Slowdown In China Money Growth Not A Good Omen for Shanghai Composite

As exports have slowed in China, the accumulation of foreign exchange reserves has slowed, leading to a slowdown in broad money growth.  In the first chart, we can see that foreign exchange reserve growth has recently rolled over, and it appears to be in a sequence of lower lows and lower highs.



Foreign trade is the engine of money creation in China and as it slows, it has cascading effects throughout the Chinese economy.  One direct consequence is slowing broad money growth, as represented by M2.  In the chart below, we show the year over year growth of Chinese M2 against the Shanghai Composite Stock Index.  The drop in M2 heightens the odds that the Shanghai Composite breaks down out of a descending wedge that began with the drop from peak prices in 2007.  If it does, the odds are high that it tests the lows of October 2008, which are only 15% away.