What's feeding the Chinese stock rally?

Many economists expect China's economy to recover early this year backed by the government's four-trillion-yuan stimulus plan. Many are also confident it would embrace on an early recovery before global economy picks up. As a result, there were a lot of buy calls for China stocks, example here. Due to these factors, the recent run up in China's stock markets may not be too shocking to many. (The above chart is the comparison between The Shanghai Stock Exchange CI -which gained almost 30% and S&P500 -which lost almost 10% over a period of 3 months)

However, I was shocked when I read the article below. China using stimulus money to prop up the share markets???...it will only create short term gain but long term pain. There is no real economic benefit to push up the share prices of the companies. Nevertheless, such strategy has been practiced by many countries for many years before China though.

NakedCapitalism: The China bulls have commented approvingly on the growth in loans in China, seeing it as a sign of pending recovery, along with an upswing in stock prices. We've pointed out that economist and China commentator Michael Pettis has heard quite a few reports that many of these loans were in fact sham transactions to meet government targets. And now it gets even better. One analyst estimates that more than 1/3 of the total "new" lending (assuming that the loans were truly extended) may have gone into the stock market.

From Bloomberg (hat tip reader Michael):

Chinese companies may be using record bank lending to invest in stocks, fueling a rally that’s made the benchmark Shanghai Composite Index the world’s best performer this year, according to Shenyin & Wanguo Securities Co. As much as 660 billion yuan ($97 billion) may have been converted by companies into term deposits or used to buy equities, Li Huiyong, Shanghai-based analyst at Shenyin Wanguo, said in a phone interview today, citing money supply figures. China’s banks lent a record 1.62 trillion yuan in January as part of a government drive to stimulate the world’s third- largest economy, while M2, the broadest measure of money supply, climbed 18.8 percent from a year earlier. The Shanghai Composite has surged 29 percent since the start of 2009, compared with a 10 percent decline in the MSCI World Index.

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