Shenzhen Stock Exchange Up Almost 50% Since Start of Year

Despite the fact that the Chinese economy seems to be slowing down, Chinese market indexes, including the Shenzhen Stock Exchange Composite Index and Shanghai Composite, continue to go parabolic.

The Shenzhen Stock Exchange Composite Index, which, much like the NASDAQ in the United States, contains a mix of tech and media firms, is up almost 50% in 2015. The Shanghai Composite, which contains a broader range of companies, is up over 22% in 2015 and has nearly doubled over the past year.

The frantic upswing in China's stock market is due to a number of reasons, including:

1) Investors are betting that China will take stimulus action in order to boost the economy. As we saw in the United States, policy easing usually leads to strong gains in equities as investors are forced to move out of bonds and into stocks in order to secure decent returns. Interest rates are expected to fall further in China this year.

2) Stock market mania. Remember when the NASDAQ was soaring in 1999-2000 and everybody was suddenly a trader? The same thing is happening in China right now as there is a full on mania going on. Many Chinese citizens are dumping their real estate holdings to enter the stock market. According to reports, more than 170,000 new stock trading accounts are being opened every day in China, far exceeding last year's pace. Nobody wants to miss out on any gains - in fact, there have been reports that over 5% of the people who are opening new accounts in China are illiterate.

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Stock market manias never end well - just ask investors in Japan in the late '80s or investors in the United States in the early '00s.

Speaking of Japan, many people are pointing to the similarities between Japan in the late 1980s and China in the present day. Many people moved out of real estate in Japan in the mid-to-late 1980s in order to pile into the stock market - the Nikkei 225 soared from 10,000 to almost 40,000 in just a couple of years.

The question now becomes - how high will the Chinese indexes soar before the bottom inevitably falls out?

Filed under: General Knowledge