With economic growth decelerating markedly and with capital flowing the wrong way for four consecutive quarters (to the tune of $300 billion), China needs its margin-fueled equity mania to continue in order to distract everyone from the fact that the fundamental picture is, to quote Bloomberg metals analyst Kenneth Hoffman who recently visited the country, “a lot worse than you think.” The PBoC looks set to step up their easing efforts in an attempt to keep the music playing as evidenced by last weekend’s RRR cut and indeed the rumor now seems to be that the central bank will conduct ECB-style LTROs to ensure a new plan to (essentially) bailout deeply indebted local governments doesn’t end up working at cross purposes with efforts to keep liquidity flowing.
Meanwhile, southbound flows (i.e. money flowing from the mainland into Hong Kong shares on the back of new regulations in China that allow mutual funds to invest in Hong Kong-listed equities) hit $10 billion in Q1 while the pace of new stock trading account creation has continued to accelerate with data from the China Securities Depository and Clearing Co. showing more than 3 million new accounts were opened in the first two weeks of April alone. This helped shares of Hong Kong Exchanges & Clearing to go “interstellar” last week as analysts and investors alike are betting that record turnover portends big gains ahead for the exchange operator with Citi looking for EPS gains of over 40% over the next two years.
As we noted on Thursday, Citi also believes we may be only halfway to peak mania because even though daily turnover is at unprecedented levels in absolute terms, it rose 10 fold from 2006-2007 and has “only” managed a 5X move this time around.
Meanwhile, on the mainland, turnover associated with the country’s self-driven stock frenzy has now propelled the Shanghai Exchange to the top spot worldwide in terms of volume and in fact, turnover was so high on Monday at 1 trillion yuan, that the exchange’s software was incapable of reporting it. Here’s Reuters:
The exchange's trading turnover exceeded 1 trillion yuan ($161.28 billion) for the first time on Monday, but the data could not be properly displayed because its software was not designed to report numbers that high.
"This is a software configuration issue, not a technical glitch," the Shanghai Stock Exchange said in a statement, adding that trading and price quotes for individual stocks were not affected.
The exchange said it would need to replace its current software files that handle volume reporting to resolve the issue.
China's stock market has nearly doubled over the past six months on hopes of monetary easing, with the world-beating performance luring retail investors who have been opening accounts at a record pace.
Trading turnover on the Shanghai and Shenzhen stock exchanges totalled $1.85 trillion and $1.56 trillion respectively in March, making the two bourses the world's biggest that month, according to the World Federation of Exchanges.
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So there you have it. China's day trading hordes — whose numbers are currently growing at a clip of around 1.6 million per week — have officially overwhelmed the software that tracks volume in Shanghai. It's worth repeating that if you believe statistics (and Jamie Dimon doesn't think you should), around one in three of the millions of new "investors" in China have an elementary school education or less and let's not forget this chart which is perhaps the scariest visual of them all:
On the bright side, it's not often in today's market that man overcomes software, so score one for human traders.