China Equities Sink 5%, Down 22 % for the Year; What will China do with its much beloved peg to the US dollar?

Rabid believers in the China growth story may need to reconsider.

Already deep in the red on the year, China Stocks Plunge Most Since August on Property Curbs, Europe

China?s stocks plunged, driving the benchmark index to the biggest loss since August, on concern government steps to cool the property market and European austerity measures will hurt economic growth.

China Vanke Co. paced declines by developers after Premier Wen Jiabao said the government will ?decisively? contain gains in home prices. Jiangxi Copper Co. tumbled 6.3 percent after commodity prices plunged the most in nine weeks and the Ministry of Commerce said the euro?s decline is pressuring exporters. Guangzhou Shipyard International Co., which got more than half of last year?s sales from Europe, tumbled 8.4 percent.

?Investors are worried that more property tightening is on the way even as Europe throws up more uncertainties about the global economy,? said Michelle Qi, a Shanghai-based portfolio manager at Bank of Communications Schroders Fund Management Co., which oversees about $6.5 billion.

The Shanghai Composite Index tumbled 136.69, or 5.1 percent, to 2,559.93 at the close, the biggest drop since Aug. 31 and the lowest since May 4, 2009. The CSI 300 Index slid 153.31, or 5.4 percent, to 2,714.72.

The Shanghai Composite has lost 22 percent this year, the world?s fourth-worst performer among the 93 gauges tracked by Bloomberg, on concern the government will keep tightening monetary policy to contain inflation and avert asset bubbles. The measure on May 11 entered a bear market after falling 21 percent from its Nov. 23 high.

Another Sea of Red in Asia

Heading into Monday's US open, this is what I see for Asia.

click on table for sharper image

What will China do with its much beloved peg to the US dollar?

Tonight, the Euro fell to as low as 1.235 to the US dollar.

Bear in mind, Europe is China's biggest trading partner, further exacerbating China's problems with its currency peg to the US dollar. This can get very interesting in a hurry if the Euro collapses.

What all the jaw-boning from Washington D.C. did not accomplish, a collapse in the Euro might.

Currency pegs work, until they don't.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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