China stock mania generating debt bubble
April 27, 2015 Category Stock Markets, Weekly
China’s current stock market craze is generating a debt bubble estimated at CNY1.6 trillion to CNY1.7 trillion. Analysts have expressed alarm at the huge level of borrowings by retail investors to buy shares, warning they may suffer if a likely correction hits. Over the past 12 months, the Shanghai Composite Index (SCI) has doubled to record levels not seen since 2008. Since March, the SCI has risen by roughly a third. “Worryingly, leverage has also risen over the course of this rally. Margin loans outstanding in Shanghai and Shenzhen reached CNY1.6 trillion, two and a half times higher compared to six months earlier,” according to a Barclays report. “It pays to err on the side of caution. China retail investors opened nearly 5 million trading accounts in March alone, a stampede that has continued into April. A survey by China’s Southwestern University of Finance and Economics found that two-thirds of new investors last year did not complete high school. Hence, there are valid concerns that these risky bets could turn sour for these inexperienced retail investors, thereby disrupting the current rally,” Barclays explained. Goldman Sachs estimated margin financing is now equivalent to 1.6% of China’s GDP last year. A Macquarie Research report added: “A-share margin positions have reached levels that exceed historical bubble peaks elsewhere. Yet it very well might go higher,” the South China Morning Post reports.
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