The fiercest surge in China’s stock market in years has left investors wondering whether the bull run for equities may last or fade away in disappointment.
The sudden surge in China’s markets came as a result of several articles in the state media announcing the arrival of a new bull market and emphasizing the importance of a well-functioning capital markets as the economic power seeks to recover from the coronavirus-driven crisis.
However, the sharp rise in Chinese benchmarks has also brought uncomfortable parallels to the 2014-2015 period, when government-backed newspapers and commentators cheered the market, only for euphoria to erupt.
“The close to 6% rise in mainland China stocks today has little obvious economic justification, and some qualitative characteristics in common with the run-up to the collapse of 2015,” wrote Oliver Jones, market economist at Capital Economics.
An editorial in the China Securities Journal stated Monday that the foundations for a “healthy bull market” have been strengthened in the past three decades, pointing to the benefits of higher asset prices that spur more spending. And a post on a Shanghai Securities News social media blog said “Hahahahaha! The characteristics of a new bull market are becoming obvious. ”
China’s CSI 300 Index 000300,
Composed of shares listed on the Shanghai and Shenzhen stock exchanges, it gained 5.7% to hit a five-year high on Monday. To date, the benchmark index has risen 14%, beating gains seen in other fields abroad.
Capital economy
Investor optimism spread to global stocks, spurring gains on the US and European stock markets earlier in the week. The S&P 500 SPX,
rose 1.4%, while the European Stoxx 600 SXXP index,
It also gained 1.3% on Monday.
Some analysts are skeptical of comparisons to the 2015 market crash, which was accompanied by a loosening of margin requirements that allowed individual investors to increase their bets by borrowing money to buy stocks. Back then, increased use of leverage helped amplify gains in the stock market, but it also accelerated a sell-off, which wiped out a third of the value of Shanghai-listed stocks in the span of the month.
Estimates initially determined the use of leverage by individuals at approximately 20%, which then increased to 100%.
This time, regulators may be more cautious about repeating past mistakes.
“I doubt 2015 will be repeated because margin standards have tightened considerably,” said Brendan Ahern, chief investment officer at KraneShares.
Still, the outstanding margin debt on China’s stock exchanges has risen to 1.16 trillion yuan ($ 165 billion), the highest since January 2016.
And analysts also point out that there has been some strength in China’s fundamentals. The recent rally has coincided with stronger-than-expected data series in recent days, pointing to a sharp pickup in manufacturing and service sector activity as China is controlling its deadly coronavirus outbreak.
Caixin China’s index of service purchasing managers rose to 58.4 in June from 55.0 in May, Caixin Media Co. and research firm Markit said on Friday. A reading above 50 indicates growth in economic activity.
But in the end, investors may be making too much of double-digit gains on the Chinese stock market.
“The current concentration, sanctioned by the authorities in the media, is so far a small beer compared to previous increases. Although it may ultimately be unsustainable, a day of reckoning could be a bit far, “Jones said.
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