As we pointed out Wednesday evening, the spill over of China’s self feeding, margin debt driven, domestic equity buying frenzy into Hong Kong-listed shares accelerated [5] markedly overnight as the Hang Seng jumped nearly 7% at one point with volume turnover 400% above the 30-day average. Shares closed up 2.7%, with the Hang Seng now at a 7-year high as cash poured in thanks to reduced regulation on Chinese mutual fund purchases and as some investors likely feel that the following chart may suggest mainland shares are overvalued.
[6]
As we’ve documented over the past several weeks, this has all the makings of an epic bubble as retail investors in China, some with little in the way of formal education, are opening stock accounts at a furious pace with more than 4 million created in March alone. Now, with Hong Kong undervalued relative to extremely overvalued mainland shares, the mania is spreading quickly as housewives and security guards “buy stocks like they’re gambling in Macau.”
Via Bloomberg [7]:
“Things are getting quite exciting,” said Chow Man, a 68-year-old housewife who favors Chinese banks and infrastructure stocks and says she has as much as HK$200,000 ($25,000) in play. “It’s becoming like a hobby for a lot of mainland investors to trade stocks now. That’s why more of them are taking opportunities in Hong Kong.”
Hong Kong locals are jostling with bargain-hunting Chinese investors after the Shanghai Composite Index’s world-beating rally pushed the discount on shares in the former British colony to the widest since 2011. While enjoying the gain, one of the patrons at the brokerage likened the situation to a casino.
“I’m trying not to buy too much because the market will likely go down a bit and some stocks are getting more expensive,” said Juliana Lui, a government worker.
“I’m staying conscious. Some people are buying stocks like they’re gambling in Macau.”
“The rally may last for a few more days,” said the security guard, who’s hoping stocks will rise another 10 percent. “I’m just taking a lunch break to do some trading because the market is hot.”
We suppose this is further evidence that no one is planning on listening to the China Securities Regulatory Commission, who recently warned [8] that investors “shouldn’t be thinking if they don’t buy now, [they’ll] miss it.”
Here's a look at the longer-term picture and peak madness from the Thursday session:
[9]
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And so, as the "elementary school-educated Chinese momentum trading hoardes descend" onto the Hong Kong exchange, we'll quote BNP who recently gave up trying to predict [10] what happens when millions of semi-literate retail "investors" suddenly adopt (without knowing it) the greater fool theory of investing wherein it doesn't matter how much you overpay as long as someone else is willing to overpay-er:
"What happens next is an unknown unknown... 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."
