Mon, 07/06/2020 – 08:41
Five years after Beijing openly urged its population to buy stocks, creating a massive stock bubble which then promptly burst, resulting in massive losses for all those who bought at or near the top, Beijing is at it again, and after a week of staggering gains in China’s Shanghai Composite and the CSI 300 Index, on Monday state officials doubled down and a front-page editorial in the state-owned China’s Securities Journal said that fostering a “healthy” bull market after the pandemic is now more important to the economy than ever.
In other words, as we noted last night, we can now add one more race in the great geopolitical rivalry between the US and China – whose stonk bubble is biggest.
It’s now a race whose bubble is biggest https://t.co/PTTWCIRs1k
— zerohedge (@zerohedge) July 6, 2020
Similar to the Robinhood euphoria that has gripped millions of Gen-Z’ers and Millennials in the US, Chinese social media exploded with searches for the term “open a stock account.” The result: Monday saw the biggest one day jump in the Shanghai Composite in 5 years, which closed up 5.7%, the most since 2015.
Ever before Beijing official invitation to buy stocks on Monday the euphoria had made a dramatic comeback: leverage in the nation’s equities in the form of outstanding margin debt in China’s stock exchanges, has risen to 1.16 trillion yuan ($164 billion), the highest since the wake of 2015’s epic bubble…
… turnover has soared above 1 trillion yuan, suggesting the rally has broad support…
… and the CSI 300 Index has surged to hit a five-year high at the close of last week even before today’s latest surge.
The $1.65 trillion rebound since March has pushed the value of China’s stock market – the world’s second largest – to $8.4 trillion.
And, as Bloomberg warns, all of China’s major stock benchmarks, from indexes tracking Shanghai’s giant state-owned firms to those that follow start ups in Shenzhen, are technically overbought.
That however has not tempered retail investor enthusiasm, in fact quite the opposite and is also evident in China’s convertible bond market, where deals are seven times more competitive than last year. One note was so popular it was 170,600 times oversubscribed, the most since at least 2007.
Indeed, as history has repeatedly shown, such momentum-fueled rallies in China tend to accelerate as the fear of missing out grows, posing challenges for officials as they seek to limit speculation – especially when there’s plenty of liquidity looking for returns within the nation’s capital-controlled borders.
As Bloomberg cautions, the pace of recent Chinese gains matches the market’s melt-up that started in the final weeks of 2014: The CSI 300 Index has now added 14% in five days, the most since December that year. A gauge of momentum on the CSI 300 is also the strongest since late 2014. Shares of brokerages surged as daily turnover exceeded 1.5 trillion yuan ($213 billion) for the first time since 2015, indicating increasing participation from retail investors. Monday’s more-than-5% gain in stocks had only happened once before since the bubble burst.
To be sure, some have said comparisons to the 2014/2015 bubble are premature, citing a lower starting point for equity valuations, margin debt which is about half what it was at its peak five years ago, and a central bank which has taken a cautious approach to liquidity, withdrawing funds from the financial system for a seventh day on Monday. That said, it is only a matter of time before US daytraders – bored with the lack of insane momentum in US stocks – redirect their attention to Chinese stocks…
Shanghai Composite (China A-Shares) up almost +6% today
You know what that means…
— Callum Thomas (@Callum_Thomas) July 6, 2020
… and quickly send the Shanghai Composite to new all time highs, in the process trapping even more longs, and forcing most of China’s momentum-addicted middle class to chase local stocks…
… until it all comes crashing down again. And yes, it will be ironic if a few million unemployed US teenagers with Robinhood accounts end up sparking the middle-class revolution that Beijing has been so terrified of for decades, the next time the Chinese stock bubble bursts. But until then, there’s always money in the banana stand…
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Author: Tyler Durden
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