Relive the epic "bull market" of 2014-2015

This article focuses on the epic bull market of 2014-2015.

I. Definition of the Time Interval Range of the "Bull Market" in 2014-2015

(I) June 2014 to June 2015: Lasting for one year, ranging from 2023.74 points to 5166.35 points

To revisit the 2014-2015 "bull market," it is necessary to first define its starting point and ending point. Data shows that the "bull market" started on June 19, 2014, at 2023.74 points and ended on June 12, 2015, at 5166.35 points, lasting for one year with a 155.29% increase.

(II) The one-year "bull market" can be further divided into four stages during the upward trend

Based on the above time range, the 2014-2015 "bull market" can be divided into four stages based on specific point changes. Specifically,

1. The first stage: From June 19, 2014, to October 9, 2014, during this stage, the stock market showed a slow rise, with the Shanghai Composite Index rising from 2023.74 points to 2389.74 points, an increase of about 18%, lasting for 3-4 months.

   From October 10, 2014, to October 26, 2014, there was an adjustment with a magnitude of 4.16% lasting for two weeks.

2. The second stage: From October 27, 2014, to January 6, 2015, during this stage, the stock market showed a rapid rise, with the Shanghai Composite Index rising from 2290.44 points to 3351.45 points, an increase of about 46%, lasting for 2-3 months.

   From January 7, 2015, to February 5, 2015, there was an adjustment with a magnitude of 8.22% lasting for about one month.

3. The third stage: From February 6, 2015, to April 27, 2015, during this stage, the stock market also showed a rapid rise, with the Shanghai Composite Index rising from 3075.91 points to 4527.40 points, an increase of about 47%, lasting for 2-3 months Adjustment from April 28, 2015 to May 6, 2015, with an adjustment magnitude of 9.17% and a duration of 1 week.

4. Phase Four: From May 7, 2015 to June 12, 2015, the stock market continued to rise rapidly. The Shanghai Composite Index rose from 4112.21 points to 5166.35 points, an increase of around 26%, lasting for 1 month.

(III) Data Overview: 3 increases of over 5%, 11 over 4%, 23 over 3%, 61 over 2%

Taking the Shanghai Composite Index as an example, during the bull market from 2014 to 2015, there were 3 trading days with increases of over 5%, 11 trading days with increases of over 4%, 23 trading days with increases of over 3%, and 61 trading days with increases of over 2%. Meanwhile, out of the 23 trading days with increases over 3%, only 3 occurred in 2014.

This indicates that compared to 2014, market sentiment was more bullish in 2015.

II. How to Define the Epic Bull Market of 2014-2015?

(I) Official Qualification: Both "Reform Bull" and "Leverage Bull"

Regarding the epic bull market of 2014-2015, there are two viewpoints in the market. One believes it is a "Reform Bull," while the other sees it as a "Leverage Bull." In fact, both viewpoints were acknowledged by the authorities at that time, so there seems to be no need for further discussion now. For example, on March 10, 2015, the then Chairman of the China Securities Regulatory Commission, Xiao Gang, clearly pointed out in the "Two Sessions E-Lounge" that both viewpoints were reasonable. He stated that the market rally at that time reflected expectations of the dividends of reform and was also the result of the accumulation of various favorable policies.

Chairman Xiao believed that in that bull market, leverage indeed played an important role. Factors such as funds transferred between securities firms and banks, net inflows of funds through the Shanghai-Hong Kong Stock Connect, and funds from insurance and trust companies all increased significantly. The development of margin financing and securities lending business was also rapid (with a financing scale exceeding trillions of yuan).

(II) Specific Manifestations of the "Leverage Bull": Rapid Growth of Various Asset Management and Leverage Products Under Loose Monetary Policy

From a data perspective, the "Leverage Bull" was mainly manifested in the following aspects:

1. Significant easing of monetary policy: Continuous interest rate cuts and reserve requirement reductions A significant relaxation of monetary policy is the main driving force behind the formation of the "leveraged bull" market. On November 15, 2014, the State Council deployed to accelerate price reforms, after which the monetary policy began a significant easing process. Specifically,

(1) The benchmark deposit and lending rates were lowered six times (25BP each time) on November 22, 2014, March 1, 2015, May 11, 2015, June 28, 2015, August 26, 2015, and October 24, 2015.

(2) The 7-day OMO rate was lowered eight times (from 4.1% to 2.5%) on January 22, 2015, March 3, 2015, March 17, 2015, March 24, 2015, April 7, 2015, April 14, 2015, June 25, 2015, and June 30, 2015.

(3) The statutory deposit reserve ratio was lowered three times (from 20% to 17.5%) on February 5, 2015, April 20, 2015, and September 6, 2015.

2. Various types of asset management products expanded significantly from 2014 to 2015

Influenced by relatively loose monetary policy and the bullish sentiment in the stock market, various types of asset management products aimed at leveraging experienced rapid expansion from 2014 to 2015 (of course, this was also the background for the subsequent introduction of new asset management regulations), and frequently took actions in the capital market (such as the Bao Wan dispute that year). Specifically,

(1) The balance of trust assets rapidly expanded from RMB 12.48 trillion at the end of June 2014 to RMB 15.87 trillion at the end of June 2015, with a net increase of RMB 3.39 trillion in one year.

(2) The scale of brokerage asset management increased rapidly from RMB 7.95 trillion at the end of 2014 to RMB 10.25 trillion at the end of June 2015, with a net increase of RMB 2.3 trillion in six months.

(3) The size of the wealth management market (including principal-guaranteed products) increased rapidly from RMB 12.65 trillion at the end of June 2014 to RMB 23.5 trillion at the end of 2015, with an increase of around RMB 11 trillion in one and a half years.

3. Rapid and abnormal growth in financing balance

During the period of 2014-2015, induced by the bull market in stocks, the financing balance showed a rapid growth, increasing from below RMB 400 billion in June 2014 to RMB 22.7 trillion in June 2015. It is worth noting that in March 2015, Chairman Xiao Gang's financing balance was only around RMB 1 trillion, which means that the financing balance increased by over RMB 1 trillion from March to June 2015, revealing to a certain extent the madness of the stock market at that time.

(3) Specific manifestations of the "Reform Bull": Driven by the Third Plenary Session of the 18th Central Committee, the second "9 Articles" and price reforms

Looking at the timeline, the market believes that the 2014-2015 "bull market" was mainly influenced by three events, namely the Third Plenary Session of the 18th Central Committee in November-December 2013, the second "9 Articles" released on May 9, 2014, and the State Council executive meeting in 2014 clearly deploying to accelerate price reforms. Among them,

1. The Third Plenary Session of the 18th Central Committee passed the "Decision on Major Issues Concerning Comprehensively Deepening Reforms," which clearly proposed "improving the multi-level capital market system, promoting the reform of stock issuance registration system, diversely promoting equity financing, developing and regulating the bond market, increasing the proportion of direct financing... promoting the two-way opening of the capital market, orderly increasing the convertibility of cross-border capital and financial transactions, establishing a sound management system for external debt and capital flows under the macro-prudential framework, accelerating the realization of RMB capital account convertibility," laying the foundation for the subsequent release of the second "9 Articles."

However, due to the lack of substantive policies, the capital market did not have a significant response.

1. The full name of the second "9 Articles" document is "Several Opinions on Further Promoting the Healthy Development of the Capital Market," with its core content being to expand market opening in both directions, encourage mergers and reorganizations, mixed ownership, relax private placement approval, and propose a steady promotion of stock issuance registration system, etc. Subsequently, the China Securities Regulatory Commission began to modify and improve relevant policies of the capital market in accordance with the spirit of the second "9 Articles," launched the Shanghai-Hong Kong Stock Connect, introduced ETF options, private fund filing system, launched SSE 50 and CSI 500 stock index futures, streamlined administrative approval procedures, etc., which to some extent stimulated market sentiment.

2. On November 15, 2014, the State Council deployed to accelerate price reforms, allowing the market to price more significantly, explicitly proposing to "steadily open up the vast majority of professional service prices that are not directly related to residents' lives," followed by a significant acceleration in the process of interest rate liberalization, with a significant increase in the frequency of rate cuts for various interest rate varieties, to some extent stimulating the market.

III. Brief Overview of the "Downturn Cycle" in 2015

(1) Downturn Cycle: Experienced three rapid declines in half a year (coming fast, going even faster)

After peaking on June 12, 2015 (on June 13, the China Securities Regulatory Commission posted on Weibo "prohibiting securities companies from facilitating off-exchange margin trading activities"), A-shares experienced three rapid declines in half a year, with a very fast pace of decline.

1. From June 13 to July 8, 2015, the Shanghai Composite Index quickly dropped from 5166.35 points to 3507.19 points, with a cumulative decline of 32.11%, lasting for about three weeks.

Subsequently, there was a slight rebound under policy stimulus, lasting for about one month 2. From August 17, 2015 to August 26, the Shanghai Composite Index once again quickly dropped from 3993.67 points to 2927.29 points, with a cumulative decline of 26.70%, lasting only about a week.

Subsequently, under the stimulus of policies, there was a slight rebound lasting about 4 months.

1. From December 22, 2015 to January 28, 2016, the Shanghai Composite Index once again quickly dropped from 3651.77 points to 2655.66 points, with a cumulative decline of 27.28%, lasting about a month.

(II) A "bull market" without fundamental and financial support is doomed to be short-lived

Looking back, the bull market from 2014 to 2015 was more driven by emotions, a result of various favorable policies stacking up. However, after the stock market continued to rise for a year, the fundamentals did not further improve, and there were no stronger financial policies in place, causing the "leverage bull" supported by the "reform bull" to come to a halt after June 2015.

1. Taking the manufacturing PMI as an example, it rose continuously from March 2014 to July 2014, from 50.2 to 51.7; however, it began to decline continuously from August 2014 to 49.8 in January 2015, then rose again from February to May 2015 to 50.2, but this trend did not continue.

This indicates that during the bull market of 2014-2015, the economic fundamentals did not truly improve continuously.

1. Taking the nominal economic growth rate (quarterly) as an example, in the fourth quarter of 2013, China's nominal economic growth rate was 10.51%, in the second quarter of 2014 it was 9.04%, and then it fell to 8.71%, 7.78%, and 7.37% in the third quarter and fourth quarter of 2014 and the first quarter of 2015 respectively, showing that the economic fundamentals continued to weaken under policy efforts.

2. What's even more bizarre is that in that epic "bull market" rally, monetary policy was basically acting alone, fiscal policy was largely absent, making it difficult for the economic fundamentals to perform well.

III. The impact of 2015 was profound: A fundamental change in the attitude of decision-makers towards capital began from this point

(I) Strictly speaking, decision-makers were not prepared for the start and end of the "bull market" rally in 2014-2015. Their attitude went through several stages of default, support, and concern. For example, before November 2014, the start of the "annual market rally" was relatively slow, and the stock market gains were relatively stable; then, following a series of significant easing measures by the monetary policy in November 2014, the market began to show more rapid and aggressive performance, with market sentiment quickly ignited after November 2014. At this point, decision-makers defaulted to the market performance and continued to support it at the policy level

(二) In June 2015, after the market ended, the monetary policy still hoped to inject liquidity into the market through significant easing measures to boost market confidence, while also shifting towards reducing the leverage crisis in the capital market through strict regulation.

In fact, it was not until 2016-2017 that the authorities began to disclose some relevant information during the decline (such as Xu Xiang, known as the "Private Equity King," and Li Jianlin, known as the "Wealthy South Overlord"), defining it as "a financial crime wave during this sharp rise and fall in the stock market."

(三) Looking back now, the impact of the decline in 2014-2015 on the market was profound. It led to a fundamental change in the decision-makers' understanding of the dark side of China's capital market and financial system, essentially halting a series of reform measures determined at the Third Plenum of the Eighteenth Central Committee. The strict regulatory wave launched in October 2015 officially began as a result.

V. Conclusion

(一) Reviewing the bull market of 2014-2015, we will find that this round of "bull market" indeed has many similarities, with characteristics of a "reform bull" and signs of a "leverage bull" seemingly emerging. We will not elaborate further here and will analyze this round of "bull market" trends in the next report.

(二) Looking back now, the impact of the 2014-2015 bull market on the market and decision-makers was profound, leading to a fundamental change in the decision-makers' attitude towards capital. In that bull market, the prominent feature of sharp rises and falls was accompanied by highly complex financial crimes, with economic fundamentals and fiscal policies not providing sustained support. Therefore, that bull market came fast and went even faster.

(三) It can be considered that 2015 has not yet experienced a relatively complete bull market cycle. However, I still remember that during that bull market, the main topic of daily discussions among classmates, teachers in learning, life, dining halls, and classrooms was the stock market. At that time, if you shouted that 10,000 points was not a dream, no one would think you were crazy, let alone feel out of place. It can be said that before the stock market crash, no one thought the bull market had ended. On the contrary, the consensus in the market at that time was that "every adjustment is an opportunity to get on board." At that time, compared to earning a Ph.D., making money in the stock market was much easier, so some people not only did not make money in the end but also did not graduate.

Article Source: Ren Zhuangzhu Original Title "Reviewing the Epic Bull Market of 2014-2015"