Chinese stock market rally may continue to expand, supported by a positive key monetary indicator, according to a report by Nomura.
In a recent report, Japanese investment bank Nomura Holdings has highlighted an intriguing pattern in China's M2 growth and aggregate social financing, suggesting it could be a significant indicator for potential prolonged bull runs in Chinese stocks. The report, led by analysts Jin Song and Ting Gao, points out that the current growth pattern in M2 and aggregate social financing resembles what was observed before significant rallies in Chinese stocks, not just in 2021 but also in previous bull markets in 2005 and 2015. M2, a money-supply metric, refers to all term and demand deposits, serving as a proxy for the money supply. Aggregate social financing, on the other hand, represents demand for capital in the real economy. The analysts believe that the current matching of M2 growth with aggregate social financing could be a sign of a strengthening liquidity environment for equities. The improved liquidity pattern, indicated by the closing of the gap between M2 growth and aggregate social financing since March, could potentially indicate a prolonged bull run in Chinese stocks, similar to the rallies in 2005 and 2015 when the Shanghai Composite Index surged sixfold and more than doubled, respectively. Nomura Holdings further suggests that a sustained strengthening in the equity market's liquidity environment could be a sign of a prolonged bull run in Chinese stocks. The analysts believe that the current bull run in Chinese stocks has more room due to the observed liquidity pattern. The report emphasises the importance of the current growth pattern in M2 and aggregate social financing as an indicator for potential prolonged bull runs in Chinese stocks. While the analyst group from Nomura Holdings that identified the improved liquidity situation for stocks and predicted further strengthening of liquidity in the stock market, similar to before the two biggest stock rallies in China, has not been specifically named in the available search results, the report itself underscores the potential significance of this pattern for investors. In conclusion, Nomura Holdings' report provides a compelling argument for considering the current growth pattern in M2 and aggregate social financing as a key indicator for potential prolonged bull runs in Chinese stocks. As always, investors should conduct their own due diligence and consult with financial advisors before making investment decisions.
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