China’s markets reopened after a week-long holiday for the New Year. At the close the Shanghai Composite Index dropped 0.6%, the Yuan rose 1.2% as the Chief of the Central Bank vocally endorsed the currency, and finally Chinese exports were reported and for the seventh straight month they continued to decline. After falling to a 15 year low the week before, the Hang Seng China Enterprises Index rose 4.8% Monday, serving as the steepest upswing in five months.
The Shanghai Composite index continues on what has been a devastating year. The world’s second worst performing index this year behind Greek equities, the Shanghai Composite has already fallen 22% this year and dipped another 3% upon the market’s reopening Monday. This dramatic decline is indicative of the global worry regarding China’s crawling economy, depreciating Yuan, and those factors’ implications on the nation’s already struggling capital outflows.
Chinese officials are seeking to quell the rumors of their nation’s markets being the riskiest of all global markets by pointing to last week’s international performance. However, this misdirection does not change the truth, which is Mainland China’s markets are incredibly over-valued. Last year Chinese markets experienced a bubble that broke records, which adds to the perception of the $5.3 trillion market’s inflation by comparison to its international counter parts. Averaging a premium of 10% since 2010, the Shanghai Composite is now trading at a rate 34% higher than MSCI Inc.’s emerging-markets index. The technologically focused Chinese equity market, the Shenzhen Stock Exchange, is also far more expensive than alternative nation’s markets. Buying an equity in the Shenzhen market is nearly four times as costly than using a comparable substitute.
Margin debt within stock markets can serve as an indicator of the confidence level of investors, with a higher balance signaling higher confidence and a lower balance representing lack of confidence. China’s collective stock market saw its margin debt fall to its lowest point in over a year on February 5th, with the combined outstanding balance on the Shanghai and Shenzhen exchanges dropping to 888.4 billion Yuan.