directed malinvestment.
On the other hand, you have the China optimists, like popular investor Jim Rogers. He and other China bulls say these fears are overhyped and overblown.
As traders, we're keeping a close eye on this debate. China is the world's workshop... and its largest consumer of commodities. If China has a big problem, the whole global asset market has a problem.
And it looks like the whole global asset market might have a problem...
When China bears make their arguments, they point to the hundreds of billions of dollars China has spent on unused infrastructure projects and real estate developments.
They also point to China's trillion-dollar-plus "shadow banking" sector. This "shadow banking" sector goes unreported in government numbers... But bears say it helps mask a giant amount of bad loans in China. They say it's "the Next Subprime."
And right now, they're pointing to the Shanghai Composite Index...
The Shanghai Index tracks the biggest and most important public companies in China. You can think of it as the "Dow Industrials of China."
As you can see in the 18-month chart below, the Shanghai Index suffered a big decline in late 2011. The index fell from a high of around 3,000 to a low of around 2,200 (a 26% drop). Then, early this year, it attempted to rally off its lows.
But as you can see from the right side of the chart, this rally has failed. After trying to break out to the upside in May, the Shanghai Index has fallen apart... It's now close to breaching its yearly low.
As always, we say, "Understand both sides of the debate... but always mind the market. The market is the judge, jury, and executioner of all ideas."
The market, in this case, is starting to side with the bears. Should the Shanghai Index continue to break down, it's a sign caution should rule your financial decisions.
Amber Lee Mason and Brian Hunt
"If you're a China bull, you may want to close your eyes for the next few months," Jeff Clark told readers recently. But if you're a bear, he suggests a great way to profit off China's downside. Find the details here: Another Sign of Trouble for China's Stock Market.
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