Posted by: Frederik Balfour on July 29, 2009
How do you spell stock market bubble? S-H-A-N-G-H-A-I. China’s main share market is up 80% this year, and some IPOs have skyrocketed several times their offer price on the first day of trading. Sichuan Expressway soared 300%, repeat 300% on its opening day of trading on Monday July 27, and China State Construction Engineering Corporation surged 70% today, July 29, even as the Shanghai Stock Index plunged 5%. Of course that might just be due to a sell-off in most other stocks so people could climb onto the IPO bandwagon. Chinese investors routinely liquidate existing positions to pile into new issues.
But let’s face it, Pigs Don’t Fly, not even in China. The febrile enthusiasm exhibited by Chinese investors in this latest market rally, shows that nothing was learned from the market rout that started in late 2007. If anything, people are desperate to plough back into the stock market to make up for previous losses. In China, the risk of missing a rally is more important to many punters than the potential downside should there be a correction. See my story Suckers Rally. Oh, and let’s not forget to mention that Shanghai has overtaken Japan as the world’s second largest stock market.
It’s important to remember that China’s stock market is still something of a black box. The China Securities Regulatory Commission’s vetting process of IPOs is anything but transparent, and you can bet that when there’s so much money to be made from listings, that corruption is inevitable. There’s a long list of firms in the queue to IPO, and the CRSC gets to decide who goes and who waits. One can well imagine how companies are willing to grease the wheels of bureaucracy to tap markets at a time like this when things are so hot. “They need listing rules to be more transparent and standardized so companies don’t have to kowtow and lobby [to the CSRC] the head of investment banking in China at an international bank told me a few weeks ago.
How long the current rally will last is anyone’s guess. Valuations are already nearly as high as they were when the last bubble burst. But with Beijing encouraging banks to pump money into the economy—lending was up more than 200% year on year in the first six months—much of this money will find its way into the stock market, regardless of what purpose for which it was originally borrowed.