“The combined wealth created this year by the Shanghai and Shenzen markets could purchase all the property in London twice.”
That insane and amazing comparison came from UBS Wealth Management’s James Purcell on Friday. Try to grasp the scale of that. London, with a population of more than 8 million, and one of the most expensive cities in the world in terms of property, could be bought out by just the *gains* made in the first five months of 2015.
What’s more, “an investor would have needed to buy the Euro Stoxx 50 back in late 1996 to have equalled the price appreciation of Shenzen’s rally in the past five months.” That’s almost 20 years of accumulated gains, being outstripped over a couple of quarters.
Equity markets in China have been absolutely explosive recently. The Shenzen index has more than doubled in value since January began.
Purcell goes on:
The rally has not been fundamental. Earnings have actually fallen over this time period and the Chinese economy continues to deteriorate. What’s driven the rally instead has actually been Chinese authorities, who’ve given numerous supportive comments and also loosened monetary policy to provide greater liquidity to the economy.
The question we get asked is why are the Chinese authorities doing this? The answer is that they’re very interested in deleveraging their economy. By inflating stock prices, they make it a lot easier for companies to obtain equity rather than debt financing.
And when you look at a chart of corporate debt from researchers at Bank of America Merrill Lynch, you start to understand why:
The boom isn’t without a price — China’s stocks are now astonishingly volatile. Shares plunged by 6.5% one day last week. But the market bounced back quickly too. It took just a week for all losses to be erased.
At FT Alphaville there’s an ongoing idiom: “This is nuts. When’s the crash?” That would be a fair summation of this sort of thing.