China mania reaches equities
Over the past 12 months, China’s Shanghai Composite index has grown by a whopping 152%. The market capitalisation of Chinese stocks has surpassed $10 trln for the first time, and it is clear that traders are flocking to invest in Chinese assets. The only question is: where are all these investments coming from, and is the rising market price still rooted in the fundamental data?
There is currently a debate raging within the analyst community regarding what’s next for Chinese stocks. Bill Gross, the former “Bond King,” announced in early June, that we are on the verge of “the short of a lifetime.”
Hao Hong, chief strategist of Bank of Communications International in Hong Kong, begs to differ with Gross. “Gross is not right,” Hong said flatly. “The Chinese market has gone up substantially this year but just because it’s risen too high, too fast doesn’t mean it has to crash down.”
It is crucial to understand the magnitude of China’s sudden spike in market capitalisation. China’s Shanghai Stock Exchange is now the third-largest exchange in the world. In contrast, companies with a primary listing in the US are valued at a total of $25 trln, making America’s New York Stock Exchange, and Nasdaq Exchange the world’s top two largest exchanges.
With a wave of voices now zoning in to what’s happening in China, it’s important to understand what is causing this optimism, and who is buying up Chinese stocks at this insane pace. David Wertime, a Senior Editor for Foreign Policy Magazine, believes the rally can be attributed to the Chinese media, and that the recent rush of investments into Chinese stocks is coming from investors within China itself. Wertime writes: “The latest bull market began with the cooperation of China’s massive, state-controlled media apparatus.”
Wertime’s assessment is supported by the most recent data from EPFR Global, which reports that, in the second week of June, foreign funds sold off $6.8 bln of Chinese assets. It appears that a group of international traders took Bill Gross’ advice to heart, and folded their cards, fearing that the trend was over.
Despite these new developments, there is still no shortage of analysts continuing to ride out the trend. Uwe Parpart, Head of Research at Reorient Financial Markets, has said: “We went over to pay a visit to the [Shanghai] stock exchange a few days ago. If you take a look at what these companies are, a lot of them are well founded, doing a good job.”
One thing that’s for sure is that China’s middle-class is growing. In the month of February, the Chinese cinema market surpassed the American movie market for the first time in history. There is adequate proof that the standard of living in China is rising, making it possible for the middle-class to enjoy leisurely activities, like trips to the theatre.
In addition, because Chinese citizens are getting wealthier, that also means that they now also have the luxury of investing in the stock market. This line of thinking supports the premise that Chinese money rushing into Chinese stocks is not only about “irrational hype.” What we seem to be seeing is the gradual development of the world’s second largest economy.