Stunning gains in Chinese stocks are testing regulators’ ability to manage the ascent, as Beijing seeks to fulfil its long-standing goal of positioning the nation’s US$12 trillion equity market as a steady source of household income that can support consumer spending and economic growth.
As the property market remains in the doldrums, eroding the wealth of Chinese investors who are sitting on a record 160 trillion yuan (US$22.5 trillion) in bank savings, the stock market has become a focus of President Xi Jinping’s drive to build a financial superpower.
Wild booms and busts over the past two decades may prompt Beijing to review how it could guide a measured but sustainable bull market, akin to what has been achieved in India, Japan and the US.
Steady gains from the stock market could serve to both move some household wealth away from the property market – which accounts for 60 per cent of Chinese families’ assets – and help boost slumping consumption. Financial regulators may be pleased to see that the nonstop gains have moderated after a pullback last week, reducing the risk of retail investors engaging in volatility-inducing pump-and-dump moves.
“We are in transition from the one-way gain to a slow bull [market],” said Hao Yifan, an analyst at Hwabao Securities in Shanghai. “Market volatility may increase, but sentiment still remains and the uptrend isn’t over yet.”
China’s key stock benchmarks slumped more than 2 per cent on September 4, their biggest stumble in the current bull run, after investors drove the Shanghai Composite Index to a decade high in the same week.
Since then, the gains that drove up the Shanghai Composite Index by 8 per cent in August, its fourth straight monthly advance, have given way to sideways trading. The shift in the trading pattern indicates that the bull run will unfold steadily, something Chinese stocks have never achieved in the past.
Two recent rallies – one sparked by the removal of Covid-19 restrictions in 2022 and the other by a slate of supportive policy measures from Beijing last year – sputtered quickly. Before that, a liquidity-driven bull market frenzy in 2015 turned into a rout that wiped out US$5 trillion in market value. Even the most substantial bull run in China’s history in 2005 was followed by a fall of more than 70 per cent.
“The recent pullback marks the first consolidation phase of the slow-bull rally,” analysts including Xia Fanjie at China Securities wrote in a note on Sunday, adding that there were no fundamental headwinds that would reverse the uptrend.
Historical cycles suggested “slow bull” corrections tended to be moderate – about 7 to 9 per cent – and lasted one to two months, according to the brokerage.
For now, there are no signs that the current gains are part of another rapid boom-to-bust trade, with no headwinds in the form of technical resistance or from the regulatory side.
Regulators seem to have given an official endorsement to the rally. Wu Qing, the chairman of the China Securities Regulatory Commission, recently said the uptrend in stocks would need to be consolidated. His supportive tone indicated a lower likelihood of regulatory intervention.
Technical indicators showed that sentiment had not reached euphoric levels. While daily turnover jumped to 3.14 trillion yuan on August 27, the second highest on record, the turnover velocity, or the ratio of daily trading values and the free-float market capitalisation, was still below 0.1, according to Lotus Asset Management. That compared with 0.5 at the peak of a 2015 bubble, implying that the ownership of the entire market changed hands within two days.
The outstanding balance of margin trading, or stocks purchased with borrowed money, had risen to a record, but its value as a percentage of the market capitalisation was 2.5 per cent versus 4.5 per cent in 2015, according to Julius Baer.
“We do not expect a boom-and-bust scenario like the one in 2015,” said Richard Tang, head of research for Hong Kong at the Swiss bank, who cited manageable leverage, reasonable valuations and the fact that the rally has yet to broaden to more sectors.
Still, a major risk factor is China’s 240 million individual investors, who have a tendency to chase rallies and sell into routs, behaviour that amplified market fluctuations like in the 2008 and 2015 meltdowns. At the moment, there is no indication of major retail inflows that could lead to stampede trades, with new account openings remaining muted based on exchange data.
The main drivers of the rally were leveraged hedge funds and margin traders, according to UBS Group.
Frequent boom-to-bust cycles are one of the key reasons behind Chinese stocks’ perennial underperformance versus other major global markets. The Shanghai Composite Index had risen 36 per cent over the past decade, while the S&P 500 and India’s Sensex index soared 250 per cent in that span, and Japan’s Nikkei 225 added nearly 130 per cent, according to Bloomberg data.
Retaining slow, but more durable gains carries significance for both policymakers and investors. Regulators now have more tools at their disposal to manage market swings than they had in the past. In the event of a runaway slump, they have a number of tools to restrain the market, ranging from unwinding about 4 trillion yuan of stocks held by state buyers to resuming short selling and accelerating new share sale approvals.
“Any regulatory scrutiny may trigger profit-taking in more speculative corners of the market, but a broad sell-off is unlikely,” said Julius Baer’s Tang. “Instead, such market consolidation is likely leaving a wider window for investors to gradually accumulate stocks at better entry levels.” – SOUTH CHIN A MORNING POST