Over the past 20 years, the PBOC (People's Bank of China) RRR has been in a downward phase only 3 times. And the circumstances were remarkably different.

During the Global Financial Crisis, China's faced a collapsing stock market bubble as well as a sudden evaporation of external demand. The policy response was not just rapid easing of monetary conditions but also one of massive fiscal intervention. This enabled the stock market to bottom very quickly.

The point I am trying to make is that if an economic crisis is purely the result of external shocks without any collapsing domestic bubbles or if there is massive fiscal stimulus measures, monetary easing would result in a bottoming of the stock market very rapidly after the first easing.

However, if there are large domestic bubbles bursting, absent any massive fiscal intervention, the cleansing process takes 12-24 months i.e. the stock market will only bottom after that process is completed.

David Fuller's view It is certainly true that we are unlikely to see a monetary stimulus on the scale of 4Q 2008 to 1H 2009 for a very long time. With a little luck and prudent governance is shouldl not be necessary. Meanwhile, there is no better tailwind for stock markets than accommodative monetary policy, which is why Fullermoney never agreed with the post crash bearish consensus forecasts throughout 2009.

For a majority of stock markets this accommodative monetary policy tailwind, which is still coming from the Federal Reserve, Bank of England and more recently from the European Central Bank, helped to cushion downward risk for most stock markets in 2011. That was certainly a difficult year, not least due to the European sovereign debt crisis, the 1Q spike in commodity prices and tighter monetary policies in the growth economies. These bearish influences inevitably led to slower global GDP growth last year.

It is unlikely that we will see any tightening of monetary policy in 2012. However, one-by-one central banks in the growth economies have been signalling that their tightening bias is over. We have also seen some small reductions in short-term rates, led by Brazil and Australia.

This process has yet to commence in China where we have only seen an initial lowering of bank reserve requirements. I expect further incremental easing by China, including lower short-term rates. If history is any guide this process will coincide with a bottoming out and support building phase for China's stock market (weekly & daily), followed by a cyclical bull market. Meanwhile, China's equity valuations have improved to historically attractive levels, as I have mentioned before.