Bloomberg
Similarities between a speculative frenzy that this month added more than $1 trillion in value to China’s stock market and 2014’s debt-fuelled binge left investors wondering if a new bubble was in the making.
Familiar signs of euphoria emerged before Beijing moved to cool the rally. Turnover soared, margin debt grew at the fastest pace since 2015 and a bullish state media helped spur sentiment.
While there are parallels, market players expect a more sustained, slower rally this time around. Dai Ming, a Shanghai-based fund manager at Hengsheng Asset Management Co., says lessons have been learned by policymakers in the previous cycle.
“There are many similarities between now and 2014, including ample liquidity conditions and a weak economy,†said Ming. “But Beijing needs a bull market to help support corporate funding needs at a time when the economy is struggling.â€
The 2014 rally began to accelerate that October, with China’s market value increasing 32% by the end of the year. The pace is even faster this time around with an increase of 41% since a March trough.
The net value of capital that investors have borrowed to buy stocks has risen to the highest in five years, data compiled by Bloomberg shows. A rapid surge in leverage was a key driver behind China’s 2014 stock rally. Still, margin debt approaching 1.3 trillion yuan is barely half of 2015’s peak.
Daily turnover exceeded 1.5 trillion yuan ($214 billion) on July 6, the first such reading since 2015, and stayed around that level the rest of the week. A similar spike in turnover was also seen in late 2014.
Despite the recent rally the Shanghai Composite is still cheap compared to other stocks globally, trading at a similar discount as in late 2014. Both Morgan Stanley and Goldman Sachs lifted their targets for the CSI 300 Index in the past week. Goldman says the gauge could rise another 15% on the back of rising volumes and policy support, but sees such a rally lasting for no more than three months.
China’s equity mutual fund issuance is on track for the largest full-year amount since 2015’s record, according to data from industry research firm Z-Ben. A total of 290 equity mutual funds were issued in the first half, raising a combined 640 billion yuan.