The hype around China is seductive, especially when we're mired in a recession. Any ray of hope is worth a few minutes of our time. Even a turning economy isn't enough ... it hasn't turned yet! So, we have the promise of China.

Well, China is about to learn about the downside of capitalism. A bear market could be threatening the country, driving home the notion that free markets (even if only slightly free) involve some risk, and proving to the American public that inside every sure thing is a hefty dose of "flavor of the month." The bears are circling Shanghai, even as the U.S. equity market appears to be coming back.

If a butterfly flaps its wings in Shanghai, does it cause a typhoon in New York? Today, The Associated Press reports, the Shanghai Composite Index fell 8.3% -- more of butterfly buzz. So will the U.S. market shrug it off like it did last week or plunge like it did in February?

In February, the Shanghai Composite fell 8.8% and the Dow plunged 416 points. But last Wednesday, the Shanghai Composite lost 6.8% and the Dow was up 184 points. The cause of the latest Shanghai Composite tumble is higher odds that the Chinese government will raise a trading tax. Last Wednesday it raised the stamp duty tax from 0.1% to 0.3%.

The reason for the Chinese government's move is to stop Chinese citizens from opening new accounts. But it's not working. More than 400,000 brokerage accounts were set up on May 30, exceeding this quarter's daily average of about 300,000. So investors fear that the Chinese government will raise the tax some more.

This has hit the Chinese market hard. According to TheStreet.com, the Shanghai Composite has lost 15% of its value in the last week -- still up 37% in 2007. But the U.S. does not seem to be panicking. Dow Jones Industrials futures are down 32 points and Nasdaq futures down 4 as of 7:30 a.m..

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter.