While slowing economic growth in China has remained high on the radar this year, performance of the Chinese equity market has grabbed little attention -until now. The Shanghai Composite fell into bear market territory earlier this week, down 20% from one year ago. Perhaps more concerning, the broad index could retest levels not seen since March 2009.
"The hits just keep on coming," says Jon Najarian, co-founder of TradeMonster.com. "We could point to a lot of issues with China, but the single biggest one is [that] their biggest client, the Eurozone, is in a recession; and the fact that they have not fully addressed that yet, I think is why China continues to trade lower."
The importance of Europe cannot be understated. The EU is China's second largest export market, and arguably the biggest contributor to their economic slowdown. China's exports to Europe plunged over 16% in July compared to last year.
The troubles are not going unnoticed. German Chancellor Angela Merkel met with Chinese leaders Premier Wen Jiabao and President Hu Jintao in Beijing this week. According to Bloomberg, it seems clear the Chinese are willing to act to support Eurozone and are even considering more European bond purchases to do so.
Whether or not Chinese leaders step in, Najarian says Central banks could hold the key to a China rebound. Specifically, he believes coordination between the ECB and the Fed to backstop European banks could have an enormous positive impact.
"If you're gonna a get bang for your buck about spending money, we're not gonna do much with QE3 or Twist, but we could get a pretty big bang for our buck helping save the Eurozone," says Najarian. "And if we did that, I think we could see a massive rally out of China."
Is it time to start buying China stocks at a discount or will this bear market get worse? Let us know your thoughts on our Facebook page.
And check out details of Jon's next Invest Like a Monster event coming up in September.
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- Jon Najarian