There are positives and negatives about debt fuelled stock market rallies. They make people happy because they go up in a straight line most of the time. The bad news is, when there is a down day, it’s a nasty one.
In China, the Shanghai Composite index is up 112 percent over the year, which pretty much fits the straight line criterion. It has benefited from central bank liquidity and lax margin lending requirements. So the Chinese public has flocked to invest in stocks, opening 3.25 million new brokerage accounts in one week of April alone. They have borrowed a record $290 billion to buy stocks.
“If you look at the new accounts opened and the Shanghai Composite, they pretty much go line in line,” says Peter Tchir of Brean Capital.
The problem is, if there is a down day, it’s going to be a nasty one, and often it only takes a little bit of bad news to necessitate it. On Tuesday, some banks have reportedly tightened margin requirements, according to Shanghai Securities News, and the Shanghai Composite promptly dived 4 percent. Property was hardest hit, falling 8 percent after a three-month 52 percent winning streak until the end of April.
