Where China shares are going ? #1--A shares liquidity

• Signs of bubble surfacing

There are many signs that A-shares are going into a bubble. However, history suggests that A-shares can stay overpriced for a sustainable period of time.

• Liquidity to the stock market

We believe looking only at the monetary aggregates is insufficient. The 2005 stock market reform is a significant event. It changed perception on stock investment radically and brought investors' confidence back. We think a better indicator of liquidity going into equity market is the ratio of stock market turnover to money supply.

• More liquidity into stocks

We have decomposed the turnover-to-M2 ratio by including market cap and GDP. We then compare this ratio to past bubble peaks in Japan, Korea, Taiwan and HK. We find further upside in China's turnover-to-M2 ratio before hitting a peak.


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