- Deltec Bank’s Investment Research team recently published note delving into flood of stimulus, ongoing Chinese equity market rally
- China’s latest wave of stimulus revives the old model for growth: debt-fueled fixed asset investment
- Fiscal, monetary boost to economy encouraging speculation within Chinese equity market, with stocks up 41% relative to March lows
- Deltec Bank has cast doubt on recent rally sustainability, warning of similarities to 2015 bubble
Deltec Bank & Trust Ltd., a Bahamas-based private bank recently awarded the title of 2020’s ‘Best Private Bank in the Caribbean’ (http://ibn.fm/ii1ua), has published its latest investment research note entitled “Big Trouble in Little China?” (http://ibn.fm/th6Jg). The piece seeks to delve into the latest wave of stimulus to hit China’s economy while also exploring the sustainability of the ongoing Chinese stock market rally.
By cutting overnight interest rates, lowering reserve ratio requirements, and increasing directed lending by state-controlled banks, China has engineered yet another wave of stimulus. This is visible in measures of the ‘credit impulse’ – an aggregation of total social financing and other credit growth – which is rising by nearly 30% year-on-year. Deltec Bank’s research team warns that this impulse is reviving China’s old model for growth, debt-fueled fixed-asset investment, which it believes is unsustainable. This model builds up bad debts in the future that are effectively funded by Chinese savers or will require government bailouts when they inevitably go sour. The benefits of this wave are temporary, but for the time being will drive a rebound in headline economic data and encourage stock market speculation.
In early July, intra-day trading volumes on mainland Chinese exchanges touched Rmb1.5 trillion ($210 billion), the highest level in over 5 years, reinforced by an editorial in the state-owned China Securities Journal talking up a “healthy” bull market (http://ibn.fm/Bqosd). Deltec Bank’s research team has delved into the foundations of the Chinese equity market’s latest rally, likening it to the bubble of 2015 – which saw the market rise by over 150% over the course of 6 months, prior to halving over the next two, erasing nearly $5 trillion in value in the process. Then, and as now, the rally was largely fueled by retail investors borrowing money to speculate on the market, encouraged by stimulus and state media. With Chinese equities up 41% from their March lows, current margin debt levels at stockbrokers have ballooned to 1.4 trillion Yuan ($200 billion), the highest margin balance in 5 years.
As the research piece concludes, “be invested, but be nimble”. The government is aware that this market volatility is unhelpful and is looking to control the mania and contain speculation. Given the Chinese market’s relatively inexpensive valuations, and the fact that the economy is still below the 2015 peak of margin balances and index price, there are reasons to believe that the current stock market rally could have further to run; however, warning signs are emerging.
For more information, visit the company’s website at www.DeltecBank.com.
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