China Market Crashed up to 8% yesterday. Signs of Disaster coming?

The China stock market had a mini crash yesterday falling up to 8% at one point of time and recovered to -5% at the end of the day. The reason for the fall is based on the rumor that the central bank of China may be tightening their money policy, soaking up the excess cash in the system. Hold on! This sounds familiar! It has happened before during 2007 and that sparked the final showdown between the bulls and bears with the bears winning and the bulls bleeding.

Interestingly, it also marks the start of the US bear market. If you recall, the subprime issue is still considered to be a manageable issue in the world at that point of time and the growth in US remains good. The China market started their plunge and bottomed at the point when Lehman and Bear Stearns went down and the worse stock market crash in history of US. 6 months later the Dow reached its bottom, and China started their run till yesterday. Looking at the chart, there is one strong possibility here: That the China market may be a good forward indicator on where the global markets may go next in the coming months. One of the key reason for such a response is probably China draw for hot money. Currently, the China stock market is still a restricted and illiquid exchange where only residents and big financial institutions can invest in it. With a good growth story, investors around the world pumped money into China via major financial institutions. And most of these capital are not here to stay. They are speculative in nature and tends to bail out on the first signs of trouble. Hot money is also forward looking and tend to move faster than the average capital. Since China is the forefront receipent of hot money, it could create a predictive nature which will tell us if the big boys are moving their money out to someplace safer.
If the China stock market starts a serious correction, it may indicate of things to come for the markets around the world. Well, this is a personal observation and no proven facts that the SSEC do lead in terms of trend of the stock market. however, if it does come true, it do give another strong argument to the possible W shape recovery of the global equities market. It could also signal trouble to the commodity markets and stocks. Check out the oil chart and overlap it with the SSEC. The story gets more exciting everyday, stay tuned!