(Bloomberg) — Investors should brace for China’s biggest stock rally in 16 years, which will eventually turn into a crisis with the economy on much weaker footing than before the pandemic, Nomura Holdings Inc. said.
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In the bleakest scenario, “a stock market mania would be followed by a crash similar to what happened in 2015,” economists led by Ting Lu wrote in a letter to clients on Thursday. That outcome could have a “much higher probability” than more optimistic scenarios.
China’s benchmark stock index posted its biggest gain since 2008 on Monday, entering a bull market after a series of measures to boost growth in an ailing Chinese economy. Since then, onshore markets have been closed for holidays.
The Hong Kong benchmark Hang Seng Index rose for a 13th day on Wednesday before falling lower on Thursday. Optimism remains high that the rally will be different from previous short-lived rebounds, with a growing number of global money managers becoming bullish on the market. But Nomura is not convinced.
“Although investors can still enjoy the boom for the time being, a more sober assessment is needed,” the bank said.
The economy’s vulnerabilities stem from nearly four years of a housing crisis, much higher local government debt, escalating geopolitical tensions and other factors, Nomura said.
Should the rally turn into a bust, worse could follow, with Beijing potentially resorting to money printing, the bank said. In that case, capital flight is likely to become rampant and the Chinese yuan may come under depreciating pressure.
According to Neo Wang, New York-based director of Evercore ISI for China Research, a repeat of the 2015 stock market crisis would be something that China’s top leaders cannot afford.
The Shanghai Composite Index more than doubled between September 2014 and its peak on June 12, 2015. Then the stock gauge dropped 40% in about two months.
Still, Wang says authorities have more tools this time to prop up stock prices. “New liquidity instruments in the capital market, such as swap and repayment facilities, have not yet been introduced,” he said.
Nomura’s base case is a bubble bursting ‘on a smaller scale’. Beijing is likely to introduce fiscal measures to stabilize demand and maintain basic local government operations, but it may fail to address serious structural problems and clean up the real mess in the real estate sector, according to economists .
However, other global banks are more optimistic. HSBC Holdings Plc strategist Alastair Pinder upgraded Chinese stocks to overweight, saying it is “not too late to join the rally.”
Meanwhile, Morgan Stanley’s Laura Wang said the country’s stocks could rise another 10% to 15% if the government potentially announces fiscal measures to extend previously reported stimulus measures.
(Adds bullish views from Wall Street in last two paragraphs. An earlier version of the story corrected the period in the lead.)
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