After central banks flooded the world with money in the wake of the coronavirus crisis, retail investors rushed into the financial markets, sending stocks sharply higher, despite weak economic fundamentals.
If that sounds familiar, think again. It describes not the U.S., but China.
What’s more, the market mania that gripped the world’s second-largest economy in the past few weeks may not be as disconnected from the real economy as skeptical Western observers may believe. Perhaps even more surprisingly, it suggests some positive changes have come to the often opaque Chinese system — changes that may even work to the benefit of both countries.
On Monday, China’s CSI 300 /zigman2/quotes/210598128/delayed XX:000300 +0.81% index surged nearly 6%, bringing it to a 5-year high, and boosting equity markets around the world in its wake. In the year to date, the index is up 16%, outpacing most U.S. benchmarks, except the tech-heavy Nasdaq Composite /zigman2/quotes/210598365/realtime COMP +0.64% .
“I don’t think that retail investors alone could drive the markets if it weren’t for the fundamentally good setup right now,” said Jan van Eck, CEO of asset manager VanEck.
“What I mean by ‘the fundamentals’ is central bank policy, fiscal policy, and corporate growth, generally speaking,” van Eck told MarketWatch. “Between the recovering growth, reasonable valuations of the stock market, and then maybe a little bit of government support because of what’s been happening in Hong Kong, I think it can continue. This could be just the beginning of something. We’re far from what I would consider to be frothy levels.”
While there’s been a lot of cynicism among Western observers about how rapidly China might be recovering, Bill Adams, senior economist for PNC Financial Services Group, points out that the country has been in a better position through the pandemic than many other countries have.
Although China has been making an effort to transition its economy to a services orientation, it’s still more manufacturing-dependent than the U.S. is, Adams noted. The pandemic didn’t deal as big a blow to the production side of the economy, enabling China to bounce back a little more quickly. And within the services sector, China’s economy is more digital than most Western economies.
“In normal times, it is often a disadvantage for China to have a legacy of state intervention in the economy,” Adams told MarketWatch, “but when there’s a crisis China has tools at the ready to prevent firms from going under, and to a lesser extent to support households. There’s also no political resistance to intervention.” Finally, the country had a “much more aggressive public health response,” Adams said. The Chinese government is willing and able to track and trace citizens infected with COVID-19.
“The speed with which the economy went downhill and then recovered has been trending up rapidly. In broad strokes it fits the model of recovery from a natural disaster,” Adams said.
Even with that as a backdrop, the sudden surge in Chinese stock markets, on the back of what seemed like signals from the government, was disconcerting.
A China Securities Journal editorial on Monday said the foundations for a “healthy bull market” had strengthened, and a social media post from Shanghai Securities News said “Hahahahaha! The characteristics of a new bull market are becoming obvious.”
Many observers were reminded of the pain of the last state-sanctioned Chinese stock market bubble, in 2015, which ended with stocks down nearly 50% from their highs .
“So far, the overall level of cheerleading is less pervasive than what we saw in 2015,” said Nicholas Borst, China research director at San Francisco, Calif.-based Seafarer Capital Partners. “Still, it’s not a best practice ever for official or even quasi-official sources to be talking the market up.”