China's cashed-up crowd is back in the stock market

Speculative fever in Chinese stocks is running red hot and catching the attention of some global funds, who figure local money is worth following into market segments sheltered from tariffs and likely to ride an eventual economic recovery.

A series of economic stimulus pledges by China in September unleashed the largest rally in Hong Kong shares in a generation and sent mainland stocks to two-year highs.

However, the subsequent lack of a splashy spending centrepiece tempered the euphoria as many big-time investors cashed out rather than wait for a more patient revival, especially as President-elect Donald Trump installs China hawks in top US departments.

Yet while Hong Kong shares have recoiled, mainland stocks have switched gears and the cash streaming in from household savings accounts is highlighting the markets’ hottest pockets.

“Money would rush into whatever stocks are in the speculative limelight,” said Lu Delong, a retail investor in northeast China who said he has 2 million yuan ($275,000) in stocks and made a 40 per cent profit since late September.

He bet on tech shares gaining as China insulates them from possible US restrictions, buying China Great Wall Technology Group and Huawei supplier Visionox Technology , which have doubled since late September.

“For tech stocks, innovation cannot be proved unsuccessful in early stages, thus creating room for speculation,” he said.

The speculative trade has pushed outstanding margin financing, or the money borrowed from stockbrokers for stock buying, to a nine-year high of 1.85 trillion yuan ($256 billion), according to data vendor Datayes.

Average daily volume for the Shanghai Composite has run at 2-1/2 times the ten-year average for the past two months and price moves point to even more action at the smaller end.

The BSE 50 Index of start-ups listed in Beijing is up 112 per cent since late September, compared with the 12 per cent gain left for the Shanghai Composite after its blistering rally.

“Speculative money and retail investors who don’t care about fundamentals remain feverish,” said Li Bei, founder of Shanghai Banxia Investment Management Centre, in a letter to investors.

Still, she increased her own net stock position to a nine-month high of nearly 50 per cent in September and is focused on state-owned construction companies and the property sector, which has collapsed in recent years and is starting to attract bets on a recovery.

Fervour extends into derivatives, with options bets on rising prices also surging, according to David Wei, general manager of Shenzhen Chengyuan Investment Consulting Co, which helps investors buy such products from brokerages.

“I am sure there will be one or two more stimulus packages,” said Michael Browne, CIO at Martin Currie, part of Franklin Templeton, an equity specialist fund manager that manages around 22 billion pounds ($28 billion), which is neutral on China. “We’re positioned for when the rally comes, and it will come,” he said. “The China trade could be the one that catches everyone out.”