Chinese investors borrow most money in five years to buy stocks as bull market charges on
- The outstanding balance of margin trading on the mainland’s stock exchanges rose to 1.3 trillion yuan (US$185.9 billion), the most since August 2015
- Bocom International’s Hong Hao says stocks are still cheap relatively to bonds, meaning rally won’t end any time soon
Chinese traders are borrowing money to buy stocks at the fastest pace in five years, helping to fuel a runaway rally that has added US$1 trillion to market capitalisation in the past week.
The outstanding balance of margin trading – borrowing funds from a broker to buy shares – on the Shanghai and Shenzhen stock exchanges rose for a 10th consecutive day on Friday to 1.3 trillion yuan (US$185.9 billion), according to China Securities Finance. That was the highest level since August 2015.
The jump in the amount of debt-fuelled buying still does not seem to be bothering the regulators. In a high-level financial meeting at the weekend, chaired by vice-premier Liu He, in which a crackdown on accounting fraud by listed companies and a tightening of delisting rules came up for discussion, there was no mention of the risk linked to margin trading.
The outstanding level of leveraged buying was still about 40 per cent shy of its peak of 2.3 trillion yuan reached in June 2015. That borrowing frenzy led to a meltdown that erased US$5 trillion from the Chinese stock market after the regulator moved to clamp down on the practice.
The Shanghai Composite Index rose 1.8 per cent to 3,433.29 on Monday, almost recuperating a 2 per cent loss on the previous trading day and allaying concerns that a quick boom-to-bust cycle is in the offing.
The world-beating rally in mainland China’s stocks, which has driven up the benchmark by 15 per cent this month amid soaring turnovers, has caught the attention of global traders. They point to a loosening of monetary policies and improvement of economic fundamentals in the post-coronavirus era as factors underpinning the run-up.
Even though about half of the 1,561 stocks on the Shanghai Composite Index are technically overbought, analysts including Hong Hao at Bocom International Holdings say the rally is not coming to an end any time soon.
Hong, who correctly predicted the bursting of the stocks bubble in 2015, is basing his current prophecy on the difference between the earnings yields of stocks and bond yields. The gap has not reached an extreme level that would foreshadow a reversal of the trend, he said.
The earnings yield on the Shanghai Composite is 2.03 per cent and the yield on China’s 10-year government bonds is 3.05 per cent. In the 2015 market rout, the gap widened to beyond minus 6 percentage points.
“We believe the upward trend remains intact,” Hong said. “Stocks are not expensive, especially when compared with bonds.”
Investors should monitor data on daily trading values, margin financing, new account openings and new mutual fund launches to gauge sentiment towards Chinese stocks, according to UBS Group. Weaker-than-estimated interim earnings, a flare-up of China-US tensions and a regulatory clampdown could increase the downside risk, the Swiss bank said.
