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China’s Stock-Trading Craze Foreshadows Another Bullish Run

(People's Bank of China)

(Bloomberg) -- The rally that swept across China’s stock market a month ago may have cooled, but a slew of indicators suggests some investors are still betting on further gains.

The CSI 300 Index has largely been range-bound since an Oct. 8 peak, with an underwhelming fiscal stimulus and concerns over US President-elect Donald Trump’s confrontational stance toward China clouding the outlook. Short-term volatility is a third of what it was in the wake of the central bank’s stimulus blitz in late September, which spurred a 32% rally over two weeks. 

But underneath the tamer price moves, a surge in turnover, a steady increase in leveraged trades and money flowing out of bank deposits show simmering animal spirits as many investors believe the market has put a years-long slump behind.  

“Stocks may hit new highs before the end of the year, the determining factor being domestic economic cycle and policies,” said Zhou Nan, founder and investment director at Shenzhen Long Hui Fund Management Co. “While Trump is expected to impose tariffs on certain industries, which will affect these sectors’ development, that won’t change the course of China’s economy.”

Here are some indicators that show buoyant trading sentiment. 

Trading Frenzy 

Daily turnover in Shanghai and Shenzhen exchanges has exceeded 2 trillion yuan ($276 billion) for seven straight sessions through Wednesday, the longest streak ever. That feat was unthinkable just a few months ago when trading often languished at below 500 billion yuan.

Both Hong Kong and China saw the highest turnover on record in October, but the amount has since retreated in the financial city. Yet the frenzy is still underway in onshore markets even as equity benchmarks post modest moves. The CSI 300 slipped as much as 0.8% on Thursday after rising 0.6% in the previous session.   

“Turnover never lies, and it’s pretty evident that this market is active and on a totally different footing than in the days before the policy pivot,” said Jiang Jiong, managing director at Liumiaoxing Private Fund Management Co. “The rally is alive and well, and it’s very difficult to be bearish on stocks when things are changing hands at this rate.”  

Margin Trades 

Leveraged equity positions — those traded on borrowed cash — in the onshore equity market has surged even as gains in the CSI 300 Index have stalled. Traders have piled on to margin trades despite disappointment at Beijing’s latest fiscal stimulus and the US election outcome, showing they remain unfazed and bullish enough to put more skin in the game. Their positions are now at levels seen in the run-up to the 2015 equity bubble. 

“The leveraged trades represent the hot money by retail and speculators over the past month,” said SDIC Securities analyst Lin Rongxiong. “When fundamentals start to improve and a consensus is formed, the disconnect between the bulls and bears will narrow.”

Retail Flows 

There are signs of a meaningful transfer of assets from bank deposits into the stock market by retail investors. Chinese households slashed 570 billion yuan in savings in October in the biggest monthly drop since since April, when the withdrawal coincided with a modest uptick in equities.  

Another indication of increased retail interest is the surge in new trading accounts. Investors created 6.8 million accounts for trading onshore shares in October, the biggest monthly tally since June 2015. These can provide fodder for another rally once conditions are ripe again. “It’s expected that residents’ deposits will continue to flow into the stock market and funds,” Zheshang Securities analysts including Li Chao wrote in a note.  

Healthy Momentum 

Most stocks in the CSI 300 Index are holding up well even as the benchmark remains about 4% below its Oct. 8 peak. Nine out of ten members are trading above their 200-day moving averages, on par with the highs in July 2020 and April 2019. 

The number of those trading above the zero line in the moving average convergence-divergence indicator, signifying positive momentum, is also elevated, with just 30 of the 300 member gauge still flashing bearish signals.   

(Updates with Thursday market moves in seventh paragraph.)

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