Spending Money: Loosening credit is great news for developers. Photo: SHK

Translated by Andrew Vanburen from a Chinese-language blog in Sinafinance

MAINLAND CHINA-LISTED A- and B-shares have added over 10% so far this year, if the benchmark Shanghai Composite Index is to be used as a measuring stick.

It's hard to argue that the successful start to the year is due to just a freakish alignment of the stars

In fact, there are some recognizable reasons why the Shanghai Composite Index seems to have so much spring in its step in 2012.

Scientists have since the dawn of Man been intrigued with the idea of a perpetual motion machine.

But just like the wide-eyed alchemists of old, some things are just physically impossible.

Therefore, the question becomes... the market has momentum, but how much fuel is in the tank?

After all, in an upward trending market, the longer it lasts the more anxious the general body of investors becomes over the growing possibility of a major correction looming on the horizon.

Greentown has been starved for cash of late.  Photos: Company

But by the same token, protracted rallies – mini or otherwise – also lull the investing public into a false sense of security.

To those guilty of harboring these sentiments, I would remind them of the eternally unsuccessful attempt to create a perpetual motion machine.

Success breeds optimism, and we all saw that cycle repeat itself several times over the past few years.

After the seismic event that was the global financial meltdown in 2008, people became very skeptical of the capital market and complained of a lack of transparency and fairness for ordinary retail investors.

But with each bounceback, many of us suddenly forget all that The Crash should have taught us.

The most important lesson in investing is this: Don’t get caught up in a group emotion. Rather, learn to anticipate the emotion before it sets in.

In other words, active investors almost always outperform their passive counterparts.

Perhaps lessons like this are once again applicable in the current uptrend, but more important is what is behind the recent strength.

It’s hard to ignore the lift to a market that can result from the promise of more money being in the pockets of investors and listed firms.

And last week, that became a reality with the credit easing move by the People’s Bank of China.

But more importantly is the fact that a growing number of research houses are predicting that this will become a recurring affair several more times this year.

Shanghai Composite's 12-month performance

This will surely have an even bigger impact on investor sentiment, and its kissing cousin – investor “group emotion.”

Which brings us back to the original point... Learn to anticipate the emotion before it sets in.

But aside from sentiment, two of the most heavily-weighted sectors in the basket that comprises the Shanghai Composite are financials and property.

The fact that these two industries are also the most reliant upon the easy availability of credit should come as no surprise to even the most casual observer of the market.

The past couple of years have been brutal to developers, with many listed firms facing bankruptcy, delisting or both due to excessive leveraging.

Therefore, the promise of easy money is just what banks, insurers and property plays have been praying for, and now that their entreaties are increasingly being answered, it should be no wonder that China’s capital markets have been on the upswing.

See also:

Funds To Fuel Further A-Share Frenzy

PROPERTY SURVEY II: Settling Down In Shenzhen

SHENZHEN: Home Rentals Range From Cheap To Steep

CHINA MARKET: Unraveling The A-Share Ascent

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