img-news

China : The Next Stock Market Bubble

(Tue, 7 July 2020). Chinese equities are at the center of the latest market rally, but analysts warn that it could end in tears as fundamentals catch up.

The Chinese stock market has rallied 14% in the past week, fueling hopes of an economic recovery. Other stock markets in Europe and the U.S. have rallied in response, yet analysts warn that the bubble may eventually burst. The overall economic picture remains fundamentally uncertain and fragile and may turn negative very soon. A worldwide stock market surge fueled by China and improving economic indicators risks creating a bubble, analysts have warned.

The Chinese stock market has jumped 14% in the past week, helping to boost global markets. Improving jobs and sales data have also buoyed stock markets in the U.S. and Europe. Unfortunately, analysts warn that things could turn ugly soon. The last time the Shanghai Composite climbed vertically, it lost around 45% of its value in a few months.

 

China’s Stock Mania Fuels FOMO Market Rally

The Shanghai Composite Index closed Monday at 3,332. This marked a 5.7% increase, as low interest rates and bullish investor sentiment fueled the rally. It had risen 2% on Friday after data showed jobs in the Chinese service sector increased their fastest pace in more than a decade.

China’s broader CSI 300 Index has grown 14% in five days, the biggest gain since December 2014. According to BOCOM International’s Hao Hong, the Chinese central bank is also responsible for the newfound bullishness. In turn, China’s bullishness is now feeding international bullishness.

In a note to investors, ThinkMarkets’ Fawad Razaqzada suggested that investors are again looking to China to drive the global economy. Data from Europe and the United States are also playing a big role. Eurozone retail sales surged 17.8% in May, compared to an 11.7% decline in April. In the U.S., 4.8 million jobs were added to the economy in June.

These factors have ignited a big stock market rally worldwide. Germany’s DAX is up by 1.7% on Monday. The U.K.’s FTSE 100 is up by 1.8%. The S&P 500, Dow Jones, and Nasdaq are rose more than 1% in pre-market futures trading. As Fawad Razaqzada also notes in his note to investors, European “stocks exposed to China such as carmakers and luxury goods were among the leaders.”

 

The Bubble Will Burst

Razaqzada is one of several analysts warning that the global stock market rally could end in tears. While some of the optimism certainly makes sense, one could argue the markets may have gotten ahead of themselves given the current situation and many risks facing investors in the months ahead. He notes that the second-quarter reporting season is about to start, and it could bring some terrible news. A waning of pent-up demand is also a negative factor. Meanwhile, other analysts are pointing to history.

 

China Stock Market Rally Bubble Tweet

Chinese state media is currently encouraging people to invest responsibly. This may avoid a repeat of the extreme market volatility seen in 2014-15. A reining in of monetary expansion from the Chinese central bank may also help. Even so, the underlying economic fundamentals don’t look great. As Westpac’s Robert Rennie told Reuters.

Sooner or later, a fuller picture of how the global economy is doing will emerge. It probably won’t be pretty, particularly if the second wave of Covid-19 arrives. Economists have previously warned that recovery from the pandemic will take at least five years. If true, it’s hard to see a China-powered stock market rally lasting.

 

 

 

DISCLAIMER ON
GFS ASIA TEAM

  • 0
  • 0
  • just now
  • 0