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China Stocks Are Blowing Bigger Bubbles

China Stocks Are Blowing Bigger Bubbles

“Sell in May and Go Away”,,,,,,,so the popular investment saying goes – investors would be so wrong on the Chinese stockmarkets if they have done so.

The Chinese stockmarkets have gone on another turbocharge in the past month.  Mainland Chinese investors have continued to push the Shanghai Composite Index, SHC, from 2,005 points in 19th May 2014, to almost 5,000 points or  a near-gain of 250% in just 12 months!

The People’s Daily commented that 4,000 on the SHC was only the beginning of a bull market at end-April was taken as bible-truft by retail Chinese investors as they drove up the SHC from 4,084 points in mid-Apr to 4,941 points at end-May in just 1.5 months!

It was accompanied by CSRC change in rules that allowed each individual investor to open up to 20 brokerage accounts compared to 1 before.  Not surprisingly, new stock account openings continue to surge almost 100% in the past 1.5 months.

Not to be outdone, mainland investors have also continued to swoop down the highway at a fast and furious pace in buying up Hong Kong equities through the North/South Connect exchange link.  The daily quota of $10.5 billion yuan was hit on both days on Wed 8th Apr and Thu 9th Apr.   The euphoria sent the HK Exchange (388.HK) up a whopping 52% over 4 days and the stock has been hovering at HK$300 ever since.

Then in the subsequent weeks through May, the quoted volatility on the HK Exchange slowed 30% down from the high of HK$292 billion hit on Thu 9th Apr.  Nonetheless, it is still significantly higher than before Easter and still 25x faster and more furious than our boring local SGX which traded at less than a S$1 billion in May.

When major markets like the US, UK and HK shut on Mon 25th May to celebrate Vesak Day, the Chinese market continued to rally, establishing a new record volume of $322 billion.  This turnover is more than 8x the NYSE and Nasdaq combined!  To put into a local perspective, mainland Chinese stockmarkets takes just 36 seconds to trade what boring Singapore trades in a whole day!   So much for comparison.

Chinese investors have continued to ignore the bad news in the current market run –up in the past 2 months –

  1.  The 1st default on debt by Kaisa, a private real estate developer
  2. The 1st default on debt by Baoding Tianwei, a Chinese SOE.  The default highlighted an interesting feature in the Chinese credit market – there is no cross default clause so that this tranche of debt default did not affect the other 4 issued bonds outstanding
  3. The 47% share price collapse of “No-Energy” or Hanergy (566 HK) on Wed 20th May which led to its suspension.  The company is currently being investigated by regulators for market manipulation.  Hanergy was in fact one of the biggest net buys from Southbound buyers via the SH-HK Stock Connect.

True to my previous warning (http://einvesthub.btinvest.com.sg/experts-of-the-month/2015/05/13/fast-and-furious-8/), Chinese stocks sold off  at end-May with the SHC down a whopping 6.5% on Thu 28th May as clampdowns on repo contracts by banks and margin accounts by stock broking firms were targeted to rein in excess liquidity.  I would expect the gap between loan/credit contracts and banks excess reserves to close in no time.

This correction was long overdue and welcome.  Unlike most western commentators and analysts, I am not turning bearish on the Chinese markets.  This is another great bull run to be enjoyed in the current decade.  I would expect Chinese markets to shrug this off and gain higher grounds after some side-ways consolidation.

I would continue to hunt for good quality HK blue chips and bet on some good Chinese national brands that are not listed in China yet in this current correction in addition to adding to positions of Chinese banks, insurance companies and large brokerages where I have traded out before the correction kicked-in on Thu 28th May.

Certainly the Chinese market would continue to be a roller-coaster creating huge volatility.  This is the “perfect wave” in surfer’s language to hit your jack-pot.  So ride the wave while it lasts.

Happy trading.

Gabriel Yap
Gabriel Yap

Mr Gabriel Yap,CFA was an eminent stockbroker who retired from stockbroking in 2009 to devote himself to philanthropy to help the needy, poor and handicap globally. He has donated and assisted Charities Aid Foundation, Australia (CAF), a not-for-profit donor funds management business.  

Mr Yap is also Executive Chairman of GCP Global Pte Ltd, an investment firm that invest in both direct capital markets, bonds, real estate, commodities, foreign exchange and builds businesses. Mr Yap appears regularly for the TV media like Channel News Asia and Bloomberg and radio channels like FM93.8 for their various investment programs.

Previously Mr Yap has also lectured at renowned government institutions like the SEASEN Course for the Monetary Authority of Singapore and at AsianDevelopment Bank. Mr Yap has also lectured at financial institutions like the Stock Exchange of SingaporeInstitute of Banking and Finance, the Institute of Certified Public Accountants, the Singapore Institute of Management and the Securities Investors Association of Singapore.

In 2010, the venerable Reader's Digest magazine created the Money Savvy column in their magazine, helmed by Mr Yap who writes on all things finance and answers questions from the magazine's subscribers.

Mr Yap presently splits his time between Melbourne, Europe and Singapore.