China's central bank targets at M2

Shanghai Composite Index dipped into bear market(20% from 3461) briefly two weeks back and fought its way back, only 17% down on last Friday closing. The players are cautious but still bullish citing the recent correction has brought the valuation a very reasonable level -- neither too expensive nor too cheap. Ahem, hello, is China market rules by the fundamentals? On the sentiment side, they think it is not the time to dump yet, still hanging to their shares.

I think liquidity is key to decode this market. This piece of news is very important: China's central banking is issuing verbal warning of the need to tighten the liquidity.

(Xinhua) The People's Bank of China (PBOC), the central bank, published its
Annual Report 2008 on August 25, emphasizing the stability of the moderate
increase in monetary credit and reaffirming the growth target of total annual
money supply, making M2 growth stand at about 17 percent.

http://news.xinhuanet.com/english/2009-08/26/content_11949332.htm

Did you catch the significance of 17% ? Look at this chart.




I believe there is no need to waste time to debate whether Shanghai Composite Index will be able to avert a bear market again. M2 reversion to mean from 27% to 17% is giving us that strong hint. As bank lending is very tightly correlated, it will be very easy to figure out their lending rate will have to slow down, liquidity will have to be mopped out from stock and property markets.

Guys and gals, I'm not that Mr. Market that has emotion problem flipping with "bullish" and "bearish" moods. I believe while others are getting more and more greedy, I think I should be a little bit fearful. See below on American investors sentiment chart, there are only 20% of people are bearish while bullish percentage are rising very fast. Another 9% more bullishness will get to the market top in 2007.