I think the significant drop in Chinese stock prices recorded for Fri. reflects more than the Central government's battle with inflation, which perhaps had its origin in the massive stimulus program program put forth to combat the financial crisis of 2008.
In my view, the drop is indirectly linked to a policy of pegging the Yuan.
This policy by the #2 economy in the world has caused significant global imbalances in finance. Combined with a structural trade surplus with America and Europe, the policy of pegging is disrupting the entire global financial system. This could cause damage lasting decades.
Politically, I believe that China is in a position that if the peg was removed there would be widespread negative business consequences within the country. China appears to be choosing to risk significant global consequences rather than to slow down domestic economic growth and raise the purchasing power of the Chinese people.
In summary, I view the sharp stock losses in China as a warning sign for the world to watch. There is no indication that China will remove the Yuan peg to the Dollar.
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