Similarities between China’s sudden $1 trillion stock rally this month and a debt-fueled speculative frenzy in 2014 has left investors wondering if a new bubble was forming.
Familiar signs of euphoria emerged before Beijing moved to cool the rally on Friday. Turnover soared, margin debt grew at the fastest pace since 2015 and a bullish state media helped spur sentiment.
While there are parallels, investors and analysts expect a more sustained, slower rally this time. Dai Ming, a Shanghai-based fund manager at Hengsheng Asset Management Co., says policymakers have learned lessons from the past, when Beijing’s fumbled response to the 2014 boom (and ensuing crash) saddled millions of individual investors with losses and undermined global investor confidence in the country’s stock market.
“There are many similarities between now and 2014, including ample liquidity conditions and a weak economy,” said Ming. “But Beijing needs a bull market to help support corporate funding needs at a time when the economy is struggling.”
On Monday stocks resumed their ascent, with the CSI 300 Index rising 2% and the ChiNext Index adding 3.3% in afternoon trade.
Here’s how today’s environment compares with 2014.
The 2014 rally began to accelerate that October, with China’s market value increasing 32% by the end of the year. The pace is even faster this time around with a increase of 41% since a March trough.
The net value of capital that investors have borrowed to buy stocks has risen to the highest in five years, data compiled by Bloomberg shows. A rapid surge in leverage was a key driver behind China’s 2014 stock rally. Still, margin debt exceeding 1.3 trillion yuan ($186 billion) as of Friday, is barely half of 2015’s peak.
Daily turnover topped 1.5 trillion yuan on July 6, the first such reading since 2015, and stayed around that level the rest of the week. A similar spike in turnover was also seen in late 2014.
Despite the recent rally, the Shanghai Composite is still cheap compared to other stocks globally, trading at a similar discount as in late 2014. Both Morgan Stanley and Goldman Sachs Group Inc. lifted their targets for the CSI 300 Index in the past week. Goldman says the gauge could rise another 15% on the back of rising volumes and policy support, but sees such a rally lasting for no more than three months.
China’s equity mutual fund issuance is on track for the largest full-year amount since 2015’s record, according to data from industry research firm Z-Ben. A total of 290 equity mutual funds were issued in the first half, raising a combined 640 billion yuan.
The ChiNext measure rose 3.4% on Monday, extending its rally over the past eight sessions to 19%. The gauge is trading at the highest level versus the large-cap SSE 50 Index in more than three years.
(Updates with Monday trading)
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