China’s stock rally has echoes of the bubble of 2015. What’s different

BEIJING — China’s stock rally so far looks different from the market bubble of 2015, analysts said.

Major stock indexes in mainland China rose more than 8 percent on Monday, extending a streak of gains on hopes of stimulus. Trading volume on the Shanghai and Shenzhen stock exchanges reached 2.59 trillion yuan ($368.78 billion), surpassing the peak of 2.37 trillion yuan on May 28, 2015, according to Wind Information.

In the six months from 2014 to 2015, China’s stock market doubled in value while leverage increased, Aaron Costello, regional head of Asia at Cambridge Associates, pointed out on Monday.

This time, the market has not risen as much, while leverage is lower, he said. “We’re not in the danger zone yet.”

Stock market leverage in percentage and value was much higher in 2015 than Monday’s data showed, according to Wind Information.

In June 2015, the Shanghai Composite topped 5,100 points, a level it has never recovered since a market crash later that summer. MSCI that year delayed adding mainland Chinese stocks to its globally tracked emerging markets index. It also hurt sentiment over time in Beijing on a crackdown on borrowed funds trading and a surprise devaluation of the Chinese yuan against the US dollar.

The yuan has been trading stronger against the greenback this year, while foreign institutional allocation to Chinese stocks has fallen to multi-year lows.

The Shanghai Composite closed at 3,336.5 on Monday, before mainland bourses closed for a week-long holiday commemorating the 75th anniversary of the People’s Republic of China. Trading is scheduled to resume on October 8.

In the run-up to the 2015 market action, Chinese state media had encouraged stock market investing while loose rules allowed people to buy stocks with borrowed funds. Beijing has long sought to build its domestic stock market, which at about 30 years is much younger than that of the US.

The market’s latest gains follow announcements over the past week of economic support and programs to encourage institutions to put more money into stocks. The news helped stocks rebound from their lowest levels of the year. The CSI 300 rose nearly 16% in its best week since 2008.

Chinese President Xi Jinping led a high-level meeting on Thursday that called for an end to the housing market decline, as well as strengthening fiscal and monetary policy. The People’s Bank of China last week also cut interest rates and the amount existing mortgage holders must pay.

“Politics is much stronger and (more) concerted this time than in 2015. That said, the economy is facing headwind(s) now compared to then,” said Zhu Ning, author of China’s Guaranteed Bubble.

A week of massive stock gains doesn’t mean the economy is on track for a similar recovery.

The CSI 300 remains more than 30% below its February 2021 high, a level that had even surpassed the index’s 2015 high.

“The Japanese experience provides an important perspective, as the Nikkei 225 returned four times by an average of 34% en route to a cumulative decline of 66% from December 1989 to September 1998,” Stephen Roach, senior fellow at Yale Law Paul Tsai China Center at the school, pointed out in a blog post on Tuesday that was also published in the Financial Times opinion section.

Economic data in recent months have pointed to slower growth in retail sales and manufacturing. That raised concerns that China’s gross domestic product would fall short of its full-year target of about 5 percent without additional stimulus.

“I think what’s missing is the key to a lot of this that hasn’t come out, which would be a real confidence booster, is how they’re going to fix the finances of local government,” Costello said, once noting the coffers local. it relied on land sales for revenue to spend on public services.

While Chinese authorities have cut interest rates and eased some restrictions on home purchases, the Finance Ministry has yet to announce additional debt issuance to support growth.

Peter Alexander, founder and managing director of Z-Ben Advisors, expects the level of fiscal stimulus — when it is likely to be announced in late October — to be less than markets hope.

“It may have investors a little bit over the skis, as people like to say,” he told CNBC’s “Street Signs Asia” on Monday.

He added in a written response that his experiences in 2007 and 2015 indicate China’s stock market rally could last another three to six months or end abruptly.

“This is pure animal instinct and the Chinese were held back for a stock market rally,” Alexander said. He added that there are market risks because of how unprepared the stock trading system has been for increased buying.

Data on the number of new retail investors in China this year was not publicly available. Reports indicate brokerages have been overwhelmed by new requests, echoing the way individuals got to the stock market nearly a decade earlier. The Shanghai Stock Exchange said on Friday that confirmation of trades at the market open was abnormally slow.

“China was cheap and lacked the catalyst … The catalyst came to unlock value,” Costello said.

“Fundamentally, we need to see corporate earnings go up,” he said. “If it doesn’t grow, it’s all a short-term pop.”

Beijing’s efforts earlier this year to stop a market rout included changing the head of the securities regulator. Stocks rallied, only to see the rally peter out in May.

One factor that may send stocks above May levels is that earnings per share forecasts have stabilized from downgrades earlier this year, James Wang, head of China Strategy at UBS Investment Bank Research, said in a note Monday note.

Lower U.S. interest rates, a stronger Chinese yuan, higher share buybacks and a more coordinated policy response are also supporting gains, he said. Wang’s latest price target of $70 on the MSCI China index is now just a few cents above where it closed on Monday.

— CNBC’s Hui Jie Lim contributed to this report.