China's stock market is closing in on a major milestone: US$10 trillion in capitalisation.
It has reached that level once before. That was in June 2015, and the spectacular implosion that followed when regulators moved to stamp out a debt-fuelled buying spree still haunts traders and investors today.
The total value of the shares trading on the Shanghai and Shenzhen exchanges rose to as much as US$9.7 trillion this week, according to Bloomberg data, amid a buying frenzy that quickly ramped up stock prices.
A bigger stock market will bolster the appeal of mainland-traded equities at a time when China is opening up more of its capital to the outside world and overseas investors have been increasingly boosting their allocations of onshore yuan-denominated assets. Foreign traders held over 2 trillion yuan (US$285.8 billion) of Chinese stocks by the end of April, making up 8.6 per cent of the free-floating shares of listed companies trading on the onshore market, according to China Merchant Securities.
"The size does matter to investors, particularly the overseas ones," said Ken Chen Hao, a strategist at KGI Securities in Shanghai. "For them, a big enough market means less volatility and less chance that stocks are subjected to manipulation. That'll ensure the fairness of the market and increase willingness to trade."
China's market cap is now the world's second largest, well behind the US which is capitalised at US$35 trillion. Japan and Hong Kong are ranked third and fourth, boasting market values of US$5.8 trillion and US$5.5 trillion respectively.
A staggering US$1.6 trillion has been added to Chinese stocks' market cap this year, with gains accelerating over the past three weeks, as unparalleled monetary loosening and increased signs of an economic recovery raise risk appetite. Margin financing has added fuel to the frenzy, with the outstanding balance of money borrowed from brokerages to buy stocks rising to a five-year high of 1.35 trillion yuan.
The market cap is now US$9 trillion, as stocks fell back on concerns the run-up was too fast and that China's return to growth in the second quarter will prompt the scaling back of policy loosening. Monetary easing will be limited for the rest of the year, as a 42 per cent year-on-year increase in aggregate financing that totalled 20.8 trillion in the first half consumed most of the annual target, according to Bob Liu, head of equity strategy at HSBC Qianhai Securities.
The abundance of liquidity has spilled over to the property market, with official statistics showing the nation's housing prices rising by the most in 10 months in June. That has led some local governments including Shenzhen and Ningbo to implement new curbs.
"We recommend our clients to buy the dip if Chinese stocks fall by 5 to 10 per cent from current levels in the near term, which is likely to happen in our baseline view," said Jing Sima, China strategist at BCA Research. "If Chinese stock prices consecutively fall by more than 15 per cent, however, a bear market is likely to follow."
Growth in China's market cap has outstripped the expansion of its economy for the last decade, mainly thanks to new listings. The capitalisation has increased fourfold in the 10-year period, while gross domestic product has expanded by 2.5 times to about 100 trillion yuan.
The mainland's exchanges have added 2,047 companies in the same period, raising a total of 1.8 trillion yuan from initial public offerings, Bloomberg data showed. Some 3,959 companies trade on the two bourses currently, with policymakers encouraging equity financing by smaller companies by creating the ChiNext market and a new technology exchange, the Star Market, in Shanghai.
Exactly when China's market will climb past the US$10 trillion mark hinges on the speed of new listings rather than how fast existing stocks rise, according to Chen.
"Even if stocks don't rise and stay where they are now going forward, it's still a matter of time before China tops that level," he said.
A rapid rise in the amount of borrowing to buy stocks poses a potential threat to the run-up. In the 2015 market crash, a rush by traders to exit their leveraged positions was mostly blamed for the ensuing collapse that saw the market fall by more than 40 per cent in just two months.
Still, the current level of leveraged stock holdings is only about half of the record high just before the meltdown five years ago.
"We can still be optimistic about the market in July and August, with the economic recovery going on and liquidity remaining ample," said Chen Li, chief economist at Soochow Securities in Shanghai. "But going forward, the overly fast gain on stock prices and the shift of the monetary policies constitute the biggest risk to the market."
With additional reporting by Yujing Liu
This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.
Copyright (c) 2020. South China Morning Post Publishers Ltd. All rights reserved.