China’s equity frenzy re­vives painful mem­o­ries

The Daily Telegraph - Business - - Focus On China - Am­brose evanspritc­hard

China’s fi­nan­cial watch­dog is in­creas­ingly wor­ried about spec­u­la­tive lever­age on the soar­ing Shang­hai and Shen­zhen equity mar­kets, fear­ing a re­peat of the boom-bust de­ba­cle in 2015 when the crash al­most span out of con­trol.

The China Se­cu­ri­ties Regulatory Com­mis­sion has black­listed 258 bro­ker­age houses ac­cused of of­fer­ing il­le­gal mar­gin ac­counts at 10 times lever­age. It told in­vestors to “raise their risk aware­ness” be­fore the buy­ing frenzy reached dan­ger­ous lev­els.

The state me­dia fol­lowed with sober re­minders of the “tragic les­son” five years ago when the mar­ket spiked and then plunged 40pc.

That episode shook con­fi­dence in the author­i­ties and com­bined into a cur­rency cri­sis which proved hard to con­tain. In the end, the Peo­ple’s Bank had to burn through $1 tril­lion (£790bn) to de­fend the ex­change rate and counter cap­i­tal flight.

Of­fi­cial data for June shows that house­holds opened 85,000 new mar­gin trad­ing ac­counts, the method used by small re­tail in­vestors to play the casino with bor­rowed money.

The Shang­hai Com­pos­ite In­dex has jumped 20pc since late June, with par­a­bolic moves ear­lier this week.

This high-risk form of fi­nance fa­mously fu­elled the fi­nal leg of the Wall Street bub­ble in 1929. In China, it has jumped to a five-year high of $260bn, though that is still well short of the peak five years ago. Bo­com In­ter­na­tional es­ti­mates that some 12pc of all equity trades are now tak­ing place on mar­gin.

The author­i­ties seem to be pulling in dif­fer­ent di­rec­tions. The mes­sag­ing has been con­fused. On Mon­day, the state-owned China Se­cu­ri­ties Journal pub­lished a front-page ed­i­to­rial ex­tolling a “healthy bull mar­ket” and ex­hort­ing in­vestors to fill their boots, which they duly did. The reg­u­la­tors are clearly try­ing to rein back in an­i­mal spir­its.

“The lead­er­ship wants to see prices roll but the reg­u­la­tors know they will take the blame if it all goes wrong. In 2015 they were fired,” said Mark Wil­liams from Cap­i­tal Eco­nom­ics. “Fun­da­men­tals don’t look too stretched yet but if prices keep ris­ing like this for an­other few weeks, it is go­ing to turn into a bub­ble.”

The pur­ported jus­ti­fi­ca­tion for the equity boom this time is the “pan­demic div­i­dend” from China’s quick sup­pres­sion of the virus.

In 2015, it was Xi Jin­ping’s sup­posed “re­form div­i­dend”, a glar­ing irony in ret­ro­spect since China has if any­thing re­verted to its vari­ant of Lenin­ist state-cap­i­tal­ism.

Gold­man Sachs told clients that the rally still had far to run, pre­dict­ing a fur­ther rise of 15pc in the CSI 300 be­fore it all came tum­bling down again next year. “We main­tain our strate­gic over­weight po­si­tion on

China eq­ui­ties,” said Frank Ben­z­imra from So­ci­ete Gen­erale. “It is too early to call the peak.”

The French bank said prof­its were hold­ing up and the fis­cal cav­alry was ar­riv­ing, al­most guar­an­tee­ing a full V-shaped recovery.

Ben­z­imra said out­stand­ing mar­gin pur­chases reached 10pc of to­tal mar­ket cap­i­tal­i­sa­tion in 2015. This time, they have yet to pierce 5pc.

The trail­ing 12-month price-toearn­ings ra­tio on the CSI 300 is to­day at 15.9 com­pared with over 20 times in the last bub­ble.

The Chi­nese equity mar­kets dance to their own tune, of­ten de­cou­pled from any­thing go­ing on in the real econ­omy.

They are highly sen­si­tive to buy or sell sig­nals from the po­lit­i­cal lead­er­ship.

Just 3pc of Chi­nese peo­ple own shares, and among those who do, it av­er­ages just 1pc of their to­tal as­sets.

The wealth ef­fect of stock moves on eco­nomic growth is there­fore much lower in the US or Europe.

Yet it is clear that the stars are now aligned for gen­uine recovery later this year in China, though much de­pends on the trade “blow­back” from sec­ond waves of Covid-19 in the rest of the world. The aug­mented fis­cal deficit is head­ing for 15pc of GDP and a blast of stim­u­lus is feed­ing into the econ­omy.

The author­i­ties have again thrown cau­tion to the winds, re­vert­ing to their old re­flex of me­tal bash­ing, coal burn­ing and top-down in­fra­struc­ture in­vest­ment.

Wil­liams said the spend­ing was equal in scale to the gi­gan­tic pack­age af­ter the Lehman cri­sis, al­though Bei­jing was be­ing less pro­mis­cu­ous with credit this time.

Whether the money is be­ing well spent is an­other mat­ter.

“An aw­ful lot of con­crete is go­ing to be poured that isn’t re­ally needed,” Wil­liams said.

‘The Chi­nese equity mar­kets dance to their own tune, of­ten de­cou­pled from the real econ­omy’

An in­vestor mon­i­tors the stock ex­change in Huaibei. Con­cerns have grown over a re­peat of the 2015 boom-bust tur­bu­lence

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