Why This China Bull Run Isn’t a Repeat of 2015
Pedestrians speak with a security officer in front of the the Bund Bull statue in Shanghai, China. (Photographer: Qilai Shen/Bloomberg)

Why This China Bull Run Isn’t a Repeat of 2015

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The animal spirits lifting China’s stock market can evaporate as mysteriously as they appear. Many discerning traders are now scratching their heads, and worry that we’re seeing a repeat of the spectacular boom and bust of 2015.

There are certainly similarities. This rally is too fast, turnover has soared in tandem with margin debt, and online trading platforms are struggling to keep up. Looking at sector-level performance also feels like deja vu — with good reason. Investors are scouring through old trading patterns and buying the same set of stocks. The tech-heavy ChiNext Index is once again the big winner, along with brokers. China’s retail tigers don’t change their stripes. 

But there are key differences. If anything, we aren't mirroring 2015 at this point. Rather, it feels like 2014, when China’s bull was just waking up.

Whereas the 2015 rally was engineered by the central bank, which started its rate cut cycle the previous November, this round of trading frenzy is a play on Beijing’s ambitious $1.4 trillion tech infrastructure build-out. In fact, the People’s Bank of China stepped back from open-market operations in June, wary that earlier rounds of easing had spurred speculative interest-rate arbitrage, as investors borrowed cheaply and sank money into higher-yielding wealth management products. 

This distinction is important, because often loose monetary conditions only make buying margin loans cheaper, without flowing into the real economy at all. Fiscal dollars, on the other hand, can directly boost company earnings. We’ve already seen this with many hard tech companies, such as chip foundry Semiconductor Manufacturing International Corp., which would still be in the red without government subsidies. So unlike 2015, the quality of helicopter money is better this time around. 

For now, there’s still plenty of market depth and appetite. In 2015, any initial public offering would drain liquidity, causing broader indexes to tumble. This time, while retail investors are still rushing to new shares and betting on big first-day pops, new supplies of stocks are welcome. This is a bullish sign. SMIC’s Shanghai IPO, the largest in a decade, only served as a catalyst to the tech rally. Rising markets that sink on new IPOs are bear rallies — we’re not there yet. 

And let’s not forget, the world has changed. In 2015, the rest of us watched the mainland stock drama with amazement and alarm. This time, China is just joining the global liquidity bandwagon — with its own idiosyncratic investor base and valuations, of course. The “Powell put” has propelled the Nasdaq Composite Index to record highs, even as the U.S. sets daily coronavirus case records. Meanwhile, retail investor participation, a major force in China, is picking up elsewhere, too

To be sure, China’s already got a lot of fluff. A rally in brokers, for instance, is unsustainable — especially if the government is ramping up competition by allowing giant commercial banks to enter the industry. But hey, there are anomalies everywhere, especially as the world’s central banks are printing money at a record pace. 

You can think about China’s stock market like a petulant toddler; you don’t know why she’s acting up, so just give her a big hug and hope for the best. With this bull run not even 10 days old, you’d better hold her tight. This is no time to talk about the 2015 crash.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.

©2020 Bloomberg L.P.

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