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Asia Markets
China Stock Surge Stokes Fears
From the Wall Street Journal of Wed, 03 Dec 2014 13:55:53 EST
High rise buildings tower above downtown Shanghai. The city’s main stock benchmark is up 31.4% this year, even as China’s economy falters.
High rise buildings tower above downtown Shanghai. The city’s main stock benchmark is up 31.4% this year, even as China’s economy falters. Agence France-Presse/Getty Images

SHANGHAI—Trading volume in China’s stock markets surged to a record Wednesday, but the recent rally has also revived memories of the kind of frenzy seen before the market cratered in 2008.

The Shanghai Composite Index has climbed 3.6% this week and 31.4% so far this year, with a large chunk of the gains coming in the past month. A 0.6% rise in the market on Wednesday was the ninth gain in 10 sessions.

The benchmark index is on track for its best performance since 2009, topping gains in most other global markets. Shenzhen’s benchmark has advanced even further, adding 37.4% so far this year.

“The current rally is mostly speculative in nature and is driven by liquidity. The risk is that it rises fast but falls fast too,” said Yang Delong, a fund manager at China Southern Fund Co. which manages $32 billion in assets.

One of the biggest worries is a record number of Chinese investors who are borrowing money to finance highly leveraged bets in the stock markets. If stocks were to fall, those investors could be left with hefty losses and any race to the exit could accelerate the market’s decline.

Retail investors, who account for around 80% of China’s stock-trading volume, have shown a renewed interest in the market. Newly opened stock-trading accounts in China hit 370,071 last week, the highest level since the week ended April 1, 2011, when 419,947 accounts were opened, according to data provider WIND Info.

Combined trading volume on the Shanghai and Shenzhen markets swelled to an all-time high of 897.7 billion yuan ($146.0 billion) Wednesday, from 663.1 billion yuan on Tuesday.

The five-month-long rally has benefited from a confluence of factors, ranging from a surprise interest-rate cut to the launch of a trading link with Hong Kong’s stock exchange that grants foreigners unprecedented access to Shanghai shares.

But to many analysts, the speed of the Chinese market’s recent gains is incompatible with the country’s slowing economic growth. “This rally lacks a solid foundation of economic fundamentals,” said Mr. Yang, adding that the surge in the volume of margin trading in recent weeks points to near-term risks.

The outstanding amount of money investors borrowed for margin trading reached a record 840.24 billion yuan as of Tuesday, up from 697.59 billion yuan as of Oct. 31 and 344.58 billion yuan at the beginning of this year.

“The market is really looking feverish right now and it is faced with a big risk of correction in the near term,” said Hou Yingmin, a Shanghai-based analyst at AJ Securities.

The memory of the Chinese market’s last tremendous boom-bust cycle is still fresh. The Shanghai index hit its record high of 6124.04 on Oct. 16, 2007, followed by a steep drop to 1664.93 on Oct. 28, 2008. Wednesday, the index closed at 2779.53.

But not everyone is concerned.

“When the market is hot, people flock into it. The mood is really strong and you don’t want to be late,” said a 65-year-old retiree surnamed Wang, who was trading at an outlet of Everbright Securities in Shanghai.

“I know China’s economic growth is still sluggish but our stock market has never had anything to do with the economy to begin with,” he said.

—Amy Li contributed to this article.

Write to Shen Hong at hong.shen@wsj.com



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