Chinese money supply a headwind for equities

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Over the past few weeks I have often posted articles about the behavior of the Chinese stock market. With the Shanghai Composite Index (SSEC) now having declined by 23.3% since its peak of November 2010, it would seem that Chinese equities have indeed been a canary in the coal main and are now leading global bourses lower. The Chinese stock market was the first to turn the corner after the credit crisis sell-off – a full five months before the majority of indices bottomed in March 2009. The graph below illustrates the SSEC (green line) leading the S&P 500 Index  (red line) at both the bottom and top.

Source: StockCharts.com

“The market environment in China has evolved under a tighter policy stance this year. Faster GDP growth and slower money-supply expansion combined to reduce the country’s excess liquidity, which has typically led domestic stock performance in the past decade,” said U.S. Global Investors in its latest Weekly Investor Alert. Should this historical relationship hold, it would not be surprising to see the SSEC trade lower still and provide a further leash for also pulling other stock markets lower.

Source: U.S. Global Investors – Weekly Investor Alert, May 14, 2010.

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