Market unfazed by latest bubble alert Katherine Ng Wednesday, February 07, 2007 Ending a freefall over five consecutive trading days, the mainland stock market climbed 2.42 percent Tuesday amid a second warning from Chinese lawmaker Cheng Siwei about a potential bubble forming in the A-share market. The benchmark Shanghai Composite Index closed at 2,675.69, following a total 9 percent drop from 2,945.26 January 29. China's A-share market started falling that day after Cheng, vice chairman of the Standing Committee of the National People's Congress, issued his first warning that people investing in 70 percent of companies listed in Shanghai would probably lose money. However, Cheng's second warning Tuesday that investors should be aware of a possible bubble failed to deter domestic investors from going bargain hunting. Institutional investors said the current valuation of the A-share market had already reached a reasonable level, suggesting no signs of a bubble. "The Shanghai A-share index constituent stocks have dropped to a comfortable level of about 21 times price to 2007 earnings. It is comparatively healthy at present," a fund manager at Bank of Communications Schroder Fund Management in Shanghai said. "Cheng's [Tuesday] warning was just a reminder to investors and does not necessary mean a bubble really has been established," said Jun Ma, chief economist at Deutsche Bank. "The domestic market has been corrected last week. Further big correction in the short term is not likely even if there would be [interest] rate hikes of a total 54 basis points." The German bank has forecast two possible rate hikes of 27 basis points each in the coming months. Ma said the monetary policy was expected, but was too mild to affect the stock market. "The A-share market should price reasonably at about 20 to 30 times price to 2007 earnings. It reached about 27 times early this year, but it now has come down to a better level," Ma said. Cheng said Tuesday the flooding in of ample liquidity and Beijing's 2008 Olympic Games were the factors causing short-term speculation and volatility in the stock market. An A-share fund manager said the recent pricing of initial public offerings showed the market reacts in a reasonable way to prevent any bubbles.
China booming to a bubble? Wednesday, 07 Feb 2007 12:52PM There are growing concerns that a bubble is forming in the Chinese stock market as local investors drive up prices to record levels, with over 1.4 million new trading accounts opening up in January alone. The Chinese Banking Regulation Commission (CBRC) is so concerned about the rising demand for equities that it has stopped banks from lending money for the purposes of stock market investment and has asked banks to recall previously approved equity investment loans. Mainland Chinese companies which are dual listed on the Hong Kong exchange are currently trading at a 30 per cent premium, suggesting that momentum rather than fundamentals are carrying the mainland market forward. In 2006 the Chinese government launched its stock market reform programme which saw it sell down its 75 per cent holdings in listed companies. This created massive demand for shares from local investors who find it difficult to invest internationally due to strict government capital controls. âIt is encouraging that the Chinese Government has recognised a problem and are trying to curb the demand,â said Stuart James, associate director of Aberdeen Asset Management. âThe government needs to ensure there is a controlled slowdown of the market â they need to be careful not to prick the bubble.â New foreign trading licences and local mutual fund applications have also been temporarily suspended in an effort to curb new money flooding into the overheated market.