The Contrarian Rally: China’s stock market soars as its economy sputters

The Main Point

China stock market is soaring.  But that might have more to do with liquidity and leverage in the market than with the performance of companies or the economy. 

Key Events

China’s economy is dragging. Its stock market is not. China’s stock market has surged over 140 percent over the past 12 months. Of course, although China’s economy has slowed this year, there is plenty of reason to believe in China’s long-term growth potential. But that growth potential might not be the primary reason why China’s stock market is going through the roof. There are also plenty of signs that China’s market is experiencing a typical liquidity-driven surge that might not last for long. Below are some interesting statistics to keep in mind when evaluating China’s roaring stock market:


Margin buying has exploded

Outstanding margin positions in Chinese equities have more than quadrupled since early July 2014 to CNY1.9 trillion, equating to almost 9 per cent of the free float market capitalization in China (compared with 2½  per cent for the United States and 1 per cent for Australia). Daily purchases using margin financing have increased tenfold over this time, and currently account for almost 15 per cent of turnover.


Valuations are very high

Stocks in Shenzhen are trading at an average of 61 times earnings, according to the exchange—nearly twice their level at the end of 2014 and almost 25% higher than where they stood on April 30. By price/earnings ratio, the Shenzhen market is more than three times as expensive as the MSCI EAFE index of international stocks; the U.S. is at about 22 times earnings. Half of the companies listed in Shanghai have a PE ratio greater than 40, with over 10 per cent having a ratio greater than 100. By comparison, only 4 per cent of companies included in the broad US Russell 3000 Index have a ratio greater than 100.3


Turnover rate has exploded

Over the past year, Shanghai’s turnover increased from 98% to 600%. Shenzhen’s turnover increased from 204% to 706%. Late in May, daily turnover in Shenzhen hit 7%, implying that the average stock was changing hands every 14 days. Turnover in the US is roughly 300%, indicating that the average stock would change hands every four months or so.

Sources for this Story:  

Here are some figures which make China’s stock market rally look dangerous


Party on, dudes – China’s stock market surges on Beijing’s latest stimulus efforts


The China Bubble That Wasn’t


China markets plunge in record turnover as margin traders take fright


Stocks in China: Still Too Hot to Handle?