China’s stock markets now among the largest in the world; meteoric rise causes concerns

In April, the daily trading volume of the Shanghai stock exchange exceeded 1 trillion yuan (€150 billion), making it the world’s busiest stock exchange. The turnover volume in Shenzhen now exceeds that of New York’s exchanges, making it the second-most-traded exchange. In terms of market capitalisation, at the end of 2014, the mainland China stock markets were the largest after the United States. In April, the Shanghai stock exchange alone surpassed the Tokyo stock exchange as the world’s third largest after the NYSE and Nasdaq. The market value of mainland China stock markets is now nearly 90 % of GDP, over double that of 2013.

Share prices are up about 120 % over the past year. The average price-to-earnings ratio (P/E) of shares has also more than doubled: to 23 for Shanghai and 52 for Shenzhen. Some company P/E numbers are very high. Observers note that the prices of China’s technology shares are now double that of US prices during the IT bubble.

The China Securities Regulatory Commission (CSRC) has this year already approved listings of 123 firms (compared to 125 new listings for all of 2014). The current approval process is complicated and hundreds of firms await listing approvals. The National People’s Congress is currently considering changes in securities law so that, instead of official approval, only registration would be required and exchanges could themselves determine which firms go on the market.

Observers now question the sustainability of the recent rise in stock prices. Higher share prices allow companies to raise capital at lower cost than on the debt markets. However, there are more and more small investors on the market, for whom the consequences of a drop in prices would be more severe. The conditions for buying shares on credit have been tightened a bit, but it has not significantly slowed the growth in buying shares on margin. On the other hand, short selling of shares has been made easier.

Stock market trends in mainland China

Source: Bloomberg