Napoleon Bonaparte, the influential French military and political leader, who ruled Europe during his time from 1769-1821, famously claimed that When China moves, she will move the world.

What he said some 200 years ago could not be more true, perhaps more so in the economic sense rather than in the military sense. According to Mao Zedong 61 years ago on 21 September 1949, The Chinese people have stood up, but if the late Communist Party leader had lived till today he would have been embarrassed by his statement because China is today far stronger and more powerful than it was six decades ago.

I have mentioned time and again that China single-handedly dragged the world out of recession in 2009 by buying up everything under the sky from everyone in the world especially much-needed resources that will feed its growing economy.

The influence of China is so far-reaching that stock markets tumble when the Chinese bourse tumbles even on speculation of a possible rate-hike in the near future. That is a testament of how investors view the importance of China, whose economy will directly and indirectly affect economies around the world.

Shanghai Composite Courting Bulls And Bears

The Shanghai Composite Index (SCI) has been flirting shamelessly with the bulls and the bears by first teasing the bulls when it surged past 3,000 points followed by taunting the bears with a rapid one-month plunge from a high of 3,186 points to a low of 2,758 points.

The 428-point plunge from peak to trough represents a significant drop of 13.4% over a period of less than one month.

All these could be attributed to fears of another rate hike after Chinas inflation raced to 4.4% a level way above the official acceptable level of 3% in October. The first rate hike in more than three years, took place on 19 October, did not cause the SCI to plunge but fears of another possible rate hike in December 2010 spooked investors.

In a typical rate hike cycle, there will always be fear of a rate hike but investors will soon get used to the environment after accepting that such a move is part and parcel of a growing economy. However, the fear of another hike will always come into play when the stock market needs a correction but will start to rally once the rate hike materializes.

The same thing happened in the US when Alan Greenspan raised and raised interest rates prior to the bursting of the tech bubble in Year 2000.

The SCI raced into bull market territory when it surged past 3,000 points but the surge can now be a possible false break unless the index crosses 2,900 points by the end of this month. The failure to do so over the next two or three months would confirm that the breaching of 3,000 points was a false break.

Entering The Rate Hike Cycle

Asias economies, led by China, faces rapid economic growth and rising asset prices leading to worries that an asset bubble is in the midst of being formed if price increases were not checked. As a matter of fact, Australia the main beneficiary of Chinas buying spree of resources in 2009 was the first to hike rates that sparked off a rally in Asia bourses on beliefs that Asian economies would be the first to walk out of the recession.

From welcoming price increases to worries of asset bubbles now, Asian governments are under pressure to raise interest rates and countries ranging from China to Thailand, India and Korea have entered tightening phases were economic growth would surely be accompanied by inflation.

Asia now faces the challenge of maintaining economic growth while ensuring that inflation does not get out of hand, as opposed to Europe and US where worries of deflation are a major concern.

The US economy has been continuously reporting better-than-expected and stronger economic data especially in the labour market. The week that ended 26 November saw weekly jobless claims drop near 400,000, which is a significant figure and has now led economists to believe that a drop below 400,000 a catalyst for another strong rally is possible.

The ADP private sector jobs report also showed that the US economy added 93,000 jobs for consecutive months, adding strength to the belief that the US economy is on the mend. A strong labour market is pivotal to the US economy a consumer-driven economy and that explains why personal income and consumer spending have also been encouraging in recent months.

All these translate into good news for the US economy and the global stock market, but that would also mean that the US may enter a phase where the US government may need to tighten its monetary policy and ultimately lead to an increase in interest rate.

While this may not come until at least the second-half of next year, a stronger economy will surely lead to calls for tightening measures and it will lead to volatility in the US stock market just like what Chinas stock market is experiencing right now.

Bull Or Bear?

As mentioned earlier, the health of Chinas economy and stock market is of paramount importance to the world.

When Chinas economy showed signs of slowing down and was thought to be in for a hard-landing, the worlds economy and stock markets sympathized and weakened. When Chinas economy grew stronger despite earlier measures to curb price increases in the property sector, its stock market rallied and pulled the whole world along with it. The most recent correction in the global stock market is a combination of several factors but Chinas possible move to hike interest rate in December was probably the key reason for the selloff although Europes problems a reason used umpteen times to cause a correction do play a small role.

China re-entered bull market territory when it hurdled across 3,000 points but its recent drop to below 2,900 points raises a concern about the direction of the Shanghai stock market. The other major Asian bourse the Japanese stock market fell into bear market territory shortly after Shanghai, but the Nikkei has staged a fight back and is now back in bull market territory unless it falls below 9,800 points once again.

The bulls are still in control but do watch out for the SCIs ability to surge past 2,900 points, which is a key level. As for the Straits Times Index, it is fighting to regain 3,200 points at the time of writing and 3,300 points beckon if the US stock market continues to rally starting from 2 December.

Garbriel Gan is a Senior Vice President at DMG & Partners Securities and is featured across a wide media net

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