All eyes on China’s unstoppable stocks after $460bn rally

China’s equity market is firmly in the spotlight after an almost unprecedented rally that helped lift global stocks to a one-month high.

The speed of the past week’s gains in China is in many ways unseen since the stock bubble that burst five years ago. Monday’s surge alone added more than $460 billion to Chinese stock values, behind just one day in July 2015 as the biggest increase in shareholder wealth since the global financial crisis.

The advance continued on Tuesday, though at a slower pace. The CSI 300 Index rose as much as 2.1% to extend its five-year high, with trading volume more than three times the three-month full-day average. The offshore yuan strengthened past 7 per dollar for the first time since March.

China’s state media struck a more measured tone on Tuesday, after earlier publishing commentaries that highlighted the case for buying shares. Two newspapers urged investors to be rational: the Securities Times — one of China’s most widely circulated financial publications — said investors should be mindful of potential risks and not use the market as way to make a fortune overnight.

“The market will likely consolidate after strong rallies, especially as big caps have outperformed smaller peers by a big margin in the past week,” said Shen Zhengyang, an analyst with Northeast Securities Co. “Regulators wouldn’t want to see rapid gains in the market either. But there remain plenty of opportunities, and investors will continue to rotate into some laggards so the uptrend is still intact.”

Wang Hongyuan, the co-chairman of First Seafront Fund Management Co who predicted the stock bubble bursting in 2015, warned investors to stay cautious. China’s equity market has the strongest fundamentals in the world but the bubbles in some parts of the market “are unseen in five years and the risks are huge,” he said in written comments shared with Bloomberg.

As China’s tight capital controls limit the investment options for the country’s savers, this year’s low interest rates and the first losses ever for some popular wealth-management products are driving retail investors to stocks. But some analysts, as well as mainland media, say the country’s economic recovery and the government’s handling of the coronavirus outbreak have helped underpin the rally.

Mainland traders are counting on the momentum to continue, increasing the amount of leverage in the equity market to almost 1.2 trillion yuan ($171 billion), the highest since late 2015.

The risk-on sentiment sent Chinese government debt plunging, with the yield on notes due in a decade rising over 3% for the first time since January on Monday. That has expanded the premium over the cost on U.S. Treasuries of the same tenor to about 237 basis points, the largest gap in data going back to 2005. The yield on China’s 10-year government bonds was last at 3.03%.

A measure of tech shares rose 4.7%, the most since June 1, as the best performer among the CSI 300 Index’s 10 industry groups Tuesday. Consumer shares also rose, with Kweichow Moutai Co. surging 6.1% to take its market cap over $300 billion for the first time.

© 2020 Bloomberg