Watch out: China’s big ball of money may be headed into the stock market

Property, overseas investments and shadow-banking products have all been targeted by China’s campaign to curb financial risks over the past year. What is left?

Some analysts are betting that restrictions on other popular investment channels will lure what is often called “China’s giant ball of money” back into stocks, which, despite steady gains, have seen a slow take up in volumes since a spectacular boom and bust in 2015.

Chinese equity holdings will swell by up to 11 trillion yuan (US$1.7 trillion) in the 30 months through end-2019 amid policies to clean up the financial system, Morgan Stanley predicts.

For China, a reinvigorated stock market has the benefit of reducing the economy’s reliance on debt – while also creating the risk of another speculative frenzy. This time around, however, there is a stronger fundamental case for stocks: economic data and earnings have improved, and the government has had some success in lowering leverage in the financial system.

“Economic fundamentals are improving, valuations are OK and there’s a global phenomenon of low volatility – that’s why stocks are in an ideal environment to heal,” said Hong Hao, chief strategist at Bocom International Holdings, who predicted the market’s peak and trough in 2015. “But to speak of frenzies in stocks again, only two and a bit years away from 2015, it’s probably a little too early.”

China’s growing wealth has been known to whip up periodic manias in various assets from stocks and homes to commodities and bitcoin, as investors seek to dodge the regulatory whack-a-mole.

The government’s campaign to curb financial risks has intensified over the past year, targeting many of the nation’s most popular investment channels. People’s Bank of China governor Zhou Xiaochuan warned on Sunday about excessive corporate debt, signalling such efforts are unlikely to ease.