Mainland investors watched agape as the stock market skyrocketed in the past two months.
The Shanghai Composite Index closed at 4,135.57 on Tuesday. In early February, the benchmark was hovering around 3,000.
Without the slightest hitch, the market chalked up a 1,000-point gain. Last time the market hit 4,000 was seven years ago.
Meanwhile, the Hang Seng Index roared to new highs on the back of the rally across the border, creating a mix of excitement and caution about how all this will play out.
Still, hordes of latecomers continue to rush in.
Since late March, three million new securities trading accounts have been opened, according to figures from China Securities Depository and Clearing Co. Ltd.
Many more are coming on stream thanks to migrant workers and housewives who have been jumping aboard the bandwagon.
The optimism is tempered by growing signs the market is overbought and that a sharp correction could come anytime soon.
After the Shanghai benchmark punched through 4,000 this week, some mainland investors began to talk about exiting the market or shifting funds to markets with lower valuations such as Hong Kong.
But overall, there is more euphoria than caution.
Some brokers are claiming they can turn 100,000 yuan (US$16,094) into a million in five years. An analyst at Huatai Securities sees the Shanghai benchmark at 10,000 in the forseeable future.
What’s driving this frenzy — or craziness?
One theory is the mainland stock market is riding on pent-up demand after years of sluggish trading.
Another is that the Chinese government wants a stronger stock market. Investors are betting on this theory given the policy-driven nature of the mainland market.
Also, President Xi Jinping wants a buoyant capital market to rekindle growth. A stock rally brings a certain “wealth effect” that can drive consumer spending.
In short, this is Xi’s market.
State media is doing its part in fueling the rally.
Last week, the official Xinhua news agency ran a second editorial about the market rally in which it described stocks as “halfway uphill” to a new peak.
People’s Daily said “a bullish stock market is essential to economic development”.
More than 1 trillion yuan sloshed through the system in February alone amid monetary easing, creating expectations that the rally has enough steam to last until the end of the year at least.
Last Wednesday, the official daily quota for Shanghai-Hong Kong Stock Connect ran out for the first time.
That triggered a wave of “unofficial” flows into Hong Kong, with people bringing in cash from across the border or converting yuan and remitting the proceeds to Hong Kong via underground banks, especially during the long Easter holiday, according to The Economic Observer.
Some fund managers reportedly encourage clients to come to Hong Kong and open domestic accounts to bypass the quota.
Many local security dealers have been holding roadshow-like promotions in Shenzhen.
Alibaba’s Taobao, the Chinese eBay, is charging 1,500 yuan to open a Hong Kong account for mainlanders.
Shadow A shares have become a red-hot concept, with mainlanders chasing H shares that have A-share counterparts but priced at a discount.
The logic is simple: as long as A shares are on a roll, their H-share counterparts will continue to boom.
Some mainland brokers joke that the current southbound capital flow is like “advance troops”. The long march of Chinese capital will begin after mainland regulators allow public funds and insurance funds to invest in cross-border stocks.
The highly anticipated Shenzhen-Hong Kong link is a step closer to reality amid calls to expand the cross-border trading quota and scrap a 500,000 yuan asset threshold.
That prospect has prompted some mainland scholars to predict that Chinese capital will ultimately change the rules of the game in the Hong Kong market.
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