Investor confidence has surged in China's stock market, as investors flock to equities, fueled by Beijing's sweeping policy measures and driven by fear of missing out on what some view as a rally of historic proportions. Brokerages are bustling with retail clients, and a surge in orders is clogging trading systems as investors shift funds from bonds and deposits into stocks. This has led to a spike in stock turnover and rising yields.
After three years of market stagnation, during which economic activity struggled to regain pre-pandemic levels and a debt crisis among property developers rippled through markets, last week brought a sudden wave of optimism. The blue-chip CSI300 Index (.CSI300) surged 16%, marking its best week since 1998, following the government’s announcement of stimulus measures, including interest rate cuts and a $114 billion fund aimed at boosting share prices.
Although many of these policies are yet to take effect and may not fully resolve deeper economic challenges, such as the prolonged property crisis and weak consumption, investors are eagerly following the influx of capital.
Last week, Reuters reported that the central bank launched a 500 billion yuan ($71.30 billion) swap program to finance stock purchases by brokers, funds, and insurers, with plans to expand the program. Additionally, a 300 billion yuan re-lending facility will support share buybacks by listed companies. Both initiatives are expected to grow further.
China Market Rallies
China's CSI300 Index skyrocketed over 8% on Monday, September 30, building on the previous week's 16% gain. Meanwhile, Shanghai stocks (.SSEC) surged more than 7%, and Shenzhen shares (.SZSC) jumped over 10%, with a combined turnover of 2.6 trillion yuan, surpassing levels seen during the bull market a decade ago.
The 2014-2015 bull run was fueled by illegal margin financing, whereas this time the central bank is providing the leverage. Investors are flocking to stocks due to state support. Additionally, the challenges in making macroeconomic projections suggest that the current rally is driven more by liquidity and market sentiment than by fundamental conditions or corporate outlooks.
In a sign of official support for the rally, the China Securities Journal stated in a Monday editorial that revitalizing the stock market and restoring investor confidence will help drive the country’s economic recovery, breaking the negative cycle of reduced investment and weakened sentiment. Across the country, previously quiet brokerages are now bustling with investors eager to open accounts or secure loans for trading. The surge in demand was so strong that clearing services remained open over the weekend to approve new accounts.
Brokerage firms are assigning extra staff to branches to manage the influx of account opening requests ahead of the National Day golden week holiday and to provide coverage during non-working hours, according to an internal notice reviewed by Reuters. The margin financing sector has rapidly become busier, experiencing a sharp rise in activity.
Signaling Asset Rotations
In a clear indication that funds are moving away from safer assets, China's 30-year treasury bond futures dropped to a two-month low on Monday, following a 3.6% decline last week—their worst performance on record.
Zhao Jian, head of Atlantis Finance Research Institute, noted in a Sunday client memo that a large-scale shift of trillions is underway, with money flowing out of bond funds, wealth management products, and other fixed-income assets into stocks. After three years of a bear market, millions of short-term investors are eager to recover their capital, which Zhao believes will drive the bull market forward with minimal corrections. However, he cautions that many could face losses when the market eventually reverses.
Spill Over to Global Markets
The recent surge in Chinese stock markets is not only driving massive trading volumes domestically but is also spilling over into international markets. With Beijing's sweeping stimulus measures sparking renewed optimism, trading volumes in China have skyrocketed. This rally has extended beyond China's borders, fueling activity in markets like Singapore, where the SGX FTSE China A50 Index Futures have surged. The A50 index, which tracks the top 50 companies listed in China, recorded one of its best-performing weeks, with 6.7 million lots traded last week.
As investors adopt a risk-on approach to Chinese equities, the A50 has seen its open interest hit an all-time high. On September 26th, open interest in the A50 futures soared to 1.2 million lots, equivalent to $16 billion, underscoring global investor confidence in China’s stock market rally. The international focus on Chinese equities has been bolstered by the prospect of continued government support, including interest rate cuts and liquidity injections, as Beijing seeks to stimulate economic growth.
The surge in trading volumes was particularly notable on September 25th, when 1.9 million lots were traded, marking the second-largest single-day trading volume on record for the A50. As Chinese investors rotate funds from safer assets like bonds into equities, global markets are feeling the impact, with international futures markets reflecting the scale of this liquidity-fueled rally. The combination of domestic policy support and international investor interest suggests that trading volumes may continue to rise in the coming weeks.
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