China’s Shanghai Composite has served as a relatively reliable leading indicator over the course of the last 3 years. As we all know, China has quickly become the engine of global growth. While most developed markets continue to struggle in the early recovery phase officials in China are working to wrangle in the already overheating economy. Equity investors have taken notice and pared back their exposure to risky assets since late last Summer when the Shanghai had rallied over 105% from the lows.
While the S&P 500 has rallied over 6% since the recent lows the higher beta Shanghai has only managed a 3% move from the bottom. Despite a holiday last week, Chinese investors were none to enthused with the prospect of what had occurred during the down week. The Chinese equity market has made a series of lower lows since the Summer and remains in bear market territory by technical standards. The Shanghai served as an important leading indicator when the bear began in 2007 and also served as a warning sign that the global economy had bottomed in late 2008 – moving several months in advance of the S&P 500. Is this another warning sign or is China just taking a breather?