China stokes stock-market mania, risking repeat of 2015 bubble

New York

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 per cent in five days, the most since December that year. Shares of brokerages are surging as daily turnover continues to exceed 1 trillion yuan (S$198 billion), indicating increasing participation from retail investors.

A gauge of momentum on the CSI 300 is also the strongest since late 2014. Monday's more-than-5 per cent gain 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.

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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 lifting 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 equity market is about half what it was at the peak in 2015. The central bank actually withdrew liquidity 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, 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 US$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, realizing 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.

The CSI 300 is up 14 per cent this year, one of the biggest gains among major global benchmarks, to trade at a five-year high. Its 14-day relative strength has climbed to 88, the highest since December 2014.

The Shanghai Composite Index closed 5.7 per cent higher Monday, with 17 stocks gaining for every one that declined, according to data compiled by Bloomberg.

Brokerages, typically seen as a barometer for market sentiment, led gains on 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 per cent daily limit. China International Capital hiked target prices for the industry, predicting the stock market will double in value in the next five to 10 years.

Signs of investor exuberance are mounting, with daily turnover on the mainland surpassing 1 trillion yuan for a third day on Monday, the longest such run since March. Surging risk appetite is one factor behind a rout in China's sovereign bonds, with the yield on the 10-year note rising the most since 2016 Monday.

In another illustration of sentiment, Semiconductor Manufacturing International is set to hold the mainland's largest stock sale in a decade, as China's top homegrown chipmaker raises capital while the US tightens restrictions on technology sales to the nation. SMIC could sell as much as 53.2 billion yuan of shares, as it released offering details in a Sunday statement to the Shanghai Stock Exchange.

While the rally looks hot, investors such as He Qi, a fund manager with Huatai Pinebridge Fund Management, 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." BLOOMBERG