No matter how you measure it the Chinese stock market is a bubble waiting to go pop.
Warnings have been issued from the government to leading brokers such as Goldman Sachs yesterday, but Chinese investors are not listening.
Investors are having too much fun: the fears of February 28 when the market fell 8.5 per cent in a day on sudden worries of moves to curtail speculation, have been long forgotten.
New share offerings are doubling in value on day one of the IPO listing and shareholder accounts are multiplying at a phenomenal rate, millions a months according to media reports in Hong Kong and international business papers.
So far this year, the domestic currency “A” share market is up 44 per cent and daily turnover exceeds $US30 billion, which is enormous when you consider how much we trade $A4 to $A6 billion on a big day here in Australia.
What to do is the big question for the Chinese Government.
As we have seen with the wider economy, three interest rate rises, a small rise in the Yuan and seven increases in the official reserve ratio which controls bank lending, have not stopped the boom in investment, property and the stockmarket speculation.
The market is rising by almost one per cent a day, sometimes more, so these official measures will have no impact unless interest rates rise very sharply and quickly.
Why would any one keep money in a bank and get at most three per cent or so when by the end of one week’s trading you could have earned five per cent?
For ordinary Chinese it is a no brainer; from the Government’s point of view it is a nightmare because they know that if the market takes fright or suddenly implodes, there will be economic and social unrest, demonstrations and possible worse.
Economic activity and confidence would be damaged. The stakes are high, very high.
It is why we here in Australian enjoying our sweet economy at the moment, should be casting a wary eye northward and starting to wonder if we should be a little more conservative.
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Goldman Sachs’ warning got a lot of play throughout Asia yesterday with all the major news services giving it prominence.
Whether it will be self-fulfilling is another thing but the fact that it has been uttered is interesting because it fits in with the official concern on the mainland.
Goldman Sachs would not have said anything if the Chinese Government and its officials had not already been expressing concern.
Goldman said that China’s shares may face a “correction” as earnings can’t justify the rally that’s made them the world’s star performers this year.
China’s CSI 300 Index, which tracks Yuan-denominated A shares listed on the country’s two exchanges.
It’s the world’s most expensive key stock index, at 42 times reported earnings, more than double the Morgan Stanley Capital International Asia Pacific Index’s at 19 times.
Goldman said yesterday that “Current valuations are demanding and seem to have outpaced the improvement in market fundamentals. The “risk of market euphoria is building up.”
China’s investors opened 385,121 new accounts at brokerages on May 8, that’s the highest daily number since records were first published by the China Securities Depository and Clearing Corp. in June of 2005.
But according to the official Chinese newsagency there were 4.78 million new stock trading accounts opened in China, and 4.5 million in April alone. That’s the best example of how the boom has become a bubble.
According to Reuters and Bloomberg, $US48.96 billion of equities were traded Wednesday on the Shanghai and Shenzhen stock exchanges, which just about equalled the value of trading on all other exchanges in Asia on the same day!
Yesterday the Chinese markets continued to record solid gains with the Shanghai Composite Index rising another 0.9 per cent to end at 4,049.7. Trading volumes remained heavy, with$US26.5 billion worth of shares traded.
That was a bit slower than Wednesday.
It was only at the end of March that daily trading volume on the Chinese markets was $US16.4 billion while six months ago it was$US 5 billion a day.
Driving it is the flood of money from retail investors. The market that has climbed 300 per cent in less than two years and continues to rise, despite the growing fears of a bubble.
On the face of it that’s pretty amazing and we can all remember the high prices and volumes on the Japanese stockmarket when the Nikkei hurtled towards 40,000 in 1989 and then sank as the Japanese economy deflated.
And it’s the comparison with Japan that has regulators inside China and those outside (and investors and bankers) increasingly worried.
The question is being asked, what happens when a financial bomb goes off, pushing the Chinese domestic markets down sharply, and very, very quickly?
Especially in an economy where the exchange rate is all but fixed, there are capital controls but there’s also $US1.2 trillion in foreign reserves.
Will all that money still be there when the dust settles? What happens to the exchange rate, what happens to the billions in foreign money in domestic Chinese markets which can’t get out in a crash because liquidity evaporates?
Does all the pain stay in China, or does it leak out into the rest of the word as it did on February 28 and March 1?
The Chinese market hit and now has topped the 4,000 point mark on the Shanghai Composite Index this week. A landmark, like our All Ords passing through the 6000 point mark on its way to higher and higher levels.
Our market is priced at around 17 to 18 times earnings, compared to that 42 times valuation in the domestic China markets. Wheeee! Tulips in Amsterdam, anyone? A drop of South Sea Bubble?
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Earlier this week Chinese newspapers prominently reported the comments from the country’s Central Bank Governor w
