Watch China

Earlier, I was saying "Watch the Euro". Well, now might be a good time to watch China.

A couple of possibly correlated events happened in the past few days in China. Days after intense media attention on those 10 Foxconn suicides + 3 unsuccessful attempts at the huge 420,000-employee factory in Shenzhen China which churns out, among other things, Apple iPhones, Sony Playstations, and various gadgets for many other companies including HP, Nintendo, Motorola and Dell, it has been announced that the workers there have been given a 20% pay raise on Friday. Around the same time, workers at a Honda factory are still on strike, coming into its second week, even after it was announced that Honda would be giving out a 24% pay raise - inflation expectations, anyone?

Next, we've got Bloomberg reporting that : "Chinese manufacturing expanded at a slower pace in May 2010, adding to signs that growth may moderate in the world's third-biggest economy. The Purchasing Managers' Index fell to 53.9 from 55.7 in April, seasonally adjusted. A government crackdown on property speculation is cooling the economy by damping sales and construction, while Europe's sovereign-debt crisis could exacerbate a slowdown by cutting export demand. Comparable indicators in manufacturing around the world in May are forecast to indicate global output growth has peaked. Australia manufacturing growth slowed in May and economists say reports due today in the U.S. will show manufacturing cooled while activity in Europe was unchanged. The Shanghai Composite Index fell 9.7% in May - the benchmark has declined more than 20% this year." - economic recovery, anyone?

Rising inflation leading to increasing pressure to raise wages, economic recovery threatening to go off the rails, and add to that the Chinese government taking a pin to the China property bubble - all this makes for a pretty potent combination. Plus, we have the confirmed completion of the China Death Cross technical pattern, and we could be looking at progressively lower lows ahead. Might, or might not be, an outright crash since the crossover isn't quite as sharp as the one back in 2008, so we might be looking at a protracted decline. For the Shanghai stock index, or SSEC, now that we have achieved the 500-point drop (which as I had mentioned to fellow investors earlier could go 500 points either way, and likely down), the next obvious support levels are around 2400, 2000 and 1800, with the 2000 level being another 500-point drop down from the 2500 area (see chart above).

So the takeaway is this - watch the leading economic indicators, watch oil prices - and watch China.

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