Well, China’s world-beating equity rally wrapped up the quarter in dramatic fashion on Friday with mainland shares surging nearly 4%.
Friday was the second best day of the year for the CSI 300 and the second session in 2019 that the gauge has risen more than 3.5%.
Friday’s mammoth rally brings the Q1 gain for the index to an astonishing 29%. That’s the best quarter since Q4 2014 or, more to the point, the best quarter since the lead-up to China’s epic stock bubble which ultimately burst in the summer of 2015.
Notably (and we’ve mentioned this before) onshore shares are trouncing their Hong Kong counterparts this year. This is the first quarter in nine that the SHCOMP has outperformed the Hang Seng China Enterprises index which, you’ll recall, started 2018 on a blistering run that was the talk of the financial universe.
Comparisons to other global benchmarks are a joke. Mainland Chinese equities are so far ahead of their counterparts in, for instance, Europe, Japan and the US, that they almost don’t belong on the same chart.
Meanwhile, the China-US “equity ratio” (that’s a crude label that I’m not particularly fond of, but c’est la vie) which sank to a listless nadir as the trade war raged in 2018, rebounded sharply as the SHCOMP easily outperformed the S&P this month and last.
There are myriad factors contributing the onshore euphoria, from promises of policy support to liquidity injections to optimism around the Sino-US trade talks to suspicions that last year’s rout meant things had overshot to the downside.
Throw in the MSCI decision and, of course, Chinese retail investors’ (very) low threshold for succumbing to their worst FOMO impulses and you’ve got a recipe for froth, which is precisely what we saw in Q1.
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Is any of this sustainable? Well, that depends on who you ask. One of the ironies of the 2019 Chinese equity rally is that it’s arguably constraining policymakers in their ability to move ahead with more RRR cuts (let alone a benchmark cut) and other easing measures.
The idea is that authorities, hoping to avoid a repeat of 2015, will be wary of pumping more liquidity into the system with stocks having run 30% in the space of three months. Here’s a snapshot of valuations, for whatever that’s worth:
(Goldman)
Some criticized the massive January credit creation tidal wave as being indicative of Beijing not learning its lesson (seasonal effects notwithstanding), but the steep drop-off in February allayed some of those concerns.
Of course monetary and fiscal easing are necessary to cushion the economic blow from the trade war and to help ensure China doesn’t experience the dreaded “hard landing” to the detriment of global growth more generally.
It is, then, the same story as it’s been for years: Beijing is walking a fine line between juicing the real economy with targeted stimulus while avoiding a scenario where stocks “re-bubble” on their way to a crash which would then exacerbate the ongoing economic slowdown. The trade war complicates this effort.
Where things go from here is anyone’s guess, but we would note, in closing, that defaults picked back up in March after falling in January and February.
(Goldman)
While the 10 defaults in 2019 have all come from privately-owned enterprises, Goldman reminds you that “this does not mean that credit stresses are concentrated amongst small private companies.” In fact, the bank goes on to say, “a number of state-owned enterprises and large POEs missed payments on their bond obligations earlier this year, but were able to avert a default after repaying the amounts during the grace period.”
