China's Stock Market

China’s stock market rallied yesterday on speculation that the government is taking steps to ease a credit crunch after the nation's new bank lending in December beat market estimates. The benchmark Shanghai Composite Index gained 2.9%, or 62.39 points, to close at 2,225.89 points, which marked its biggest advance in almost three months. Investors also seemed to take comfort from a statement posted over the weekend by Premier Wen Jiabao, who said that a difficult global environment made addressing problems in China’s own financial system more urgent. Wen suggested stock market investors' rights should be better protected.

On Sunday, the PBoC reported that the country's banks lent 640.5 billion yuan in new yuan-denominated loans in December, a sharp rise from 562.2 billion yuan in November. M2 was up 13.6% y/y at the end of December, higher than the 12.7% rise at the end of November.

The Chinese stock index is highly correlated with the CRB raw industrials spot price index. The former dropped 23.4% last year, while the latter fell 11.5%. The stock index was 16.4% below its 200-dma at yesterday’s close. I expect that the Chinese stock market will rebound this year as the PBoC lowers bank reserve requirements to ease credit conditions in order to stimulate economic growth. That should boost commodity prices.

Japan’s Nikkei is also highly correlated with the Chinese stock market. That’s not surprising given that China is Japan’s largest trading partner. In 2002, China beat the US to become the largest source of imports to Japan. In 2009, China displaced the US as the largest export market for Japan. (More for subscribers.)