Will China face a stock market crash?

With PetroChina debuting with a market cap that's larger than India's GDP, is it time to think of a stock market crash in China? Certainly a whole host of wise men think so, led by former Fed chief Alan Greenspan.

Investment firm JP Morgan has put out a note on the China bubble and quotes Greenspan as saying (on May 23) that the boom in China was 'clearly unsustainble' and would give way to 'a dramatic contraction at some point'.

Morgan then decided to compare China with the US and Japan during the bubbles in those countries (late 1980s for Japan and late 1990s for the US) and found, in May, that China's market capitalisation-to-GDP ratio was around 0.8 while that for both the US and Japan was around 1.4 when the collapse occurred - it also notes that the US ratio was 0.7 when Greenspan made his 'irrational exuberance' comment!

In October, however, Morgan revisited China, this time with a market cap-to-GDP ratio of 1.6, way above the US and Japan at their peaks.

So, does this mean the market will tank? JP Morgan then looked for some more signals and found that the US and Japanese bubbles were preceded by monetary tightening - while money supply tightened, asset prices continued to rise for a while, but tightening eventually had the desired impact.

China's money supply, however, isn't tightening, so JP Morgan concludes the time to take a closer look is when money supply starts tightening and if this fails to cool down stock prices. That does make you think a bit about India where market cap-to-GDP is currently around 1.4.