Rough day for Hong Kong stocks, with the HSCEI down 3%. Foreign investors were big sellers of A-shares as the government lined up its pension funds and brokerage houses to defend the Shanghai Composite. Reorient Group’s weekly missive has a chart that sheds light on China’s stock-market roller coaster: It shows total lending growth in China spiking to nearly 60% in March just before the stock market peak.

Year-on-year lending growth in China spiked to 60% before stock market peak

“China is in a sense the victim of the strength of the consumer balance sheet. By our calculations the loan-to-value ratio for Chinese home mortgages is roughly 1:2, one of the world’s strongest, giving households enormous borrowing power,” the Hong Kong broker commented. The Chinese authorities can do whatever they want to limit the direct application of leverage by brokers, but they cannot prevent equity-rich Chinese households from using their borrowing power to buy stocks. There was a stampede into the market–as if the stock market gods were throwing 1000-yuan notes into the stadium from a blimp–and a stampede out.

The difference between China in 2015 and the US in 2008, of course, is that Chinese households are vastly underlevered while US households were vastly overlevered. Down payments on Chinese homes range from 30% for a first home to 50%-70% for a second home. China’s banks have increased their Tier I capital by issuing $110 billion of preferred shares last year, and the major banks seem able to handle NPL reserves out of earnings.

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