China's stock market is ripping higher in the middle of a 'all-hands buying' run

china gold silver tradersTraders at the Chinese Gold and Silver Exchange Society demonstrate manual deals settling used before computerization as part of celebrations at the beginning of their first trading day after the Chinese Lunar New Year holidays, in Hong Kong, February 14, 2013.REUTERS/Bobby Yip

  • China's stock market has gained nearly 20% this year as the US and China have at least temporarily eased their trade tensions through a string of negotiations.
  • But Nomura analyst Masanari Takada says China's stock market rally has been led by speculative flows.
  • Takada compared some market indexes and concluded that the equity market sentiment in China did not accurately reflect expectations for the future business climate.
  • Takada warned that global investors should clam down on China stock market's recent cheers.

China's roaring stock market is over-cheered and lacks economic support, a Wall Street analyst says.

The country's stock market was under pressure last year, with the benchmark Shanghai Composite Index tanking 25% amid fears over an escalating trade war between the US and China. In 2019, China's stock has rallied sharply, up 18%, as Washington and Beijing have at least temporarily eased their tensions through a string of trade negotiations.

Buoyed by the recent US-China trade talks held last week and President Donald Trump's announcement that the US would delay an increase of its tariffs on $200 billion worth of Chinese goods, the Shanghai Composite surged nearly 6% Monday. Turnover on Chinese exchanges rose beyond 1 trillion yuan to the most since 2015, according to Bloomberg.

But Nomura analyst Masanari Takada says this massive China market rally is apparently led by speculative flows.

"China's mainland market could be described as an 'all-hands buying' situation," Takada said in a note distributed Tuesday.

Takada compared Nomura's Chinese Equity Market Sentiment Index with the Li Keqiang Index, the namesake of China's premier, who created it to measure China's economy, and said the country's stock market sentiment had passed the "optimism-zone" and reached "euphoric levels."

China equity market sentiment index since Jan 2012Nomura

The difference between the two index shows the China's stock- market sentiment does not accurately reflect expectations for the future business climate, Takada said.

"Looking at the recent change in aggregate open interest in CSI300 futures, there seems to have been an extreme amount of purchases," he said. "Indeed, some technicals-based trend-followers in the mainland market - as measured by Nomura's model estimate - likely covered their net-short position and shifted to a net-long position."

As a result, Takada warned global investors should clam down on China stock market's recent cheers.

"Considering these unusual movements in stock prices and market sentiment in China, the global equity market's response so far has been clam," he said. "In attempting to ascertain any implications for DM equities, the current situation in Chinese stock markets should be taken with a grain of salt."

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