A-shares and M1 move together
Start with one chart.
Sources: People's Bank of China and Shanghai Composite.
The equity line and M1 growth have followed remarkably similar paths. When M1 turns up, equities tend to rise; when it falls, equities tend to weaken. The timing is never exact, but the larger direction has been consistent.
China A-shares are, at their core, a liquidity market.
Fundamentals and valuation still matter, but in this market their influence is often smaller than investors assume. During a liquidity retreat, even excellent companies can be repriced aggressively.
What M1 is saying
M1 measures the most liquid money in the economy: currency and demand deposits that can be spent immediately. When its growth rises, money is becoming more active and searching for an outlet. The equity market is one of the easiest destinations. When M1 growth falls, that money is moving back toward deposits and away from risk.
The major A-share advances of 2007, 2015 and 2019-21 were all accompanied by a turn higher in M1 growth. The indicator does not call the exact day of a top or bottom, but it captures the regime that makes a large move possible.
Will more liquidity arrive?
M1 growth had recovered from its late-2024 low, explaining how the market rose from the 2,600s to above 4,000. The key question was whether that acceleration could continue. My answer was probably not.
The central bank's stance was to wait: no large new injection, but no abrupt tightening either. Liquidity was near its ceiling. If M1 stopped accelerating and began to flatten or turn down, the market would eventually have to respond.
Markets respond to the change at the margin, not merely to the level.
A score of 80 can be good after 70 and disappointing after 95. The important question is not whether there is a lot of water today, but whether the tap is opening or closing.
The final rally
The outlook was not especially optimistic, yet I still expected one final rise.
M1 and equities usually peak with a lag. After liquidity growth reaches its high, market momentum can carry prices further, just as a car continues moving after the driver lifts off the accelerator.
Several forces create that inertia: improving sentiment draws in new buyers; better liquidity reaches corporate earnings with a delay; margin financing creates a short-term positive feedback loop; and the sharp geopolitical selloff created room for a rebound. But inertia is finite.
This did not mean the market had to fall the next day. It could continue rising long enough to make the warning look foolish. Market tops are persuasive precisely because confidence is strongest near the end.
Back to the chart
After 2021, M1 growth rolled over and the equity index followed it lower. There were rebounds, trading ranges and repeated calls for a V-shaped recovery. But while M1 kept falling, those rebounds did not change the regime.
The chart strips away stories and leaves a cold observation: when money arrives, prices rise; when it leaves, they fall.
My approach is to watch a small set of core indicators rather than react to every headline: M1 growth, turnover and margin financing. At the time, M1 was high but the central bank had signaled that it would not keep opening the tap. The market still had momentum, but its engine was weakening.
I therefore expected one final advance, perhaps accompanied by exceptionally high turnover. After that, a slow, grinding decline was more likely than a crash because liquidity would converge gradually rather than disappear at once.
Do not let the final rally turn you into the buyer who provides everyone else's exit.
You can participate in momentum, but remember that inertia always ends. Decide in advance what you will do when it does.
A candid conclusion
The investors who survive are not necessarily the best forecasters. They are the most disciplined. You do not need to know tomorrow's close; you need to know what you will do when the data change.
My rule is simple: hold while the line rises, reduce when it turns, and leave when the decline is confirmed. Reassess every month when new central-bank data arrive.
Follow the data, not the crowd.
If liquidity does turn down, one asset may benefit from the transition: gold. I will examine that relationship separately.