Wednesday, 15 April 2015

Is China's stock market in a bubble?

Many analysts think that China's stock market is in a bubble. For example, Ron Insana at CNBC wrote:

Everyone, these days, is looking for a bubble here in the U.S. But it may be more wise to look overseas — to China.

Whether it's Shanghai, Shenzhen, or Hong Kong, Chinese stocks are shooting up like bottle rockets, lifted, in large part, by individual investors. Not to condescend to "mom and pop" anywhere in the world, but they are often the last ones to arrive at a party, and the first to be carried out the door.

See also my earlier post on the surging margin debt and the impact of high-school dropouts on the Chinese stock market.

However, the Economist blog is not so sure the surge in Chinese stocks is a bubble.

... Valuations for smaller companies are increasingly irrational but the market as a whole is less frothy. The Shanghai index, which includes China’s biggest companies from banks to oil majors, is trading at a forward PE of about 15, in line with its ten-year average. From this perspective, the rally looks more like a “mean-reversion trade” than something wildly unsustainable, says Francis Cheung of CLSA, a broker...

And Jonathan Shapiro at the Sydney Morning Herald cited London-based macro-consultant James Aitken's interview with The Australian Financial Review in saying that a "put" had effectively been placed under the market by Chinese policymakers who were keen to inject liquidity into the system to help it transition through a weak patch.

For now it seems momentum, the weight of money, the will of policymakers is behind China's sharemarket rally. And if it keeps going, it's a matter of time that more international funds feel compelled to enter the hottest stock market around.

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