Is China's A-shares bubble about to
burst? By Olivia Chung
HONG KONG - China's yuan-denominated
A-share market has soared about 250% since the
beginning of last year but analysts have split
opinions regarding its future.
While some
caution that the inflating market bubble may burst
at any time, others say the A-share market is just
at the initial stage of a "Golden Decade".
(A-shares refer to those issued by domestically
listed firms for Chinese investors.)
The
benchmark Shanghai Composite Index has gained
about
120%
so far this year after soaring 130% in 2006.
Defying a warning by former United States
Federal Reserve chairman Alan Greenspan that
China's stock market is a speculative bubble that
will burst, domestic investors continue to bet on
Chinese equities.
"When you don't expect
it, it breaks," Greenspan said of the bubble in
the Shanghai stock market on October 31. It was
the second time in six months that Greenspan has
warned investors who are betting on the rise of
the Chinese market. In May, Greenspan said he was
concerned Chinese equities might undergo a
"dramatic contraction" after its main stock index
at the time had jumped more than 90% since the
start of the year.
On the mainland, apart
from the chairman of the China Securities
Regulatory Commission, Shang Fulin, who is the
latest high-ranking official to remind new
entrants to the mainland stock market of the risks
involved, the country's three major business
newspapers ran recent front-page editorials saying
market bubbles are threatning to burst.
Some mainland analysts said the China's
stock market has grown expensive compared with its
regional counterparts as its average A-share price
to earning (P/E) ratios are currently as high as
65, in contrast to 37 in Japan, 21.5 in the United
States and about 20 in Hong Kong.
They
warned that the current situation of China is
similar to that of Taiwan or Japan after the 1980s
when stocks listed on the Japanese and Taiwanese
markets traded at P/E ratios of 71 and 60, before
the two markets collapsed.
However,
analysts from Hong Kong and Taiwan hold different
views, with some even saying that using the term
"Golden Decade" is no exaggeration.
The
parallels betweeen the Japan and Taiwan markets
and China's current A-shares situation is a cause
for increasing concern, Citic Ka Wah Bank senior
vice president Liao Qun said. However, he added
that "Chinese characteristcs" of the mainland
market, such as reforms to end split shares, mean
that China's P/E ratio is better supported than
the previous P/E ratios in Japan and Taiwan.
"Note that current A-share P/E ratios of
65 times are still below the ratios of nearly 100
times in Japan and Taiwan in the late 1980s to
early 1990s ... the current A-share price to
earnings ratios are supported more strongly than
the high valuations reached on the stock markets
in Japan and Taiwan ... A-share profit growth is
largely sustainable, and therefore the A-share
market is not likely to suffer a collapse similar
to that which occurred in Japan and Taiwan," Liao
said.
"The market factors including higher
economic growth rate and corporate profit growth
and excess liquidity, partly due to large trade
surpluses, that led to high price to earnings
ratios in Japan and Taiwan in the late 1980s, are
all present to a more pronounced degree within the
current A-share market," Liao added.
China's gross domestic product (GDP), for
example, grew by a compound annual growth rate
(CAGR) of 10.2% in the past five years from 2002
to 2006, while the GDP of Japan and Taiwan grew by
a CAGR of 4.8% and 9.2% respectively between
1986-1990.
"In addition, the capital
market in China is even more closed than the
capital markets in Japan and Taiwan, given that
the yuan remains unconvertible ... [and] current
business volumes under the qualified foreign
institutional investors and qualified domestic
institutional investors schemes are still not
large enough to challenge the closed nature of the
capital market ... Thus, excess liquidity pushed
up A-share prices and hence their price to
earnings ratios," Liao said.
Yu
Tzong-shian, a member of the Academia Sinica,
Taiwan's top science research body, said the
mainland's excessive liquity problem is similar to
that of Japan and Taiwan before the almost
simultaneous collapse of those markets in early
1990. But he said that China's situation is also
different.
Although Japan was leading the
world in terms of industrial technology, its
domestic consumption was limited and its
development potential was also limited, while
Taiwan lost its labor advantage and lacked
internal development potential. These factors
readily led them into a "bubble economy". However,
the mainland's emerging economy has attracted a
flood of foreign direct investment, helping it
sustain higher growth rates, Yu said.
"In
addition, the growth in terms of China GDP,
foreign trade and savings and investment is
healthy, with every city and region sparing no
efforts to develop economic development ...
Meanwhile, the Chinese government has recently
taken a series of measures to prevent bubbles in
the stock and property markets from getting
bigger. Therefore, it’s unlikely that the A-share
market will collapse in the short term," Yu said.
Liao warned that with the current A-share
price to earnings ratios higher than desirable,
heavy adjustments in share prices may be triggered
if valuations surge further before the high profit
growth of A-share companies for 2007 as a whole is
confirmed.
"If share prices advance too
fast from this point, the bull market will end
sooner," he said.
Liao said heavy market
adjustments would likely cause economic and social
instability, particularly since there are a large
number of small individual investors in the
current A-share market who have little investment
knowledge and experience. There are currently
about 50 million stock investors in China.
"What is equally important is to improve
investor education and establish a reliable
information system, possibly by the government or
semi-government bodies, on which investors can
base their decisions," he said.
He said
the term "Golden Decade" for the A-share market
would be no exaggeration if the bull market
continues its run. The term originated in a report
of Shanghai-based Orient Securities in December
14, 2006, when the Shanghai Composite Index
reached a record high of 2,249 points. The report
attributed the rosy prospects to the steadily
growing economy, a series of reforms in the
capital market, and massive capital inflows into
the mainland.
However, at that time, the
report added "the index is expected to break 3,000
points in 2007". So when the index breached the
6,000-point threshold on October 15, it could it
be opined that share prices had advanced too far,
too fast and that the bull market would end before
the "Golden Decade".
Olivia
Chung is a senior Asia Times Online
reporter.
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