18 October 2018
China's A-share market (left) still has an upside while the US stock market (right) may have peaked. Photos: Bloomberg, AFP
China's A-share market (left) still has an upside while the US stock market (right) may have peaked. Photos: Bloomberg, AFP

What differences between US, China markets tell us

There are some similarities in and differences between the bull markets in the United States and China.

(1) Both markets have rallied on the back of liquidity

The central banks in both countries have pumped massive amounts of money into the system, which has led to a red-hot equity market.

It’s obvious that the US market run-up is closely linked with the Federal Reserve’s quantitative easing (QE) program in the wake of the 2008 financial crisis.

However, why has the US market continued to rise and even set new records after the Fed withdrew QE3 late last year?

In fact, the Fed has yet to fully exit from QE.

It can still use the principal from maturing bonds to invest in the market, so the balance sheet of the Fed remains at a high level.

Nevertheless, the peak of the Fed’s maturing debt investments will come in the third quarter of this year, and by then money flowing into the market will start dwindling.

And the Fed has indicated that it’s on track to raise interest rates in the fourth quarter.

That could trigger a long-awaited market correction.

Meanwhile, Beijing also keeps pumping money into the system to stave off an economic slowdown.

The question is how far the Chinese central bank can go, given that the leverage of non-financial institutions has already reached historic levels.

Anyway, monetary easing measures are likely to push up A shares further.

(2) The US is enjoying a long-lasting market rally

The mainland’s A shares started to soar in mid-2014, and over the last 11 months, they have posted a whopping gain of 163 percent from the year before.

By contrast, it has taken more than four years for the US market to post a similar run-up.

There are two key reasons for the sharp gains in A shares.

First, the mainland market is dominated by retail investors; second, there are limited short-selling tools.

However, Shanghai-Hong Kong Stock Connect and the expected Shenzhen-Hong Kong Stock Link might improve the investor mix in the mainland market.

But the process takes time, and Beijing faces challenges in making the bull market a long-lasting one.

(3) US stocks are supported by fundamentals.

Apart from massive capital inflows, the QE program has created super-low interest rates, considerably reducing the financing costs for US firms and leading to a great number of share buybacks.

As a result, the US market rally has accompanied earnings growth most of the time since 2009.

However, we’ve seen signs of falling earnings and fewer share buybacks among companies in the S&P 500 index, and that could be a turning point for the US market.

Looking at the mainland market, earnings per share has kept falling despite the Shanghai Composite Index surging since mid-2014.

That means the market rally has not been driven by improving earnings growth.

If so, can the market rally be sustained for long without earnings support?

(4) Both markets have reached record-high levels of leverage

Investors’ risk appetite continues to expand in both markets in light of the continuous rallies.

At the end of April, outstanding trading margin set new records in both markets.

Nevertheless, high leverage does not necessarily lead to a market correction.

However, if the market does correct, it could occur in a dramatic way because of it.

(5) China’s markets have not yet peaked

Technical analysis of the 50-day average and 200-day average shows that the US market rally has seemingly run out of steam since early this year, while there is further upside for A shares.


The A-share market may rise further in the second half, but risks are also growing with the overvaluation of stocks.

If the US market continues its recent sluggish performance or even enters a bear period, it cannot be ruled out that China’s stock market will be dragged down with it.

This artice appeared in the Hong Kong Economic Journal on June 4.

Translation by Julie Zhu

[Chinese version中文版]

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Hong Kong Economic Journal chief economist and strategist

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