PortfolioBubble debate flares over China stocks dream run
“By definition, bubbles must pop, although the timing is necessarily impossible to pin down” - BNP Paribas
Are A shares in a bubble? With the Shanghai stock market back in the 5,000 point territory after seven years, that’s the big question on everybody’s mind.
“The surge meets most of the usual definitions of an asset bubble: little, if any, fundamental support,” a BNP Paribas report said. “For stock markets, ‘fundamentals’ are, of course, earnings. It is noticeable that the A-share surge has coincided with both steady downward revisions to GDP growth and flat to falling profits.”
BNP said the current bubble is supported by leverage and government policy support. The rally that started in May last year has been sustained by interest rate cuts to boost liquidity.
On the regulatory front, the central government has allowed individuals to open more securities accounts. In the last week of May, a record 4.5 million securities accounts were opened while the turnover of the two mainland stock markets crossed 2 trillion yuan – 10 times the average daily turnover between 2007 and 2013.
“By definition, bubbles must pop, although the timing is necessarily impossible to pin down,” BNP report said.
It, however, said the bursting of the bubble would not hurt the economy too much. “Equity bubbles are less pernicious than credit and housing bubbles, where fixed liability and long duration ensure a much longer-lasting fallout.