China’s stock boom puts Australian housing in the shade

That’s not a bubble, this is a bubble. Or is it?
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Australians, and the RBA, may be concerned about soaring property prices and a possible bubble, but compared to the appreciation on the Shanghai Composite Stock Exchange in China, our housing market looks tame.

As this chart shows, China’s main stock index has risen almost 100% year-on-year, briefly climbing through 4000 points before closing at 3994.8 on Wednesday.

 

The rise has been fuelled by local policy, tech company valuations, and by a flattening in the domestic property market, tempting Chinese investors into higher-return investments.

This smashes the 8.8 per cent growth in the Australian stock exchange over the same period, and is far greater than 12.5 per cent and 8 per cent property price growth experienced in Sydney and Melbourne.

“China is experiencing exactly what the rest of the western world has been experiencing over the past few years, a wall of money chasing assets,” Investment Director at Fidelity Worldwide Investment Alva Devoy said.

“It’s the restrictions by the government on the amount of money that can actually flow out of China.”

“A lot of money is chasing a finite number of shares and assets … there’s limited places for it to go,” she said

The question is, is it a bubble? Quite possibly, according to Ms Devoy, but she can’t see it bursting in the short-term.

“There is possibly a level of being overvalued on the A-shares basis, because of supportive policy measures. But could you expect the bubble to burst anytime soon? No, quite the opposite. If you think about it, it’s only going to increase, however I would say the head of steam comes out of it,” Ms Devoy said.

As this second chart shows, the current rise still puts the Shanghai bourse at only two-thirds of its pre-global financial crisis value of 6092 points, which was reached in October 2007. That high was followed by a crash over the following year, which knocked two-thirds off the market by November 2008.

Chinese stocks only really began to recover from that fall in the past year.

 

China’s central bank has cut interest rates twice since November and analysts predict authorities will ease policy further to keep economic growth above their 7 per cent target. The nation’s individual investors, who account for about 80 percent of equity trading, may view the 4,000 milestone as a signal to boost holdings, according to Shenwan Hongyuan Group Co., the nation’s second-largest brokerage by market value. “Breaching the 4,000 level can be read by retail investors as a bullish signal,” said Gerry Alfonso, a director at the international business department of Shenwan Hongyuan in Shanghai. While the market’s rapid ascent has fuelled concerns about a bubble, Shenwan Hongyuan estimates the Shanghai index may rise to 4500 as individuals shift more of their assets into equities.  Currently there are limited channels for international investors to put money into China, but with the upcoming opening of the “Shenzhen Connect”, expected near the end of the year, Ms Devoy says that foreign capital available to companies is likely to increase, further fuelling the rise of the Chinese tech sector. “I actually think that they could extend their price appreciation …some of the smaller to mid cap companies, a lot of which are on the tech side of life, they’ll have more access to capital flows,” Ms Devoy said. But not all agree with that assessment. Valuations have climbed too high, the head of China research at Credit Suisse Group AG,  Vincent Chan, says. He sees a correction that will take the Shanghai gauge back down to 2,800 by the end of the year, amounting to a drop of about 30 percent. Losses may accelerate as margin traders liquidate their positions, he said. China’s stock market has a long history of booms and busts. The Shanghai Composite has recorded more than 50 bull and bear markets, defined as a move of at least 20 percent from a recent peak or trough, since Bloomberg started compiling the data in 1990. The current gain of about 100 percent compares with an average advance of 122 percent during previous rallies. “It’s the nature of the Chinese bull market that every seven to eight years, a few investors get rich quickly,” Earl Yen, the chief investment officer at CSV China Opportunities Ltd. in Shanghai, which oversees more than $200 million, told Bloomberg. “Then the bubble bursts and mass retail investors stay away from the market.”

with Bloomberg

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