China’s Stock Markets Hit All-Time High Valuation Of More Than $10 Trillion, But Remain Far Behind US In Size

China’s stock markets – buoyed by a remarkable recovery in the national economy during the COVID-19 pandemic and a strengthening yuan – hit an all-time high in market value at Tuesday’s closing.

The Financial Times reported that the market capitalization of all shares that trade on the Shanghai and Shenzhen stock exchanges reached $10.08 trillion – surpassing the previous peak of $10.05 trillion in June 2015 during a market bubble. (Just after that previous high, Chinese authorities cracked down on leveraged trading which had inflated equity prices. The markets plunged thereafter).

However, now analysts do not think Chinese stocks are facing a serious correction.

“Investors are looking for growth and finding it very scarce elsewhere, so they see an enormous amount of opportunity in China,” said Craig Coben, co-head of Asia Pacific global capital markets at Bank of America.

This year the benchmark CSI-300 index – which is designed to replicate the performance of the top 300 stocks on the Shanghai and Shenzhen exchanges – has jumped 17% year-to-date, nearly double the 9% gain of the S&P 500. In addition, the Shanghai and Shenzhen markets have attracted some $26.5 billion in funds from global investors.

On the economic front, China has shown extraordinary resilience – despite escalating tensions with the U.S.

In the third quarter, China's exports jumped by 10.2% on a year-over-year basis to 5 trillion yuan ($742.9 billion), while imports rose 4.3% to 3.88 trillion yuan ($576 billion) over that period.

“Compared to five years ago [during the Chinese market bubble] there have been some major changes,” said Bruce Pang, head of macro and strategy research at China Renaissance, an investment bank.

Pang cited that the use of margin lending to purchase stocks was far less common now than in 2015. (Margin lending refers to the practice of borrowing money to invest through the use of existing shares, managed funds or cash as security)

“Obviously the question that comes to mind is whether valuation is as bubbly as it used to be [in 2015] and the answer is no,” said Frank Benzimra, head of Asia equity strategy at Societe Generale.

Indeed, stocks on the CSI 300 index are now trading at less than 19 times trailing 12 months’ earnings – versus a comparable figure in excess of 40 during the frothy 2015 period.

Pang commented that volatility in China’s domestic equity markets has been lessened by the increased presence of foreign and institutional investors.

As of the end of June 2020, institutional investors owned more than 70% of the free float of all Chinese stocks, while foreign investors held about 5%. Retail investors held less than one-fourth of the shares, dramatically down from about 50% five years ago.

“Risk factors are actually controllable and manageable for the authorities,” Pang said.

Despite China’s strong growth, its stock markets remain dwarfed by U.S. equities – the total American market cap has a value of about $38.3 trillion, putting China at a distant second in the world.