Bloomberg: U.S. Dot-Com Bubble Was Nothing Compared to Today’s China Prices

[greengiraffe]

Why China's sharemarket surge is too powerful to ignore
Jonathan Shapiro
1002 words
14 Apr 2015
The Australian Financial Review
AFNR
English
Copyright 2015. Fairfax Media Management Pty Limited.

Equities Is the boom all blind speculation and should that stop you?

China's sharemarket is on fire. The Shanghai Stock Market Index is up 20 per cent just this month, 30 per cent for the year and almost 100 per cent over 12 months. This week it's been the turn of Hong Kong's large-cap index which surged 10 per cent. This is a bull market of such scale and veracity it is impossible to ignore, given the sheer numbers involved.

On Friday, $US250 billion ($330 billion ) of Chinese stocks changed hands, more than the combined volume in US equity markets. And as if to celebrate the giddy rise, a stockbroker, GF Securities, floated itself on the Hong Stock Exchange and duly surged 42 per cent. The fund managers that got allocations enjoyed a massive payday based entirely on Chinese market hubris.

But the frenzy that is the state of the Chinese sharemarket naturally has Western investors scoffing that the epic flow of "dumb" money into Chinese stocks is at odds with fundamentals and is fuelling a speculative bubble.

And they have a point. There's real evidence to show the new wave of investors in Chinese stocks, on paper, is not that smart. A well-circulated Bloomberg briefs graphic breaking down the level of education attained shows that investors piling into the market today have on aggregate a lower level of education than the previous vintage of speculators. The number of punters with a high school degree or less now accounts for more than half of new investors, compared with 26 per cent of existing investors.

That may be the case but it would be a bad idea to go against what is a seemingly unstoppable tide of money flowing into Chinese shares.

The bull case for Chinese shares was put forward in September by James Aitken. In an interview with The Australian Financial Review, he explained 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.

"The Chinese authorities are all in and there is tremendous put [option] under Chinese assets," he said.

Since then there have been key regulatory initiatives relating to the sharemarket and it's really taken to the sky.

The big-bang moment has been the introduction of the Hong-Kong Shanghai Connect program that has allowed investors in each market to buy securities in each market. Chinese onshore punters can now buy the big Hong Kong stocks while foreign investors have access to onshore stocks.

It now seems like this has turned into the watershed event it was billed as in transforming China's capital markets. And if China is indeed adopting a more Western-style financial system where markets rather than policymakers play the central role in allocating capital, there's no better way to encourage more capital to flow into the markets than through a rampant bull market.

But after the stampede are Chinese stocks now excessively valued? Well they've certainly been more expensive. Even after a 27 per cent surge since the start of the year, the Hang Seng index is still 13 per cent off its peak reached in late 2007. Also relative to other global comparisons, their valuations aren't out of control.

The share price of Bank of China has increased 77 per cent since October yet its price to book of 1.14 times compares with about 1 times book for JP Morgan and 3 times for Commonwealth Bank. There are other stocks that look cheap to some.

One of Australian global fund manager Platinum's favourite stock picks is Kweichow Moutai - a Chinese alcoholic spirit brand that suffered because of the well-documented corruption crackdown. But its growing sales at rates of 20 to 40 per cent, and at a price-to-earnings valuation of 14 times, the fund manager believes it is cheap compared with the 17 times valuation of Nestle, which isn't growing nearly as quickly.

Shanghai Automotive was another of its picks discussed in its most recent fund update, which at a price-to-earnings ratio of 8.5 times and a dividend yield of 5 per cent appeared attractive.

Platinum is one of a few global stockpickers that regard Chinese stocks as cheap, which suggests there may still be room to rally on valuation grounds.

"There is no question that the Chinese economy has slowed significantly as the credit-fuelled investment boom has come to an end. It is highly likely we will see a significant rise in bad debts for Chinese banks," wrote Andrew Clifford from Platinum.

"Yet it is exactly this risk that global investors are trying to avoid that is giving us an opportunity to buy companies at very attractive valuations."

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.

The problem for many Western investors remains transparency. They're still relying on Chinese disclosure and Chinese auditing firms to vet the accounts. They've had bad experiences in the past and are not yet willing to blindly venture into the unknown.

But that misses the broader trend that China is hellbent on developing its financial markets and that means the growth in sharemarket activity is only just getting started.

With billions of dollars changing hands, a whole lot of inefficiencies and trading opportunities are opening up. The Chinese market is providing a haven for hedge funds that can identify mispricings and make markets.

That's a good thing for Australia and the region.

You don't have to go long Chinese shares to appreciate the centre of financial market gravity is shifting in our direction.


Fairfax Media Management Pty Limited

Document AFNR000020150413eb4e00024

[greengiraffe]

China rally in 13 numbers

Patrick Begley
595 words
17 Apr 2015
The Australian Financial Review
AFNR
English
Copyright 2015. Fairfax Media Management Pty Limited.

There seems no end to the spectacular Chinese equities rally as more and more retail investors jump in and feed the frenzy.

On Thursday in morning trade, the Shanghai Composite added another 1.6 per cent, more than rebounding from the previous day's rare 1.2 per cent loss after some disappointing economic data. Some analysts are calling it a bubble. Others note the sharemarkets are still well below 2007 levels. These 13 numbers tell the story of the remarkable rise:

98 - The per cent increase in the Shenzhen Composite Index over the past year. The Shanghai Composite Index rose 97 per cent. The Hong Kong Hang Seng Index was more demure: it increased only 22 per cent.

1.6 million - The number of new accounts opened in Shanghai and Shenzhen A-shares market over a five-day period in March, according to the People's Daily.

⅔ - The proportion of new Chinese retail investors who have not graduated from high school, according to a survey by China's Southwestern University of Finance. A quarter listed elementary school as their highest qualification. About 6 per cent were illiterate.

100 billion - The amount of cash in US dollars China's central bank freed up when it eased capital reserve requirements for banks in February, The Wall Street Journal estimated.

193 billion - The market capitalisation of internet giant Tencent in US dollars, which puts it in the same league as Facebook ($US232 billion). Yahoo, in contrast, has a capitalisation of $US42 billion.

67 - The percentage rise in the share price of Peoplecn, the company which owns official government newspaper People's Daily over the past year. A report last week, "Booming stock market a yes vote for Chinese economy", described the rush as "a natural reflection of the great expectations for the world's second-largest economy".

1.64 trillion - The amount in yuan stockbrokers owe to investors. The margin credit equates to $US250 billion and has risen 50 per cent in three months, Bloomberg reports.

3 - The number of months three of the nation's largest brokerages - Citic, Guotai Junan and Haitong - were banned for breaking margin credit rules. The bans expire in April but six more were recently handed out to other brokerages.

388 - The price-to-earnings ratio for market darling Shenzhen Infotech Technologies based on next year's profit expectations. That's a sizeable fall from its p/e ratio last year of 1249.

4090 - The Shanghai Composite Index points in Wednesday trade. At the index's full height, in late September 2007, it reached 5552 points. This led some analysts to believe Chinese equities have further to go.

5.7 - The year-on-year percentage fall in housing prices, announced in February. The area of land sold between January and the end March fell by 32 per cent from the same period last year while the number of new, unsold homes increased 24 per cent. Many investors have turned to the sharemarket instead in search of yield.

17/11/2014 - The launch date of the Shanghai-Hong Kong Stock Connect, which provides quotas for the two markets to buy into one another. Southbound traffic along the connect hit a record $US2.1 billion in early April, the Financial Times reported. Other stock connects with Singapore and Shenzhen have also been discussed.

1990 - The last year China saw economic growth as weak as the current 7 per cent annual rise in GDP, which is the rate Premier Li Keqiang has committed the country to.


Fairfax Media Management Pty Limited

Document AFNR000020150416eb4h0001u

[greengiraffe]

China regulator seeks to cool stock lending heat
THE AUSTRALIAN APRIL 20, 2015 12:00AM

Scott Murdoch

China Correspondent
Beijing
China’s stockmarket regulator has been forced to calm global fears new measures on stock lending were ordered to help deflate the domestic market’s recent record run.

The China Securities Regulatory Commission revealed on ­Friday it would encourage institutions to start to lend their stock that could be shorted and urged stockbrokers to increase the amount of stocks that could be shorted.

The news created fears around the world that the changes meant the Chinese regulator was becoming worried that its national markets gains over the past year had run too far.

Analysts said the planned reforms was part of the reason behind the 280-point sell-off on the Dow Jones on Friday night, even though the Shanghai and Shenzhen markets rallied by up to 2.2 per cent after the CSRC made its announcement earlier in the day.

However, the CSRC moved to calms fears on the weekend and said the new changes were ordered to offset the growing level of margin lending that has emerged in the past year.

In a statement, CSRC spokesman Deng Ke said the regulator wanted a “balanced development” in both buying and selling in margin trading accounts. “In the past five years, margin buying has experienced rapid development while short-selling with borrowed stocks saw much ­slower growth,” Mr Deng said.

“Taking the rules for a crackdown on the stock market is a misinterpretation ... short selling by borrowing stocks is a mature mechanism commonly adopted overseas that can reduce fluctuations, discover reasonable prices and hedge against market risk.”

Mr Deng said the changes were in line with the central government’s promise made last year to allow the mainland equities to “mature” and become more competitive with major markets around the world.

The Shanghai Composite index is trading at a seven-year high, after surging 111 per cent in the past year, while the main Shenzhen trading board is 98 per cent higher compared to the same time last year.

It is estimated about 80 per cent of those markets is owned by domestic Chinese investors, but the CSRC has pledged to encourage greater overseas institutional investment in the next few years.

The CSRC estimates the number of new domestically-held share accounts stands at 109,000 a day but ordered changes last week where investors could operate more than one account.

Minsheng Securities Research Institute analyst Zhu Zhenxin said the Chinese market’s recent run and the record surge of investors buying stocks increased the risk of a damaging bubble emerging. “I think in the long-term, there is still optimism for the stock market but there is a need to be concerned about risk at this stage,” Mr Zhu told The Australian. “There is now more shorting of stocks, and for new investors, especially those who have joined the market for the first time they should take care. The cost of entering the market is high, valuations are high and that means the risks are larger.”

Additional reporting: Wang Yuanyuan

[greengiraffe]

The world's cheapest sharemarket 'bubble'

836 words
24 Apr 2015
The Australian Financial Review
AFNR
English
Copyright 2015. Fairfax Media Management Pty Limited.

When the price of any market doubles in 12 months (like the Shanghai Stock Exchange's benchmark index), or jumps by almost a quarter in a matter of weeks (like its Hong Kong equivalent), the temptation is to write them off in one word: "bubble".

But can a sharemarket trading on a price-to-earnings ratio of 10 be considered to be in a bubble? That's the Hong Kong-listed stocks in both the Hang Seng Index and the Hong Kong China Enterprises index.

If the answer is "yes", then Mammon help local investors who are ploughing money into the Australian sharemarket, which trades on a nose-bleeding forward P/E of 16.

Ah yes, you say, but look at the mainland Chinese sharemarkets. That's where the full weight of irrational exuberance is on display. The Shanghai Composite Index trades at 18 times estimated earnings for this calendar year, on Bloomberg data. Once again, the move has been dramatic, but the resulting valuation less so. The Shanghai index is about the same as the S&P 500 index, but well below the multiple of 28 investors are paying for the US Russell 2000 index.

"On an absolute basis, the valuations are not expensive, nor are they if you benchmark their P/Es against the US, Japan, Australia, or even Europe," says Joseph Lai, who manages Platinum Investment Management's Asia Fund.

HSBC's head of Asia ex-Japan equity strategy Herald van der Linde doesn't see a bubble in Chinese shares, also pointing to valuations that have expanded fast but from very low levels. He remains "overweight" China.

"We like the financials sectors, banks and property companies, on the back of the lower interest rates we see in China," van der Linde says. "We also see infrastructure projects, such as those on the old silk road, benefiting infrastructure companies in China."

What has been particularly exercising pundits is that the surges on the Shanghai and Shenzhen exchanges, and more recently in Hong Kong, are the result of a wave of new money from individual Chinese investors who look to be punting on a government-sanctioned boom in share prices, and often o on borrowed money.

"In our summer last year we started seeing in the Chinese media almost educational pieces encouraging mainland investors to get back into the sharemarket," Catherine Yeung, a Hong-Kong based investment director at Fidelity Worldwide Investment, says.

But this needs to be put in context. After years of losing money, "mum and dad" investors in China had left the sharemarket, often in favour of property. Exchanges in Shanghai, Shenzhen and Hong Kong essentially stagnated from late 2011 to 201.

Then in November the Chinese government announced reforms that made it easier for foreigners to invest in the Shanghai exchange and for mainlanders to buy Hong Kong-listed mainland businesses.

Policymakers began stepping up measures designed to stimulate a flagging economy. Chinese mums and dads started to take notice of the sharemarket, which was showing signs of life for the first time in years. They began to pile in.

The crescendo looks to have been reached in March, when retail Chinese investors opened about 4.2 million brokerage accounts, triple the number in February and taking the total number of new accounts this year to about 8 million. That's more than were opened in 2012 and 2013 combined, Fidelity's Yeung says.

A change of rules around Easter that gave Chinese mainland fund managers more access to Hong Kong-listed shares sparked a buying frenzy. The average daily turnover tripled from an average of $HK87 billion ($14.47 billion) to $HK231 billion between April 8 and 21.

Then regulators announced curbs on margin lending, which had been embraced by mainland investors.

"The ultimate aim of the government is to create a slow bull market rally," Yeung says. "It's very hard to change the behaviour of an investor who is set to go two ways - either a strong rally or sharp correction. That is the conundrum."

Lai says there has been some particular exuberance among Chinese small caps, but the larger names remain good value. He points to SAIC Motor Corporation, a joint venture between Volkswagen and General Motors and "a big company that sell millions of cars in China". The Hong Kong-listed stock is up 86 per cent over the past year, but trades on a P/E of 9.5. Or the giant China Mobile, which is the dominant mobile telco provider in China, with more than 800 million subscribers. It trades on eight times cash flow, Lai says, and that's after jumping 65 per cent in 12 months.

A bet on China is also a bet that the government can continue to reform and rebalance the country's economy and steer it towards a more sustainable future. But Lai warns: "If the reform stalls, we would have to reassess the market and our investment".


Fairfax Media Management Pty Limited

Document AFNR000020150423eb4o00013

[greengiraffe]

The man who holds the MSCI key to China’s bull market

Jonathan Shapiro
1062 words
27 Apr 2015
The Australian Financial Review
AFNR
English
Copyright 2015. Fairfax Media Management Pty Limited.
Investment China’s weighting in MSCI index may double.

Chin Ping Chia cuts an unassuming figure in the modest Sydney offices of global index firm MSCI. But his next move is the subject of rampant speculation among Chinese stockbrokers and their many clients, and it could trigger billions of dollars of foreign buy orders, which will fuel the next phase of China’s runaway bull market.

Singapore-based Chia oversees the Asian research team at MSCI, which is expected in mid-June to announce whether it will include Chinese mainland or ‘‘A’’ shares in its all-important sharemarket indices. Such a move would almost double China’s weighting in MSCI’s emerging market index, from 18.8 per cent to 37.5 per cent, if there was full inclusion.

‘‘There is lots of money tracking the index but suffice to say when it becomes half of your emerging market portfolio that’s a big change. That is why there are a lot of nervous investors asking their questions,’’ Chia told The Australian Financial Review.

MSCI, or Morgan Stanley Capital International, was founded in the late 1960s by US mutual fund Capital, one of the first to invest extensively in global markets. It is now an independent listed business, overseeing the world’s sharemarket indices, which are tracked or benchmarked directly by $US10.5 trillion ($13.42 trillion) of passive and active investments globally.

Until now, the MSCI (often pronounced ‘‘miski’’) indices have excluded China’s mainland sharemarket because foreigners have not been able to access this market. But as Chinese authorities push to open its capital markets and float its currency, MSCI is responding. In June, MSCI is due to inform the market of the findings of its annual review and its intentions around including Chinese ‘‘A’’ shares. The likely impact of the addition and the impact on a parabolic sharemarket is the source of speculation among hedge funds, large institutions and the the millions of Chinese retail investors who are signing up in their droves for margin brokerage accounts.

‘‘The whispering of all the retail brokers to their clients is don’t get out [of the sharemarket] now because of June,’’ Michael Kelly, the head of asset allocation of US-based asset manager PineBridge, says.

PineBridge has a stake in a Chinese mutual fund business and Kelly says speculation was swirling around the market about the inclusion of A-shares in the global index, which would prompt a flood of foreign buying.

‘‘There is a substantial market cap represented by the A-shares that didn’t get factored into the global index but if you did [investors] would be massively underweight China,’’ Kelly says.

‘‘And the whisper is that they will be included.’’

Hong Kong-based portfolio manager Mark Tinker, of AXA Framlington, believes Chinese authorities ‘‘intend to exploit the indexation effect’’.

By opening its capital markets and forcing the index providers to include its enormous sharemarket, foreign investors who have ignored China’s market are forced to take a view one way or another. To lower the risk of under-performance against their benchmarks, many will pile into an already rampant market.

‘‘It will almost inevitably start to drag in index money, simply as a way of reducing risk and of course when the RMB becomes fully convertible, which may be quicker than many think, the rush to benchmark will be huge,’’ Tinker wrote in a note to clients.

But Chia says any possible inclusion of Chinese A-shares will be gradual, and will most likely result in the initial inclusion of a smaller, select group of shares. It took about a decade for Taiwanese and Korean markets to be fully included in their indices.

‘‘China is likely to go through a similar process, where it takes multiple years to fully reflect the weight of China in the index. This depends on how China opens up their financial markets. If they decided tomorrow there would be no restrictions [on ownership], there would be no reason to wait 10 years.’’

As Chia explains, China’s sharemarket and its economy is an anomaly. While China’s gross domestic product has grown by 16 per cent a year since 1994, the Hong Kong, or H-sharemarket, has increased by only 2 per cent a year. China’s domestic A-shares, by contrast, have tracked economic growth better, delivering 12 per cent a year returns.

Restrictions on A-shares have prevented foreign investors from participating in the economic miracle but as Chinese authorities seek to open their capital markets, they have increased access. A big-bang moment came in November, when Chinese authorities introduced the Hong Kong Shanghai connect programme, which allowed investors to access A-shares via the Hong Kong exchange.

The MSCI contemplated including A-shares in 2013. Their criteria reflect economic development and size – neither are impediments in China’s case. The missing piece was ‘‘accessibility’’ and the efforts of Chinese authorities – such as the Connect programme and an expansion of their quota programme – have left fewer reasons for exclusion.

The impact for the $US1.7 trillion of funds that tracks the emerging market index will be huge, doubling China’s exposure in that index to nearly 40 per cent. China’s share of the world index would double to 5 per cent.

The maths suggests something like $250 billion will be ploughed into A-shares by index tracking funds, assuming full inclusion. But a partial inclusion in the index could result in more modest flows of $20 billion to $30 billion. That’s at a time when Chinese A-shares have more than doubled in value since June 2014, prompting foreign onlookers to brand the fast and furious rally as a speculation and margin-fuelled bubble.

The doubling of the China market has also amplified the calls for the introduction of Chinese shares to the index. For MSCI it is not its job to assess value, or time the markets, but to reflect the size of the investable equity market. It is the fund managers that have to make a call. ‘‘When we speak to investors there was a time when China was just not interesting – ‘the market is not performing well and it’s not on my radar’, they said,’’ Chia says.


Fairfax Media Management Pty Limited

Document AFNR000020150426eb4r0000x

[opmi]

Feels like a lot of VBs dont invest in HK shares via stocks or ETFs or HKEX.
Dont miss a bubble...

[specuvestor]

I doubt China is in a stock bubble YET but the trend is clear

I also doubt MSCI will include China A into MSCI yet. I think China will continue opening up the capital account and there will a chance next year just in time for a 18 months bull run

When you have such misleading titles of doom and gloom, you know the end is NOT near. The article is actually refering to China tech shares not China market.

I have been through CLOB and dot com. I know what's a bubble without defining it to the 4th decimal point. China stock market is no bubble as of now, whereas Australia property bubble should be cracking soon just as Singapore and China did. Besides HK I think so far Asian countries have done well taming the property market, Australia has tamed it better than I thought but it will have to come down rather than "rise slower".

This year could easily be China stock market's year

[corydorus]

I got this feeling is going to burst. This is not sustainable. I hope we will not be implicated when it does.

[CityFarmer]

I got this feeling is going to burst. This is not sustainable. I hope we will not be implicated when it does.

Up to the latest info, the HKEX's average PE is 12.5, and the respective B-Share PE for Shanghai and Shenzhen Exchanges are 21.6 and 16.0 respectively.

Bubble? probably not yet. Going to become one? May be, and still need more time to reach the boundary. May be as Mr. specuvestor estimation, 1.5 years down the road...

Source: http://www.hkex.com.hk/eng/csm/highlight...angCode=en

[BlueKelah]

I got this feeling is going to burst. This is not sustainable. I hope we will not be implicated when it does.

Up to the latest info, the HKEX's average PE is 12.5, and the respective B-Share PE for Shanghai and Shenzhen Exchanges are 21.6 and 16.0 respectively.

Bubble? probably not yet. Going to become one? May be, and still need more time to reach the boundary. May be as Mr. specuvestor estimation, 1.5 years down the road...

Source: http://www.hkex.com.hk/eng/csm/highlight...angCode=en

New accounts being opened per month are now at a record high in China at same level during 2007/2008. Everyone is jumping in on the stock bandwagon after the property speculation has fizzled.

Fundamentally there's big divergence with economic data being poor and trending in opposite directions. SSE has doubled in less than a year and still going up a few % every week/day.

Don't think it can last another 18 months. Another few months the most.