Hundreds of thousands of investors are piling into China’s stock market on the back of a spectacular rally, driving up prices in a borrowing-fueled frenzy, despite warnings of heightened risks.
The benchmark Shanghai Composite index was sent skyward by a surprise interest rate cut on Nov. 21 and since then it has soared almost 20 percent, despite also recording its biggest one-day fall in five years.
In the two weeks after the announcement, 495,819 new investor accounts were opened on the Shanghai bourse, according to China Securities Depository and Clearing, which clears and settles stock trades — twice the rate before the move.
Liu Chang, an investor in Wuxi, Jiangsu Province, had been out of the market for years, but is now back in.
“For the time being, stock investment definitely makes money much faster than anything else,” he told reporters. “People tend to go with the tide and do whatever others are doing, it’s a Chinese characteristic.”
Yuan Hai, a civil servant in Guangdong Province, has seen colleagues and friends opening new accounts or activating old ones to get a piece of the action.
“When people got wind of the rally, they showed a willingness to enter the market,” said Yuan, who started trading in July. “The stock market had been lukewarm since 2008 and the takeoff now has met with enthusiasm.”
Analysts say the interest rate cut made deposits and other investments less attractive, while heightening expectations of more easing measures, and at the same time made retail investors — who make up the vast majority of traders — worried about missing a rising market.
“Turnover, leverage and account openings have all soared and there is a sense of mania taking hold,” Capital Economics chief Asia economist Mark Williams wrote in a report.
Leverage refers to investors’ use of borrowed funds from brokerages to trade stocks with only a small portion of money, or margin, put down as deposit. Margin trading amplifies both profits and losses.
By the close on Thursday — the latest available figures — Shanghai’s outstanding balance of margin trading transactions had reached 617.4 billion yuan (US$99.8 billion), up 27 percent from Nov. 21, exchange data showed.
Put off by newfound sluggishness in a sector that was once a pillar of China’s economy and a long-favored investment destination, property owners are also pouring their money into stocks in search of higher returns, analysts said.
“Funds on the sidelines flew in from the banking system, trust products, the property sector and other channels, as everyone has seen the wealth effects,” Central China Securities Co (中原證券) analyst Zhang Gang (張剛) told reporters.
Chinese markets have underperformed in comparison with the rest of the world for years and in late August, Xinhua news agency sought to talk them up, publishing nine articles within four days highlighting low valuations and the need to “reinvigorate” the stock market to “revitalize” the domestic economy.
“This seems to have convinced many that the government was determined to see the market rise,” Williams said. The “resulting enthusiasm has to some extent now become self-reinforcing.”
However, authorities are worried by the heat in the market and high leverage levels.
The Shanghai index broke the psychologically significant level of 3,000 points on Monday, then crashed 5.43 percent on Tuesday after authorities tightened the use of corporate bonds as collateral for short-term financing — which could curb investors’ ability to trade on the margin.
Online news portal Sina reported on Thursday that authorities were “highly concerned” and planned to inspect brokerages’ margin trading business and short-selling this week.
Xinhua itself has cast doubts on the sustainability of the gains, in a commentary warning of the “hidden risks of a ‘mad bull’ built on leverage.”
“Once the wind shifts, funds trading on margin will swarm out and trigger a cliff-diving fall, and investors who used leverage could face huge losses,” it said.
China’s stock regulator also urged investors to be “rational” and “revere” the market.
Analysts foresee more control measures on the horizon, but say the index is likely to consolidate at about the 3,000-point level for the rest of the year.
“Naturally, when the market goes up too wildly, there are going to be some control policies to put it back on a trajectory of rational gains,” Zhang told reporters.
“It’s still in the early stage of a bull market after all,” he said, adding that Shanghai could peak at more than 3,500 points next year, before winding down toward the end of the year.
Capital Economics also expected it to rise further, before consolidating to end next year at about 3,000.
However, the retail investors whose appetite has driven the rally are undeterred by the volatility and expect more rises in the future.
“Corrections are normal. Any bull market could suffer some losses during the process,” Yuan said. “I’m not worried at all. I think the rally will sustain for a while with a slow and steady rise till it reaches 4,000 points.”
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