Why is the Chinese stock market so bullish?

I have been pounding the table a few times in the past few months to buy Chinese stocks. Sure as expected, the Chinese market has been on fire now. The Shanghai stock index has been up 37% this year, the brightest stock market in the world now. I have put my money into more conservative FXI but recently also more aggressive ASHR, which is the ETF directly tracking the performance of the Shanghai stock market. Thanks to the recent extremely bullish move, my ASHR has already doubled in just 2-3 weeks. It is too much too fast to me. So I cashed in half of my positions to take my original investment capital off the table. The remaining is just my house money.

So is the Chinese stock market a bubble now? In a short term, it smells like that and I’m afraid it will get some sort of mini-crash soon. But in the long run, it is far from over. As I said, if the history is any guide, the Chinese market may go up by 100% to 500% before it is done. The driving force is becoming more clear that this is the government engineered bull market. You see, the Chinese government has recently taken a couple of major steps to encourage people to invest in the stock market. Last month, they launched a program called Stock Connect that links the Shanghai and Hong Kong stock exchanges. This has created a platform to allow foreigners to buy Chinese stocks on the Shanghai Exchange and Chinese citizens to buy foreign stocks by trading shares in Hong Kong. Then a few weeks ago, the People's Bank of China (the Central Bank), reduced one-year lending rates 0.4% and one-year deposit rates 0.25%. It is also reported that the Chinese authorities has cut fees for trading and opening investment accounts to lure more small investors to get back into stocks. All these efforts have obviously been effective as only in November over 1 million brokerage accounts were opened in China, which was almost triple from a year ago. This has been translated into an explosive increase of the trading volume on the Shanghai Composite Index, rising 85% over its 30-day averages according to Bloomberg.

Putting all together, I’m more confident than ever that there is powerful force behind the Chinese stock market to skyrocket for at least a few years. Don’t miss it! Any weakness will be a great buying opportunity!!