There was an interesting interview this morning on either Bloomberg or CNBC where the host asked an analyst why has the Chinese stock market been so weak. The analyst (I didn't get his name) said that the Chinese stock market was the first major stock market to recover after the recent Global Financial Crisis because they started reflating early. In the past few months, the Chinese authority had begun to tighten their monetary policies in order to control the runaway bubble in the property market as well as the overheated economy. The current tightening of the monetary policies caused further selldown in the SSEC, which has been consolidating since August last year.

If we look at the period from November 2008 to March 2009 in the chart below, we can see the sequence of events as follow:
- China started reflating & SSEC made a bottom (A)
- SSEC started to recover (A1)
- US finally brought the Banking system under control & DJIA began to recover (A2)

Now for the current state of play:
- China tightened its monetary policies & SSEC consolidated within a triangle (B)
- China further tightened its policies & SSEC broke below its triangle (B1)
- US to normalize? Possibly leading to a top in the DJIA? (B2?)


Chart: DJIA & SSEC's daily chart as at May 18, 2010 (Source: Stockcharts.com)

The normalization of monetary policies is now gathering steam worldwide. In Malaysia, Bank Negara had raised interest rates twice over the past 2-3 months. Part of the reasons for doing so is to tackle inflationary pressure (as reflected in the sharp rise in property prices). The other important reason to raise interest rate & to tighten up our monetary policies is to conserve some bullets for the rainy days. This would likely to extend to fiscal policies too, where the government would likely to reduce its fiscal deficit. The last thing any government needs is to be caught out in a crisis with heavy debts, large fiscal deficit & lower interest rates, with no room to maneuver. In such scenario, we can expect our stock market to also consolidate.