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Is a stock market bubble building in China? After days of dramatic surges on the Shanghai and Shenzhen exchanges, stocks are now back at their highest levels since the notorious 2015 crash.
On Monday, the benchmark CSI 300 surged by 5.6%, its best day in over a year. It’s gained another 1.5% today, driving stocks to their highest levels in over five years.
China’s stock market is now UP 15% for 2020 despite the Covid-19 pandemic.
The rally appears to be driven by Beijing policymakers rather than simply by solid economic fundamentals. Several state-controlled media outlets have been urging the populace to buy equities, to share in China’s economic recovery.
Yesterday, a front-page editorial in the state-run China Securities Journal declared boldly that investors cold look forward to “the wealth effect of the capital markets”, thanks to the “healthy bull market” now building.
China’s army of day traders have taken such talk seriously, piling back into stocks.
Jeffrey Halley, senior market analyst at OANDA explains:
Retail investors dominate China’s equity turnover on the Mainland. With a closed capital account, and the Government managing most other investment avenues, China’s savings surplus can really only flow into real estate or equities. It is thus, not a difficult challenge to mobilise the masses, by extolling them to “fill their boots” with equities.
The implication being, that if state media is telling them to, there is an implicit “letter of comfort,” that the Government has their back. Much like the Federal Reserve is ostensibly doing these days, albeit in a less subtle manner.
But is it safe? Older heads can remember the turmoil of 2015, when a previous Chinese stock market boom ended in tears.
Bloomberg reports that some investors are urging caution:
Wang Hongyuan, the co-chairman of First Seafront Fund Administration Co., warned buyers need to be cautious.
China’s equities have “the strongest fundamentals in the world” but the bubbles in some areas of the sector “are unseen in five years and the dangers are large,” he reported in penned feedback shared with Bloomberg.
But….recent economic data from China has been encouraging — with services companies posting their fastest growth in a decade. So there are solid reasons to buy shares too.
Dai Ming, Shanghai-based fund manager at Hengsheng Asset Management, reckons that it’s different this time….
“The market isn’t flooded with money everywhere like last time. Beijing is still very prudent with its monetary policy.”
China’s rally has helped to push stocks up across the globe. After surging by 2% yesterday, European stock markets are expected to dip this morning.
Wall Street had a strong Monday too, with the Nasdaq hitting yet another record high as money surges into tech stocks.
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