Beware The Chinese Stock Market

On the front page of today’s South China Morning Post, there’s a quote from Li Ka-shing, Asia’s richest man.

As a Chinese, I am worried about the mainland stock market. History shows that any phenomenon whereby shares are priced at 50 to 60 times forward earnings will end in a disaster. And any economic fluctuation in the mainland will absolutely hit Hong Kong.

In a sharply volatile stock market, small investors will be the victims in the end.

If any of you own China Funds it might be a good idea to lighten up on them now. Li Ka-shing didn’t get to be Asia richest person by being dumb!

Here’s a comparison between the Shanghai Stock Market Index and the Dow Jones Industrial Average.
If this doesn’t look bubblicious, I don’t know what does!

Note: There’s a difference between the Shanghai Mainland stock market and the Hong Kong Stock Market. The Shanghai Stock Market is where the locals and Jim Rogers trade. The big multi-national companies like PTR trade on the Hong Kong Market which hasn’t had such a speculative run-up.

Also of interest is this note from the China Fund (CHN), dated April 30th 2007.

Our returns in April came mostly from the A-share market, which is building up a good head of steam. The ‘B word’ is increasingly appearing in commentaries on the market, but as veterans of the late-80s bubble in Japan, when any stock under 30X was considered dirt cheap, we think this bubble will inflate still further. There have been disparaging comments about panic buying by local investors, now opening stock accounts at the rate of about 200,000 per day. We think they are reacting perfectly rationally to extremely high earnings growth (34% in 2006, accelerating in the first quarter of 2007) and negative real interest rates (Chinese banks only pay 2.2% after tax on one-year deposits, but the latest official inflation number was 3.3%). Ahead of the 17th party congress in October, it seems unlikely that Chinese politicians will make the ‘courageous’ decisions necessary to stop the market (big increases in interest and exchange rates), so they will continue to fiddle in vain with increasing equity supply and administrative guidance.

Hmmm….200,000 illiterate poor farmers/workers lining up to open a brokerage account doesn’t look like a market top? ok, so they don’t believe that the market’s over-valued. But then why are they acting like it is? Here’s a quote from a few paragraphs later.

The Fund is 93.5% invested with holdings in 65 companies. In April we began a big switch, selling US$19 million of A-shares to cut the Fund’s weighting there to 24.1%, whilst buying a net US$46m of the laggard, low-priced Taiwan market to lift the Fund’s exposure there to 29.4%. We believe that the A-share market has further to run, but Taiwan looks better when risk is balanced against potential reward. The NT dollar has also recently depreciated against the weak US dollar, never mind the mighty renminbi.

In addition to the broad-based buying of Taiwan favourites (Fu Hwa Financial, Formosa Petrochemical, Wah Lee, Synnex, Lien Hwa, Wistron Neweb and Taiwan Secom) the Fund received miniscule allocations to two hot Hong Kong IPOs, Yangzijiang Shipbuilding and China Molybdenum.

Ah, so they want to buy the somewhat undervalued Taiwan stock market and the Hong Kong Market instead of mainland China! Atleast they’re not as stupid as you pretend to be!

Disclaimer: I own a miniscule amount of PetroChina (PTR) in my Roth. PTR is traded on the HK stock exchange. I’m not selling it but I’m not actively encouraging you to buy it or anything else, except maybe gold 😉

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