Shanghai Should Continue to Sell Off

Includes: CAF, FXI, GXC, PGJ
by: J. Christoph Amberger

U.S. investors are getting inured to the bad news about American financials and insurers. Gold bugs are uneasy as gold posts losses of nearly 30% over its highs. Oil investors wonder how their "$300 oil" could have possibly lost $45 per barrel in eight weeks.

And yet, few people outside of TFN are pointing out that the supposed engine of all global growth, China, has dropped lower and faster than any other losing asset except for Fannie Mae (FNM) and Freddie Mac (FRE) stock. (Alright, throw in Lehman Brothers (LEH).)

Only more slowly.

Trading as low as 2,070.427 (a new post-boom low!), the Shanghai Stock Index today closed at 2,078.981. Based on its high of 6,124.04, today's low represents a spectacular loss of 66.05% -- two thirds of its October 2007 valuation.

Last month, I was a guest at TFN's latest Smart Trading video on China. Laura Cadden had invited me to check what I foresee for China. (Take a moment to revisit this interview.)

To make it short and painful: I see financial catastrophe brewing in China. And that is bad news for U.S. consumer prices... and for commodities.

Remember, China's growth and the increasing prosperity of the urban Chinese are considered the prime movers for commodities and especially gold consumption. What is most distressing at this point is that the decline in Shanghai not simply represents a loss in market valuation — but a very real destruction of Chinese middle class savings -- which, as you will remember, were pumped from more traditional savings accounts into trading accounts by the billions last year.

The lower valuations also will work their way into Chinese bank balance sheets: Plenty of corporate portfolio punting was undertaken using indiscriminate loans issued by Chinese banks to party functionaries working in corporate executive positions. If you think paying back upside down mortgages reflecting 10-20% in valuations were dynamite for U.S. mortgage lenders, just wait until last years punting loans come due in Beijing…

You may think that the downside to Chinese stocks now is contained. Don't count on it: There are rumblings in the big four Chinese banks that not just their real estate loans, but their legacy load of non-performing loans are about to hit the headlines before the year is over. When that happens, people will die -- quite literally. I believe there is a corruption purge imminent that will result in at least a dozen top financial official being executed.

And the Shanghai stock exchange may plunge another 1,000 points.

Disclosure: None