China’s stock surge has echoes of the 2015 bubble. What’s different

BEIJING – China's stock market surge so far looks different from the market bubble of 2015, analysts say.

Mainland China's main stock index soared more than 8% on Monday, extending gains driven by stimulus hopes. According to Wind information, trading volume on the Shanghai and Shenzhen stock exchanges reached 2.59 trillion yuan ($368.78 billion), exceeding the high of 2.37 trillion yuan on May 28, 2015.

Aaron Costello, regional director for Asia at Cambridge Associates, noted on Monday that Chinese stocks doubled in value in the six months from 2014 to 2015, while leverage climbed.

This time, he said, the market has not risen as much and leverage is lower. “We're not in the danger zone yet.”

Stock market leverage, both in percentage and value terms, was much higher in 2015 than on Monday, data from Wind Information showed.

In June 2015, the Shanghai Composite Index soared above 5,100 points, a level it has not regained since the market plunged in late summer that year. Morgan Stanley Capital International postponed the inclusion of mainland Chinese stocks into its globally tracked emerging market index that year. Also dampening market sentiment were Beijing's repeated crackdowns on borrowed money transactions and an unexpected devaluation of the yuan. RMB against the US dollar.

The yuan has strengthened against the dollar this year, while foreign institutional allocations to Chinese stocks have fallen to multi-year lows.

The Shanghai Composite Index closed at 3,336.5 points on Monday before mainland exchanges were closed for a week to commemorate the 75th anniversary of the founding of the People's Republic of China. Trading is scheduled to resume on October 8.

On the eve of the 2015 market rebound, Chinese state media Encourage stock market investmentwhile loose rules allow people to buy stocks with borrowed funds. Beijing has long sought to build a domestic stock market, which is about 30 years old and far younger than the U.S. stock market

The latest market gains come after last week's announcement of plans to support the economy and encourage institutions to put more money into stocks. The news helped stocks rebound from their lowest levels this year. The CSI 300 Index rose nearly 16%, its best week since 2008.

Chinese President Xi Jinping chaired a high-level meeting on Thursday and called for curbing the property market's decline and strengthening fiscal and monetary policies. The People's Bank of China also last week cut interest rates and the amount existing mortgage holders need to pay.

Zhu Ning, author of “China's Bubble Guaranteed,” said, “The policies this time are stronger and more coordinated than in 2015. Having said that, the economy now faces greater headwinds than then.”

A sharp week for stocks doesn't mean the economy is heading for a similar recovery.

The CSI 300 Index is still more than 30% below its February 2021 high, a level that even exceeds the index's 2015 high.

Stephen Roach, a senior fellow at Yale Law School, said: “Japan's experience provides an important perspective. The Nikkei 225 index rebounded four times from December 1989 to September 1998, with an average increase of 34%, with a cumulative decline of 66%. blog post The article was also published on the opinion page of the Financial Times.

Economic data over the past few months have shown slowing growth in retail sales and manufacturing. This has raised concerns that China's gross domestic product will not reach its full-year target of around 5% without additional stimulus measures.

“I think the key to a lot of the issues that are not being addressed yet and this would be a real confidence boost is how they are going to address the fiscal issues of local governments that rely on selling land for revenue,” Costello said. For public service.

While Chinese authorities have cut interest rates and eased some home-buying restrictions, the Finance Ministry has yet to announce additional bond issuance to support economic growth.

Peter Alexander, founder and managing director of Z-Ben Advisors, expects the level of fiscal stimulus, likely to be announced by the end of October, to be lower than market expectations.

“This may make investors a little nervous, as people like to say,” he told CNBC's “Street Signs Asia” on Monday.

He added in a written response that his experience in 2007 and 2015 suggested that China's stock market rally could continue for another three to six months or end abruptly.

“This is purely animal instinct, the Chinese have been waiting for the stock market to rise,” Alexander said, adding that there was a market risk in the stock trading system being ill-prepared for a surge in buying.

Data on the number of new retail investors in China this year has not been made public. Report It shows brokerages have been inundated with new requests, echoing an influx of individuals into the stock market nearly a decade ago. The Shanghai Stock Exchange said on Friday it had confirmed opening trading Extremely slow.

“China is cheap but lacks catalysts…the emergence of catalysts unlocks value,” Costello said.

“Fundamentally, we need to see corporate profits rise,” he said. “If it doesn't go up, it's just a short-term epidemic.”

Earlier this year, Beijing's efforts to stem the market rout included replacing the head of its securities regulator. Stocks rose, but the gains tapered off in May.

James Wang, head of China strategy at UBS Investment Bank Research, said in a note on Monday that one factor pushing stocks above May levels is that earnings per share forecasts have trended lower relative to the downward revisions earlier this year. to stability.

Lower U.S. interest rates, a stronger yuan, increased share buybacks and a more coordinated response from policymakers also supported the stock market rally, he said. Mr. Wang's latest price target for the MSCI China Index is $70, currently just a few cents above Monday's closing price.

—CNBC’s Hui Jie Lim contributed to this report.