China’s economy is buckling under the weight of tariffs and a deep-rooted property crisis, yet stocks are extending their bull run — a disconnect that is stirring doubts on the rally’s staying power.
In just the past month, onshore stocks have added almost 1 trillion US dollars to their market value, the Shanghai Composite Index has hit a decade-high, and the CSI 300 Index has taken its advance from this year’s low to more than 20 percent. That is when nearly every recent economic indicator — from consumption trends and home prices to inflation — has brought red flags for investors.
The rally has been driven by cash-rich investors shifting into stocks amid a lack of alternatives. While the market’s steady advance might suggest less risk of a sudden correction, some analysts say there is a bubble in the making. Nomura Holdings Inc is cautioning against “irrational exuberance,” while TS Lombard is calling the mismatch a stand-off between “market bulls and macro bears.”
Photo: Bloomberg
“Markets might be expecting, either correctly or incorrectly, that macroeconomic fundamentals will improve,” said Homin Lee (李霍民), senior macro strategist at Lombard Odier Ltd in Singapore. “But a bull market will not be sustainable if inflation remains close to 0 percent and corporate pricing power faces severe headwinds from weak domestic demand.”
A deflationary spiral that erodes corporate pricing power in the world’s second-largest economy is one of the biggest reasons to doubt the sustainability of the current rally.
Consumer prices were flat last month, producer prices fell for a 34th month and the GDP deflator extended its negative streak. While Beijing has embarked on a campaign to curb overcapacity and rein in price wars, it has had limited impact so far.
The challenging picture has fueled expectations that Beijing would step up support, but the policy rollout so far suggests officials are steering away from the large-scale stimulus playbook, instead preferring a measured approach.
Equity gains are also complicating policy response to the economy’s slowdown, Nomura said, as pro-growth measures risk inflating a stock-market bubble.
Market watchers are also drawing comparisons to the start of the 2015 boom-bust cycle. Back then, a surge in margin trading sent stocks soaring, before a clampdown on such leveraged activities triggered an epic crash.
The amount of outstanding margin debt is at 2.1 trillion yuan (US$293 billion), compared with 2.3 trillion yuan at the 2015 peak. China’s equity gains tend to have strong correlations with liquidity as well as margin balances.
“The abundant liquidity in the market and the gradual wake-up of animal spirits remind us of the crazy times a decade ago,” said Hao Hong (洪灝), chief investment officer at Lotus Asset Management Ltd. “Of course, it is still early days.”
China’s bull market “is more of a mystery box than a conventional growth story,” said Hebe Chen (陳碧菲), an analyst at Vantage Markets Pty Ltd in Melbourne. “The risk is that once sentiment fades, investors would flee in no time.”
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