BofA Securities warns China’s stock rally may face a correction 'soon'

BofA Securities warned that Chinese equities could face a meaningful correction soon, similar to the 2015 cycle, citing the sticky economic headwinds and the overlooked geopolitical tensions, according to Bloomberg.

The bank noted that the Hang Seng China Enterprises Index and the MSCI China Index have risen by at least 30 percent from their mid-January lows, similar to the pace of the 2015 rally before the market crash. After hitting a new high in May 2015, the Hang Seng China Enterprises Index fell nearly 50 percent in February of the following year. 

The current fundamentals are similar to the economic rebalancing cycle and policy cycle from a decade ago, and suggest that a market rebound driven by multiple expansions could be fragile, said strategists.

The strategists, citing an investor trip to Shanghai, noticed that long-term investors in mainland China are becoming nervous about a lack of improvement in employment, deflation and credit demand, while the impact from geopolitical tensions has been overlooked. Some investors are also seeing bubbles emerge in some technology sectors.

STAFF REPORTER