I’ve maintained for quite some time that the biggest risks to the U.S. equity markets were not domestic.  Not even close.  The biggest risks to the U.S. equity markets come from abroad.  Clearly, the problems in Greece are taking all the headlines today, but the biggest news of the day (in my opinion) is the continuing tightening measures that were announced in China where the reserve ratio was raised for the third time this year.  As I’ve said before, the huge stimulus response in China was the grossest misuse of public funds during the entirety of bailout fever.  It’s slowly coming back to haunt them as malinvestment in the property market has sparked fears of a bubble and the economy now appears to be overheating.

Marc Faber told Bloomberg TV overnight that the Chinese equity market is now at risk of a crash:

“The signals are all there, the symptoms of a major bubble are all there.  The Chinese economy is going to slow down regardless. It is more likely that we will even have a crash sometime in the next nine to 12 months.”

HSBC is a bit more sanguine on the situation:

“We think most onshore investors are comparing the equity market this year with what’s happening in 2004-2005.  China equity market fell from 3000 to 1500 after the internet bubble and just start to recover which is similar to 09 recovery rally as well.  China also started to raise RRR and later IR during that period, PBOC is obviously doing the same thing now.   We see the liquidity situation in the mkt will keep weighing on markets.”

Like most central banks throughout history China is responding in classic scientific method – AFTER The evidence is in.  Of course, we’ve seen this happen time and time again here in the states and the Chinese appear to be replaying this episode for themselves.  Just as they were late to the party in tightening and cutting during the last cycle they are once again behind the curve.

Only this time, the stakes are arguably much larger as a serious decline in the Chinese economy would almost certainly trigger a worldwide double dip (or should we call it a new recession?).  Shanghai and Shenzhen are closed today for holiday, however, Hong Kong equities are trading 1.5% lower as I type (12:30 AM EST).  Chinese equities are off 12% year to date and just as we saw at the 2007 highs and the 2008 lows, U.S. equities are largely ignoring the leading indicator that is China….