Stocktake: Irrational exuberance in China?

Morgan Stanley reckons Chinese stocks can go much higher

An investor looks at screens showing stock market movements at a securities company in Nanjing in China’s eastern Jiangsu province. Photograph:  STR/AFP via Getty Images

An investor looks at screens showing stock market movements at a securities company in Nanjing in China’s eastern Jiangsu province. Photograph: STR/AFP via Getty Images

 

The global equity rally is being led by China, where stocks recently gained more than $1 trillion in value in just eight days.

Clearly, Chinese investors are exuberant. Last Thursday, Chinese tech company QuantumCTek soared a record 924 per cent on its first day of trading, exceeding the previous record (614 per cent) set just two days earlier.

Margin loans to buy stocks have hit their highest level since 2015. Chinese stocks have enjoyed one of their biggest five-day advances on record. Much of the recent excitement has been generated by state-run media, with the China Securities Journal running a front-page editorial celebrating prospects for a “healthy bull market”.

The problem is that speculative spirits, once unleashed, aren’t easy to contain. Authorities encouraged a big rally in 2015 but it ended in tears, with stocks eventually losing over 40 per cent of their value.

Still, things were more overheated then. Valuations were higher and leverage levels were roughly twice as high as today’s.

Morgan Stanley reckons Chinese stocks can go much higher, partly due to rising retail interest. Additionally, Bespoke Investment notes that while rapid five-day rallies marked major tops in 2007 and 2015, similar instances have historically occurred “in all types of market environments”. Stocks have always been prone to extreme volatility in China, so Bespoke suggests Chinese investors may see the recent move as “nice, but they may still be thinking ‘you ain’t seen nothin’ yet’”.

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