During the past ten years, China has been one of the single biggest drivers of global economic growth. The country has steadily grown its gross domestic product (GDP) by more than 9% a year since 2002.
As a result, the country has become the largest global consumer of commodities. Rising food and energy prices, surging demand for industrial materials, and even the 10-year bull-run in gold can all be attributed, at least in part, to China.
But China affects more than just commodities... it affects all asset prices in general. As the world's second-largest economy, China's consumption of goods like raw materials from around the world promotes growth in the global economy.
In other words, if China has a problem, then our entire financial system has a problem. And right now, it looks like we may have a problem...
The chart above shows the performance of the Shanghai Composite Index since 2011. The Shanghai Composite is an index of all stocks that trade on the Shanghai Stock exchange -- the biggest stock exchange operating in the People's Republic of China.
As you can see, the index fell for sharply for most of 2011. After rallying briefly at the beginning of the year, the index has started to sell off again. On Monday, the index touched 2,147 -- its lowest level since 2008.
The fear is that China's economy is slowing down. With the European debt crisis starting to weigh on demand for Chinese exports, China's second quarter GDP growth came in at 7.6% -- its weakest quarter in more than three years.
Investors are also scared about the reliability of economic data published by Chinese authorities. There is a shroud of secrecy surrounding the data reporting process in China, and some investors worry that the slowdown may be even worse than Chinese officials are leading on.
But either way, this is definitely a chart that every investor needs to keep his eye on. If China continues to struggle, then you can expect weakness in equity markets across the board.
Risk to Consider: With the economy slowing and inflation concerns easing, some experts predict the Chinese government will shift to a pro-growth economic policy. If Chinese stocks get a boost from the government, then it could help support stock prices in the short to medium-term.
Action to Take --> As the largest economy in the developing world, China is one of the biggest drivers of global economic growth. If the country continues to stagger a long, then it could start to hurt your domestic and international portfolio holdings. This isn't a signal to dump your holdings and head for the hills... but it is something to keep in mind when you're making any future "buy" or "sell" decisions.