More on Shanghai 4000
Brian Bremmer in Business Week on the phenomenon of Shanghai 4000, which we discussed a few days ago:
China’s domestic stock markets have moved into Alice in Wonderland territory. The Shanghai Stock Exchange composite index has shot up 50% this year, following a 130% gain in 2006. Even though the so-called “A-share” mainland companies are now trading at rich multiples of about 30 times projected 2007 earnings…”We believe it’s now critical for the government to take action and prevent the excess from building up further,” Goldman Sachs equity strategist Thomas Deng warned in a note to clients on May 10…
“The government should actively state that there is a bubble in China and the wording should come from senior Chinese Communist Party leaders,” says Shaun Rein, managing director of the Shanghai-based China Market Research Group (CMR). “There are too many new investors coming into the market with glossy eyes expecting to make fortunes.” In fact, some 368,000 brokerage accounts were opened on May 8 alone, according to the China Securities Depository and Clearing Corp.
While China’s economic fundamentals are incredibly robust–first-quarter gross domestic product advanced by 11.1% and mainland companies are enjoying explosive earnings growth–the rally this year has taken on a life of its own. A sizable chunk of China’s $2.2 trillion in household savings has shifted to equities. Money inflows are driving market gains, which in turn attract more cash, and so on…
Though estimated earnings for A-share stocks traded on the Shanghai-Shenzhen 300 index (recently renamed the CSI 300 Index) should grow at a torrid 40% clip this year, it would be hard to justify those kind of valuations even in an economy as high-speed as China’s. At 4,600 or so, the stocks on the Shanghai stock exchange would be trading at a staggering 42 times estimated 2007 earnings…
the longer Beijing waits — and some think China won’t act forcefully until after the 2008 Summer Olympics — the bigger the risk of a painful blowout. Right now, China’s market is worth about 70% of the country’s total $2.6 trillion in annual economic output, compared to 150% in the U.S. So the mainland’s macro-economy wouldn’t suffer a Japanese-sized shock if the market collapsed…
“China’s market is worth about 70% of the country’s total $2.6 trillion in annual economic output, compared to 150% in the U.S.” But what if China’s GDP isn’t really $2.6 trillion, but is vastly overstated and really far less, as Investors Business Daily claims? The risks, already significant, would appear to be even greater, given China’s allegedly cooked books and mountain of bad debts.