SHANGHAI (AFP) – China’s stock market is set to finish 2014 as the second-best performer in the world after soaring more than 50 per cent in a borrowing-fuelled, government-backed rally following four years in the doldrums.
The benchmark Shanghai Composite Index closed up 52.87 per cent for the year on Wednesday, putting it behind only Argentina among global markets, according to figures from the Wall Street Journal’s Market Data Center.
By contrast, in recent years it has slumped even while other bourses around the world gained, losing more than 35 per cent between 2010 and 2013.
This year’s transformation came despite weakening momentum in the world’s second largest economy, where growth hit a five-year low of 7.3 per cent in the third quarter and the slowdown is seen persisting in 2015.
“This rally runs contrary to macro-economic fundamentals,” said BOC International analyst Shen Jun. “It’s driven by financial leverage and encouraged by government policies.”
The surge was triggered by an interest rate cut in November and powered by liquidity, with a boom in margin trading – investors using borrowed funds to trade stocks with only a small portion of money put down as deposit – after authorities loosened controls on the practice.
A long-awaited move to link trading on the Shanghai and Hong Kong exchanges in November also raised expectations for a flood of incoming capital.
In December the market broke above the key 3,000-point level – and also recorded its biggest single-day decline in more than five years, of 5.43 per cent.
It rallied 2.18 per cent Wednesday to close at 3,234.68.
A survey of five major domestic brokerages showed most expect the Shanghai index to carry on rising in 2015 and peak between 3,500 and 3,600 points, although they expect it to fall back to 3,200 to 3,300 by year-end.
Earlier this year the government sought to talk up the market, with China’s official Xinhua news agency publishing nine articles in four days in August highlighting low stock valuations and the need to reinvigorate the market to “revitalise” the domestic economy and deepen economic reforms.
Authorities are looking to use the stock market to funnel funds to cash-hungry companies, especially private firms that often have difficulties securing loans as state banks prefer to lend to state-owned enterprises, according to analysts.
The government wants to turn the exchange “into a financing platform to breathe life into China’s economy”, said Central China Securities strategist Zhang Gang.
Officials also realise that rising stock markets are popular, with most investors being individuals rather than big institutional players, while a downturn in the domestic property market has heightened stocks’ appeal.
“The heat has built up in the market and that’s what the policymakers want to see,” said Shen of BOC International.
But the abrupt turnaround in market sentiment now has regulators warning of risk, and some analysts question how long the rally can be sustained, while Xinhua has reversed its previous stance.
“Beware of the mad bull stopping on the way for a rest and weigh the risks lurking behind the rapid rise of A-shares,” it said in a commentary this month, referring to stocks denominated in Chinese yuan and traded on the mainland.
December’s one-day correction came after authorities tightened the use of corporate bonds as collateral for short-term financing – a move that could curb investors’ ability to trade on margin – and moved to inspect brokerages’ fast-expanding margin trading business for irregularities.
But retail investors could stay for the ride for fear they will miss out on further gains, analysts said.
For 2015, Haitong Securities forecasts the Shanghai index will peak at around 3,500 before easing gradually to end the year at the 3,200 level, and its analyst Zhang Qi told AFP: “It may be that an advancing market will bring in more funds.”
Experts say they expect greater volatility in the coming year.
UBS Securities strategist Chen Li wrote in a research report: “Fasten your seat belts for a bumpy road ahead.”