Finance
China’s stock surge has echoes of the 2015 bubble. What’s different
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.
Economic data for the last few months have pointed to slower growth in retail sales and manufacturing. That raised concerns that China’s gross domestic product would not reach the full-year target of around 5% without additional stimulus.
“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.
— CNBC’s Hui Jie Lim contributed to this report.
Trump donor Norm Champ details how the Biden-Harris regulations have been hurting Americans’ retirement funds on ‘The Bottom Line.’
Tens of millions of private-sector workers lack access to a retirement savings plan through their employer, which experts at the AARP Public Policy Institute warn could pose a significant burden to future taxpayers.
The institute estimates that 57 million private sector workers in the U.S. – about half of the workforce – are not offered either a traditional pension or a retirement savings plan through their employer, a problem that has persisted for decades, according to David John, senior strategic policy adviser at AARP.
In April, an AARP survey showed that 20% of adults at least 50 years old had no retirement savings, and more than half were worried they would not have enough money to support them in retirement.
John said that individuals in their 50s or early 60s who are facing retirement without enough savings are in the midst of a crisis.
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For society as a whole, he said, “It’s not a crisis right now, but it’s pretty inevitable that it will be.”
“It’s a really significant problem, and it’s one that’s going to affect all of us, because if we’re not the ones with the small retirement savings to supplement Social Security, we’re going to be the ones who are paying the taxes to help the people who didn’t have that opportunity,” John said.
An AARP survey showed that 20% of adults at least 50 years old had no retirement savings. (Annette Riedl/picture alliance via Getty Images / Getty Images)
If many people lack adequate retirement savings, they will likely require more forms of public assistance – from nonprofit organizations or government programs. This could include support for health care needs, housing or other essential services.
To help, more than a dozen states have already set up or are in the process of implementing state-facilitated retirement savings plans for small businesses, according to John.
Small businesses are more likely not to provide retirement savings benefits to employees compared to larger corporations. Pew Charity Trusts cited Bureau of Labor Statistics data showing that 57% of private-sector firms with fewer than 100 workers offered a retirement benefit plan as of 2023. However, 86% of companies with at least 100 workers and about 91% of firms with at least 500 workers did.
For small businesses, their main focus is often on staying afloat, leaving little time or resources to handle such tasks. But these state programs, such as CalSavers, California’s retirement savings program for workers who do not have a way to save for retirement at work, are a way to help that does not have any cost to a small business.
More than a dozen states have already set up or are in the process of implementing state-facilitated retirement savings plans for small businesses. (iStock / iStock)
Greg McBride, chief financial analyst for Bankrate, told FOX Business that the bigger issue is that most workers don’t recognize that they can still contribute to a retirement account independently, without relying on their employer.
“Something lost on consumers is that lack of access to a retirement savings plan through your employer doesn’t mean that you can’t save for retirement on a tax-advantaged basis,” McBride said.
If someone or their spouse with whom they jointly file taxes with has an earned income, they are eligible to contribute to an Individual Retirement Account (IRA), which provides tax advantages for retirement savings.
It’s estimated that 57 million private sector workers in the U.S. are not offered either a traditional pension or a retirement savings plan through their employer. (iStock / iStock)
According to the IRS, there are several types of IRAs available, including a traditional IRA, a tax-advantaged personal savings plan where contributions may be tax-deductible, and a Roth IRA, a tax-advantaged personal savings plan where contributions are not deductible but qualified distributions may be tax-free.
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While McBride said the “lack of employee-sponsored retirement savings isn’t a barrier to saving for retirement,” he did acknowledge that it is harder. There is no employee match and there are lower contribution limits for IRAs compared to workplace-based plans, according to McBride.
Still, he doesn’t believe enough workers are taking advantage of these accounts.
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