China’s Equity Mania Intensifies——–Daily Trading Volume Now 4X NYSE

By LAURA HE at Marketwatch


Some say that when the average “mom-and-pop” retail investors get back into the stock market, it could be time to get out. But what about when even teenagers start buying?

China has entered a new stock frenzy, like something out of America in the Roaring 20s or the dottiest days of the dot-com bubble, with trading volumes continuing to push to new record highs.

On Wednesday, combined trading on the Shanghai and Shenzhen markets hit 1.24 trillion yuan ($198 billion), the seventh straight session in which turnover surpassed the 1 trillion yuan mark. By comparison, the New York Stock Exchange typically saw $40 billion-$50 billion a day in trading during the first two months of this year.

The Shanghai Composite Index SHCOMP, +0.24%  is hovering near its seven-year closing high of 3,691, hit on Tuesday when the index completed a 10-session winning streak.

For the year so far, the benchmark is up 13.8%, making it the best-performing major East Asian stock index of 2015 to date, though it still has a way to go to match 2014’s 53% surge.

The lure of flush times on the Shanghai market is sweeping in unlikely investors by the hundreds of thousands. This week, both the China Securities Daily and the Beijing Morning Post had dueling reports about recent college graduates and, yes, teenagers buying shares.

“Risk-Love (equity sentiment) in China’s equity market is in euphoria territory. It is time to book some profits.”

Bank of America Merrill Lynch

Typically these young investors speculate with money given to them by their parents, according to a Great Wall Securities broker quoted in the Beijing Morning Post story.

Yet another report, this time by the Beijing News newspaper, relates that at the Beijing trading halls of China Securities Co., “even the cleaning lady” has opened an account to play the market.

The data appear to agree with the anecdotes: Within the last week alone, 1.14 million stock accounts were opened in China, the biggest such surge since June 2007, according to China Securities Depository & Clearing Corp.

What does it all mean?

In a note this week entitled “The Worrying Sense of Calm in China,” analysts at Bank of America Merrill Lynch got right to the point: “Risk-Love (equity sentiment) in China’s equity market is in euphoria territory. It is time to book some profits.”

After holding an overweight rating on Chinese shares since August of last year, Merrill Lynch is now cutting the market to neutral, making it clear that economic problems — especially looming deflation — suggest the current environment doesn’t justify buying into stocks.

“China’s real interest rates remain too high, the currency is too expensive, fiscal policy is tight, and debt deflation is taking hold,” the analysts said.

“We are now concerned that the scale of monetary/fiscal easing required in China is so large, and so radically different from where policy makers’ assessments are, that an overweight [rating] is no longer tenable,” they said.

But of course, there are some bulls in the analyst community as well. Erwin Sanft, a China strategist with Australian investment bank Macquarie, says that despite the recent upsurge, valuations for Shanghai’s yuan-denominated stocks are still “normal … [and] not at a bubble level.”

Speaking at a panel with financial journalists Wednesday in Hong Kong, Sanft said the climb in Chinese stocks is partly due to the fact that the Shanghai market has been moving off of an extremely low base over the past 10 to 20 years.

According to FactSet data, the Shanghai Composite’s milestones tell a story of Octobers: The benchmark turned 1,000 in October 1996, then peaked at just above 6,000 in October 2007, before crashing to a post-crisis low of 1,665 in October 2008. On Thursday, the index closed at 3,682.

Macquarie China economist Larry Hu, speaking at the same event, said Chinese stocks still have room to grow, if only because the country is in the process of reforming and developing its equity markets as a channel for companies to raise funds directly. Currently, Chinese companies mainly source funds through indirect means, such as commercial-bank loans.

Hu also said Chinese shares are benefiting from trouble in other asset classes. Trust products have turned risky amid the weakening economy, and the real-estate market is in decline, so stocks now look more attractive to Chinese households, he said.

China stocks may be in serious bubble – MarketWatch.