China could be the economic engine that helps pull us out of the global recession, but the government’s stimulus programs may be inflating an asset bubble instead of actual growth. Could it lead to another round of selloffs in global markets and exchange traded funds (ETFs)?

The Chinese government threw a huge wad of money at its economy and banks have issued loans at four times the rate of last year, but the government has started to hint at easing spending, which could halt the country’s economic growth, writes Daniel Fisher for Forbes.

It is estimated that China’s real underlying GDP growth could actually be as low as 3%, not the reported 7.1% of the first half, because of unsustainable government spending and increased production with goods that aren’t being purchased by domestic or export consumers. If China’s exports fall, China may devalue its currency, which could led to a global price war.

Many believe that gains this year in the Chinese stock market have boosted U.S. and European stocks as investors become more risk tolerant by wealth accumulated in international investments. However, the Shanghai stock market is almost down 20% from its high, putting it close to a bear market, reports Matt Krantz for USA Today.

Experts on China’s economy and stock market say this low does not necessarily signal challenges in other stock markets because:

  • A pullback after high gains in Chinese stocks was expected
  • Curtailing spending in China doesn’t mean other countries will follow suit
  • Trading in Chinese stocks is mainly based on speculation.

Does this mean can you buy the new rally? While there is skepticism in China’s numbers and concerns about the rapid growth there, the ETFs are in an uptrend that you can’t fight. Protect yourself by having an exit strategy if the trend ends suddenly.

  • iShares FTSE/Xinhua China 25 Index (FXI): up 40.8% year-to-date

ETF FXI

For more information on China, visit our China category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.