Stock bull run goes against downward economic pressure
Stock markets on the Chinese mainland surged to new seven-year highs on Tuesday, with the benchmark Shanghai Composite Index approaching 4,000 points. But analysts have warned of the mounting risks accompanying the current stock frenzy.
The Shanghai Composite Index rose 2.52 percent to close at 3,961 points on Tuesday. The Shenzhen Composite Index, which tracks stocks on the Shenzhen bourse, jumped 2.1 percent to 2,124 points.
Over 100 stocks on the Shanghai and Shenzhen bourses surged to their daily limit of 10 percent on Tuesday, with stocks in sectors like banking and transportation leading the charge, media reports said.
The Hong Kong stock exchange was closed on Tuesday.
The Shanghai Composite Index has skyrocketed more than 20 percent since the beginning of the year. The stock rally has attracted greater interest. Over 1.66 million new accounts were opened during the week ending March 27, up 46.52 percent over the previous week, according to the latest data from the China Securities Depository and Clearing Company.
Analysts said that the recent easing in monetary policy as well as the lack of investment channels for investors are the major reasons behind the stock surge.
The central bank cut the interest rate on March 1 and lowered banks' deposit reserve ratio on February 5, which have partly contributed to the bullish market. The cooling real estate market, which has attracted huge investments in the past few years, has also made people turn to the capital market.
Some stock analysts expect the rally to continue on hopes that the central government may further ease the monetary policy to spur the economy. UBS said in a report on April 1 that the government is expected to further cut interest rates and the reserve ratio this year, since the Chinese economy still lacks momentum.
Citi Research projects a 12 percent rise to 4,500 points in the Shanghai Composite Index this quarter, US newspaper Barron's said.
Stock analysts said that the Shanghai Composite Index may exceed 4,000 points in the next few days, but at the same time, the risks are increasing as the markets are rising "too fast."
"Both individual and institutional investors are exposed to huge risks," Li Daxiao, director of research at Shenzhen-based Yingda Securities, told the Global Times on Tuesday, suggesting that it is not the right time for new investors to enter the market.
The Shanghai Composite Index peaked at 6,124 points on October 16, 2007. On October 28, 2008, the Shanghai Composite Index dropped to a low of 1,664 points, and the bear market lasted five years.
The current bull run started in June 2013, when the Shanghai Composite Index stood at around 2,000 points, analysts said, and in less than two years, it has nearly doubled to its current level of 3,961 points.
But unlike the stock rally before 2007, the current market leaps are inconsistent with economic fundamentals - China's GDP dropped to a 24-year-low of 7.4 percent in 2014 and is still facing downward pressure.
Dong Dengxin, director of the Finance and Securities Institute at the Wuhan University of Science and Technology, said that the bull run on mainland stock markets usually lasts around two years while the bear market usually lasts over 5 years.
"It [the 4,000 points] is close to the end of the run," he said.
Individual investors currently account for some 90 percent of transactions on the stock market, the China Securities Regulatory Commission said in a press conference on March 20. Though investors may be reluctant to withdraw from the capital market, they should be very cautious over potential risks, Dong noted.
Financial shares led the gains on Tuesday. In Shanghai, banking giant ICBC rose 2.29 percent to 4.47 yuan while China Merchants Securities jumped 5.95 percent to 34.91 yuan.
