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Home / Business / The performance of the Chinese stock market is incredible. But too high, too fast has risks

The performance of the Chinese stock market is incredible. But too high, too fast has risks



Benchmark Shanghai Composite (Shanghai Commodity Exchange) In China’s official media, local investors are called on to invest money in the market to ensure their economy recovers from the coronavirus pandemic. As the country enters a boom period, the index begins to enter a bull market this week. By Friday, the index had ended its best week in five years. Trading volume surged, with daily trading volume soaring nearly 80% from last week.

International onlookers noticed this surge. Goldman Sachs predicted this week that the Shanghai and Shenzhen 300 indexes will rise another 15% in the next few months. Analysts attribute it to the “strong economic opening”

; and “the government’s positive comments on the stock market”. factor.

China’s stock market is not as open as other major international exchanges. According to the latest survey data from China Securities Depository and Clearing Corporation, almost all investors in the mainland stock market are individual traders.

However, the significance of this rally is that the country’s idea of ​​how to project the image of a healthy stock market to other parts of the world is particularly important, especially because the country is receiving more and more International review implements comprehensive national security laws in Hong Kong.

Brock Silvers, chief investment officer of Adamas Asset Management, a Hong Kong-based company, said: “This rally reflects Beijing’s preferred image in a prosperous and successful society. “

However, there is the risk of jumping too high, too fast-China seems to be acutely aware of this.

The state-owned economy daily wrote in a commentary article published on Friday: “The rise in the stock market will ease the company’s financing difficulties, boost the real economy, and speed up the recovery.” “But the bull market does not mean that we should let the market run out of control.”

On Friday, the stock market cooled somewhat: for example, the Shanghai Composite Index fell by nearly 2%, but this was not enough to offset its historic gains. Official media reports attributed the retreat to news that China’s Social Security Reserve Fund will reduce or exempt hundreds of millions of shares in a major state-owned insurance company, the People’s Insurance Company of China. This is a warning sign that Beijing may believe that the market surge has occurred too quickly.

Analysts also warned that the bull market may lose momentum. Silvers said that although the Chinese economy is recovering, it is still weak. He added that the impact of Hong Kong’s security laws on the economy is still unknown, and pointed out that the tension between China and the United States may cause more economic difficulties.

Silvers said: “To some extent, this image is not supported by potential economic fundamentals. This may be a kind of rage building.” “Today’s bulls may pay for it.”

Adventure strategy

Some analysts pointed out that what is happening in China is not the only one. For example, last quarter, the US economy fell into a recession triggered by a pandemic. However, the stock market there has just hit its best three-month period in more than 20 years.

Jing Sima, China investment strategist at BCA Research, said: “The decoupling between stock prices and economic fundamentals is not a “Chinese phenomenon” per se, but a global phenomenon.” “Actually, Chinese stocks compare with domestic economic fundamentals , Did not diverge as similar stocks in the world.”

Just as US President Donald Trump often associates his presidency and economic success with stock market performance, former senior Chinese officials have joined the country’s official media, arguing that a bull market is needed to offset the economic headwinds.
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“Central leadership [Chinese Communist Party] The capital market has never been so valued as it is now. “Xiao Gang, the former chairman of the China Securities Regulatory Commission, said at a financial meeting on Tuesday.

Xiao once chaired the committee during the turmoil in China’s stock market in 2015. He called on China to transform its economy and compete with the West in technological and financial development.

But Julian Evans-Pritchard, a senior Chinese economist at Capital Economics, wrote in a research report on Thursday, “Using the stock market as a tool to support the economy is a Adventurous strategy.”

He said that the market rebound has some economic benefits, such as making it easier for listed companies to raise cash when their balance sheets are tight. He added that a series of trade activities will also directly contribute to GDP.

But Evans-Pritchard said the government recognized that price increases would encourage investors to view the market as a “single bet.”

He said: “Once the large-scale rally is successfully held, it can be self-sufficient with the influx of retail investors.”

Echo of 2015

The biggest concern is whether the boom of the Chinese stock market will follow, such as the Great Depression in 2015. In the summer of that year, the Shanghai Composite Index plunged 30% in the three weeks after rising 150% in one year. The volatility lasted for several months. Experts attributed the volatility to the slowdown of economic growth and risky trading practices, coupled with bullish official media. The volatility lasted for several months, triggering a global defeat .

Evans-Pritchard writes: “Despite the belated efforts of the authorities to contain the 2015 rebound, oil prices have been rising and are breaking away from economic fundamentals until they bear Until the force collapses.”

Sometimes there will be some similarities. Oliver Jones, senior market economist at Capital Economics, wrote in a research report on Thursday that the rise in 2014-2015 was characterized by the influx of new traders into the market. He pointed out that China’s transaction volume has also increased recently.

China’s official media also once again acted as cheerleaders for the market surge. Jones pointed out that the Shanghai Composite Index and Shenzhen Composite Index soared on Monday, “although after the official media approved a “healthy” rebound, the economy and the spread of coronavirus has no major news.”

But there are reasons to believe that this time it will be different. Evans-Pritchard said it was encouraging that the recovery of margin trading using borrowed funds for investment was much milder than at the time. He added that stricter restrictions on secret lending should also reduce risk.

He said: “However, obtaining stricter leverage does not necessarily avoid bubbles. Officials will need to act quickly to eliminate the momentum in the rebound and prevent expectations from becoming too monotonous.”


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