Uddrag fra Zerohedge
On Tuesday, when we profiled China’s semiconductor giant Cambricon which we said is now better known as “China’s Nvidia”, we said that after doubling in the past 3 weeks, it was about to explode higher. And that’s exactly what happened because two days later it is up another 20%, meaning some enterprising trader could have made their entire year in the past 48 hours.
The bigger picture, of course, is that Chinese stocks have been on a historic tear, and as we observed one week ago, “China Stocks Hit New 10 Year High, On Verge Of Historic Breakout.”
And considering the explosive surge in Cambricon not to mention dozens of other names, and the SHCOMP itself, it is hardly surprising that one of the most popular questions across Wall Street’s trading desks is whether the Chinese liquidity-driven (because it certainly is not due to fundamentals) rally can continue. According to Goldman, the answer is a definitive yes.
Starting with the latest comment by Goldman trader Bella Chong, she notes that China total trading volume yesterday was 3 trillion Rmb, having made it the 4th day to trade above 3tr in history, and the 12th consecutive day in which trading volumes surpassed 2tr, the longest stretch in history. The volume is 6% lower vs. the day prior but still 87% higher than July ADTV which was 1.6tr Rmb.
Additionally, and confirming our view that China is now fully swept up in another stock bubble, CSI 300 ETFs traded 10.7bn Rmb on Thursday, while the July daily average was 6bn Rmb so 78% higher than normal days. Goldman is expecting more active trading in TMT today after Cambricon made a warning overnight to deny the chatter and frenzy trading of its stock (which will at best only delay its continued explosion higher).
What about the bigger picture? Well, as Goldman’s China strategist Kinger Lau writes, “the summer breakout for Chinese equities has gained momentum in the past 2 weeks, with A-share large and small caps surging 8% and 10% since August on record volumes, and H shares making new year-to-date/4-year highs in 2 out of the past 5 trading days.”
Remarkably, the rally has manifested against a backdrop where macro statistics are showing signs of “cyclical softness” and consensus profit revisions are muted, prompting investor questions about the durability of this liquidity-driven rally. Well, it will hardly come as a surprise to anyone that nobody gives a rat’s ass about fundamentals, and even Goldman notes that “liquidity” has boosted equity returns globally, and with:
- (i) China equity multiples at mid-range levels,
- (ii) trend profit growth running at high-single-digit pace,
- (iii) A-share retail risk appetite only moderately above neutral territory on Goldman measures,
- (iv) far-from-extended fund positioning across investor types, and
- (v) strong potential for asset reallocation flows to equities…
… the Goldman strategist believes “the uptrend has legs notwithstanding near-term profit taking pressures.” He notes that key risks are abrupt market liquidity tightening, regulation shocks, and macro policy disappointments, which have tended to derail most flow-powered equity booms historically. In other words, the bubble will go on until it bursts.
Below we excerpt from Kinger’s full note, available to pro subs in the usual place:
- A slowing economy, but rising stock markets. Macro datapoints have exhibited signs of growth fatigue starting in July, after surprising investor expectations to the upside in the first half of the year, helped predominately by the resilient export market. GS economists expect that, with the full-year official growth target of around 5% more or less within reach, sequential growth slowdown is going to prevail in the remainder of 2025 considering the likely payback of front-loading exports and the lack of (and low urgency for) aggressive and large-scaled policy stimulus. In the listed universe, consensus earnings revision trends have stalled in recent months, consistent with the broadly pedestrian 2Q/1H earnings results so far in this reporting season.
- Policy has instilled optimism and reflated valuations. MSCI China and CSI300 have gained 27% and 11% ytd, mainly on multiple expansion. Goldman ascribes the valuation recovery to a number of policy (related) events and positive catalysts that have materialized in the past year, namely the policy pivot in September last year that took out the left-tail risks in Chinese equities, the “DeepSeek Moment” in late January that has rewritten the AI/Tech narrative for China, the POE Symposium in February which suggested that the regulatory tightening towards the private economy is probably over, the de-escalation of US-China trade tensions since late April, and the CCFEA meeting in early July where President Xi called for more rational competition, and the anti-involution rhetoric has triggered a reflation trade in the financial markets. The common trait of these events is that they are helpful in compressing equity/policy risk premium and shoring up forward earnings expectations, although the immediate earnings impacts are likely limited.
- China is not alone — liquidity-driven market gains are happening globally. Among the top-10 equity markets across DM and EM (ex-China), which account for over 90% of total market capitalization globally, 8 are currently trading at or close to their all-time highs in local currency terms and are priced at the top-end of their respective valuation ranges. For comparison, China Offshore and A shares are 34% and 26% below their ATHs recorded in 2021. Furthermore, the divergence in performance between the real economy (proxied by GS CAI) and financial economy (based on local market equity returns) seems to be manifesting across major equity blocs around the world, with the macro-market correlations for China and the US falling to the lowest level since 2021 and 2020. This suggests that liquidity factors and valuation expansion, as opposed to cyclical macro fundamentals, have been the main propeller of equity gains globally, China included.
- Which sentiment inning are we in for China A? The risk-on in A shares has dominated Goldman’s client conversations of late. The trading stats and headlines are indeed eye-popping: Shanghai Composite is now at a 10-year high, retail margin financing balance is approaching its 2015 peak of Rmb2.3tn, and cash turnover has surpassed Rmb2tn for 12-consecutive days, the longest in history. All these may paint a picture that onshore risk appetite is extended and speculation risk is rising, and therefore have drawn comparisons to previous boom-bust episodes. However, Goldman’s proprietary A-share retail sentiment proxy, a comprehensive risk-appetite indicator which encompasses 11 distinct variables centering on flows, allocation, and speculative length, suggests that while investor sentiment has improved in recent weeks, it’s nowhere near the euphoric levels observed in the 2015 leverage-fueled surge and the Sep 2024 policy-triggered upswing. If retail risk appetite were to return to the 2024 and 2015 peaks, CSI300 would trade at 5180 and 5870 respectively (+18% and +34% vs current), assuming the sensitivity between our sentiment measure and index returns stays constant.
- What could go wrong? Historically, high equity multiples, on a standalone basis, seldom mark the turning point of major flow-driven equity booms, but it’s rather policy shocks in the form of abrupt market liquidity tightening (i.e., the off-balance-sheet leverage curb in 2015), regulation changes (regulatory crackdown on property developers and POEs in 2021), and policy disappointments (e.g., post the Sep 24 policy pivot) that were responsible for reversing the bull runs. Given the increasing strategic importance of the stock market to the economy in terms of allocating resources, funding new productive growth drivers, and creating wealth and positive sentiment for Chinese households, Goldman believes the likelihood of a policy-engineered equity downturn is low unless there is clearer evidence of valuation excess and rampant speculation emerges.
