The outlook for Chinese equity continues to look poor across 2010. After being one of the top performers in global equity markets across 2009, Chinese equity has failed to impress this year. The Shanghai Composite Index has fallen by nearly 10% since the beginning of 2010.

Indeed the market has now dropped to the point of reaching what is known as the “death cross”. This rarely seen technical indicator is where the 50 day moving average drops below the 200 day moving average. It is a strong indicator that a market is about to experience a strong decline.

This move in Chinese equity markets highlights broader problems in the Chinese economy. China is reported to have grown by 8.7% in 2009. Many analysts have asked the question of how this was achieved. China's main source of economic growth is from US export which fell dramatically during the credit crisis and subsequent recession.

While many commentators hailed China’s economic stimulus package last year as proof of what strong leadership could achieve, it is now becoming clear that much of the $586 billion dollars was wasted.

Much of the stimulus package was bank lending. At the request of their major shareholder (the Chinese government) Chinese Banks began an unprecedented lending programme. Instead of this money being used to re-tool factories or improve infrastructure, much of it went into property and stocks. Both markets have now produced serious asset bubbles and the bursting of these will have a large effect on the new Chinese middle-class.

This is not the first time that China has done this. In 2004, after an unrealistic business lending target set to Banks, most Chinese lenders became insolvent. The government was forced to pump billions into the system to hold it together. With Chinese Banks now being amongst the largest in the world it may be difficult for Beijing to do the same in future.

The parallels between 2004 and 2010 are clear. Chinese equity was the world's worst performing asset sector across 2004 and 2005. It is likely to be the worst performer in 2010.

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