China’s stock market is in rally mode. Before there was a holiday break of several days at the beginning of October due to the “Golden Week”, the Shanghai Composite on the Chinese mainland saw a steep rise. But are the profits sustainable or is a bubble currently forming?
• Strong rally on the Chinese stock market
• Similarity to Rally and Crash from 2015
• Experts mostly unconcerned
At the end of September, China announced several economic support measures and programs to help the ailing economy: The Chinese central bank lowered the key interest rate and the Politburo also made promises of aid. According to “CNBC”, these steps are intended, among other things, to encourage institutions to invest more money in stocks. The economic stimulus immediately had an effect on the stock exchanges: on the last trading day alone before the longer holiday break due to the “Golden Week”, the Shanghai Composite rose by 8.06 percent to 3,336.50 points. According to “CNBC”, there were signs that a lot of new investors in China currently want to get involved in the stock market. For example, the trading volume exceeded the last high from May 2015.
In fact, some experts are also recalling memories of around ten years ago. At that time, the Chinese stock market had doubled within six months and the Shanghai Composite reached a level of 5,100 points in June 2015 before collapsing sharply again a little later. The level back then remains still a long way off today. Although the recent rise in China stocks shows similarities to the stock market rally at the time, experts see no reason for concern so far.
Leverage level low, supporting factors present: Experts do not see a bubble
According to experts, today’s situation reveals some differences from the bubble back then. For example, the level of debt in the market is significantly lower today than in 2015, said Aaron Costello, regional manager for Asia at Cambridge Associates, according to “CNBC”. While the Chinese state, in the run-up to the 2015 rally, actually encouraged investors to buy stocks with borrowed money through relaxed rules, the level of debt on the stock market is significantly lower today, both in percent and in absolute terms, than it was back then. “We are not yet in the danger zone,” said Costello, referring to the less leveraged investments.
Zhu Ning, author of the book “China’s Guaranteed Bubble”, also called for a more differentiated view of the situation, according to “CNBC”. “Politics are much stronger and more concerted this time than in 2015. However, the economy is currently facing stronger headwinds than back then,” he is quoted by the news site. James Wang, head of China strategy at UBS Investment Bank Research, noted that in addition to the coordinated response from policymakers, a stronger renminbi, lower US interest rates and increased share buybacks would help support the market, according to CNBC.
Cambridge Associates expert Costello also expressed optimism about the economic stimulus. “China was cheap and lacked the catalyst,” he said, according to CNBC. However, with the announced support measures, the catalyst has now emerged and released value. “Fundamentally, we need to see corporate profits rising,” he warned. If this doesn’t happen, the recent rally will be “just a short-term upswing.”
Expert sees “animal instincts” and warns of disappointment
However, other experts expressed greater doubts about the sustainability of the current upswing on China’s stock exchanges. According to Peter Alexander, founder of Z-Ben Advisors, the specific fiscal stimulus expected to be announced at the end of October could be smaller than currently expected by the stock market. With the current run on Chinese stocks in the hope of a large economic stimulus package, investors may have “overextended themselves a bit, as people like to say,” the market professional told “CNBC”. We are dealing here with “purely animal instincts” and the Chinese have some catching up to do when it comes to a stock market rally, Alexander continued. Judging by his experiences from 2007 and 2015, the rally in China could possibly last another three to six months – or end abruptly.
Editorial team finanzen.net
