Stampede to the Exits

A Chinese government mandate that banks' increase their reserves, combined with fears of further speculation-squashing, sparked China's correction. The reserve requirement removes liquidity from the system, similar to the impact of a rate hike or a rise in the value of its currency. Such moves may be just beginning.

The government has been on a campaign lately to discourage rabid speculation. Chinese officials warned in early February that "speculation will only cause bubbles, which will burst," adding that "the most important move to protect investor interests is to ensure the healthy development of the capital market."

China has already cooled down real estate investment with tax policies and many expect it will implement similar policies to quell stock market speculation, says Winston Ma, author of "Investing in China: New Opportunities in a Transforming Stock Market." China wants to preserve its aim of constructing a "harmonious society," says Ma, meaning reducing the gap between rich and poor as much as possible.

Whether China backs off from imposing more liquidity-reducing controls or not, the chain of events Tuesday spotlights the thin ice our markets skate on. The U.S. economy, at slightly below-trend growth and above-trend inflation levels, is ultrasensitive. China's aim, as outlined in its 11th Five-Year Plan for National Economy and Social Development last October, is to move from prioritizing "getting rich first" to "common prosperity."

That mission might not fit so well with global stock market rallies.

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