The China stock bubble is getting more and more bonkers. This from Deutsche Bank:
Bubble watchers point out median earnings multiples for Chinese technology stocks are twice US peer valuations at their dot.com peak. More worrying perhaps is a health-goods-from-deer-antlers producer on 70 times, the seamless underwear manufacturer on 90 times or those school uniform and ketchup makers on 330 times!
It seems everyone in the country is racing to open a brokerage account – 1.67m new accounts in the latest week, according to the China Securities Depository and Clearing Co. That sounds a lot, although it is growth of only about 1 per cent a week in the total of new accounts: China, remember is big.
But a quick bit of Excel work shows just how silly the bubble in Chinese domestic stocks, known as A shares, has become. Read more
Yes, dot-com comparisons are flung about all too easily. But it’s quite hard to argue with the fairness of this one from Bloomberg:
The world-beating surge in Chinese technology stocks is making the heady days of the dot-com bubble look tame by comparison.
The industry is leading gains in China’s $6.9 trillion stock market, sending valuations to an average 220 times reported profits, the most expensive level among global peers. When the Nasdaq Composite Index peaked in March 2000, technology companies in the U.S. had a mean price-to-earnings ratio of 156…
Valuations in China are now higher than those in the U.S. at the height of the dot-com bubble just about any way you slice them.
… By the notorious PBoC?
To be clear, the issue here is falling M0 in China.
SocGen’s China watcher in chief Wei Yao suggests that this is perhaps more important to real growth than the normally fixated-upon M2. Read more
Just going to leave these few charts here for a second…
That’s from BNP Paribas, this is via Tom Orlik and a few others: Read more
A Chinese rendering of jusqu’ici tout va bien courtesy of Bloomberg:
The chief China strategist at Bocom International Holdings Co. points to soaring price-to-earnings ratios, the shrinking yield advantage that stocks offer over bonds and the fact that mainland-listed equities now trade at a 34 percent premium over nearly identical shares in Hong Kong.
So what’s Hong’s advice to investors?
Keep buying, of course.
Sentences to remind us of the nuttiness of Chinese equities over the past few months from BNP Paribas’ Richard Iley (and yeah, the Shanghai Comp fell 0.8 per cent today we have to admit, but that just broke “a 10-session winning streak — the longest in 23 years, according to Bloomberg data — that had taken the index to its highest since May 2008″):
Against all odds, the best performing asset class on the planet over the last nine months or so has been Chinese equities. After languishing for the first seven months of 2014, Chinese stocks have since been on an incredible tear, ending 2014 up a remarkable 49% in USD terms, even outstripping the c.28% annual return posted by Bunds (Chart1). And the strong gains have continued so far in early 2015. Up almost 12% in USD year-to-date at time of writing, Chinese equities continue to sit atop the heap of global asset returns. All told, the Shanghai and Shenzhen markets have surged almost 80% in local currency terms since mid-2014 (Chart 2).
Yes, yes… “必有牛市” – “There must be a (dynastic) bull market”. Read more
From RBS’s Alberto Gallo and team:
Gallo is, selectively, very bearish (not on India though, natch) for the obvious reasons: Read more
We don’t have too much to add to the Shambaugh-generated “is the Chinese Communist Party cracking up” debate. Apart from suggesting that…
1. It seems that the debate itself is noteworthy and wouldn’t have happened even one year ago. As JCap’s Anne Stevenson-Yang said, this “may represent the first time in three decades that a prominent foreign expert on China has been willing to so thoroughly blow his entrée in Beijing by publishing an incendiary piece, and only two months after the China Foreign Affairs University had ranked Shambaugh No. 2 among the top 20 international scholars who are best informed about China! That will not be happening anymore. Shambaugh’s boldness, or recklessness, in itself may be the most potent sign yet that China’s soft power has waned.”
2. The trouble the CCP is apparently finding itself in seems an almost inevitable reaction to the economic pressures China is facing. Read more
“Chinese lenders were overzealous in funding domestic boondoggles since 2008″ has almost become a mainstream opinion, thanks in part to charts like this:
A rumour started floating around last week that a CNPC-Sinopec merger might, just might, be on the cards with the FT suggesting China’s national planners were “openly discussing the idea of mergers in a number of state-dominated industries, following the $26bn marriage of high-speed rail companies China CNR and CSR Corp at the end of last year to create a more formidable competitor in international tenders.”
Fair enough and we’re not saying this definitely won’t happen, stranger things etc, but there’s something really very funny about the idea. Read more
The invention of modern accounting in Renaissance Venice was arguably one of the prerequisites to the development of capitalism, so it’s interesting to discover that Chinese merchants developed methods distinct from those employed by their European counterparts that nevertheless made it possible to run successful and growing businesses.
That knowledge comes to us from scholars at the Chinese Academy of Social Sciences and the London School of Economics, who recently found and dug into a remarkably complete archive of business records going back to the late 1700s. This is far from the first study of Chinese accounting but it is the first comprehensive look at a firm that was run by people who probably never encountered European bookkeeping techniques. Read more
China’s richest man has been loading up on high interest shadow banking loans — and selling off a private jet — to fuel the rapid growth of the most valuable solar company in the world.
A Financial Times investigation has found that Hanergy Group, run by founder Li Hejun, has borrowed billions of renminbi from high-interest Chinese “trust products” marketed to wealthy individuals, and loans secured through pledging shares in its Hong Kong-listed subsidiary.
Yup, you’re never short of a lede when your subject is China. A little more, still courtesy of the FT: Read more
Charts from Nomura showing, on the left, China’s largest cumulative two-month decline in FX purchase positions on record occurring despite a record trade surplus over the same period and, on the right, the probable hoarding of foreign currency as reflected in a sharp monthly rise in foreign-currency deposits in January.
Or to paraphrase a bit further: more signs of capital flight and depreciation pressure in China. Read more
A guest post by Simon Cox, Asia-Pacific Investment Strategist, BNY Mellon Investment Management
China’s weak inflation numbers, updated on February 10, underscore why the People’s Bank of China (PBOC) is now easing policy wholesale, after a long sequence of targeted tweaks. (It cut reserve requirements on February 5 less than three months after cutting benchmark interest rates in November.) But does monetary easing work in China the way it works elsewhere? Does it, indeed, work at all? Read more
With an unspoken currency war supposedly upon us and a cry for China to join in — according to BofAML the market is pricing about a 30 per cent probability of a 10 per cent devaluation of the CNY this year while insistent market forces push the yuan down anyway — we thought a lopsided CNY depreciation pro and con list from Nomura might be helpful:
1. Makes exports more competitive, helping to boost growth.
2. Raises the cost of imports, helping to reduce the risk of CPI deflation.
There have been enough pixels spilt over yesterday’s required reserve ratio cut from China so we’ll keep this short (ish).
First, go read your 2012 Mark Dow explaining why a “Chinese RRR cut is NOT like a rate cut in the developed world. And it does not necessarily signify an easing of the monetary policy stance.”
Which is basically true here again Read more
Another BoAML FX observation on Thursday, this by way of Claudio Piron, emerging Asia FI/FX strategist, and his team.
On the analysts’ radar this week, the continuing risk of CNY depreciation, and in particular this chart:
Since 2008, debts owed by China’s nonfinancial sector have soared by more than 90 percentage points relative to GDP. As David said, that’s “pretty damn fast.”
Almost all of that increase can be attributed to corporate borrowers. Chart via Goldman:
The thing about a “pervasive implicit state guarantee” is that it’s pretty pervasive. It gets everywhere. Well, just about everywhere. Everywhere that an implicit state guarantee can get.
Futhermore, it’s hard to get rid of once it spreads. (We’ll spare you an analogy) Read more
Pretty obviously — with ECB QE, a presumed resultant euro funded carry trade, and all sorts of central banks rushing to cut rates — there’s some sort of renewed currency war movement going on.
And while we’re all ears for arguments about positive-sum outcomes (in a deflationary world), it’s worth remembering those who might struggle to get involved. Read more
Like 97th percentile fast.
From Goldman, do click to enlarge: Read more
The Chinese government seems to have noticed that the country has no policy institutes or think tanks with global clout. So it’s going to get some. Up to a hundred, in fact. But this isn’t Xi Jinping reworking Mao’s famous 100 flowers campaign. Wouldbe think takers are not being invited to think freely…
A new type of think tanks with Chinese characteristics would support development and strengthen soft power, according to a guideline issued Tuesday.
As Goldman flagged this morning, December has brought with it $19bn of FX outflows from China. That’s the biggest move since 2007 (with our emphasis):
The position of FX purchases for the entire banking system (the PBOC plus commercial banks) decreased by about $19bn in December (vs. essentially flat in November)…
The FX outflow in December underlined the weakness in demand for the CNY, despite a strong trade balance of close to $50bn. The FX outflow size is the largest since December 2007 (and this earlier data point was skewed by the MOF’s FX injection in China’s sovereign wealth fund). The PBOC has been setting the daily USDCNY fix on the strong side of the spot rate since late November to counteract depreciation expectations. Today’s data suggest that besides displaying such a bias in fix setting, the central bank might have gone further in supporting the currency by buying CNY in the market. But we await PBOC balance sheet data, due out in the coming weeks, to confirm if it is indeed the case. The FX outflow also partly explains the slow M2 growth in December.
Or the risk of “lethal damage” if you’re into that sort of thing.
As said before, we’ve had 34 months and counting of negative PPI inflation in China with CPI at best lacklustre — coming in at 1.5 per cent in December. The risk is that, in a country charmingly wrapped in debt based uncertainty, we get outright deflation. Read more
The thing about the relationship between monetary stimulus and inflation in China is that — much like like a Wookie, an 8ft tall Wookie, living on the planet Endor with a bunch of 2ft tall Ewoks — it does not make sense. At least not if you approach it with a conventional eye.
So says China maven Michael Pettis, who emailed us over the last few days to say we must, at minimum, consider the possibility that there is a reason rapid credit growth in China has failed to do what it’s “supposed” to do. And, by extension, why deflationary pressures in China indicate the probable need for monetary tightening, not loosening. Read more
Said China of its own mooted plan on Thursday:
“It’s not a stimulus program by expanding fiscal input, it’s about guiding social capital into investment projects,” Luo [an investment official with the National Development and Reform Commission] said. “It has nothing to do with the 4-trillion-yuan stimulus plan in 2008, and it is fundamentally different from that.”
But wasn’t it already pretty clear it wasn’t a legit stimulus? Read more
Here’s what 33 months of negative Producer Price Index inflation in China look like:
Of course, we’re now at 34 months, following December’s print. This clocked a 3.3 per cent year on year fall in the index — the biggest annual fall in more than two years.
Dramatic. But the question is, should we care? Read more