A funny thing happened in China in July. [9]Ever so quietly, and with little aplomb, the PBOC unleashed CNY 1 trillion of 'Pledged Supplementary Lending' (PSL) to China Development Bank - later dubbed "QE-Lite." Economic indicators temporarily blipped higher, a new recovery was proclaimed by the masses, and the world fell back into its stupor... despite the post-credit-impulse hangover which has seen Chinese data collapse in the last 2 months. But that did not stop speculators... tired of betting on Chinese real estate (which never goes down), the 'signal' of QE has sparked a stunning 41% surge in Chinese stocks since PSL (and boosted by the recent rate cut). However, this exuberant resurgence (+4.3% last night alone) rests on shaky foundations as margin trading balances have more than doubled during this period...
Probably just coincidence, right?
[10]
Charts: Bloomberg
As The Wall Street Journal notes, [11]
Desperately low valuations for China’s biggest companies, especially its banks and property developers, may have helped, but hardly explains the sudden jump. These sectors have been cheap for years. Lower oil prices help at the margins for China’s big industrial companies. And the opening of the Shanghai-Hong Kong Stock connect, while failing to meet expectations, has added a new source of fuel.
A bigger factor may be a great rotation among retail investors who make up the bulk of mainland traders. Stocks have been moribund since rising to bubble levels and then crashing in 2007. Households turned instead to property and high-yielding shadow banking products. Both of those have now lost favor. Property prices are falling, while wealth management products are being squeezed by regulators, and in a few cases failing to pay back in time or in full.
Declining interest rates in the market for interbank funds further reduces returns on savings.
But the steepness of the rally should have investors on edge.
While authorities have certainly moved to a more pro-stimulus stance, the chances for an all-out easing campaign aren't assured. Many within the government remain resolute that credit-fueled growth must be curbed. And property woes, while ebbing somewhat, are far from solved.
Leverage has proved a potent accelerant. Margin trading in Shanghai and Shenzhen has doubled since July to 800 billion yuan ($130 billion), notes Chen Long at GaveKal Dragonomics.
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Nothing to see here, move along...
