Commentary: The Role of Money Supply in Reviving China’s Stock Market

The core issue behind China’s current deflationary pressures is stagnation in money circulation rather than an overall credit contraction

A screen shows the level of the Shanghai Composite Index on Monday. Photo: VCG

The Chinese mainland stock market experienced a strong rally around the National Day holiday that started on Oct. 1, after four straight months of decline. The key event that triggered this shift was the Federal Reserve entering an interest-rate-cutting cycle.

The Chinese market’s performance has shown a negative correlation with the health of the U.S. economy in recent years. The latest bear market began in February 2021, when the U.S. economy entered a phase of high growth, high inflation, and high interest rates.

Since the beginning of this year, the U.S. services purchasing managers’ index, consumer price index, and other indicators have shown signs of weakening. The Fed made a 50-basis-point rate cut on Sept. 18, indicating a slowdown in the U.S. economy. Subsequently, there was a rebound in the Chinese market.