HONG KONG (Reuters Breakingviews) - China’s latest stock pop mixes the bitter with the sweet. Indexes have spiked to levels not seen since 2015, and leverage is rising, adding to fears of a crash. Weakness in shadow banking and property are pushing speculative funds into shares, but the rally is also underpinned by reforms accelerating a shift into equities.
As of Tuesday, the benchmark CSI300 index had gained over 14% over the past six consecutive trading days. The immediate drivers look dubious at first glance. Similar to the rally in 2015 – which blew up spectacularly – China’s housing market is soft. Property sales by value have fallen by more than one-tenth year-on-year in the first five months of 2020, Rhodium estimates. Lacklustre returns are likely pushing speculative funds into shares. At the same time, returns from once-popular wealth management products are falling as defaults rise. China’s $3 trillion trust industry, for example, has been hit by a wave of investor protests as firms miss payments. Most worryingly, just as in 2015, margin borrowing has started to rise rapidly, with retail traders egged on by bullish articles in state media.
On the positive side, margin loans outstanding, at around $170 billion, are still only around half what they were at the 2015 peak. And investors have some cause to be confident, especially if they believe the economy is turning around. The regulatory apparatus overseeing securities, banks and insurance has been integrated, while onerous rules governing listings and trading are being selectively liberalised across local bourses. President Xi Jinping’s anti-corruption campaign has pivoted to target corporate fraud after the Luckin Coffee scandal, which is good news too.
With U.S. politicians threatening to kick Chinese companies off New York exchanges, Beijing desperately needs a deep and liquid market that can finance firms with equity instead of debt, plus deliver long-term growth to insurance and pension funds. Slowing growth in property and shadow banking, which have funnelled money from stocks for decades, will help. But the real change will come when people feel confident enough to move more of the $12 trillion in personal deposits into stocks. That will produce the sort of steady, stable appreciation in value that their government has tried and failed to deliver for so long.
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