Will China "shanghai" the Global Equity Rally?     

• Reports continue to filter out of China that the government is moving to tighten bank lending, and this is weighing on China stocks as well as other stock markets in the region.
• Foreign investors are leery of a big sell-off, while domestic retail investors in China (which account for some 60% of trading) have turned cautious. Some 52% of Chinese investors surveyed by the 'Economic Observer' newspaper said last week that the government's so-called 'moderate adjustment' would have a big impact on their markets.
• As for China stock prices being a bellwether for global stock prices, while it is true that China's stock market bottomed and began to recover before the US market, this is because China introduced their big stimulus package much earlier in  November of last year and because signs of recovery emerged first.
• Prior to this cycle, however, there doesn't appear to be any close relationship between peaks and troughs in the China market vis-a-vis the US market that can be construed as a leading indicator for US stocks.
• US stock prices are more likely to respond more to US, not China economic or stock fundamentals. If the US stock market does consolidate appreciably from here, it will be because of US-centric issues. Presently, all other markets are keyed to the US market because investors perceive US consumption to be the key to a global recovery, not the other way around.
• Global investor surveys show the largest global investors are now back to fully weighted equities, with emerging markets being the most over-weighted, and developed markets in the US, Europe and Japan still being underweighted. Currently, however, the only buying holding up Japanese stock prices is foreign buying, as essentially all domestic investors are selling into this buying.
• The concern about Japanese companies as China plays is that Japan's exports will benefit little from China's new growth until China's exports recover, because of the triangular trade between Japan, South Korea and Taiwan and the emerging Asia nations including China and Viet Nam. Of further concern are suggestions that China's stimulus itself may be wearing off.

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