Chinese Jitters

S&P futures fell last night as China raised bank reserves yet again. Notice where they fell to: 1274.25. I've been mentioning 1274 all week.

With investors across the world pinning their hopes and dreams on China to merrily continue buying commodities and sovereign (junk) bonds from Europe, it is important to keep the country in perspective. For that, please consider a few points from a 2011 Outlook from J.P. Morgan:

First, this small caveat. A positive view of the world must assume China can continue to control inflation and deliver ~8% growth. Things like increased bank reserve requirements which are ordinarily a prudent thing are an anathema to investors with stars in their eyes, hence the negative reaction overnight.

Roughly 85% of all FX transactions occur in US$ (BIS data), with 39% in Euros, 19% in Yen, 13% in Sterling and 0.3% in Chinese RMB (numbers add to 200% given two sides to each FX transaction). Pinning ones hopes or investment strategy on a country with .3% of global money flows is a little silly.

Most Emerging Market countries (14 of them) are highly correlated to China's year over year GDP growth. Here is where it gets dicey. EM is the current darling of the alpha crowd and the hopefuls that follow them. When China stumbles, EM pain will be extraordinary acute. Can your EM strategy withstand a 60-70% correction?

China's two largest trading zones are the US and Europe. Both markets are structurally unsound. China's internal demand is many many years from self-sustaining levels. At this point in time, China is like a $300 internet stock from 1999 with no earnings. Exciting to trade, but potentially deadly as one's complete and total investment thesis.

For today's trading, I will look to be a buyer if the futures get to 1274 again.