First, the Chinese economy has led the global stock markets higher since 2008. Traders and investors should know that the Shanghai Index bottomed out in late 2008, meanwhile, the U.S. market indexes did not bottom out until March 2009. The Chinese economy leads the U.S. and the rest of the global markets since that time.
The second reason that investors should fear a Chinese slowdown is because many companies are doing a lot of business in that part of the world. Companies such as General Motors Co (NYSE:GM), Yum Brands Inc (NYSE:YUM), Wynn Resorts Ltd (NASDAQ:WYNN), and even the mighty Apple Inc (NASDAQ:AAPL) do a lot of business in China. If the Chinese economy really slows down it will hurt all of these corporate profits in the future. Remember, the stock market cares about the future not the present. Investors can easily see how the base metal stocks such as Freeport McMoRan Copper & Gold Inc (NYSE:FCX), and Rio Tinto plc (NYSE:RIO) have traded recently compared to the major stock indexes in the United States. This is due to a weaker Chinese economy.
The third reason why a Chinese economic slowdown will affect the global stock markets is due to a lack of investment abroad. Just think about it, it was not that long ago that the International Monetary Fund, the European Central Bank (ECB), and the even French leader Nicolas Sarkozy begged China to help with a European bailout. At that time, the leaders of the world acted as if China could bail out the entire Euro-zone. Now, these same leaders act as if China no longer matters to the global economy.
Here is the bottom line, if the Chinese economy significantly slows down it will affect the world. If the Chinese no longer continue to invest abroad the world economy will feel it. What will happen to the United States if the Chinese stop buying U.S. Treasuries? Better yet, what will happen to the United States economy if the Chinese actually begin to sell bonds? The U.S. will have to pay a much higher debt service as yields rise. All eyes should be on China over the next few months as this could be the bigger problem for the global economy. 