For some perspective on one of the more important global stock markets, today’s chart focuses on Chinese stocks and presents the current trend of the iShares FTSE/Xinhua China 25 Index (FXI). As today’s chart illustrates, Chinese stocks have endured what amounts to an extremely wild ride since 2005. Considering China’s increasingly significant contribution to the global economy, this recent stock market action is most definitely a red flag.
The FXI trended upward at an ever accelerating rate (i.e. parabolic) from 2005 to Q4 2007. As the credit bubble began to unravel, so too did Chinese stocks with the FXI trending downward at an ever accelerating rate from Q4 2007 to Q4 2008. Beginning in Q4 2008, the FXI surged — gaining over 155% trough to peak. Since that post-financial crisis peak back in Q4 2010, Chinese stocks initially treaded water but more recently have entered in to a steep downward trend channel. – Chart of the Day

A Recession in China would affect the resource producing regions of the world.

Marc Faber: China may be on the verge of economic collapse, stemming from the dreaded one-two punch of rapidly increased capital goods overcapacity to match significant reductions of global demand for its products.

“I think if China had much slower growth or even a recession, which very few people talk about, but it is conceivable if you look at the U.S. 1800 to 2000, we had many recessions and we kept from growing. But basically, if that happens, then the demand for raw materials would go down. So it would affect all the resource producing regions of the world, including Latin America, Africa, the Middle East, central Asia, Russia, Australasia, and it would affect their currencies. And then these countries would have less money to buy goods that come from China, and we could have a downward spiral in the world which would be very vicious.”

The often repeated story regarding China is that the country will grow without end,  it will overtake the US, and rule the world. The recent precipitous decline in the price of cooper tells Faber that China’s rapid GDP growth may have been somewhat of a mirage for a spell.  What was once thought of as a clever means for China to dump U.S. dollars in favor of ramped-up infrastructure spending in the People’s Republic, with numerous reports streaming into the West of newly-built cities erected in anticipation of millions of soon-to-come inhabitants, may, instead, result in another example of a Mao-like central planning scheme gone bust. Marc Faber’s Blog

China no Miracle

I propose the China story is really about rampant credit expansion, malinvestments, unproductive assets, no free capital markets, centralized planning that people mistake for capitalism, no legal system of merit, no freedom of speech, no respect for either property rights or human rights, and that peak-oil will in and of itself kill the story.