The Shanghai Stock Exchange managed to add 2% gain to the seven-year high it reached on May 26th. However, the winning streak snapped on May 28th 2015 when the overall Chinese equity index fell ~6.5%, and the Shenzhen index dropped 5.5%. However, even with this massive one-day index decline, Shanghai index was still over ~130% in the past months, and Shenzhen index was still up ~160%.
Prior to this decline, market observers and logic-minded individuals has concerned about the high P/E due to fast advancement. Both Shanghai and Shenzhen market has went from a P/E of less than 20 a few years back to now a P/E of 120+. Another problem is that more than 80% of the equity market is owned by retail and individual investors who has less flexibility and liquidity in a volatile market. These type of investors don’t have the risk appetite for a +/- 6% decline daily. To further complicate things, the Chinese central government has loosened margin lending as a boost of confidence in their equity market earlier this month. However, one of the biggest contributions to the rally in recent weeks can mainly be attributed to the massive linkage of Shenzhen, Shanghai and Hong Kong stock exchanges, therefore boosting liquidity and demand/supply of equities.
While many questioned the deceleration of the Chinese economy (7% projected GDP growth in 2015) and the massive run-up of Chinese equity markets, I believe this market still has a little more leg-room to expand. The Chinese central government will continue to loosen lending policies and pump liquidities into their banks so this rally will still continue for a while. It would be interesting to see if this rally will continue as the IMF is analyzing on whether to include the Chinese Yuan in the global currency basket. The scale will tip when the retail/individual investors lose their risk appetite for the massive daily decline like the one that happened on May 28 2015.
Intersection notepad 