False illusion of China's stock market

China's benchmark stock index rose yesterday to a 5-month high on investor enthusiasm about added liquidity amid rising bank lending, shrugging off declines in other Asian markets on news of Japan's economic contraction. The benchmark Shanghai Composite Index climbed 3 percent, or 68.59 points, to 2,389.59, its highest close since August 29. The Shenzhen Composite Index added 1.9 percent to close at 763.3.

The rise was driven not by economic fundamentals but by a surge in bank lending, which has sent money flowing into the market, analysts said. The government says lending hit a new monthly high in January, driven by a massive stimulus plan. "The economic fundamentals are not strong enough to support the market's rise," said Zhang Xiang, an analyst for Guodu Securities in Beijing. "The market is in an irrational state, which is not going to last long." The rise came despite a government announcement yesterday that foreign investment in China fell 32.7 percent in January from a year earlier. That was on top of last week's news that January exports fell 17.5 percent.

The motive is correct but the end result will lead to another downtrend soon. China government's aim to relax bank lending is to help support the existing businesses and companies tide over this uncertain period. However, the funds are not directed to the parties which needed them the most. Instead, the money is being used to speculate in the stock markets. These speculators are likely to exit the market at the first sign of bad news. As such, the run-up over the past month is not sustainable.