**Market Surge in China: A New Era or a Familiar Bubble?**
As China’s stock market surges, analysts are weighing in on whether this newfound optimism is a sign of a sustainable upswing or a fleeting bubble. The Shanghai Composite Index soared over 8% on Monday, with trading volumes reaching a record high of 2.59 trillion yuan ($368.78 billion). This surge is being fueled by stimulus hopes and a series of economic support measures announced by the government.
While some see parallels with the 2015 market bubble, others argue that this time around, the market hasn’t run up as much, and leverage is lower. Aaron Costello, regional head for Asia at Cambridge Associates, notes that “we’re not in the danger zone yet.” However, he also cautions that the economy faces greater headwinds now compared to 2015.
The latest market gains follow announcements of economic support and programs to encourage institutions to invest in stocks. Chinese President Xi Jinping has called for halting the real estate market’s decline and strengthening fiscal and monetary policy. The People’s Bank of China has also cut interest rates and reduced mortgage payments for existing holders.
Despite the optimism, some experts warn that one week of massive stock gains do not necessarily mean the economy is on its way to a similar recovery. The CSI 300 remains over 30% below its February 2021 high, and economic data point to slower growth in retail sales and manufacturing.
Stephen Roach, senior fellow at Yale Law School’s Paul Tsai China Center, draws parallels with Japan’s experience in the 1990s, where the Nikkei 225 Index bounced four times before ultimately dropping 66% over nine years.
Others argue that the key to sustained growth lies in addressing local government finances, which have historically relied on land sales for revenue. While authorities have cut interest rates and eased home buying restrictions, the Ministry of Finance has yet to announce additional debt issuance to support growth.
As the market continues to rally, experts caution that the level of fiscal stimulus may not meet market expectations, and the stock trading system may not be prepared for the surge in buying. With earnings per share forecasts stabilizing and lower U.S. interest rates supporting gains, some see room for further growth. However, others warn that without a fundamental improvement in corporate earnings, this rally may be short-lived.
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