The gyrations in the Chinese stock market have taken on a life of its own. The government is trying to place a floor on any decline and new investors are seeking to profit from a market that has exploded in the last year. These investors are not value players but stock newbies that want to ride momentum just like the real estate market a few years ago. The saving herds have moved from real to financial assets and the government is trying to provide some type of floor on loses.
There is no question that the move to higher levels is conditional on the large amounts of liquidity provided by the central bank. This liquidity has allowed for a high amount leverage like what we saw in the real estate market. Margin debt has marched in step with the market increase. In many ways, the government controlled real estate through managing the supply and liquidity. Now in the stock market, we are also seeing the government control leverage, supply, through stopping IPO's, and buying. We have seen this story before.
What is odd is the disconnect with fundamentals for the last year. While the 7% growth story has continued, the fundamentals do not suggest the size of the market surge. The liquidity story may be consistent with the surge no different than the asset price moves in other countries that have increased liquidity. Combined with higher pent-up demand, the liquidity increase moved with changes in sentiment from real estate to financial assets. With the decline in stocks, we have seen a pick-up in real estate demand over the last two months. It may be early to suggest a connection but it seems that there will be swings in demand between these two asset classes based on the ability to borrow and the sentiment of investors. This is a dangerous game since both are risky assets. Any surprise decline in growth may cause investors to search for a new safe asset when there is none to be had.
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