In the past few months, we have seen that China Total Social Financing (TSF), a broader measure of credit and liquidity, has been falling sharply with the annual change in TSF 12-month sum down from over 10tr CNY in October 2020 to nearly 0 in May 2021. As a result, investors’ concern has been growing as they have been questioning if the rally we have observed in global asset prices can continue in the coming 6 to 12 months without Chinese help.
In the past cycle , periods of contraction in Chinese liquidity were usually associated with a fall in both domestic and international asset prices. This chart shows the striking co-movement between the annual change in China Tech stocks (CQQQ ETF) and the annual change in China TSF 12M sum. China Tech stocks are down over 25% since their mid-February highs; according to this chart, China tech stocks are expected to continue to consolidate in the short term.