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Friday, the benchmark Shanghai Composite Index closed at 4,034.31. That’s up 24.7% for the year.
Since last July, when the current bull market began, Shanghai stocks have soared 97.0%. Shenzhen shares during the period are up 95.9%. Tech companies are leading the way, now trading around 220 times profits.
Thank retail punters for the surge. In March, investors opened more than 4.8 million stock trading accounts, and they added about a million in the first two days of this month.
And to make matters worse, the boom is debt-fueled. Margin loans in Shanghai and Shenzhen in the middle of last week amounted to about 2.2 trillion yuan, up about 250% in six months. About 40% of stocks are now bought on credit according to Orient Capital Research’s Andrew Collier, who points out that inventive investors are pledging the same shares to multiple lenders.
So call it a frenzy, and Chinese state media is loving the ride up. “It is no easy job to attract so many new funds back,” stated the official Xinhua News Agency on Wednesday, after noting that around a trillion yuan in new money flooded into China’s stock markets in the first quarter of this year. “It is strong confidence in the Chinese economy, which is witnessing deepening reforms and restructuring, that has lured them back.” The headline for the article? That would be this boast: “Booming Stock Market a Yes Vote for China Economy.”
The bubble is the result of many things, and an expression of confidence in central government technocrats is certainly one of them. Chinese stocks, over the course of decades, have reliably risen on expectations of government stimulus. Now the decades-long expansion is faltering—many consensus estimates put growth at 6.9% or lower for Q1—there is a belief Premier Li Keqiang will do whatever it takes to keep the economy at his announced target of “approximately 7%.”
There are even suspicions that Li deliberately engineered the stock boom. “When our national economy is in its worst shape in more than a decade and many corporates have run into trouble, our stock market suddenly shot up to make everybody happy,” writes the South China Morning Post’s “Mr. Shangkong,” columnist George Chen, today. And as ING’s Tim Condon told the Wall Street Journal’s MarketWatch site, “I don’t know if I’ve ever seen such official stock-market boosterism.”
Some observers privately say Li wanted to encourage the use of stock offerings for fund-raising purposes and needed soaring prices to attract new money into the market, and others talk about a conscious plan to create a wealth effect to stir lagging consumption. The surge, however, is more like an unintended consequence.
The big story is that excess cash is powering the run up. “The bull case for China is now liquidity not growth,” correctly notes Michael Hartnett of Bank of America Merrill Lynch. The People’s Bank of China, the central bank, has been releasing liquidity into the economy as fiscal measures either haven’t worked or are considered counterproductive.
The bank’s most recent move has been to make short-term, below-benchmark loans to boost liquidity through its Medium-Term Lending Facility and Standing Lending Facility, and analysts suggest that some of the new cash is finding its way into stocks.
There is surprisingly little domestic corporate demand for money, something evident from 37 consecutive months of declining producer prices. At the same time, the property market looks dismal and wealth management products appear dodgy. Bonds? Last Tuesday’s historic default of Cloud Live Technology—and of other issuers bound to come—make those instruments suddenly seem risky. So additional yuan released into the money supply is finding its way into the only other major class of domestic investment, stocks.
The phenomenon is not new. After all, the same general process occurred in 2009, the first full year after the announcement of then Premier Wen Jiabao’s stimulus program. The economy then could not absorb the new tidal flood of cash so China enjoyed stock-market and property-market booms. Then, new money contributed to increasing growth rates, but that is not true these days because by now Chinese technocrats have built too much of most everything in their country. It appears, therefore, that liquidity now has no place to go but stocks.
This surge in Chinese equities, therefore, is the sign that central government tools are no longer working. Li Keqiang can print and spend, but he cannot create growth. In short, he has essentially lost control of the economy. He is, like the rest of us, a bystander to events.
The dazzling stock market rise, therefore, looks like the death rattle for the Chinese economy.
China: Did We Just Hear The Death Rattle Of The Economy? - Forbes
Since last July, when the current bull market began, Shanghai stocks have soared 97.0%. Shenzhen shares during the period are up 95.9%. Tech companies are leading the way, now trading around 220 times profits.
Thank retail punters for the surge. In March, investors opened more than 4.8 million stock trading accounts, and they added about a million in the first two days of this month.
And to make matters worse, the boom is debt-fueled. Margin loans in Shanghai and Shenzhen in the middle of last week amounted to about 2.2 trillion yuan, up about 250% in six months. About 40% of stocks are now bought on credit according to Orient Capital Research’s Andrew Collier, who points out that inventive investors are pledging the same shares to multiple lenders.
So call it a frenzy, and Chinese state media is loving the ride up. “It is no easy job to attract so many new funds back,” stated the official Xinhua News Agency on Wednesday, after noting that around a trillion yuan in new money flooded into China’s stock markets in the first quarter of this year. “It is strong confidence in the Chinese economy, which is witnessing deepening reforms and restructuring, that has lured them back.” The headline for the article? That would be this boast: “Booming Stock Market a Yes Vote for China Economy.”
The bubble is the result of many things, and an expression of confidence in central government technocrats is certainly one of them. Chinese stocks, over the course of decades, have reliably risen on expectations of government stimulus. Now the decades-long expansion is faltering—many consensus estimates put growth at 6.9% or lower for Q1—there is a belief Premier Li Keqiang will do whatever it takes to keep the economy at his announced target of “approximately 7%.”
There are even suspicions that Li deliberately engineered the stock boom. “When our national economy is in its worst shape in more than a decade and many corporates have run into trouble, our stock market suddenly shot up to make everybody happy,” writes the South China Morning Post’s “Mr. Shangkong,” columnist George Chen, today. And as ING’s Tim Condon told the Wall Street Journal’s MarketWatch site, “I don’t know if I’ve ever seen such official stock-market boosterism.”
Some observers privately say Li wanted to encourage the use of stock offerings for fund-raising purposes and needed soaring prices to attract new money into the market, and others talk about a conscious plan to create a wealth effect to stir lagging consumption. The surge, however, is more like an unintended consequence.
The big story is that excess cash is powering the run up. “The bull case for China is now liquidity not growth,” correctly notes Michael Hartnett of Bank of America Merrill Lynch. The People’s Bank of China, the central bank, has been releasing liquidity into the economy as fiscal measures either haven’t worked or are considered counterproductive.
The bank’s most recent move has been to make short-term, below-benchmark loans to boost liquidity through its Medium-Term Lending Facility and Standing Lending Facility, and analysts suggest that some of the new cash is finding its way into stocks.
There is surprisingly little domestic corporate demand for money, something evident from 37 consecutive months of declining producer prices. At the same time, the property market looks dismal and wealth management products appear dodgy. Bonds? Last Tuesday’s historic default of Cloud Live Technology—and of other issuers bound to come—make those instruments suddenly seem risky. So additional yuan released into the money supply is finding its way into the only other major class of domestic investment, stocks.
The phenomenon is not new. After all, the same general process occurred in 2009, the first full year after the announcement of then Premier Wen Jiabao’s stimulus program. The economy then could not absorb the new tidal flood of cash so China enjoyed stock-market and property-market booms. Then, new money contributed to increasing growth rates, but that is not true these days because by now Chinese technocrats have built too much of most everything in their country. It appears, therefore, that liquidity now has no place to go but stocks.
This surge in Chinese equities, therefore, is the sign that central government tools are no longer working. Li Keqiang can print and spend, but he cannot create growth. In short, he has essentially lost control of the economy. He is, like the rest of us, a bystander to events.
The dazzling stock market rise, therefore, looks like the death rattle for the Chinese economy.
China: Did We Just Hear The Death Rattle Of The Economy? - Forbes
