China stokes a stock-market mania

The dramatic moves in Chinese stocks over the past week are inviting comparisons with a bubble that burst spectacularly five years ago.

In many ways, the pace of gains matches the market’s melt-up that started in the final weeks of 2014. The CSI 300 Index has now added 14% in five days, the most since December that year. A gauge of momentum on the CSI 300 is also the strongest since late 2014. Shares of brokerages surged as daily turnover exceeded 1.5 trillion yuan ($213 billion) for the first time since 2015, indicating increasing participation from retail investors. Monday’s more-than-5% gain in stocks had only happened once before since the bubble burst.

Low interest rates and the first losses ever for some popular wealth-management products are driving China’s savers to stocks. The advance is also being aided by an enthusiastic chorus from the nation’s influential state media. A front-page editorial in the China Securities Journal on Monday said that fostering a “healthy” bull market after the pandemic is now more important to the economy than ever. Chinese social media exploded with searches for the term “open a stock account,” with bullish sentiment also boosting the yuan.

But there are also key differences between now and 2014 — including a lower starting point for equity valuations. And while more traders are taking on debt to buy shares, leverage in the stock market is about half what it was at its peak five years ago. The central bank has this time taken a cautious approach to liquidity, withdrawing funds from the financial system for a seventh day on Monday.

“It’s very unlikely for us to go through the boom-and-bust like we experienced in 2014 and 2015,” said Dai Ming, Shanghai-based fund manager at Hengsheng Asset Management Co., who is buying property shares. “The market isn’t flooded with money everywhere like last time. Beijing is still very prudent with its monetary policy.”

Talking up stocks is a dangerous game in China, where investment choice is limited due to capital controls. In 2014, encouraging words by state media helped revive interest in what had been a dull equity market. The result was a debt-fuelled speculative bubble that burst, wiping out $5 trillion of value. Just like then, regulators have recently unveiled measures to liven up trading, including a new, streamlined approach to initial public offerings.

“The state is very cautious about creating another boom-bust as seen in 2015, realising the harm to confidence that comes from the bust is greater than the good from the ride up,” said Wang Zhuo, fund manager at Shanghai Zhuozhu Investment Management Co.

The CSI 300 is up 14% this year, one of the biggest gains among major global benchmarks, to trade at a five-year high. Its 14-day relative strength index has climbed to 88, the highest since December 2014. The Shanghai Composite Index rose 5.7% Monday, its biggest single-day gain in five years. Futures on the city’s SSE 50 Index of large caps jumped 9.1%.

Brokerages, typically seen as a barometer for market sentiment, led gains Monday with a Bloomberg gauge for Hong Kong-listed securities firms surging the most in nearly four years. A dozen mainland-listed brokers surged by the 10% daily limit. China International Capital Corp. hiked target prices for the industry, predicting the country’s stock market will double in value in the next 5-10 years.

Surging risk appetite is one factor behind the relentless rout in China’s sovereign bonds, with the yield on the 10-year note rising the most since 2016 Monday. The selloff is also spilling over to the credit market, where companies are shelving plans to sell debt as borrowing costs surge. They canceled about $11 billion worth of deals in June alone.

In another illustration of bullish sentiment, Semiconductor Manufacturing International Corp. is set to hold the mainland’s largest stock sale in a decade. The chipmaker is seeking to raise as much as $7.5 billion, or more than double the cash predicted by analysts. SMIC’s Hong Kong stock jumped 21% to a record Monday, its biggest gain since 2009.

While the rally looks hot, investors such as He Qi, a fund manager with Huatai Pinebridge Fund Management Co, say they have made the most of lower valuations and a catch-up rally in cheaper stocks.

“I’ve been fully invested in stocks since early June to bet on the shift in market focus,” he said, adding that he had focused on brokerages, property developers and automakers. “After a tough two months or so, it’s finally my moment to shine.”

© 2020 Bloomberg L.P.