- The Chinese stock market could be heading for another bubble with the CSI 300 index recently hitting a five-year high.
- A robust service and manufacturing PMI, backed by central banks policies to maintain credit balance and media house calling for a bullish market, has fuelled the stock market to a new level.
- 5G rollouts, technology and automation advancements have pushed the tech-based ETFs to record highs.
- The Chinese government is also augmenting the technology sector by announcing investments worth US$1.4 trillion in technology infrastructure until 2025.
Media influenced investors have augmented the Chinese stock market to a record high in the last five years, signalling a warning regarding a repeat of the 2015 bubble. The boom in the Chinese stock market has also influenced various global stock markets to end higher in during their respective trading sessions.
CSI 300 has gained almost 12% in the past five days and ended at 4,840.77 on 9 July 2020. The current stock market gain has been significant with a considerable chunk of the CSI 300’s shares ending the session in green. The investments in stocks by retail investors have been financed through margin loans from the brokers. According to Bloomberg, margin loans offered by brokers to their clients to buy stocks also increased to a level last seen in 2015. The rise in margin loan backed investment also exposes the client towards the risk of losing heavily once the share market bubble bursts. In 2015, when the bubble burst, the market collapsed by 40%, representing a loss worth US$5 trillion of value. However, the current economic backdrop has altered with the number of traders significantly less than in 2015.
Retail investors propelled the stock market backed by an optimistic attitude towards the Chinese economy and the need for a bullish equity market, as indicated by a Chinese media house. China registered a positive service PMI and factory output in May and June, demonstrating a recovering economy. China’s June Caixin services PMI experienced a ten year high at 58.4 from 55 in May. Another reason that drove the price rally is investors’ preference for investing in stocks because of higher returns which Chinese wealth management products lack because of low interest rates. The rising level of margin financing also drove the onshore equities market. The central bank is also relaxing lending policies for sustainability of economics.
Despite the resurgence in COVID-19 cases, the market participants remain bullish propelling the stock market backed by strong government intervention through grants and policies to keep fostering the economy.
Technology, Automation, 5G & Cybersecurity heating up in the stock market
Buyers are betting heavily in the tech arena with tech-based ETFs such as the First Trust Cloud Computing ETF (SKYY), the Global X Social Media ETF (SOCL) and the First Trust Dow Jones Internet Index Fund (FDN) recording new highs. The confidence in tech stocks appears to reflect China’s push for technology in the coming years.
Government funding for technology
The technology arena is receiving a boost from President Xi Jinping himself with an estimated US$1.4 trillion to be invested for technology infrastructure till 2025. The President is urging urban governments and private tech giants like Huawei Technologies to deploy fifth-generation Internet of Things based products such as wireless networks, cameras and develop AI software to promote automation in driving and factories. Apart from AI and IoT, ultra-high voltage lines and high-speed rail will also be a part of the infrastructure boost.
The move, in alignment with the Made in China 2025 program, will drive local giants such as Alibaba and Huawei and SenseTime Group to compete at the same level as US companies and will enable China to use domestic technology and be less dependent on foreign technology.
The government is set to announce US$563 billion worth of infrastructure funding in 2020 in which some of the biggest cloud computing and data analysis players like Alibaba Group Holding Ltd. and Tencent Holdings Ltd. will play a pivotal role.
Current Initiatives in 5G
China telecom operators are fast-tracking their 5G installation and establishing 5G as a pillar of economic recovery once the pandemic subsides. While many countries in Asia and Europe with 5G planned to be rollout has stalled their progress because of the Pandemic, China is encouraging the rollout plans without paying heed to the pandemic. China’s three telco giants, China Mobile, China Telecom, and China Unicom, are speedily trying to achieve their deployment targets to install around 600,000 5G base stations by the end of September 2020.
While China Unicom is yet to disclose 5G estimates, China Mobile and China Telecom have about 15.4 million and 10.7 million subscribers, respectively. As of now, the Chinese carriers have already installed over 160,000 5G base stations by Q1 2020.
China Mobile, which is largest telecommunications operator globally and leads in 4G coverage, has contracted Huawei, ZTE, Ericsson and China Information Communication Technologies to install over 232,000 base stations in 28 provinces and autonomous regions by September 2020.
Huawei has been boosting its 5G business significantly. The multinational tech giant secured 91 5G contracts in China and abroad over the next year. The company is already shipping parts and infrastructure equipment to support 600,000 5G base stations worldwide in 2020 alone.
Currently, China is second in the list of countries with 5G technology and has 57 cities with 5G coverage areas. Market-leader South Korea has covered at least 85 cities and towns with 5G since 2019.
There is no investor left unperturbed with the ongoing trade conflicts between US-China and the devastating bushfire in Australia.
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