In his “Investment Adventures in Emerging Markets” blog earlier this year, veteran investor Mark Mobius noted, “According to the Chinese calendar, 2015 is the Year of the Goat (or sheep), creatures that are typically peaceful in nature but can also be stubborn, while exhibiting herd-like behaviour.”
That year official began on February 19. And so far, the Chinese zodiac has completely nailed what’s going on in the Chinese stock market.
China’s mums and pops poured into the stock market at an accelerating pace during the weeks following the start of the new year. The total number of trading accounts in China has exploded by more than 25% over the past year to more than 170 million as everyone wants a piece of the action.
The stampede into the market has caused the Shanghai Composite to gain 43% since the Year of the Goat began, and has run the index to its best level in seven years. This is even after a crash we witnessed during the week.
The unprecedented gains have been fuelled by a herd-like behaviour that has seen both local and international investors gobble up shares at a frantic pace. And a lot of those investors and traders are betting on stocks with borrowed money, or margin. In the Reserve Bank of Australia’s May statement, the central bank warned:
“Outstanding margin positions in Chinese equities have more than quadrupled since early July 2014 to CNY1.9 trillion, equating to almost 9 per cent of the free float market capitalisation in China (compared with 2½ per cent for the United States and 1 per cent for Australia). Daily purchases using margin financing have increased tenfold over this time, and currently account for almost 15 per cent of turnover.”
The extent of the mania was apparent in the March China Household Finance Survey, which showed 5.8% of new stockholders are illiterate and more than 67% haven’t received schooling past junior high.
The size of the herd has grown to epic proportions now that international investors are piling in. On Friday, FT cited data from fund-flow watcher EPFR:
China equity funds took in $US4.6bn from overseas over the past week, according to data from EPFR released on Friday, more than double the previous high set in the second quarter of 2008. At that time, Chinese stocks were in the middle of long and painful downturn after the popping of the 2007 stock market bubble.
The Year of the Goat still has another eight months to go, leaving investors ample opportunity to get trampled by the herd.