Global markets in turmoil. Central banks rushing to arrest panic. But in China, the country most affected by the virus outbreak, it’s boom time for traders.
A gauge of stocks in Shanghai and Shenzhen has jumped 14% in just over a month to close at a two-year high on Thursday. One exchange-traded fund focused on 5G amassed $2 billion in days as investors clamoured to chase a rally in tech shares. Seeking to maximise returns, punters have driven stock leverage and daily turnover past 1 trillion yuan ($142 billion), both near four-year highs. Government bonds have surged too, with the 10-year yield approaching its lowest level since 2002.
It’s a sharp turnaround from just a month ago, when the virus darkened factories across the nation, whole cities were isolated under quarantine and the stock market was hit by the most savage selling in years.
The swift response from the Communist Party to arrest the spread of the deadly disease helped restore confidence as the number of new infections outside of the worst-hit province of Hubei drop. A succession of policy-easing measures ensured liquidity was ample in markets, with a measure of interbank borrowing costs tumbling to its lowest level in almost a decade. Another impetus for the rally: the prospect of massive fiscal stimulus similar to that unleashed in the wake of the global financial crisis.
The result is an explosion of speculative trading by Chinese investors hooked on greed at a time when global equity markets are imploding and fear is rampant — as seen in Wall Street’s session Thursday, when the S&P 500 Index slid 3.4%. Shanghai’s equity benchmark has become this week’s top performing in the world.
“Chinese equities provide a hedge against the recent volatility in global risk assets,” Eugenia Victorino, head of Asia strategy at SEB AB, wrote in a note Thursday. “We continue to believe in the resilience in Chinese equities in the near term.”
She recommends a long position in Chinese equity futures, targeting another 16% rally.
Still, the contrast to the rest of the world is glaring, especially given the potentially devastating impact of the virus to an economy already struggling under a mountain of debt and weakened by the trade war with the US Factory activity contracted by the most on record in February and economists continue to lower their China growth forecasts.
Private enterprise faces a rising debt bill and an increase in defaults is likely this year. Just last week the government took over once-acquisitive HNA Group after the contagion hurt the firm’s ability to meet debt obligations.
Yet, for now, investors have faith in the government to navigate this crisis like it has others in recent decades. China’s army of about 160 million retail traders are a formidable force when momentum starts to take off, as seen by a rush into new mutual stock funds as well as ETFs.
As China’s markets continue to defy gravity, the rest of the world can only look on with wonder — or fear that it could all come crashing down.
© 2020 Bloomberg L.P.