Qin Peng’s Observation: How Long Will the A-Share Bull Market Last?

Hello, viewers, welcome to “Qin Peng Observation.”

Today, let’s talk about the current bull market in the A-share market in China. How long will this artificially-induced frenzy last? What are the factors that will impact it moving forward?

The market rescue measures taken by the authorities in Zhongnanhai have a certain logic, but there are three impossible missions. Since September, a major mistake has been made.

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In recent days, the whole world has been watching the A-share market in China, which can be described as going crazy. From being one of the most pitiful markets before August to now surpassing the gains of the U.S. stock market.

This frenzy of surging prices has mostly occurred within the past week. On September 30th, the total market value of A-shares surged by over 7.35 trillion yuan in a single day. In the last five trading days, the total market value of A-shares has increased by a cumulative 17.23 trillion yuan. Currently, individual investors hold around 33% of A-shares, with approximately 220 million stockholders. The average profit per investor over five days is around 25,800 yuan.

Considering that the majority of the 200 million stockholders have been dormant this year, the profits for this round of speculators are even higher. For example, a friend of mine in Beijing, who lost 8-9 million RMB in A-shares last year, recently told me that within a week, she and her husband invested over 6 million in accounts in Hong Kong and China and made over 2 million in profits. Another friend living overseas, who hasn’t touched A-shares in over a decade, recently applied for permission to trade through the Northbound Stock Connect, hoping to make a profit while the Communist Party is redistributing wealth.

Foreign capital has also joined the frenzy. Goldman Sachs’ technical strategist Scott Rubner stated in a report, “In the past 48 hours, I’ve had more Zoom calls about China than in the entire year of 2024.” He mentioned that investors are increasingly worried about missing out on the surge in the Chinese stock market, leading to a “FOMO” (fear of missing out) mentality.

He also expressed, “I really believe that this time is different for the Chinese stock market.”

Just last Tuesday, Goldman’s major brokerage business recorded the largest net purchase of Chinese stocks since March 2021 and the second-largest in the past ten years.

This surge in A-shares has also led to increases in Hong Kong stocks and Chinese concept stocks. Billionaire and chairman of Pruser Companies hedge fund, David Tepper, expressed strong optimism for the Chinese stock market. After the recent interest rate cut by the Federal Reserve, he purchased “all stocks” related to China. Tepper, a value investor, now sees the Chinese stock market differently than before.

I believe that as China enters a long holiday, more people will share and digest these wealth stories, leading to more people rushing into the stock market. Even though we may foresee a bleak outcome in the end, I still want to discuss how long this bull market will last.

Firstly, we must understand that this stock market surge is indeed different from the past. Many compare this bull market to the one in 2015, but there are significant differences:

Politically, the stock market frenzy in 2015 stemmed from the power struggle between the Jiang Zemin faction, facing Xi Jinping who had been in power for three years and continuously cleansing the Jiang faction through anti-corruption efforts. This led to an economic coup attempt. The China Securities Regulatory Commission, the media, and securities firms, funds, etc. joined forces to boost the stock market, only to aggressively sell off later, thus plundering the wealth of millions of small investors. In contrast, this time, it’s Xi Jinping himself facing GDP decline and ongoing deflation who proactively initiated massive liquidity injections, going as far as having the Central Bank of the Communist Party step in and provide refinancing for securities firms and funds for stock speculation.

Economically, after nearly a decade of development, China’s GDP scale, total capital, and structure have undergone significant changes. The Chinese household leverage ratio was just 38.9% in 2015, but by the end of 2020, it had risen to 61.7%. The current massive injection of liquidity by the Communist Party aims to reshuffle household wealth, allowing stockholders to benefit from this wealth redistribution, a significant difference from the situation back then. However, whether they can achieve this remains to be seen.

Comparatively, this current surge in the Chinese stock market resembles the period following the burst of the Japanese real estate bubble and the subsequent 3-4 years of deflation starting in the first half of 1995. The Federal Reserve’s consecutive interest rate cuts drastically caused the appreciation of the yen. This prompted the Japanese government to implement a series of policies including interest rate reduction, increased government spending, infrastructure revitalization, land asset invigoration, and the establishment of a stock market stabilization fund. While it didn’t fundamentally solve deflation issues, it did bring a brief market rally — with the stock market rising about 30% from its lowest point of 14,000 to a high of around 22,000 points.

Additionally, the dynamics of this current bull market in the Chinese stock market are typical of emotion-driven markets influenced by policies, detached from economic fundamentals. Some believe that the current policies have not changed the real economy, so the surge in the stock market seems unreasonable. However, short-term fluctuations in the Chinese stock market do not always require logical reasoning. In economics, there is an important concept called expectations; capital transactions are largely based on expectations, with actual economic data being mostly insignificant in the short term (although crucial in the medium to long term).

Given that the high-level authorities immediately deployed potent measures to support the market, directly having the central bank back stock speculation, it has altered investor expectations. This has led them to plunge into the market fearlessly, engaging in reckless gambling. Particularly, after three years of a bear market causing 90% of the stockholders to lose money. One pertinent psychological principle is that only losing money turns people into gamblers, not making money. The three-year bear market in China has bred millionaire gamblers.

As everyone is betting on significant moves from Zhongnanhai, with monetary policies and relaxed property purchase policies in cities like Shanghai and Guangzhou already implemented, the next phase of observing the Chinese stock market will largely hinge on fiscal policy. It can be said that fiscal policy will determine how far this current Chinese stock market rally can go.

A few days ago, I shared a speech by Liu Shijin, former deputy director of the Development Research Center of the State Council, at the China Macro Economy Forum, suggesting a 10 trillion yuan stimulus package to revive the economy. Given his unique background and the timing of his speech, it is clear that he was conveying a message on behalf of the highest levels of the Communist Party.

However, the crucial issue is how large-scale the stimulus package the Communist Party will roll out be — 3 trillion or 5 trillion yuan? And how much would flow into people’s livelihoods, be allocated to local governments, or go into infrastructure development. Liu Shijin acknowledges the necessity of a 10 trillion or larger economic revitalization package; yet, if the funds cannot directly increase individual income, sticking to the old road would not only fail to achieve the desired outcomes but also accumulate greater economic risks.

A large-scale stimulus package needs to be implemented through issuing national debt. Typically, the National People’s Congress Standing Committee meets at the end of October. So, despite current market rumors that the Communist Party’s Ministry of Finance will soon introduce policies, further observation is required.

On September 30, Chinese economists Hong Hao and Liu Yuhui, a member of the China Chief Economist Forum, had a discussion. Liu Yuhui revealed important information that the ongoing economic stimulus policies by the authorities are being adjusted based on market responses and practical effects. Therefore, to evaluate whether the next phase of the stock market trend can continue and how high it can reach, we need to monitor policy developments.

Regarding the duration of this current market trend, Liu Yuhui believes it will likely last approximately half a year, from the fourth quarter starting now to the first half of next year. This period is expected to be when policies are intensively implemented. The verification of these policies will come after the National People’s Congress session in March next year.

However, not everyone shares this optimistic view. A prominent domestic investor told me it may last a little over two months.

Personally, I estimate that this frenzy may only persist for a little over three months. On one hand, by early next year, a lot of data will be revealed, unmasking the true colors of Communist Party policies; there’s no need to wait until the National People’s Congress. On the other hand, both domestic and foreign capital markets and a sizable proportion of stockholders are driven by short-term speculative motives. They want to make a quick profit and leave, thus at the slightest sign of trouble, they will swiftly exit, and it won’t last for very long.

Nonetheless, I agree with Liu Yuhui’s other judgment that, in the initial stage of this bull market, stocks will generally rise, and even some mediocre stocks will surge remarkably due to their previous undervaluation. However, as the market progresses, it will become more discerning and logic-driven. Sectors and companies directly influenced by Communist Party policies will see greater capital inflows. For example, some technology stocks. The Communist Party is currently emphasizing the development of new productive forces, seeking to bolster its technological capabilities through substantial fiscal investments and policy support.

I would like to emphasize that the Communist Party’s current market rescue operation is doomed to fail. Even if the liquidity injection scale reaches as high as 3-5 trillion, the fundamental issues in the Chinese economy will not undergo substantial changes, nor will the essence of the Chinese stock market be altered. This is because:

Firstly, printing money cannot solve all economic problems, or else the United States and the global economy wouldn’t have experienced over three years of inflation; countries like Venezuela and Zimbabwe wouldn’t have faced economic collapse, and Japan wouldn’t have taken three decades to emerge from deflation.

Secondly, for the Communist Party authorities to truly address economic problems, they need to tackle three fundamental issues. However, under the current Communist Party system, these three issues are insurmountable.

Boosting confidence. Since the bursting of the real estate bubble, Chinese consumers and investors have been pessimistic. The lack of confidence is rooted in uncertainty about the future. Survey results indicate that the primary reason for people refraining from buying houses is “income instability.” Private investments have dropped, and entrepreneurs are generally lying low. Although economic factors play a role, the Communist Party’s governance also contributes significantly. For example, a single piece of paper can ruin an entire industry, and the current party leadership governs the country like flipping a pancake — burning one side, flipping it, then burning the other. Private entrepreneurs have long been discriminated against and treated as cash cows. While the National Development and Reform Commission Chairman recently declared that all entrepreneurs are part of the same team, few likely believe it.

Shift toward consumption. The Wall Street Journal suggested that if the Communist Party authorities shift their fiscal support focus to consumers, strengthening the weak welfare system could lower high savings rates and improve living standards. However, expecting the Communist Party, a looting cartel, to suddenly show kindness and stop looting to give back to the people seems unattainable. Consequently, such investments will remain insufficient. The Communist Party will likely continue to cater predominantly to the 800 million people it financially supports and their cronies.

Even this market rescue operation is destined to be a grand feast for the privileged Communist Party ranks, who will undoubtedly take advantage of this rare opportunity to fleece retail investors. Perhaps Xi Jinping is envisioning a scenario where a rising stock market boosts the confidence of everyday investors to spend and entrepreneurs to invest. Yet, this is but a pipe dream. In a manner reminiscent of the end of the Ming Dynasty, Emperor Chongzhen hoped his ministers would step up financially to save the country in times of crisis, only to see most of them hoard their wealth when needed the most. The Communist Party has nurtured an immense unparalleled corrupt group, which has been instrumental in stabilizing the regime, but will ultimately be its downfall.

To achieve a successful market rescue, there is also a need to raise productivity. Despite the Communist Party’s policy leanings toward the tech industry, this mission is also impossible. Since 2010, China’s total factor productivity has been on a decline. A clear reason being that the Communist Party has centralized power, directing bank loans and capital towards favored sectors and state-owned enterprises, depriving more dynamic companies of resources.

Furthermore, the ongoing substantial market support measures by the Communist Party lack any political reform and show no intentions of improving relations with major world powers. The key to the Communist Party’s success in reform and opening up for the past 40 years has been through opening up to developed countries like the United States and Japan. Presently, the Communist Party has close ties with rogue states or organizations like Hamas, while actively working to disrupt the existing international order. This will inevitably lead to tighter containment measures imposed by the international community, pushing China’s high-tech capabilities further away from the world.

Thus, even with the current influx of foreign capital into the Chinese stock market, it merely serves short-term speculative purposes and will not lead to fundamental improvements in the Chinese economy. When the tide recedes, these investors will promptly retreat, leaving behind nothing but disappointment.

Moreover, the Communist Party made a grave error that will inflict significant damage on the Chinese economy. Recently, the yuan-dollar exchange rate breached 7, bringing delight to Chinese domestically and officially, as if to say, “We’re powerful, and the dollar can’t match us.”

However, this move is remarkably foolish. Basic economics dictates that a stronger domestic currency is unfavorable for exports, which currently represent China’s only economic bright spot. The yuan’s steep drop of over 3% in a few months has eroded the profits of most Chinese export enterprises.

This folly is deeply rooted in the Communist Party’s vanity. This year, due to the Communist Party’s relentless issuance of offshore yuan bonds, it devoured most of the offshore yuan’s liquidity. This impulsive behavior, like seizing the moment by drinking all the wine today, will inevitably cause severe harm to the Chinese economy.

To sum up, this artificial bull market resembles more of an apocalypse celebration and won’t address the fundamental economic issues in China. It will undoubtedly bring about more severe problems than the 40 trillion yuan investment back in 2008. The majority of Chinese stockholders who were looted by the privileged elite will likely end up even poorer, with even less confidence in the future, inching the Chinese revolution closer.

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