Wednesday 17 October 2007

China stockmarket breaks 6000

When does a bubble get to be called a massive bubble?

Yesterday the China stockmarket broke the important 6000 barrier. The current PEs are way out of line and close to 50.

The bubble will burst but the longer inflates the more trouble it is storing up and the harder it will be for the government to let it deflate. The danger therefore is that specualtors see this as a one way bet.

My predicitions have already been shot out of the water with the predictions posts a few posts ago looking quite possible.

The danger lurks in the background. WHO OWNS the shares. The trouble is that in many cases it is party officials, the ARMY and SEOs that own the shares. When it unravels it has the ability to induce serious political instability.

China cracks 6,000 in trading frenzy [FT]

China's benchmark stock index broke the symbolic 6,000-point mark for the first time yesterday, as investors in the rampant market celebrated a sixfold increase in a little over two years.

The Shanghai Composite Index rose 2.15 per cent to close at 6,030 points on the day the nation's top leaders opened the 17th Communist Party Congress in Beijing.

The spectacular rise in stock prices has made Chinese companies some of the most expensive in the world and driven most analysts to warn of a growing bubble that could lead to social instability when it bursts.

"The market was a bubble when it reached 5,000 points and, of course, the same applies at 6,000," said Wu Chunlong, a strategist at Citic Jiantou Securities. "But with liquidity still growing quickly it is quite possible the market will continue to inflate up to 7,000 points."

In China, where the government still attempts to maintain tight control over most of the economy, the five-yearly congress is likely to have helped sentiment in recent weeks. The market dropped precipitously in May after the government introduced a higher stamp tax on stock transactions, but in the lead-up to this political pageant, investors correctly assumed that Beijing would do nothing to slow the bull run because of concerns a large drop could cause discontent among the new middle class.

The central bank has raised interest rates five times this year and lifted the proportion of deposits that banks must hold in reserve with the central bank.

In spite of this, the country is awash in liquidity and prices of everything from pork to property have been accelerating throughout the year. Chinese companies are rushing to sell shares and cash in on superlative valuations.

Unsurprisingly, more than a dozen stock brokerages have plans to make initial public offerings and, according to reports, Orient Securities plans to join them by raising $4bn in an IPO before the end of the year.

The stock frenzy has spilled over into the separate and more mature market in Hong Kong, where the benchmark index has risen more than 40 per cent since the end of August on expectations Beijing will allow mainland investors more access to the market in the near future.

PetroChina, which also plans to raise up to $8bn in a Shanghai IPO by the end of the year, rose 13 per cent yesterday in Hong Kong, taking its market value to about $426bn. After rising 65 per cent since the start of September, PetroChina now challenges General Electric for the title of the world's second-most valuable company after Exxon Mobil.


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