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China's Stock Bubble Leaves BNP Speechless: "What Happens Next Is An Unknown-Unknown"

Tyler Durden's picture




 

Earlier this month, we identified the reason why Chinese stocks have continued to rise in the face of overwhelming evidence that the country’s economy is decelerating quickly. While the first part of the 8-month run can be plausibly attributed to PSL, the furious buying that began in late November looks to be at least partly attributable to the fact that thanks to tighter regulations on lending outside the traditional banking system, China’s $2 trillion shadow banking complex needed somewhere to put cash to work and that somewhere turns out to be the giant bubble that is the SHCOMP. Here’s more: 

Because according to Reuters, it is precisely China's trust firms, with total assets of $2.2 trillion, and who together with Banker Acceptances comprise the bulk of China's shadow banking pipeline, and no longer able (or willing) to lend to China's small companies and individuals due to a spike in regulation, are shifting more cash into frothy capital markets and over-the-counter (OTC) instruments instead of loans.

 

In other words, instead of using their vast cash hoard of over $2 trillion to re-lend and stimulate China's economy, China's unregulated, shadow banking conduits are now directly buying stocks!

Shortly thereafter we highlighted the 7 main reasons for the Chinese stock ramp all of which boil down to one thing: liquidity. Here they are, courtesy of UBS:

With no significant change in China's macro or corporate fundamentals, the visible rebound in China's A-share market since November appears to have been largely liquidity driven. We think this, in turn, may have been fuelled by a number of factors including:


1. new funds flowing into the stock market from household saving, real estate, commodities and trust markets;


2. banks' bridge loans provided to investors who lost access to other high-yield shadow banking products as the result of tighter regulation;


3. the PBC's easing of liquidity conditions via a variety of "targeted easing" tools (e.g. MSL, PSL, etc.);


4. the official launch of Mutual Market Access (MMA) between the Hong Kong and Shanghai exchanges;


5. long-term expectations for SOE reform and A-shares entering the MSCI index next June;


6. increased use of leverage by retail investors via margin trading; and

 

7. market sentiment being boosted by expectations for further policy easing.

Meanwhile, February’s RRR cut failed to meaningfully lower China’s interbank rates, likely due to continued sizable capital outflows and significant liquidity withdrawals from China’s money markets by recent IPO applications.

Meanwhile, China’s securities regulator warned investors that not wanting to miss out on the next leg up is not a good investment strategy to follow, especially in a market as frothy as this one. Now, BNP is out with a note calling China’s equity bubble “a microcosm for the overall economy: unsustainable growth in leverage masking ever-deteriorating fundamentals and increasing future downside risks.” Here’s more: 

Against all odds, the best performing asset class on the planet over the last nine months or so has been Chinese equities…

...it’s not the economy (as we’ve been saying for months)...

What underlies these extraordinary gains? It is certainly not economic fundamentals. Led by the accelerating real estate slump (China: It’s Only Just Begun), China’s GDP growth has steadily slowed with reported 2014 GDP growth of 7.4% the slowest in almost twenty years. A range of ‘hard’ economic indicators such as electricity production and rail cargo volumes suggest even slower growth. Our preferred ‘real, real’ GDP estimate flags that output growth could have been as low as c.4½% in 2014 (China: Fit as a Fiddle). While the usual data fog around the Lunar New Year partially clouds analysis, high frequency indicators that generate early estimates of GDP growth suggest that the growth has continued to slide in 2015Q1…

...it must be liquidity….

By definition therefore equities’ stellar performance has been a function of liquidity driven multiple expansion. The P/E ratios for the Shanghai and Shenzhen markets have roughly doubled since August to c.19x and c.44x respectively. While still a long way short of the incredible highs of 70-80x reached during the 2006-2007 bubble, multiples are now rapidly approaching their post-GFC highs. One obvious source of fresh liquidity which could have powered equities’ bull-run is from the long-delayed introduction of the Hong KongShanghai ‘stock connect’ last November. The scheme, formerly known as ‘the through train’, allows two trading between the Shanghai A-share market and the Hang Seng. Two-way flows however have been relatively meagre. An initial aggregate quota of RMB300bn was set for northbound flows into Shanghai. So far only about a cumulative RMB125bn has flowed north, leaving RMB175bn of the aggregate quota unfilled. And northbound buy orders have in turn typically only accounted for around ¾% of the Shanghai market’s daily turnover…

...and it comes from a predictable place, leverage…

Far from a surge in external liquidity, an increasingly self-feeding domestic frenzy fuelled by leverage appears to be the key driver….Margin purchases have been running well ahead of redemptions ensuring that the outstanding stock of margin debt has ballooned by over RMB1 trillion since August; equivalent to more than 1% of GDP…

...and castles built on quicksand (i.e. margin debt) will likely collapse…

Margin purchases are now accounting for almost 20% of equities daily turnover which itself has soared to wholly unprecedented levels in another sign of self-feeding speculative frenzy. What happens next is clearly an ‘unknown-unknown’. By definition detached from fundamentals, speculative bubbles are inherently re-enforcing in the short-term and frequently last longer than expected. The longer they continue, however, the larger the eventual bursting. 

 

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As a reminder: 

 

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Thu, 03/26/2015 - 20:06 | 5931835 ukspreads
ukspreads's picture

Nikkei cash dropped 107 points X dividend and within 10 minutes of the Cunt opening, it's up 110 already......

What fucking crisis ! 

Thu, 03/26/2015 - 20:23 | 5931888 ukspreads
ukspreads's picture

Now up 170 points in 30 minutes and all because there isn't anybody who can fuck with a printing press

Thu, 03/26/2015 - 21:15 | 5932035 Yen Cross
Yen Cross's picture

Relax... Watch the selling after " Blue Fin" tuna time. ;-)

 http://en.wikipedia.org/wiki/Tokyo_Stock_Exchange

 It's ZULU time somewhere on planet Earth.

Thu, 03/26/2015 - 22:59 | 5932376 one_hundred
one_hundred's picture

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... www.globe-report.com

Thu, 03/26/2015 - 20:02 | 5931837 HedgeAccordingly
HedgeAccordingly's picture

the battle of the ibank opinions... JPM a few weeks ago said "no bubble" .. 

"Global Assets Not In A Bubble Yet: J.P. Morgan"

http://hedgeaccordingly.com/2015/02/global-assets-not-in-a-bubble-yet-j-...

Thu, 03/26/2015 - 20:02 | 5931838 The man with po...
The man with pointy horns's picture

If your erection lasts longer than five hours...

Oh never mind.

Thu, 03/26/2015 - 20:05 | 5931844 LetThemEatRand
LetThemEatRand's picture

Call the Red Phone in the White House?  

Thu, 03/26/2015 - 20:08 | 5931842 LetThemEatRand
LetThemEatRand's picture

If I recall, John Travolta rode off on a horse into the sunset after he left his bubble.  So it could happen.  Of course, what the movie didn't tell us is that he turned into a zombie and ate his girlfriend later while the "credits" rolled.

Thu, 03/26/2015 - 20:11 | 5931863 Yen Cross
Yen Cross's picture

 Are you fucking kidding me! China can buy the fucking world with their F/X reserves. China has been allowing the Yuan to appreciate vs the majors. The last thing the PBoC want's is to unsettle the cash markets.

 Japan is an>>> Run Away Train.... with a bond market that's circular<<<  JFC, KAMPO and the Postal pension managers are divesting from Japanese investments over 30 seconds.

 I posted the Foreign Bond & Equity numbers last night.

Thu, 03/26/2015 - 20:14 | 5931870 Porous Horace
Porous Horace's picture

Wait... wait... wait... I've been told, in no uncertain terms, by Nobel Prize winner Krugman himself, that economics is a hard science, supported by lots and lots of math. Their economic models, run on huge supercomputers with lots of flashing lights and pinging and beeping noises, would have predicted a crash if one were imminent. The future looks bright, so let's all cheer and pop another champagne cork.

Thu, 03/26/2015 - 20:22 | 5931896 q99x2
q99x2's picture

What happens next is that you get the Chinese to sell you back NYC for a dollar an acre.

Thu, 03/26/2015 - 22:23 | 5932261 TheReplacement
TheReplacement's picture

How much would it cost to make them keep it?  I'm willing to chip in extra if they take Detroit, Chicago, DC, New Orleans, Atlanta, Philly, Cleveland, Denver, Minneapolis, and the entire west coast.

Thu, 03/26/2015 - 20:29 | 5931908 Yen Cross
Yen Cross's picture

 I'm going to make this really simple.

 China is deeply indebted with internal , not external obligations.

 Why would the PBoC want to devalue the YUAN when the Yuan is backed by external commitments? The whole reason behind the yuan/usd trading band was so that China could remain competetive with exports, vs other Asian economies.

  The Chinese aren't stupid... Why would the Chinese, want to devalue the yuan, if global exports are slowing?

 The Chinese are looking to find backing for the yuan. Strength. The complete opposite of the BoJ.

  The Fed. has created the global credit anomoly. Carry trade craziness<> We're dealing with a glut of over capacity.

Thu, 03/26/2015 - 20:36 | 5931947 LetThemEatRand
LetThemEatRand's picture

I hear they bought some gold, too.

Thu, 03/26/2015 - 20:41 | 5931964 Yen Cross
Yen Cross's picture

 I'm no China fan LTeR. The Chinese are stacking @ "rock bottom" prices. I'd be doing the same thing, with all commodities.

Thu, 03/26/2015 - 20:44 | 5931974 LetThemEatRand
LetThemEatRand's picture

Same here on all counts.  They invented the printing press, and sold it to Bernanke for some gold.

Thu, 03/26/2015 - 21:09 | 5932044 Yen Cross
Yen Cross's picture

 It all went downhill after ' sulfur, charcoal, and potassium nitrate (saltpeter)' were mixed.

Thu, 03/26/2015 - 20:44 | 5931975 Callz d Ballz
Callz d Ballz's picture

poof

 

Thu, 03/26/2015 - 22:41 | 5932307 kelley805
kelley805's picture

Now let's look at the US stock market.  April will be a doozy.

http://michaelekelley.com/2015/03/24/stocks-could-have-worst-april-since-1970/

Here is how to prepare yourself.

http://michaelekelley.com/2014/10/16/8-things-to-do-when-recession-happens/

Good luck.

Thu, 03/26/2015 - 23:08 | 5932425 MATA HAIRY
MATA HAIRY's picture

Janet B. Yellin' will make a "fat tail distribution" that will cure everything...

Fri, 03/27/2015 - 02:55 | 5932778 kiwimail
kiwimail's picture

I love to watch parabolic charts revert!!!

Fri, 03/27/2015 - 18:06 | 5935489 scubapro
scubapro's picture

 

 

am tired of hearing about china's great equity market.   there are a few funds/etf's that claim to be 'china exposure'  but when i look at FXI... i see only about 30% run from bottoms 18 months back.  are there any 'china funds'  that have matched the index (which is closed to outsiders (typical asian xenophobia))

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