Sonali Ray, writer
Brief news
- Chinese equities have surged over 8%, driven by stimulus expectations, with trading volumes surpassing previous peaks, but analysts assert this rise differs from the 2015 market bubble due to reduced leverage and appreciation of the yuan.
- Recent policy measures, including interest rate cuts and support for the real estate market, aim to stabilize the economy, although concerns remain about meeting GDP growth targets amid slowing retail and manufacturing.
- Experts caution that while the current market rally may continue for a few months, it could be temporary unless corporate earnings improve significantly.
Detailed news
BEIJING — Analysts noted that the recent surge in Chinese equities appears to be distinct from the 2015 market bubble.
Principal stock indices in mainland China ascended by over 8% on Monday, continuing a string of gains fueled by expectations of stimulus. According to Wind Information, trading volume on the Shanghai and Shenzhen stock exchanges reached 2.59 trillion yuan ($368.78 billion), above the previous peak of 2.37 trillion yuan on May 28, 2015.
Between 2014 and 2015, the Chinese stock market had a twofold increase in value over a span of six months, accompanied by a rise in leverage, as noted by Aaron Costello, regional head for Asia at Cambridge Associates, on Monday.
Currently, the market has not experienced significant appreciation, and leverage has diminished, he stated. “We have not yet entered the perilous zone.”
According to Wind Information, stock market leverage in terms of percentage and value was significantly greater in 2015 compared to the figures presented for Monday.
In June 2015, the Shanghai Composite Index exceeded 5,100 points, a threshold it has not reattained following a market decline later that summer. That year, MSCI postponed the inclusion of mainland Chinese companies in its widely monitored emerging markets index. Beijing’s inconsistent stance on a crackdown on trading with borrowed funds and an unexpected fall of the Chinese yuan versus the U.S. dollar also affected sentiment.
This year, the yuan is appreciating versus the dollar, although foreign institutional investment in Chinese equities has declined to multi-year lows.
On Monday, the Shanghai Composite concluded at 3,336.5, prior to the closure of mainland exchanges for a week-long holiday celebrating the 75th anniversary of the People’s Republic of China. Trading will recommence on October 8.
Prior to the 2015 market surge, Chinese official media promoted stock market investing, and lax regulations let individuals to purchase stocks using borrowed capital. Beijing has consistently aimed to enhance its domestic stock market, which, at around 30 years old, is significantly younger than that of the United States.
Robust policy indications
The recent market gains are a result of announcements made in the previous week on economic support and initiatives aimed at incentivizing institutions to invest more capital in equities. The news facilitated a recovery in equities from around their lowest points of the year. The CSI 300 surged by around 16% in its most successful week since 2008.
On Thursday, Chinese President Xi Jinping presided over a high-level conference that advocated for the cessation of the real estate market’s slump and the enhancement of fiscal and monetary policies. Last Thursday, the People’s Bank of China reduced interest rates and the payment obligations for current mortgage holders.
The policy is far more robust and coordinated this time compared to 2015. Zhu Ning, author of “China’s Guaranteed Bubble,” stated, “Currently, the economy encounters more significant headwinds than it did previously.”
A week of substantial market gains does not indicate that the economy is poised for a comparable comeback.
The CSI 300 is over 30% below its peak in February 2021, which exceeded the index’s 2015 high.
Stephen Roach, a senior fellow at Yale Law School’s Paul Tsai China Center, noted in a blog post published Tuesday in the Financial Times opinion section that the Japanese experience offers a significant perspective, as the Nikkei 225 Index rebounded four times, averaging a 34 percent increase, during its 66 percent cumulative decline from December 1989 to September 1998.
Recent economic figures indicate a deceleration in retail sales and manufacturing growth. This generated apprehensions that China’s gross domestic product will fail to meet the annual target of about 5% without more stimulus measures.
Costello stated that a crucial element that has not been addressed, which would significantly enhance trust, is the strategy for rectifying local government finances, emphasizing that local revenues formerly depended on property sales to fund public services.
Although Chinese officials have reduced loan rates and relaxed certain house purchasing restrictions, the Ministry of Finance has not yet declared further debt issuance to bolster GDP.
Animal spirits in action
Peter Alexander, founder and managing director of Z-Ben Advisors, anticipates that the forthcoming fiscal stimulus, expected to be unveiled in late October, would be inferior to market expectations.
It “might have investors somewhat overextended, as the expression goes,” he stated on Monday on CNBC’s “Street Signs Asia.”
He stated in a written answer that his experiences in 2007 and 2015 suggest the Chinese stock market surge may last for an additional three to six months or conclude abruptly.
“This is a manifestation of primal instincts, and the Chinese have been repressed in anticipation of a stock market rally,” Alexander stated. He stated that there are market dangers due to the stock trading system’s lack of preparedness for the rise in buying activity.
The data on the quantity of new retail investors in China for this year was not publicly accessible. Reports suggest that brokerages have been inundated with fresh inquiries, reminiscent of the influx of consumers into the stock market over a decade ago. The Shanghai Stock Exchange announced on Friday that transaction confirmations at the market open had been unusually sluggish.
Seeking revenue expansion
“China was inexpensive and lacked the catalyst. … The catalyst has emerged to unlock the value,” Costello stated.
“Essentially, we must observe an increase in corporate earnings,” he stated. “If that does not increase, this is merely a temporary surge.”
This year, Beijing’s initiatives to mitigate a market downturn including replacing the head of the securities regulator. Stocks ascended, only to have the gain diminish in May.
James Wang, head of China strategy at UBS Investment Bank Research, stated in a report on Monday that a factor capable of propelling equities above May levels is the stabilization of earnings per share expectations compared to prior downgrades this year.
Decreased U.S. interest rates, a robust Chinese yuan, heightened share buybacks, and more coordination among policymakers further facilitate benefits, he stated. Wang’s recent price objective of $70 for the MSCI China index is currently marginally above its closing value on Monday.
Source : CNBC News
