Key money-supply metric signals Chinese stock rally has more room to run: Nomura
News Summary
Nomura Holdings analysts Jin Song and Ting Gao indicate that a key money-supply metric suggests the current bull run in Chinese stocks has more room to extend. The metric shows M2 growth matched aggregate social financing (ASF) last month, signaling improved liquidity for equities. This phenomenon also occurred prior to China's two biggest stock rallies in 2005 and 2015, when the Shanghai Composite Index surged sixfold and more than doubled, respectively. Nomura's findings lend further weight to the argument that liquidity-driven stock gains, which pushed the Shanghai Composite Index to a decade high last month, may have more upside.
Background
The article references Nomura Securities' analysis, highlighting the relationship between M2 (broad money supply) and Aggregate Social Financing (ASF) as a key indicator for Chinese stock market liquidity. M2, representing all term and demand deposits, serves as a proxy for money supply, while ASF signifies capital demand in the real economy. Historically, the pattern of M2 growth matching ASF growth preceded significant Chinese stock market rallies in 2005 and 2015. During those bull markets, the Shanghai Composite Index surged sixfold and more than doubled, respectively, providing a historical precedent for current market movements.
In-Depth AI Insights
What are the underlying implications of this M2-ASF correlation analysis for China's capital markets beyond mere liquidity? - While seemingly straightforward, this correlation might reflect more strategic policy guidance rather than purely organic market dynamics. Beijing could be subtly channeling liquidity into equities to support economic growth, manage local government debt, or boost the valuations of national champions. This isn't just about money supply; it could be strategic capital allocation. How reliable is this historical M2-ASF correlation as a predictor in the 2025 economic landscape, especially with current global uncertainties? - While historical patterns offer context, current global uncertainties (e.g., US-China trade tensions under the Trump administration, potential tech decoupling, and evolving domestic consumption patterns) introduce significant variables not present in 2005 or 2015. The Chinese economy is larger and more complex. Thus, while liquidity is a necessary condition, it is not sufficient, and investors must exercise caution. If this liquidity-driven rally continues, how might it impact the Chinese government's long-term goals for economic rebalancing and financial risk prevention? - A sustained liquidity-driven stock market rally could provide short-term economic support, but in the long run, it might exacerbate asset bubble risks and potentially divert government attention from deeper structural reforms (such as reducing reliance on real estate and optimizing industrial structure). Over-reliance on liquidity to inflate markets makes the economy more vulnerable to external shocks and internal imbalances.