Chinese stocks have staged an impressive rally, outperforming every other national index in the world in the first quarter of 2019. The CSI 300 Index, which covers the biggest equities in Shanghai and Shenzhen, has gained nearly 30% in 2019, its best quarterly performance since late 2014.
Investors have cheered up after last year’s 25% slump. Beijing has decided to tackle the economic downturn by encouraging more bank lending, while tax cuts and spending increases should bolster growth too, as Standard Chartered points out. The bank expects the Chinese business cycle to bottom out in the first quarter of this year.
That implies further upside in the market bounce as earnings gradually improve. Reasonable valuations also bode well, as Stanley Chan of Hong Kong brokerage Emperor Securities told the South China Morning Post. The inclusion of more Chinese shares in the MSCI Emerging Markets Index will also boost prices.
“Now comes the time to pour cold water,” says Bloomberg’s John Authers. Investors should tread carefully. Domestic Chinese stocks are prone to bubbles. The market is dominated by herdlike retail investors and the government also tends to interfere and push it “too far in both directions”. With liquidity being injected into the system again and margin lending on the rise, we could be in the early stages of another mania.