Jul 18, 2020 01:26 AM

In Depth: Will China’s Bull Market Be Short-Lived?

Analysts agree the recent performance of China’s stock market can’t be explained by fundamentals.
Analysts agree the recent performance of China’s stock market can’t be explained by fundamentals.

“No doubt this is a bull market you won’t see in a decade,” analysts at a futures company wrote about the recent rally in China’s A-shares market. “If you miss it, you will have to wait for another 10 years.”

They are not the only ones betting on the Chinese stock market frenzy. After the benchmark Shanghai Composite Index broke 3000 points July 1, trading volume on the bourses in Shanghai and Shenzhen surged to 16.3 trillion yuan ($2.33 trillion) in the following two weeks. That was more than the total trading volume in all of June. Some brokerages even project the benchmark index to surge to 3800 by the end of 2020, which would be up 15% from Friday’s close and reach a level it hasn’t tested for five years.

Not everyone is bullish. The never-ending Covid-19 pandemic, escalating U.S.-China tensions, a slow economic recovery and geopolitical conflicts are all pulling in the opposite direction.

The debates have fueled recent volatility after a 15% rally from June 30 to July 9. The Shanghai Composite Index has since retreated by 7% as of Thursday closing in roller-coaster trading.

No matter whether bullish or bearish, analysts agree that the recent performance of China’s stock market can’t be explained by fundamentals and that the rally is more of a recovery for long-undervalued sectors boosted by unprecedented liquidity injected into the stock market.

Recovery by undervalued sectors

The real estate, banking and brokerage sectors, which are the best performers this month, were long undervalued until the end of June, with valuations at historic lows, in contrast with sectors including food and beverage, medical and biopharma, and leisure and services, with valuations near historic highs.

The recent surge for banking and real estate stocks is mainly a reasonable recovery of undervalued sectors after severe valuation polarization made these sectors more attractive, said Li Lifeng, an analyst at Zheshang Securities.

Newly launched mutual funds and foreign capital inflows are widely seen as important drivers for this round of bull market.

In the first half of 2020, new mutual funds raised 1.06 trillion yuan, more than double the amount in the same period last year. It was the second-highest amount for the first six months of any year, behind only the first half of 2015, according to Ping An Securities. Nine active mutual funds raised more than 10 billion yuan each, and 39 funds completed fundraising within a day.

On July 8, an equity fund launched by Shenzhen-based Penghua Fund Management Co. Ltd. received 137 billion yuan of subscription on its first day of sales, the largest in China’s mutual fund history. The company eventually cut short the sale date and capped the fundraising at 30 billion yuan.

China Universal Asset Management Co launched a mid-cap investment fund July 6 but suspended accepting money after just half a day of sales to “limit the fund size to ensure smooth operation after hot subscriptions” from investors, it said. It’s speculated that fund management companies cap fund sizes under “window guidance” from regulators to limit the initial fundraising of a single mutual fund to no more than 30 billion yuan. The China Securities Regulatory Commission (CSRC) didn’t confirm the existence of such guidance.

A too-large fund could pose challenges for fund managers to build positions, especially as the market is at a high level and there is disagreement over whether the bull market will last, said the chief investment officer of a private equity fund in Beijing.

Smart money outflow

Since the start of July, the flow accelerated of northbound funds — capital pouring into the A-share markets from Hong Kong via stock connect programs. In just three days from July 2–6, northbound funds had net inflows of 45 billion yuan, about the same amount as in the whole of May.

But the inflow turned into an outflow July 10 when the market rally lost steam and debate over whether the bull market would continue started to boil. More than 17 billion yuan ($2.48 billion) of foreign capital in China’s cross-boundary investment programs fled the mainland market July 14, posting the highest daily net outflow since the launch of the Shanghai- and Shenzhen-Hong Kong stock connect programs in 2014, according to exchange data.

“Foreign capital only makes up a small portion of the A-share market,” a private-equity fund manager told Caixin. “They are just bargain hunters and will leave once money is made.” Onshore capital is the deciding force for the direction of the A-share market, the fund manager said.

Not comparable to 2015

The market rally has also been fueled by leverage capital, money borrowed from brokerages that can help investors generate extra-large profits if stocks rise. This is also known as margin borrowing, in which investors pledge the shares they buy as collateral for loans. The margin is the difference between the amount of the loan and the value of the securities used as collateral.

But when the value of shares falls below the amount of margin loans, investors have to sell to repay the borrowing. This can have the effect of accelerating a market downturn. Margin lending was blamed for China’s 2015 stock market crash.

The amount of leverage in the market crossed 1.2 trillion yuan July 3, the highest since late 2015. New margin accounts opened July 7 were four times the previous day’s total, a broker told Caixin.

Securities margin lending is the exclusive business of licensed brokerages in China, and undercover margin lending is illegal for other institutions or individuals. The recent market surge has revived the illegal margin lending business. Since May, the CSRC published a blacklist of illegal funding platforms that pitch their business via cold telephone calls and social media advertisements. Some platforms are allowing investors to borrow more than 1,000 yuan ($142.80) to buy stocks with a deposit of as little as 100 yuan, a leverage of 10 times, while the legal brokerage leverage ratio is usually 1:1.

The CSRC recently named and shamed 258 funding platforms that illegally lend money to investors for buying stocks and warned investors to voluntarily avoid illegal lenders and report to authorities if they get swindled by such platforms.

Currently, illegal margin lending is not a threat as serious as in 2015, some brokerages said. Learning from the 2015 stock market crash, regulators have repeatedly told brokerages not to provide any facility to accounts trading with funds borrowed from illegal platforms. The new rules on wealth management also make it hard for such funding platforms to obtain cheap financing from banks.

“We use our own capital or funds from private lending venues,” an executive from a funding platform said. “We can only offer leverage funds of about 20 million yuan to 30 million yuan, not comparable to the 200 million yuan to 300 million yuan in 2015.”

Contact reporter Denise Jia ( and editor Bob Simison (

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