Wall of money powering China’s bull market
They used to say you know it’s a stock market bubble when taxi drivers start offering stock tips. In the ongoing Chinese equities bull market, we’ve got livelier signs than that.
We have got, for instance, folk trying to limp across the Lo Wu border with suspiciously robotic gaits – the effects of having cash taped to every limb as well as stuffed into their shoes.
One woman nabbed by customs officers last week had HK$1.9 million in notes tucked away under her clothes. Records show she has been in and out of the country 90 times in 15 days, and one doubts she was here for milk powder.
It is widely believed that Mainland investors are smuggling in funds to get around daily quotas in the Shanghai-Hong Kong Stock Connect programme.
Oh yes, then we’ve also got those young men who crashed their luxury sports cars while racing in a Beijing traffic tunnel; the owner of the now-crumpled Lamborghini said he purchased the car thanks to winnings in the Chinese equities rally. It is admittedly a fishy story, but another sign of the times.
This is a hooting, tooting, bona fide bull market. It started in China, where benchmark indices have doubled in a year, and is now spreading to Chinese equities listed in Hong Kong,
Ignore those who are warning of a disconnect with China’s underlying economic reality. This is not about fundamentals; this is about old ladies limping across the border with fresh cash stuffed into their Wellies.
Brokers are in “fill-your-boots” advisory mode. The most convincing "buy" stories are the ones that simply point to the obvious wall of money. Those trying to enumerate supposed fundamentals just get twisted into all sorts of painful logical contortions.
One brokerage report, for example, noted that China’s proposed bank deposit insurance system will only cover up to RMB500,000 in savings deposits.
Thus savers have an incentive to put any money above that into the stock market.
Huh? Before they had no protection at all, yet Chinese banks were stuffed to the gills with excess savings – now as soon as there is a deposit insurance programme the money will flood out to find greater safety in, say, internet stocks with 200 times price-earnings ratios?
This is crazy logic - yet there is a method to the madness. Households are obviously ploughing more money into equities. Stocks really are going up. As they rise, the logic for investing in them inevitably catches up. People feel richer, they spend more, money circulates.
Let’s consider the banks. Not too long ago, China’s banks were trading under two times earnings amid fears of non-performing loans, a property market crash or the thundering hard landing that so many China bears have been warning about for years.
Now the banks are eight times earnings – and believing they are worth that is what saves them from a fate of being duds at twice earnings. Because as the stock market booms, banks are raking in fees from financial services, such as asset management, investment banking or trading execution.
This can explain why China’s culturally conservative leaders – who don’t even want college students reading Adam Smith much less Fortune magazine – are permitting this go-go market madness, even as some profits will get recycled into decadent purchases like Rolexes and Lamborghinis.
It’s a risky game, but what choice do Chinese leaders have? The old economic growth model - pumping cheap credit into a high-rises and infrastructure – is obviously over.
The anti-corruption drive is adding its own weight. And China’s not getting any lucky save from exports, which have been sluggish in line with lackluster global demand.
Authorities could kill this at any time – like they did Macau – but instead are “managing” the stock market bubble. This has involved occasional weak-lipped verbal warnings and, more recently, the opening up of new channels to direct more of the froth towards Hong Kong.
Next up is the Shenzhen Stock Connect and the Guangzhou Free Trade Zone. Both these initiatives should have secondary impacts by boosting the private equity sector in southern China.
I argued in this space in January that the A-share market could push well beyond what fundamentals would suggest. I was not exactly alone; with a flood of money hitting the market, it was an easy call. Predicting if and when the fundamentals ever catch up– that’s the tricky part.