It was only a month ago that I last written an article on the China stock market (article here). Back then, I mentioned how the dragon has risen from 1,900 all the way to 3,700. The index is now at 4,800 and everyone is predicting it will only a matter of time before it reaches 5,000. The Chinese stock market rally is finally back on. There was only one word to describe this phenomenal bull run: Incredible.
We have been hearing a lot of news that there was a lot of margin account traders who has leveraged to participate in this bull run. I even highlighted in my previous article how people of all ages and education, some of whom with very few financial knowledge, who has participated in this long awaited bull run. We have heard the quote that when even the shoe boy has purchased shares, it’s better to run away with the money. Now, we even have cleaners in China who have done the same. Perhaps a sign?
The US Federal Reserve infamous monetary policy over the last few years have fuelled the American market’s recovery with a series of bond purchases and interest rate cuts. Record high were seen in the stock market, even though the economy remained weak with low inflation and low GDP growth. Now, the same can be said for the Chinese central government intervention.
Has it ever occurred weird to you that during the Chinese economic boom period when growth rates were above 10%, investors were not as bullish on the stock market as they were now when growth has stalled and they can barely forecast a 7%.
That’s not surprising given a purpose intervention by the Chinese Central Government to convince investors to fuel the stock market by having a succession series of interest rate cuts in recent months. And they are making it very easy for investors to do so with the use of margin leveraging, even to the extent of using pension funds to invest in stocks.
One reason why I think the government is doing so is because too much debt is being tied up in the property market, which has stalled for growth and economy is slowing as a result without fuel for demand. As a result, they are doing this with plenty of agenda behind their own back by pushing money into the stock market and fueling for growth so that economy can pick up, but at what consequences at the end of the day. You and I will know when that happens. It won’t end up pretty like how it started.