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Chinese stocks as measured by the Shanghai Composite have now lost about 25% of their value.  At what point does this matter to the rest of the world?

Clearly, most global equity markets are in a bubble considering the level of inflation, the multiples, and the lack of dividends.  I would guess at some point in the near future most paper assets get a big haircut.  Perhaps the scare out of China will finally ripple into other markets as the damage has gone beyond what is repairable in a week or two.

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I don't think the world worries as much anymore about the Shanghai index, if I got my indexes straight, and this deflation is just what the Chinese government wanted when they raised the transaction tax on stock purchases on the Shanghai stock market.  If the Hang Seng index dropped by 25%, then the world would panic.  As I understand it, the Shanghai index is an internal index, invested in mostly by Chinese citizens and has way too much money chasing way too few stocks.  I don't believe that too many non-Chinese are invested in the Shanghai index, so the impact on the world should be fairly minimal.  If you look at the ADR's of CEO, BIDU or ACH you will see they haven't dropped much recently, and these should be big players in the Shanghai index.  If it only hurts Chinese citizens, then that limits the effects on the rest of the world.  The Chinese are not a big consumer society in the sense of personal goods, (which is why they have huge trade surpluses and huge foreign reserves), so while this is painful for Chinese consumers, I don't think it will hurt companies such as Boeing, BP or Toyota, so realistically should have minimal effect on world markets.  Just my opinion.

 Craig

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