China's Stock Buying Mania In 3 Charts

Back in December, we wrote about how China was playing Palov's dog when on one hand it tried to clamp down on "excessive" speculation, while continuing to provide fodder for hungry speculators with the other. Fast forward 4 months and the results of the Politburo's efforts become evident, and rather grotesquely so.

Sparing on the narrative, we will present readers with a few charts that speak a thousand words and probably explains why anyone worth their salt should think twice before wagering in the Chinese market.

Manic Retail Speculation

As Xi Jing Ping along with his administration continues attempting to orchestrate a soft landing of China's economy, much to the hilarity of those that actually watch real economic and financial data emanating from the world's second largest economy, it seems the retail community has been much less patient about another economic growth renaissance and has taken their tokens directly to the financial markets in hopes of striking it big. 

What they should have probably done was to read our note about how misguided the retail community actually is, and why most of them consistently loose their shirts as if the game was rigged against them.

If readers need a definition of what a mania is, the charts below should shed some light. Enjoy... 

  The number of regulated A-Share accounts in China has surged vertically since mid-Febuary to a mind-numbing 3.257mn accounts last recorded in April 21.    This easily surpasses the peak seen in 2007 during the onset of the global recession and financial crisis. But under what circumstances will this vertical trend continue?  We believe part of the reason for this surge has been the  breaking down of capital restrictions across the boarder with Hong Kong, allowing mainland investors access to Hong Kong markets for the first time in decades  (see chart 3). To do that, mainland investors have opened stock brokerage accounts that allow them to trade not only on the main boards of China but also transact across the boarder.   Despite authorities imposing stricter margin requirements and raising minimum deposits to retail brokerage accounts, retail investors in China have apparently not been deterred one bit.  With the sheer amount of  cash on the sidelines , it is no wonder we are seeing  hockeystick charts  all across China even as it's economy continues flagging.  Chart courtesy of Zero Hedge

The number of regulated A-Share accounts in China has surged vertically since mid-Febuary to a mind-numbing 3.257mn accounts last recorded in April 21.

This easily surpasses the peak seen in 2007 during the onset of the global recession and financial crisis. But under what circumstances will this vertical trend continue?

We believe part of the reason for this surge has been the breaking down of capital restrictions across the boarder with Hong Kong, allowing mainland investors access to Hong Kong markets for the first time in decades (see chart 3). To do that, mainland investors have opened stock brokerage accounts that allow them to trade not only on the main boards of China but also transact across the boarder.

Despite authorities imposing stricter margin requirements and raising minimum deposits to retail brokerage accounts, retail investors in China have apparently not been deterred one bit. With the sheer amount of cash on the sidelines, it is no wonder we are seeing hockeystick charts all across China even as it's economy continues flagging.

Chart courtesy of Zero Hedge

If past is prologue, and if history does rhyme this time, the following NASDAQ redux could be a harbinger for utter mayhem in China's markets. We will see in a few weeks time...

  Overlaying the Shanghai Composite (Yuan denominated) with that of the NASDAQ during its fleeting rally to dysphoria from 1999 to 2000, we can clearly appreciate the similarities.    Although we would usually  caution against curve fitting as a means of confirming a bias , these 2 plots just fits too nicely for us to pass.    Nothing goes up without a reason.  In 1999, the NASDAQ index saw a nearly 120% gain in just over a year; it was primarily due to excessive speculation over the Internet stocks.   The analogy bears little resemblance when we flip over to Shanghai.  No Internet bubble, property boom over, diminishing IPO activity, a flagging economy; the only thing we see lifting all of the Chinese boats is that of central bank and state intervention.    But will this state funded intervention last? And is it any good? We leave these to our reader to figure out.      Hint: Apply Newton's Second Law of Motion.        "Fear of missing out"   trumps the   "Fear of losses"  as the dominant sentiment across the retail investing and trading community in the mainland. The flurry of buying exuberance has driven up equity multiples to bubble territory. We don't foresee this ending in an orderly fashion. Also note that  volatility has been incredibly elevated  in the Chinese stock markets.  With so many " weak hands " propping up this market,  any cursory margin hike or another clamp down on speculative activity in the stock market will trigger a rush for the exits . We just hope no one has mortgaged their homes to buy a few ICBC stocks.   Chart courtesy of Zero Hedge

Overlaying the Shanghai Composite (Yuan denominated) with that of the NASDAQ during its fleeting rally to dysphoria from 1999 to 2000, we can clearly appreciate the similarities.

Although we would usually caution against curve fitting as a means of confirming a bias, these 2 plots just fits too nicely for us to pass. 

Nothing goes up without a reason. In 1999, the NASDAQ index saw a nearly 120% gain in just over a year; it was primarily due to excessive speculation over the Internet stocks.

The analogy bears little resemblance when we flip over to Shanghai. No Internet bubble, property boom over, diminishing IPO activity, a flagging economy; the only thing we see lifting all of the Chinese boats is that of central bank and state intervention.

But will this state funded intervention last? And is it any good? We leave these to our reader to figure out.

Hint: Apply Newton's Second Law of Motion.  

"Fear of missing out" trumps the  "Fear of losses" as the dominant sentiment across the retail investing and trading community in the mainland. The flurry of buying exuberance has driven up equity multiples to bubble territory. We don't foresee this ending in an orderly fashion. Also note that volatility has been incredibly elevated in the Chinese stock markets.

With so many "weak hands" propping up this market, any cursory margin hike or another clamp down on speculative activity in the stock market will trigger a rush for the exits. We just hope no one has mortgaged their homes to buy a few ICBC stocks. 

Chart courtesy of Zero Hedge

And as if China's markets weren't large enough to contain all that dry powder, retail fund flows have spilled over to neighboring Hong Kong. It doesn't seem to be stopping...

  The Hang Seng Index, Hong Kong's benchmark equity index has rocketed nearly 18% in less than 2 months after restrictions barring access to its stock market by Mainland investors were removed in March.   The ensuing influx of capital from China meant that share prices in the financial center rose sharply, prompting officials to comment on the frenzy. No action has however been taken by Hong Kong authorities as it seems even the Cantonese like a soaring stock market.    So is the wealth effect indeed working?   We are not sure if this will end well, too.   Chart by Business Of Finance

The Hang Seng Index, Hong Kong's benchmark equity index has rocketed nearly 18% in less than 2 months after restrictions barring access to its stock market by Mainland investors were removed in March.

The ensuing influx of capital from China meant that share prices in the financial center rose sharply, prompting officials to comment on the frenzy. No action has however been taken by Hong Kong authorities as it seems even the Cantonese like a soaring stock market.

So is the wealth effect indeed working? We are not sure if this will end well, too.

Chart by Business Of Finance

Bonus chart: Are the Chinese making up their economic figures?

It is not just us; almost every single Investment Bank and fund house seems to think so too. From huge discrepancies in trade figures, to bogus private sector numbers, China's nose has been growing longer ever since it was pressured to perform as the world's second largest and fast growing G7 economy is expected to.

But in the market's eyes, all this is immaterial. Because the only thing that matters is a guarantee by the PBoC to backstop every dip in the stock market, so that mum and pop can continue on their buying entourage. 

 From reputable Investment Banks to Hedge Funds, the smart money has been holding a skeptical view on China's own reported figures. And with good basis.     Take this fact for instance:    China has always been the first major economy to report GDP figures each quarter even as it is the world's most populated country and the second in geographical size. How on Earth does one sanely buy the integrity of this data when even the efficient Germans fail to even report their output figures in twice the time China does.   We suspect a lot of the reporting is actually guesswork and phony math.  Chart courtesy of WSJ

From reputable Investment Banks to Hedge Funds, the smart money has been holding a skeptical view on China's own reported figures. And with good basis.

Take this fact for instance: China has always been the first major economy to report GDP figures each quarter even as it is the world's most populated country and the second in geographical size. How on Earth does one sanely buy the integrity of this data when even the efficient Germans fail to even report their output figures in twice the time China does.

We suspect a lot of the reporting is actually guesswork and phony math.

Chart courtesy of WSJ