China's Leverage-Driven Rally (by Chen Long, GaveKal Capital) - China's domestic 'A-share' market is on steroids

China's Leverage-Driven Rally (by Chen Long, GaveKal Capital) - China's domestic 'A-share' market is on steroids. The Shanghai composite index has now risen by 38% since the middle of the year, and has shot up by 15% just in the eight trading days since the People's Bank of China cut benchmark interest rates. Sure, the rate cut provided a fillip to sentiment, yet even so the current rally looks highly unusual. Over the last three years, the A-share market has broadly mirrored China's economic cycle, rising when growth accelerated, and falling when growth momentum faded. Now however, A-shares are tearing higher even as China's economic growth rate has slipped to its lowest level since the depths of the 2009 crisis. So why are A-shares suddenly so bullish? The answer, we believe, has little to do with economic fundamentals, central bank policy or even valuation, and everything to do with investor sentiment and leverage. This calls into question the sustainability of the run-up. (VIEW LINK)