The Strategist

Amateurs are About to Bring Down the Chinese Stock Market

03/30/2015 - 15:53

Trading volume on the Chinese stock markets rose to $ 198 billion, and Chinese people have registered 1.14 million exchange accounts in the past week. However, experts believe that, in the face of declining economic growth and harsh tax policy, unprofessional amateur players can lead to the formation of bubble and eventually collapsing of the Chinese stock exchanges.

Aaron Goodman
Aaron Goodman
The rapid increase in the volume of trading poses a serious risk of overheating in the Chinese stock market. Bank of America Merrill Lynch’s analysts came to such conclusion after studying the dynamics of China’s marketplaces growth.

This week, Shanghai stock market SHCOMP index rose by 0.24% to the highest in seven years indicator up to 3,691 points. At the start, the index gained 13.8%, and the Shanghai Stock Exchange has been recognized as the fastest growing trading platform since the beginning of 2015.

Total trading volume on the Shanghai and Shenzhen markets exceeded 1 trillion yuan on Wednesday for the seventh time in a row, accounting for 1.24 trillion yuan, or $ 198 billion. For comparison, since the beginning of 2015, daily trading volume on the New York Stock Exchange accounts $ 40 -50 billion.

Not surprisingly that the population of China is discovering exchange trading as a mechanism of earnings with neck breaking speed. Just last week residents of China registered 1.14 million exchange accounts.

Among the owners of accounts, according to the Beijing Morning Post, there are a large sector consisting of housewives, university graduates and even teenagers.

In recent years, Chinese teenagers have become very fond of playing with market and often do it with help of parents’ money, writes China Securities Daily. In general, according to the newspaper, nowadays, "even provincial laundress" in China has an account for exchange.

The sharp rise in the Chinese stock market indexes have caused serious concern of analysts Merrill Lynch.

In their article “The Worrying Sense of Calm in China", they describe in detail the risks of overusing Chinese Stock Exchange as a toy.

According to experts, the current situation in China's economy is not conducive to an increase in trading volumes, and incompetence of amateur players can lead to inflating the financial bubble.

- China has too much of interest rates on loans and too harsh tax policy. In addition, the country is gaining momentum debt deflation - analysts say.
If in the near future the Chinese government does not pay attention to these problems, the financial market, obviously, will be overheated.

However, the Australian Investment Bank Macquarie’s analyst Erwin Sanft, argues with the statement.
-  I am confident in the stability of the Chinese stock exchanges. Denominated in RMB Chinese securities are valued appropriately, so that there is no threat, and the bubble does not exist, - he said.

Speaking on Wednesday to financial journalists in Hong Kong, Sanft linked the rapid growth of the Chinese stock markets with increasing popularity in recent years.
- Shanghai Stock Exchange for the first time gained the confidence of the players and investors shortly before the 2008 crisis, and now again gaining popularity as a stable platform for trading, - he told.

His colleague from the Chinese branch of Macquarie Larry Hu also supports Sanft. According to him, the Chinese stock markets have great potential for growth as the country itself goes through a phase of reform and actively positioning their trading platform as a tool for direct fundraising.
- Chinese companies are interested in entering the stock market, because nowadays they have to raise funds through credits - says Hu.

Moreover, the increase in trading volumes on Chinese sites, according to the analyst, is also caused by market factors.

The Chinese now perceive the fall of the housing market and asset management businesses due to the economic slowdown as too risky mechanisms, so that investing in stocks is becoming the most viable option.

It is worth noting that, according to statistics from FactSet, the peak of the rise or fall of the index of the Shanghai Stock Exchange falls to October in the last 20 years. For example, in 1996, the index in October reached 1,000 points, in 2007 - 6000 points, and in October 2008 fell to 1665 points. Therefore, to confirm or refute the fears of analysts Merrill Lynch probably have to wait for the fourth fiscal quarter of 2015.