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Tom Holland

Yesterday the Shanghai stock market closed at its lowest level since March 2009.
That's quite something when you think about it. After all March 2009 was the very depths of the sub-prime crisis, when the United States stock market plunged to a 12.5 year low and financial giant Citigroup was only saved from collapse by government intervention.
Now the Shanghai market is back down to where it was then, having fallen a gut-wrenching 23 per cent over the last 12 months.
Even more astonishing are the valuations on which mainland shares are trading. According to the South China Morning Post's Bloomberg data terminal, at the close of yesterday's trading session the benchmark Shanghai composite index was valued at a price-earnings multiple of 11.7. 
That is the cheapest valuation since Bloomberg's data series began back in the mid-1990s.
But before you rush to call your broker, it is worth reflecting that while the valuations on offer in mainland stock markets might be astonishing, there is no mystery about why the market is so cheap.
Valuations count for little on the mainland. Local investors wisely put no faith in the accuracy of company statements. And if you can't trust earnings figures, then valuation measures like price-earnings ratios are meaningless.
Instead the mainland market is propelled by sentiment and momentum. And sentiment and momentum are themselves driven by the amount of excess liquidity in the financial system.
When there is a lot of surplus cash around, it flows into the stock market, driving up prices. And when money is tight, stock prices fall.
You can see the relationship at work in the first chart.  The blue  line represents the amount of excess liquidity in China's economy, measured here as the ratio of narrow money supply growth to the growth in nominal gross domestic product. The red line  shows the year-on-year performance of the Shanghai stock market.
When the authorities massively boosted money supply in 2009 to stimulate the economy, within a few months a lot of the spare cash found its way into the equity market, igniting a spectacular boom in stock prices.
And when Beijing slammed on the brakes last year, bringing the rate of narrow money growth below nominal output growth, stock prices soon began to sink.
So if you are looking for a signal that it's time to buy into the mainland stock market, wait until monetary easing pushes money supply growth above the rate of nominal GDP growth.
But don't hold your breath. Narrow money grew at just 8.4 per cent in November,  well below nominal GDP growth, which came in at 19.5 per cent in the third quarter.
With Beijing still talking tough on inflation and playing down the prospect of more monetary stimulus next year, you may have to wait a long time for another liquidity-driven rally in mainland stocks.
 Hong Kong Exchanges and Clearing chairman Ronald Arculli was bragging yesterday about the achievements of the Hong Kong stock exchange.
In particular he was boasting about the success of the exchange this year in attracting listings from high-profile international companies such as  Glencore, Prada and Samsonite.
But whether Hong Kong is really the leading international market Arculli likes to claim is doubtful.
To see what I mean, consider May's US$11 billion initial public offering from Glencore, in which the Swiss-based commodity giant listed simultaneously its shares in  Hong Kong and London.
Despite the dual listing, trading activity in Glencore's shares has migrated overwhelmingly to just one market: London.
As the second chart shows, since June, average daily trading volumes in Glencore's stock have been 20 times greater in London than on the Hong Kong stock exchange. 
Perhaps Glencore isn't such a great example for Arculli to choose when he's trying to talk up the Hong Kong market.



Shanghai back to crisis levels while HK loses out to London