China’s stock market has experienced a significant rebound under official policy stimulus, with a large number of post-90s and post-00s opening new accounts to enter the market. Experts have indicated that the surge in the stock market is attributed to a bold gamble by Xi Jinping. Nomura Securities has issued a warning, saying that the most pessimistic outcome could be a market crash following the frenzy, reminiscent of the stock disaster in 2015.
Before the National Day holiday, the A-share market in China surged for a week. Reports from the media mentioned that brokerage firms were flooded with account openings, and even vendors at traditional markets and delivery drivers were discussing stocks. Pictures circulated online showing a monk going through the account opening process at a securities company, with captions mentioning that “even monks are joining the stock market, a scene reminiscent of 18 years ago.” Another image showed a monk in a robe attentively checking stock market trends in a crowded trading hall.
An online fiction writer claimed to have earned over three million yuan in just a few days and announced a hiatus from writing, stating that financial freedom was on the horizon. They mentioned possibly returning to writing in the future purely for artistic purposes, bidding farewell to the online community.
Amid the grim macroeconomic indicators in China, this wave of policy-driven bull market has drawn a surge of Chinese people into the stock market. Yu Guoming, a professor at Beijing Normal University, expressed profound implications in a post, indicating scenarios of individuals selling their homes to enter the stock market, while others cashing out from stocks to buy properties, prompting a humorous interaction in a situation of mutual judgment labeled as “fools.”
According to the “China Business News,” a head of a brokerage firm disclosed that a large number of young people with no prior stock trading experience have rushed into the market. Throughout the past week, over 70% of new account holders were post-00s and post-90s, prompting some brokerage firms to adjust their working schedules during the National Day holiday to accommodate the surge in account openings. Reports on “post-90s and post-00s investors entering the market” quickly trended online.
Simultaneously with the influx of new investors into the stock market, data from Wind showed that between September 25 and September 28, 115 announcements related to reductions in holdings by shareholders were made by 55 listed companies in China. Reports indicated that over a hundred shareholders cashed out within four days.
Why are shareholders rushing to reduce holdings at the start of the “big market trend”? A securities investment advisor told “Huaxia Times” that it was because many had finally emerged from a two-year slump.
Regarding the phenomenon of a significant number of Chinese entering the stock market, Li Hengqing, an economist at the U.S.-based Information and Strategic Research Institute specializing in investment risk management, stated to Da Ji Yuan that this unique phenomenon resonates with a popular saying in mainland China – “seeking wealth amid risks.” Li mentioned that with increasing life pressures, particularly for the unemployed youth, many opt to take a gamble despite acknowledging the inherent risks.
Li Hengqing revealed insights from industry insiders engaged in domestic investment, indicating a basic consensus among professionals regarding this policy-driven bull market; the logic being that this extensive liquidity injection may mark a final round of profit-making for authorities. Despite the awareness of these dynamics, individuals taking perceived intelligent risks view it as a chance worth taking, prompting a rush of participants into the market.
This policy-driven bull market coincided with the National Day holiday, witnessing the two major A-share benchmarks surging to the largest levels in 16 years, alongside record-breaking transaction volumes. Within a short span of two weeks, the Shanghai-Shenzhen 300 Index rose by over 20% from its low point. The sustainability of the market rebound has become a focal point of market attention.
As reported by the “Wall Street Journal,” Thomas Gatley, an analyst at GaveKal Dragonomics based in China, analyzed 20 years of China’s stock market data. His report on September 30 indicated that since the introduction of the Shanghai-Shenzhen 300 Index in 2005, China’s stock market has witnessed five “super rebounds.” While the first rebound had the highest surge, subsequent crashes were equally severe. The other four rebounds ended within 8 to 13 months.
Gatley noted that three out of the five “super rebounds” were driven by stimulus policies, with surges ranging from 50% to 100% built from the low points due to stimulus. He highlighted that the sustainability of this rebound hinges on whether the CCP’s decision-makers could further enhance the expected combination of international investors regarding monetary and fiscal stimulus.
Nevertheless, Nomura economist Lu Ting holds a pessimistic view. In a recent report to clients, he expressed concerns about the impending collapse post-market frenzy, likening the current situation in the Chinese stock market to that of the 2015 stock market disaster, urging investors to brace for a potential crash amid the strongest uptrend in the Chinese stock market in the past 16 years.
The 2015 stock disaster refers to the period from September 2014’s low point (2,217 points) to June 12, 2015’s peak (5,178), witnessing the Shanghai Composite Index more than doubling. Subsequently, the index plummeted by about 40% within approximately two months.
Lu Ting’s analysis pointed out that China’s economic fundamentals are weaker now than in 2015, attributing the fragility to nearly four years of the real estate crisis, soaring local government debts, and escalating geopolitical tensions. Should this current market surge come to an end, the repercussions might exacerbate with the CCP potentially resorting to printing money, intensifying capital outflows and depreciating pressures on the Yuan.
Li Hengqing underscored that the CCP has introduced extensive stimulus policies, with measures such as reserve requirement cuts and interest rate reductions further heightening latent risks within the financial system. Additionally, the CCP has involved national social security funds and pension funds in the stock market, posing substantial risks. A downturn or a crash from this policy-driven bull market could trigger a severe social crisis, representing a gamble staked by Xi Jinping on his political career.
The China Banking and Insurance Regulatory Commission released data on August 9, mentioning that the average net interest margin for various Chinese banks in the first half of the year was 1.54%, significantly below the acceptable standard of 1.8% for regulatory interest margins. This indicates that many banks are likely to face losses or even capital depletion. Following this, the CCP Central Bank announced another rate cut, suggesting a downward adjustment of 0.2 to 0.25 percentage points for the loan market quoted rates and deposit rates. Such a move would further constrain the banks’ net interest margins.
Li Hengqing pointed out that after the reserve requirement rate cut, the average reserve requirement ratio for Chinese banks stands at 6.6%, considerably lower than the U.S. banks’ average reserves ratio of 10%. This perilous position renders Chinese banks highly vulnerable, with a risk of bank runs potentially toppling the entire banking sector if financial risks surface.
Furthermore, to stimulate the stock market, the China Securities Regulatory Commission announced on September 26 initiatives to encourage long-term capital inflow, promoting access for social security, insurance, wealth management funds, and other capital to enter the market, striving to bolster the capital markets. Recently, with the approval of the Central Financial Commission, the Central Finance Office and the CCP Securities Regulatory Commission jointly issued guidelines on promoting long-term capital entry into the market.
Li Hengqing highlighted that the CCP has previously attempted to introduce pension funds into the market as proposed by Li Keqiang, albeit unsuccessfully. This time, Xi Jinping has successfully realized this endeavor despite the looming extensive risks. He has placed both his personal wealth and the country’s fate on the line, embarking on a high-stakes gamble!