The Shanghai Stock Exchange Composite (SHCOMP) increased by 4.31% today reaching a record of 2,899.46, a high not seen in the last three years.
Today’s figure was extraordinary in the sense that such a one-day rise was last seen in December 2012, but was also part of a larger move by the index that completed a 37% increase since the beginning of the year, including a 15% gain in the past ten days alone.
The reason for the rise in the index are the recent incredible trading volumes on the exchange. In the last couple of days, the trading volume at the Shanghai exchange topped at ¥530 billion (about $81 billion), more than double the average for Shanghai and more than triple of the New York stock exchange for the same time.
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Naturally, such a frenzy of activity leads to many commentators in China warning that this can’t be anything else but a stock bubble, especially as China’s real economy is slowing down. Retail investors, responsible for about 80% of China’s volume, are said to be opening trading accounts at record levels and borrowing funds from the banks to speculate on stocks. As a general rule, when the man on the street is leveraging to buy into the market, the bubble is ready to burst.
However, those who believe that the rally is justified claim that a surprise interest rate cut, as well as the launch of a trading link with Hong Kong’s stock exchange providing unprecedented foreign access to the mainland Chinese securities markets, are the driving forces behind the rise.
We shall soon see if the record holds or not. The last time the SHCOMP index jumped 15% in 10 days days was in October 2010 when the government pledged to boost household incomes, and economic indicators showed stronger growth. The following month, the index corrected by 3.8% and was still down 11% after a three month period.