Over the past two months, we’ve witnessed multiple 4%-plus drops for the Shanghai Index. And we already know what happens when the China euphoria truly wanes. In 2008, the Shanghai index plunged by two-thirds.

This week’s sell off could signal we’re headed for another correction. And if history is a guide, it could be severe.

To sum it up in two words: Caveat emptor!

Chinese stocks got way ahead of the global recovery and are in dire need of a cooling off period before even attempting another bull charge.

A satisfactory theory of the boom explains the depression. In the crisis what has been sown during the boom has to be reaped. Well those are words of Wilhelm Roepke, in 1936. When the discipline inherent in the gold standard and the Bretton Woods system ceased to exist, trade inbalances produced an expansion of international liquidity. In turn, surging liquidity permitted credit expansion that resulted in over-investment,overcapasity, asset price bubbles, and deflation. The pattern is very clear.

“If China is booming the way people think, why would anyone pull their money out of China and invest in real estate in Australia? The answer is: Insiders know what the dangers are.”

- George Friedman

Much to-do has been made about China in both the political and business worlds for some time now. Especially with the emergence of the Brazil Russia India China (BRIC) craze, the top four, fast growing economies - at least until last year - investors practically tripped over each other in an effort to get a piece of the country and its wealth.

In fact, in many and even most circles, China taking over America’s position as the superpower to reckon with… Well, that isn’t speculation; it’s just fact.

These days especially, with the U.S. ailing under the load of sub-prime loans and toxic assets, you won’t find too many people who think that China won’t take over in the next 15 to 30 years.

Normally, I’m in that boat myself. I’ve read too many articles about China’s growth to doubt its potential. However, I have to hand it over to one of the few dissenters in the debate, George Friedman, founder of STRATFOR and author of “The Next 100 Years,” who doesn’t believe China stands a chance in this century.

One of his main reasons for doubting its long-term abilities comes down to general population wealth. What Westerners don’t get, Friedman claims, is that there are two stark polar realities in China: the “region that’s lost its bearings in China vs. the rest of China that’s bitterly poor and extremely angry.”

The former, he says, is actually an extension of Europe and the U.S. more than anything, with western-style shopping and lifestyles. But the majority of Chinese citizens outside the eastern coast lead hopelessly wretched lifestyles under an oppressive regime.

Naturally, that’s a state of existence that doesn’t lend well to dominating the world. Plus, he smiles, “I’m old enough to remember how Japan was going to be the new Japanese super state overwhelming everyone else.”

In other words: Just because hype exists, doesn’t mean that it has a right to.