China’s stock boom may turn into a 2015 bust, warns Nomura

(Bloomberg) — Investors should brace for China’s biggest stock market rally in 16 years to blow out, with the economy on a much weaker footing than before the pandemic, Nomura Holdings Inc said .

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In the worst-case scenario, “a stock market mania would be followed by a crash, similar to what happened in 2015,” economists led by Ting Lu wrote in a note to clients on Thursday. This outcome may have a “much higher probability” than more optimistic scenarios.

China’s benchmark stock index posted its biggest gain since 2008 on Monday, entering a bullish market following a raft of measures to boost growth in a struggling Chinese economy. Since then, the land markets have been closed for holidays.

Hong Kong’s benchmark Hang Seng index rose for a 13th day on Wednesday, before falling on Thursday. Optimism remains high that the rally is different from previous short-lived recoveries, with a growing number of global money managers becoming bullish on the market. But Nomura is not convinced.

“While investors may still be okay to indulge in the boom for now, a more sober assessment is needed,” the bank said.

The economy’s vulnerability stems from nearly four years of a housing crisis, much higher local government debt, escalating geopolitical tensions and other factors, Nomura said.

If the rally falters, worse could follow, with Beijing likely to resort to printing money, the bank said. In this case, capital flight is likely to be rapid, and China’s yuan could come under depreciation pressure.

For Neo Wang, Evercore ISI’s managing director of China research based in New York, a repeat of the 2015-style stock loss would be something China’s top management could ill afford.

The Shanghai Composite Index doubled from September 2014 to its peak on June 12, 2015. Then, the equity gauge fell 40% in about two months.

Still, Wang says the authorities have more tools they can use to shore up stocks this time around. “New liquidity instruments in the capital market, such as swap and credit facilities, have not yet kicked in,” he said.

Nomura’s baseline scenario is a bubble bursting “on a smaller scale.” Beijing is likely to introduce fiscal measures to stabilize demand and maintain basic local government operations, but may fail to address serious structural problems and clean up the real mess in the real estate sector, according to economists.

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Other global banks, however, are more optimistic. HSBC Holdings Plc strategist Alastair Pinder upgraded Chinese stocks to overweight and said it was “not too late to get into the rally.”

Meanwhile, Morgan Stanley’s Laura Wang said the country’s stocks could gain another 10 percent to 15 percent as the government could announce fiscal measures to extend the previously reported stimulus.

(Adds bullish Wall Street views in last two paragraphs. An earlier version of the story corrected the time period at the top.)

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