A customer watches stock market at a stock exchange in Hangzhou, China, on September 27, 2024.
Costfoto | Nurphoto | Getty Images
BEIJING — The rocket higher in Chinese stocks so far looks different from the market bubble in 2015, analysts said.
Major mainland China stock indexes surged by more than 8% Monday, extending a winning streak on the back of stimulus hopes. Trading volume on the Shanghai and Shenzhen stock exchanges hit 2.59 trillion yuan ($368.78 billion), surpassing a high of 2.37 trillion yuan on May 28, 2015, according to Wind Information.
Over six months from 2014 to 2015, the Chinese stock market doubled in value, while leverage climbed, Aaron Costello, regional head for Asia at Cambridge Associates, pointed out Monday.
This time around, the market hasn’t run up as much, while leverage is lower, he said. “We’re not in the danger zone yet.”
Stock market leverage by percentage and value were far higher in 2015 than data for Monday showed, according to Wind Information.
The Shanghai Composite in June 2015 soared past 5,100 points, a level it has never regained since a market plunge later that summer. MSCI that year delayed adding the mainland Chinese stocks to its globally tracked emerging markets index. Also hitting sentiment was Beijing’s back-and-forth on a crackdown on trading with borrowed funds and a surprise devaluation of the Chinese yuan against the U.S. dollar.
This year, the yuan is trading stronger against the greenback, while foreign institutional allocation to Chinese stocks has fallen to multi-year lows.
The Shanghai Composite closed at 3,336.5 on Monday, before mainland exchanges closed for a week-long holiday commemorating the 75th anniversary of the People’s Republic of China. Trading is set to resume on Oct. 8.
In the runup to the 2015 market rally, Chinese state media had encouraged stock market investment, while loose rules allowed people to buy stocks with borrowed funds. Beijing has long sought to build up its domestic stock market, which at roughly 30 years old is far younger than that of the U.S.
Strong policy signals
The latest market gains follow announcements in the last week of economic support and programs to encourage institutions to put more money into stocks. The news helped stocks rebound from roughly their lowest levels of the year. The CSI 300 rallied by nearly 16% in its best week since 2008.
Chinese President Xi Jinping on Thursday led a high-level meeting that called for halting the real estate market’s decline as well as strengthening fiscal and monetary policy. The People’s Bank of China last week also cut interest rates and the amount existing mortgage holders need to pay.
“The policy is much stronger and [more] concerted this time than 2015. That said, the economy faces greater headwind[s] right now compared to back then,” said Zhu Ning, author of “China’s Guaranteed Bubble.”
One week of massive stock gains do not mean the economy is on its way to a similar recovery.
The CSI 300 remains more than 30% below its February 2021 high, a level that had even surpassed the index’s 2015 high.
“The Japanese experience provides an important perspective, as the Nikkei 225 Index bounced four times by an average of 34 per cent on its way to a 66 per cent cumulative drop from December 1989 to September 1998,” Stephen Roach, senior fellow at Yale Law School’s Paul Tsai China Center, pointed out Tuesday in a blog post that was also published in the Financial Times opinion section.
“I think what’s missing is the key to a lot of this, that has not come out, which would be a truly confidence-boosting measure, is how are they going to fix the local government finances,” Costello said, noting local coffers once relied on land sales for revenue to spend on public services.
While Chinese authorities have cut interest rates and eased some home buying restrictions, the Ministry of Finance has yet to announce additional debt issuance to support growth.
Animal spirits at play
Peter Alexander, founder and managing director of Z-Ben Advisors, expects the level of fiscal stimulus — when it’s likely announced in late October — to be less than what markets are hoping for.
It “may have investors a little bit over their skis, as people like to say,” he said Monday on CNBC’s “Street Signs Asia.”
He added in a written response that his experiences in 2007 and 2015 indicate the Chinese stock market rally could last for another three to six months, or abruptly end.
“This is pure animal instincts and the Chinese have been pent up for a stock market rally,” Alexander said. He added that there are market risks from how unprepared the stock trading system was for the surge of buying.
Data on the number of new retail investors in China this year wasn’t publicly available. Reports indicate brokerages have been overwhelmed with new requests, echoing how individuals piled into the stock market nearly a decade earlier. The Shanghai Stock Exchange on Friday said confirming transactions at the market open had been abnormally slow.
Looking for earnings growth
“China was cheap and was missing the catalyst. … The catalyst has occurred to unlock the value,” Costello said.
“Fundamentally we need to see corporate earnings go up,” he said. “If that doesn’t go up, this is all a short-term pop.”
Beijing’s efforts earlier this year to stem a market rout included changing the head of the securities regulator. Stocks climbed, only to see the rally peter out in May.
A factor that can send stocks past May levels is that earnings per share forecasts have stabilized versus downgrades earlier this year, James Wang, head of China strategy at UBS Investment Bank Research, said in a note Monday.
Lower U.S. interest rates, a stronger Chinese yuan, increased share buybacks and more coordinated policymaker response also support gains, he said. Wang’s latest price target of $70 on the MSCI China index is now just a few cents above where it closed Monday.
Check out the companies making headlines in extended trading. Discover Financial – Shares inched lower by 1%. The financial services company posted third quarter results that surpassed expectations, with earnings of $3.69 per share on $4.45 billion of revenue. Analysts polled by LSEG were calling for earnings of $3.42 per share and revenue of $4.35 billion. CSX – The rail transportation company lost 4% after third quarter results fell short of Wall Street’s forecasts. CSX reported earnings of 46 cents per share on revenue of $3.62 billion, while analysts polled by LSEG anticipated 48 cents per share in earnings and revenue of $3.67 billion. Overall volumes were up 3% from the year-ago period, but revenue per unit was down about 1%. Alcoa – Shares of the aluminum producer jumped nearly 9%. Alcoa posted third quarter adjusted earnings of 57 cents per share, topping analysts’ estimate for 28 cents a share, per LSEG. Revenue missed the mark, coming in at $2.90 billion versus the Street’s call for $2.97 billion. Lucid Group – The electric vehicle maker slid 10% after announcing a public offering of more than 262 million shares. Lucid also said that Ayar Third Investment Company, an affiliate of the Public Investment Fund, indicated it would buy more than 374 million shares. Kinder Morgan — Shares of the energy infrastructure company fell 2.7% on disappointing third-quarter results. Kinder Morgan reported adjusted earnings per share of 25 cents and revenue of $3.70 billion. Meanwhile, analysts had estimated 27 cents earnings per share on $3.98 billion in revenue. Management also announced it expects to fall below budget on adjusted earnings before interest, taxes, depreciation, and amortization and adjusted earnings per share by 2% and 4%, respectively. PPG Industries — Shares slipped less than 1% after the paints manufacturer missed on both top and bottom lines in the third quarter. PPG Industries posted adjusted earnings of $2.13 per share on $4.58 billion in revenue. Analysts surveyed by LSEG had forecasted $2.15 earnings per share and revenue of $4.65 billion. A challenging global industrial production backdrop pressured the company’s results. SL Green – The office building-focused company tumbled around 3% after posting a revenue miss in the third quarter. SL Green reported $139.6 million in quarterly revenue, based on a rental income basis, while analysts polled by LSEG had expected $142.5 million. Meanwhile, losses came in at 21 cents per share versus the Street’s forecast of a 50-cent per share loss. Equifax — The consumer credit reporting company dropped nearly 5% after issuing weak guidance. In the fourth quarter, Equifax anticipates adjusted earnings of $2.08 to $2.18 per share, while analysts polled by LSEG sought $2.20 per share. The revenue outlook for the quarter also fell short of expectations. Steel Dynamics — The steel producer added 3%. Third quarter earnings came in at $2.05 per share, beating the $1.97 per share anticipated by analysts, per LSEG. Revenue also trounced expectations, with Steel Dynamics reporting $4.34 billion, versus the $4.18 billion estimated by the Street. — CNBC’s Darla Mercado contributed reporting
Check out the companies making headlines in midday trading. Novavax – Shares plunged more than 17% after the biotech company said the Food and Drug Administration put a clinical hold on its application for a Covid and influenza combination shot as well as a standalone flu vaccine. United Airlines – The stock soared 11% after the airline posted an earnings and revenue beat for the third quarter and guided for a strong fourth quarter. In addition, United said it is starting a $1.5 billion share buyback, its first since before the Covid pandemic. Morgan Stanley – Shares popped 7% after the bank reported quarterly results that beat Wall Street’s forecasts , boosted by higher profits from its wealth management, trading and investment banking divisions. The firm posted earnings of $1.88 per share, higher than the $1.58 expected by a LSEG analyst poll. Revenue was $15.38 billion versus the $14.41 billion consensus estimate. Cisco Systems – The technology networking stock advanced 3.3% to a 52-week high on the back of a Citi upgrade to buy from neutral. Citi said artificial intelligence can become a larger part of the business over time. Novocure – The stock rose 2.1% on the heels of the Food and Drug Administration’s approval of the company’s wearable treatment for metastatic non-small cell lung cancer, known as Optune Lua. ASML – Shares of the semiconductor equipment maker slumped 5.8%, building on a 16% loss from Tuesday after the Dutch company mistakenly released its third-quarter earnings earlier than expected . ASML Holding cut its sales outlook for 2025, citing a slower-than-expected recovery in segments beyond AI. J.B Hunt Transport Services – Shares added 3.4% after the company posted a top and bottom line beat. J.B. Hunt posted $1.49 earnings per share on $3.07 billion of revenue in the third quarter. Analysts polled by LSEG had forecast $1.41 in earnings per share on $3.02 billion of revenue. The company said demand for its intermodal service rose throughout the quarter. Aspen Aerogels – Shares gained 11% after the company announced that it received a conditional commitment for a proposed Department of Energy loan of up to $670.6 million. Aspen Aerogels also released preliminary results for the third quarter. For the period, the company is expecting revenue of around $117 million and adjusted EBITDA of around $25 million, above the $95.1 million in revenue and $14.1 million in adjusted EBITDA that analysts polled by FactSet were expecting. Prologis – The warehouse giant rose more than 4% after posting better-than-expected quarterly results . For the third quarter, Prologis reported core funds from operations of $1.43 per diluted share, above the $1.37 estimate from FactSet. In a statement, CEO Hamid Moghadam said: “Looking ahead, the supply picture is improving, and the long-term demand drivers for our business remain strong.” U.S. Bancorp – The stock moved more than 4% higher after U.S. Bancorp’s third-quarter earnings beat estimates, posting $1.03 per share versus the 99 cents per share that analysts were expecting, per LSEG. Revenue, however, missed estimates, coming in at $6.86 billion compared to the consensus estimate of $6.9 billion. General Motors – Shares increased more than 2% on the heels of the automaker’s agreement with Lithium Americas Corp. to establish a joint venture. The deal includes General Motors giving $625 million in cash and credit to the Canadian mining business. — CNBC’s Alex Harring, Hakyung Kim, Samantha Subin, Pia Singh and Michelle Fox contributed reporting.
Check out the companies making headlines before the bell. Cisco Systems — The networking technology stock added nearly 2% on the heels of a Citi upgrade to buy from neutral. Citi said artificial intelligence can become a bigger part of the business over time. Novocure — Shares soared roughly 22% after the U.S. Food and Drug Administration approved Novocure’s Optune Lua wearable treatment for metastatic non-small cell lung cancer. Morgan Stanley — Shares gained more than 3% after the bank reported quarterly results before the bell that beat Wall Street’s forecasts, helped by higher-than-expected revenue from its wealth management, trading and investment banking operations. The firm’s earnings came in at $1.88 per share, versus the $1.58 expected by a LSEG analyst poll. Revenue was $15.38 billion versus the $14.41 billion consensus estimate. United Airlines — Shares rose about 1% after the airline beat earnings and revenue expectations for the third quarter. United also announced a $1.5 billion share buyback, its first since before the pandemic. ASML — Shares of the Dutch chip equipment firm slid 4% before the bell, adding to Tuesday’s losses after it accidently released its third-quarter results a day early . The report was disappointing as ASML cut its 2025 sales forecast, suggesting weakness in markets other than those that serve AI applications. J.B Hunt Transport Services — Shares jumped more than 7% after the company’s third-quarter results topped expectations. J.B. Hunt posted $1.49 earnings per share on $3.07 billion of revenue. Analysts polled by LSEG had forecast earnings of $1.41 per share on $3.02 billion of revenue. The company said demand for its intermodal service rose throughout the quarter. — CNBC’s Sean Conlon, Alex Harring, Sarah Min, Michelle Fox and Hakyung Kim contributed reporting.