Chinese Stocks Skyrockets on STIMULUS HOPES, European Stocks follow China’s Footsteps

Who says stocks are about economic and earnings growth? In today’s era of modern central banking, stocks have really been all about credit and liquidity expansion designed to rev up confidence (animal spirits) based on “hopes” from government’s free lunch magic.

It’s why bad news have become 'good news' for stock speculators. 

China's Shanghai index catapulted to new 3-year highs following today’s 3.1% surge.

From Bloomberg Businessweek: (bold  mine)

China’s stocks jumped the most in 15 months, sending the benchmark index to a three-year high, as a surge in trading boosted the outlook for brokerage profits and investors bet the central bank will ease monetary policy…

The Shanghai Composite Index (SHCOMP) advanced 3.1 percent to 2,763.55 at the close. Hong Kong’s Hang Seng China Enterprises Index (HSCEI) rebounded from the steepest plunge in nine months, adding 2.8 percent. Data yesterday showing slower-than-forecast growth in manufacturing increased speculation the central bank will follow up on last month’s cut in interest rates with a reduction in lenders’ reserve-requirement ratios.

See? Bad news (slower than forecasted growth) has now become fodder for manic bidding up of securities because the PBoC will come to the rescue (follow up on last month's interest rate cut).

The PBoC suspended sterilization via open market operations again yesterday which means allowing recently injected liquidity to stay within the system.

I’ve repeatedly saying here that the Chinese government has been engineering a stock market bubble. The reason for this could most likely be to camouflage her deflating property bubble, as well as, to find alternative avenues for overleveraged companies to access funds.

Here is what I wrote of the stock market veneer from China's deflating property bubble:

Given that the housing markets have been on a steep decline, the Chinese government hopes that by providing “gains” on speculative activities to retail investors in the stock market, such would create “demand” for housing, thereby cushioning the current pressures on the housing markets.

It figures that there could be a third reason: divert the average Chinese from shadow banking into the stock market.

From the Wall Street Journal:  (bold mine)

Chinese investors have long chased the best-performing assets. They dumped stocks to buy into a property boom before the global financial crisis, and when the housing market cooled about two years ago, they piled into high-yield but risky bank loans packaged as wealth-management and trust products…

But Beijing has been seeking to reduce use of these products. The trust industry, a pillar of the country’s large but poorly regulated informal lending system, has come under the spotlight in recent years after a few high-profile incidents when investors suffered losses from missed or delayed interest or principal payments…

“I used to buy some trust products with returns of more than 10%, but I have lost some money recently. I am staying away from that risky business and putting more money into stocks now,” said Ralph Lv, a 41-year-old retail investor in Nanjing in eastern China.

Sad to see how Chinese government’s financial repression policies have led the average citizenry to chase bubbles after bubbles— “dumped stocks to buy into a property boom” then “piled into high-yield but risky bank loans packaged as wealth-management and trust products” and now back to chasing stocks.

In short, desperate to generate returns from savings and given the few alternatives amidst a zero bound regime, the average Chinese has tacitly been goaded by government policies to gamble their savings away. 

Also the average speculators have known to leverage their bets on the stock market, so Chinese debt problem will likely surge, perhaps shifting from shadow banks to brokerages and financial houses. So China's debt problem will only balloon.

Again the Wall Street Journal

Such a speculative mentality is evident within the stock market itself. In contrast to the losses last year on the blue-chip-heavy Shanghai bourse, the ChiNext board, the Nasdaq -style marketplace for startup firms on the smaller Shenzhen stock exchange, rose 83% last year as investors piled into more volatile tiny stocks. The Shanghai index fell 6.8% last year.

The idea that the 21st century will be a China century will only be a dream if current bubble blowing policies will continue. The Chinese have been consuming or depleting their savings from chasing bubbles after bubbles.

In today’s actions, it’s not just Chinese stocks. European stocks have been up (as of this writing) reportedly for the same reason as the Chinese: expectations of bailout.

From the Bloomberg (bold mine)

European stocks rose, snapping two days of losses, amid an increase in mergers-and-acquisitions activity, and as investors weighed stimulus prospects before the European Central Bank meets this week.

The Stoxx Europe 600 Index added 0.4 percent to 346.95 at 8:07 a.m. in London. The benchmark gauge lost 0.5 percent yesterday as a decline in oil prices, and factory data in China and Europe stoked concern about slowing inflation and global growth. The gauge gained 3.1 percent last month as ECB President Mario Draghi said the lender may broaden its asset-buying program to include government bonds, while central banks in Japan and China boosted stimulus measures.

The ECB’s next policy meeting is on Dec. 4. More than half the economists in a Bloomberg survey expect the central bank to buy government bonds if it expands its stimulus program.

Good news—stocks go up. Bad news—stocks also go up. Stocks can only go up forever. 

That’s if you believe in the fantasy called "free lunch".