Chinese Stock Market, Deflation and Inflation

The Chinese Social/Economical/ Political structure tends to respond well to deflationary pressure (much better than the rest of the world), which is the main problem in the current global recession.

The Chinese government is far more efficient in delivering economic stimulus than the US. The current growth has mostly been driven up by that stimulus, which hopefully will be a bridge to a more sustainable economic recovery when China's major trading partners recover. The one thing that the stimulus has not done is to steer the Chinese economy from export-driven to more domestic-consumption driven economy. The income disparity remains high and ratio of personal income to GDP remains low. Consumers in the near term will not be the driving force of the economy. Though China has been moving in the direction of liberating its consumers by raising labor protection, salary and social welfare. The goal won't be achieved in the short time.

China would be more concerned with inflation instead. As the economy is mostly driven by investment for lack of both domestic and foreign consumption at this time. The stock market is driven by excessive liquidity both injected by central bank recently and from accumulated monetary supply from high savings rate and the long term surplus from international trade and investment. In a deflationary environment, these would be great forces to offset it. But it will exacerbate the problem of inflation when it occurs. The Chinese stock market will peak and turn at any credible sign of inflation or even before that if enough speculation of inflation builds up. The risk appetite has been huge lately as the Chinese government is now having trouble selling its treasuries at current interest rate.