Last week we highlighted a Bloomberg chart which showed [4] that more than a quarter of new investors in the “self-feeding, leverage-fueled domestic frenzy [5]” that is China’s equity market have an elementary school level education or less. Bloomberg categorized nearly 6% of new Chinese stock investors as “illiterate.” If true, we imagine this doesn’t bode particularly well for a bubble that’s been inflated on the back of massive leverage (buying on margin accounts for a fifth of daily turnover and margin debt now sits at 1% of GDP). As a reminder, here’s the graphic:
[6]
Now, thanks to the China Securities Depository and Clearing Co., we get a look at just how quickly the situation is escalating. Nearly 1.7 million new stock accounts were created last week…
[7]
...marking a 49% increase from the previous week…
[8]
...which itself represented a 58% increase from the week before…
[9]
Here’s more via Bloomberg [10]:
To get a sense of the frenzy in China’s world-beating equity market, consider this: In a two-week span last month, the rally lured 2.8 million rookie stock pickers, almost the equivalent of Chicago’s entire population.
The number of new equity accounts surged to a record during the two weeks ended March 27, five times the average of the past year, data from China Securities Depository and Clearing Co. showed on Tuesday. About 4 million were opened in
March, enough for every person in Los Angeles. More than two-thirds of new investors have never attended or graduated from high school, according to a survey by China’s Southwestern University of Finance and Economics.
Signs of inexperienced investors’ growing influence on the $6.5 trillion market have already shown up in the outperformance of China’s equivalent of penny stocks and a jump in share-price volatility to the highest level in five years. While fresh capital may feed market momentum as the government steps up efforts to support economic growth, foreign money managers have been selling shares on concern the gains are overdone.
“A lot of speculative money has come into the market,” Michael Wang, a strategist at hedge fund Amiya Capital LLP, said by phone from London. The rally “is not fundamentally driven. It’s much more of a flow-driven phenomenon,” he said.
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We certainly don’t see what could go wrong here. Last month alone, a new investor base the size of Los Angeles — many of whom may be only semi-literate — piled into Chinese equities which have nearly doubled in the space of 8 months on the back of margin debt that can now be measured as a percentage of GDP and volatility is at a 5-year high. Everything should be fine.
