China Equity Rally Reaches Escape Velocity As Shenzhen Trades At 71X Earnings

As noted Tuesday morning, China’s margin-fueled equity mania reached new heights overnight with the Shanghai Composite wrapping up its best six-day run in seven and a half years, rising 2% on the session to within shouting distance of 5,000 and rounding out a 15% move over the past week.

But the real story was the tech-heavy Shenzhen Comp which, after a brief hiccup precipitated by the Hanergy ponzi debacle, has now firmly regained its momentum jumping nearly 4% with at least 250 listed companies trading limit up on the session. 

The rally came as reports suggested the quota on the Shanghai-Hong Kong link will be abolished once the Shenzhen-Hong Kong connect is up and running later this year, a move which will effectively remove the last obstacle to unfettered speculative excess. This of course follows directly on the heels of a weekend announcement that paves the way for cross-border mutual fund trading. 

Via Reuters:

Markets were apparently encouraged by a new cross-border investment scheme announced over the weekend that would allow funds domiciled in Hong Kong and China to be sold in each others' market starting July 1.


The scheme, called mutual fund recognition, "will bring a fresh flood of mainland capital to Hong Kong's market and is a big positive for the city's stocks", China Investment Securities (HK) said in a note to clients on Tuesday.


Lu Wenjie, a strategist at UBS Securities, estimates that Chinese investors could potentially pump 200 billion yuan ($32.3 billion) into Hong Kong stocks in the next two to three quarters, as Beijing is likely to guide excessive liquidity in the domestic market to Hong Kong.

Meanwhile, Reuters also reports that Chinese A shares are set for inclusion in major global benchmark indices within 24 months. Here’s more:

FTSE Russell, one of the world's largest index providers, said it will launch two transitional indexes that include China A shares - a staggered approach that will bring local Chinese shares into its global emerging markets benchmark in two to three years.


Expectations that yuan-denominated shares listed on the Shanghai and Shenzhen exchanges could make the cut have grown as reforms such as the Hong Kong-Shanghai Stock Connect scheme have helped open up China's stock market.


Chinese authorities have lobbied hard for the inclusion in global benchmark indexes which could prompt billions of dollars to pour into China stocks over time, but some of the world's biggest fund managers oppose the move due to investment constraints in the country.

And it’s not just FTSE...

The FTSE announcement comes ahead of a June 9 decision on China A share inclusion by rival MSCI Inc, owner of the world's most influential emerging markets benchmark against which some $1.7 trillion of funds is tracked.


"Some investors want to move much quicker than others," Mark Makepeace, CEO of London Stock Exchange Group-owned FTSE Russell, told Reuters in Hong Kong on Tuesday.


"The biggest funds want to move earlier, it's more complex for some others and they will want a longer period of time to manage this change," he said, adding that some clients had been shocked at the idea of A share inclusion.

We'll close with the following chart which demonstrates, beyond a shadow of a doubt, that the insanity on the Shenzhen exchange has officially reached escape velocity...