Chinese Stocks Just Reversed All Of Monday's Epic Collapse

Shanghai stocks collapsed by 7.7% on Monday, as the government cracked down on major brokers offering leverage to their clients. It was the biggest one-day drop in Chinese equities since 2008, and for any other stock index, that might take some time to recover from.

But not in Shanghai. During trading Friday, the stock index erased those losses, after just four days.

The index closed up 0.30% on Friday, slightly below its open this week, but it pushed above 3,338, breaking to a fresh five-year high during the day.

Here’s how that looks:

Nobody predicted Chinese stocks would bounce back quite so quickly, but Morgan Stanley did stick to its guns and argue that the bull run in equities wasn’t over. Here’s what their economists said in a note after Monday’s crash:

The twin underlying drivers of the recent bull trend in our view remain intact. They are: a) reduced returns on alternative investment assets (property, wealth management and trust products and bond yields), and b) the government’s desire to promote development of the equity market as part of the Third Plenary reform agenda.

They have also got a great chart showing that Shanghai’s price/earnings ratio, a common barometer of how cheap or expensive stocks are, is still very low by the standards of the last 15 years. It’s nowhere near the bubble territory seen just before the financial crisis in 2008:

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