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A customer watches the stock market at a stock exchange in Hangzhou, China, on September 27, 2024.
BEIJING — Recent movements in Chinese stocks have shown a markedly different pattern compared to the bubble witnessed in 2015, according to market analysts.
On Monday, major stock indexes across mainland China experienced an increase of over 8%, continuing a rally that has been fueled by expectations of stimulus measures from the government. Trading volumes on the Shanghai and Shenzhen exchanges surged to 2.59 trillion yuan ($368.78 billion), exceeding the previous high of 2.37 trillion yuan recorded on May 28, 2015, as reported by Wind Information.
During the period from 2014 to 2015, the Chinese stock market had doubled in value as leveraged trading surged. Aaron Costello, regional head for Asia at Cambridge Associates, observed that the current market dynamics show less volatility and lower leverage levels. “We’re not in the danger zone yet,” he stated, indicating a more stable market condition compared to the past.
Data indicates that leverage ratios and overall value were significantly higher in 2015 in comparison to current figures from this past Monday. The Shanghai Composite Index had reached a peak of over 5,100 points in June 2015, a level it has yet to recover since the subsequent market collapse later that year. During that time, MSCI postponed the inclusion of mainland Chinese stocks in its emerging markets index, exacerbated by regulatory uncertainties and a surprise devaluation of the yuan against the dollar.
This year, the yuan has shown a stronger position against the U.S. dollar, yet the allocation of foreign institutional investments in Chinese stocks has dropped to its lowest levels in years.
As mainland exchanges prepare for a week-long closure in observance of the 75th anniversary of the People’s Republic of China, the Shanghai Composite closed at 3,336.5 on Monday. Trading is set to resume on October 8.
Strong policy signals
The recent gains in the market have coincided with several announcements aimed at economic support and incentivizing institutional investment in the stock market. This has led to a notable rebound, particularly for the CSI 300, which posted its best weekly gain since 2008, climbing nearly 16%.
During a high-level meeting led by Chinese President Xi Jinping, there were calls to reverse the ongoing decline in the real estate sector, along with commitments to bolster fiscal and monetary policies. Additionally, the People’s Bank of China has recently reduced interest rates and adjusted mortgage payments for existing homeowners.
Zhu Ning, author of “China’s Guaranteed Bubble,” commented on the robust nature of the current policy approach, stating, “The policy is much stronger and [more] concerted this time than in 2015. That said, the economy faces greater challenges now compared to then.” He cautioned that one week of considerable market gains should not be mistaken for a guaranteed recovery trajectory.
Despite the spike, the CSI 300 index remains over 30% below its peak from February 2021, a figure that previously surpassed the heights reached in 2015.
Stephen Roach from Yale’s Paul Tsai China Center noted the lessons from Japan’s experience during its economic downturns, highlighting a pattern where indices rebounded multiple times before experiencing significant cumulative declines.
Recent economic data points towards a slowdown in both retail sales and manufacturing, leading to concerns that China may struggle to meet its GDP target of around 5% for the full year without additional stimulus measures.
Costello pointed to local government financing as a critical issue that needs addressing, given that local authorities traditionally depended on land sales for revenue directed towards public services. While there have been interest rate cuts and some easing of home buying restrictions, more substantial measures such as heightened debt issuance from the Ministry of Finance have not yet been revealed.
Animal spirits at play
Peter Alexander, founder of Z-Ben Advisors, expressed his belief that the anticipated fiscal stimulus, expected to be unveiled in late October, might fall short of market expectations. “It may have investors a little bit over their skis,” he remarked on CNBC’s “Street Signs Asia.”
He warned that drawing from his experiences in both 2007 and 2015, the current rally in the Chinese stock market could either thrive for the next three to six months or come to an abrupt halt.
“This is pure animal instincts and the Chinese have been pent up for a stock market rally,” Alexander commented, flagging potential risks stemming from a stock trading system that may not be fully equipped to handle the recent surge in buying activity.
While statistics regarding new retail investors entering the market this year remain scarce, there are reports suggesting brokerages have faced overwhelming requests, mirroring the frenzied stock market entry witnessed nearly a decade ago. The Shanghai Stock Exchange indicated that transaction confirmations at market open had been “abnormally slow” as trading volumes surged.
Looking for earnings growth
“China was cheap and was missing the catalyst. … The catalyst has occurred to unlock the value,” Costello noted.
He emphasized the need for corporate earnings to increase for the rally to be sustainable, warning that without such growth, the current uptrend might simply be a fleeting bounce.
This year, Beijing’s interventions to stabilize the market involved leadership changes within the securities regulatory body, which initially resulted in a stock rally that subsequently tapered off by May.
A potential driver for overcoming May’s levels is the stabilization in earnings per share forecasts compared to earlier downgrades this year, as noted by James Wang from UBS Investment Bank Research. He pointed to supportive factors such as lower U.S. interest rates, a stronger yuan, increased share buybacks, and a coordinated response from policymakers as beneficial for continued market gains. Wang’s updated price target for the MSCI China index currently sits just above recent closing levels.
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