Chinese stock have been on a 2-day tear as Premier Wen Jiabao has come flat out in support of the stock market.

Moreover, money supply in China is up the most since last April and new Chinese loans exceeded the estimates of all 18 Bloomberg economists. M2 rose 13.6 percent, the fastest pace since July.

Bloomberg reports China Stocks Rise Most in 3 Months on Loan, Money Data

China’s stocks rose the most in three months after new lending and money supply exceeded estimates in December, boosting speculation the government is relaxing monetary policies to bolster economic growth.

Chinese new loans totaled 640.5 billion yuan ($101 billion) last month, the highest amount since April, the People’s Bank of China said yesterday. That exceeded the estimates of all 18 economists surveyed by Bloomberg. M2, a measure of money supply, rose 13.6 percent, the fastest pace since July, it said. That compared with the 12.9 percent median of 18 estimates.

Premier Wen Jiabao called for measures to boost confidence in the nation’s stock market, the Shanghai Securities News reported today, citing his comments at the National Financial Work meeting. He urged reforming initial public offerings and improving companies’ dividend payouts, according to the report.

The premier’s comments signal the government may take more measures to boost stocks, including allowing social security funds to buy equities, David Li, UBS’s chairman and country head for China, said in an interview in Shanghai. Funds may flow out of the property market and into stocks as the government isn’t showing any inclination to ease curbs in the real-estate industry because prices “are still high,” he said.

Central bank governor Zhou Xiaochuan said yesterday the nation must be ready to combat possible shocks from Europe’s debt crisis and an uncertain U.S. economic outlook. China cut the reserve requirement for the first time since 2008 on Nov. 30 as Europe’s debt crisis eroded demand for its exports.

$SSEC Shanghai Stock Index Daily Chart

The Shanghai stock index has been on a big two-day advance, but let’s put some perspective on the story.

$SSEC Shanghai Stock Index Monthly Chart

US vs. China M2 – Who is Printing More?

For all the hype talk about US hyperinflation and soaring money supply from the Bernanke Fed, let’s add some perspective on money supply growth as well.

US vs. China M2 Absolute Amounts

click on chart for sharper image

US vs. China M2 Year-Over-Year Percentage Change

Charts courtesy of Chris Puplava at Financial Sense. I asked for them yesterday in expectation of writing this post today. Chart annotations and comments are mine.

The above chart provides a nice visual explanation for the “reverse decoupling” and outperformance of the US stock market in 2011. Money supply plunged in the Eurozone as well.

Bernanke flooded the markets with liquidity, yet all if did was hold stocks flat. Compared to China and Europe, that was a huge “accomplishment” but it fueled a rise in gasoline and food prices and brutally punished those on fixed incomes with excessively low interest rates on savings accounts.

Note that Money supply in China in mid-to-late 2009 was soaring at 30% annual growth. The recent stock market plunge in China came with growth “collapsed” to 13.60%. Meanwhile M2 growth in the US peaked at 10%.

All things considered, it is amusing to hear all the US hyperinflation rants, especially those accompanied with a virtual love affair for China such as Peter Schiff and Jim Rogers.

Those looking for malinvestment can find no bigger place than China.

Mike “Mish” Shedlock
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