Six Charts to make you Suspicious of the Chinese Equity Market Rally

While equities around the world are getting severely hit this December, one market stubbornly rallies on. For the Chinese stock market lower oil prices, the demolition of Russia, and the political tensions in Greece do not seem to matter for now. With a housing market that is slowly deteriorating, the Chinese now try their luck in equities . But, here are six graphs that should make you at least a little wary of the massive rally that is going on.

  1. Chinese stock prices have diverged from economic fundamentals.

Click to Enlarge


Manufacturing PMI’s are one of the few macro-economic statistics that are (positively) correlated with stock market returns. The chart above shows that even though the Chinese PMI has been lackluster at best, equities have staged a massive rally. YoY stock prices are up almost 45%, while the PMI has been going down in recent months.

  1. Chinese stock prices have diverged from liquidity measures.

Click to Enlarge


China is a good example where excess liquidity often ends up in the stock market. But money supply growth has been slowing for almost two years now. In recent months the deceleration of money growth has strengthened. Yet, stocks have soared. I admit, it looks like China is bound to add more liquidity into the markets, but for now the divergence remains impressive.

  1. Chinese stock prices have diverged from signs of overcapacity.

Click to Enlarge


One look at the ratio of investments to GDP will underpin that most of China’s stimulus was aimed at (fixed asset) investing. More roads, more airports, but also more factories and production plants. Producer prices can function as a sign of (potential) overcapacity, and they have been going down for 32 consecutive months. In recent years the Shanghai Stock Exchange has, to a certain extent, mirrored the movements of the PPI as overcapacity is damaging company earnings. But the two have definitely diverged in recent months.

  1. There is no E in the PE

Click to Enlarge


The PE ratio of Chinese stocks has risen about 40% since early August, which is roughly the same as the return on Chinese equities during the same period. Hence, the recent rally in the Chinese stock market is almost fully explained by a rise in prices, resulting in a significant higher valuation. To make things worse, on a relative basis, compared to the MSCI world Index, Chinese stocks have become even more expensive (50%).

  1. There really is no E

Click to Enlarge


Just to be sure, I looked at the Chinese earnings separately. And the view is not all that comfortable. Earnings have been pretty flat for years now, and from the beginning of this year it’s hard to detect any trend in earnings at all. Earnings growth seems absent.

  1. Chinese stock market prices have NOT diverged from new stock market accounts.

Click to Enlarge


The one statistic that Chinese equities did track is the number of new stock market accounts that have been created. I guess if you were not already a bit suspicious until now, this will do it, right?

2 responses to “Six Charts to make you Suspicious of the Chinese Equity Market Rally

  1. Pingback: Week End Blog – Yellen to the rescue! | Jeroen Blokland Financial Markets Blog·

  2. Pingback: News: Real Estate, Risk, Economics. Jan. 20, 2015 | PropertyPak·

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s