Investments

Investors Fear China Stock Market Bubble Brought On By Gov't Stimulus To Combat Virus

A surge cap has triggered fears of economic repercussion in China.

A surge cap in Chinese stocks, fueled by the stimulus package from the government to combat the virus-riddled economy, has brought about fears of a repeat of the 2015 market crash, according to Reuters on Wednesday (Feb. 26).

China has been working hard to inject funds into the economy, which has seen itself crippled as the coronavirus descended. The government has cut interest rates and encouraged lenders to extend cheap loans to limit the fallout from the virus epidemic.

The epidemic has hit the country's manufacturers and retailers alike as people have been out of work and quarantines have come down.

But the surge cap saw Shenzhen's tech-heavy startup board ChiNext .CNT jumping 13 percent this month through Wednesday, and far outpacing a 1.7 percent gain in China's blue-chip CSI 300 index.

A broader index of shares saw companies such as ZTE and other startups gaining 14 percent.

Investors are suspicious. One of them, Shen Shikai, who manages money pooled amongst his friends, told Reuters, this was "already a bubble," and "a game of the greater fool." He pondered why stocks were trading so highly, given that the economy had been stalled and the first-quarter earnings of many companies would not be pretty.

ChiNext is trading at roughly 59 times last year's earnings, up from around 30 a year ago and 47 at the end of 2019.

In New York, meanwhile, the NASDAQ is trading at 26.5 times trailing earnings, according to statistics from Refinitiv.

Fan Huang, head of wealth management at Deutsche Bank (China), said the central bank's monetary easing was directly connected to the speculative activities of investors, per published reports. He urged investors in a blog post on Feb. 24 not to forget the lessons of the 2015 market meltdown, which saw $5 trillion in capitalization wiped off the Shanghai and Shenzhen markets, with ChiNext losing half its value within months.

Some, such as capital markets lawyer Li Shoushuang, urged the government to ease the market by introducing a capital gains tax on share trading.

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