China Insight: A look back at 2015 for clues on A-shares' next move

After trading lackluster in a 500-point range for 12 months, the Shanghai Composite Index (SHCOMP) finally made an upside breakthrough at the beginning of this month on the back of high trading volumes. Suddenly, the market was flooded with optimism. Interbank repo rates have been creeping upwards over the past few days on the back of surging demand for borrowing (financing) associated with IPO subscriptions. Meanwhile, bond yields have been heading upwards as investors switch out of bonds into equities. The whole picture reminds us of the equity boom during November 2014 to June 2015 and the bust afterwards.

We are not sure if the boom-and-bust cycle that we experienced some 5 years ago will repeat itself this time round in terms of magnitude and/or timing. However we do think the boom that kicked off just some days ago is still far from complete, though there is a good chance A-shares will see a moderate downward pullback later this month.

Recall the bust which happened in the summer of 2015 was largely triggered by the regulators' decision to crack down on the use of wealth management products or highly leveraged tools to fund equity investment. Given the fact that the Chinese economy is still in the early stage of post-COVID-19 recovery, the central government would unlikely take any action to cool down the equity market, which in fact is not yet overheating anytime soon.

We instead think the SHCOMP is now at a stage like the one we saw in December 2014. At that stage, the interbank 7-day repo was creeping upwards on the back of accelerating demand for financing/borrowing driven by IPO subscriptions (Chart 1). We expect to see the most exciting part of the 2020 A-share boom in September or October when the US election polls still suggest Joe Biden will likely win the presidential election in November (Chart 2).

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