Malcolm Graham
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The chart that shows the worst may be yet to come for Chinese stocks

The Chinese stock market ballooned over the past year on the back of borrowed money, with margin debt climbing to a high of 9.6% of market cap as equities peaked in June, according to Guggenheim Chief Investment Officer Scott Minerd.

This is an alarming level, both historically and globally, and as you can see by the chart, it puts China in some unsettling territory. Even after the latest spiral.

“While margin debt has begun to unwind in the midst of the latest stock selloff, there is still a great deal of margin debt outstanding, meaning more turbulence could lie ahead for China’s stock market,” Minerd wrote in a blog post cited inMonday’s “Need to Know” column.

“If Chinese policy makers don’t alter course soon, the current Chinese equity-market correction could turn into a stock market plunge similar to what happened in the United States in 1929,” he wrote. For comparison, the U.S.’s margin figure is currently below 3%.

Minerd said the best case for China may be what we saw in the U.S. in 1987, when a steep market drop and rebound ultimately established a base for the next big rally. But if the worst-case 1929 scenario were to unfold, it may not be so bad for U.S. investors.

“A Chinese slowdown will put energy and commodity prices under pressure, which will benefit U.S. consumers and U.S. manufacturers as input prices fall, and should help support earnings in the near term,” Minerd said.

MarketWatch