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China bubble debate turns to when, not if, stocks will sink
[SHANGHAI] It's no longer a question of whether China's stock-market rally is a bubble, but when the bubble will burst.
That's the refrain from a growing number of analysts as valuations climb to levels that by some measures already exceed the peak of China's last equity mania in 2007.
A market crash may come within six months, Bocom International Holdings Co said Tuesday, citing an analysis of global bubbles over 800 years that shows the speed of gains in China mirroring past market peaks. Macquarie Investment Management, whose Asian stock fund is outperforming 97 per cent of peers in 2015, has already eliminated exposure to mainland shares after turning bearish for the first time in seven years.
The government may engineer a correction if valuations rise much further, according to CLSA Ltd.
"We are probably going to be in a very volatile trading period before a crash eventually happens," Hao Hong, the chief China strategist at Bocom International in Hong Kong, said in an interview with Bloomberg Television. "It is plain that China is in a bubble."
Fuelled by record margin debt and unprecedented numbers of novice investors, China's market capitalisation has tripled in the past year to US$9.8 trillion. At 84 times projected earnings, the average stock on mainland exchanges is now almost twice as expensive as it was when the benchmark Shanghai Composite Index peaked in October 2007.
In a sign of how quickly investor sentiment can shift, the Shanghai gauge has tumbled 5.4 per cent over the past two days, after closing at a seven-year high on June 12. The index is still up 134 per cent in the past 12 months, the most among major markets worldwide, despite projections for the weakest annual economic expansion since 1990.
The Shanghai Composite dropped 1 per cent at 10:03 am.
The combination of surging turnover and rapid price gains in China's yuan-denominated A shares suggests a market peak is near as traders continuously test whether "the greater fool" will step in to buy, Mr Hong said. He estimates the Shanghai Composite could climb as high as 6,100, versus Tuesday's close of 4,887.43, before turning lower.
The 20-day average value of shares changing hands on mainland exchanges has jumped to about US$314 billion, versus US$244 billion on bourses in the US, which has a market capitalisation more than twice the size, according to data compiled by Bloomberg.
"If you look at the A-share market, it's becoming very speculative," Sam Le Cornu, who oversees about US$3 billion in Asian equities at Macquarie in Hong Kong, said in an interview with Bloomberg Television on Tuesday. "That's the root cause of the concern when you have bubbles."
While some parts of the Chinese market are overextended, valuations on the whole aren't high enough to warrant a crash, according to Miranda Carr, the head of China thematic research at Espirito Santo Investment Bank.
The Shanghai Composite, which has about half its weighting in financial and industrial companies, is valued at 18 times projected earnings. That compares with 65 times for the nation's ChiNext gauge, which is dominated by technology shares.
"The idea that this is going to suddenly peak and burst, and you're going to have this sort of cataclysmic crash, and it's all going to be over - that's way too pessimistic," Mr Carr said in an interview on Bloomberg Television in London. "What you're going to see is a correction in some of the really highly-valued areas."
Chinese policy makers view a 12-month forward price-to- earnings ratio of 20 as a signal of over-valuation for the broader market, Francis Cheung, a strategist at CLSA in Hong Kong, wrote in a June 12 report titled "Bubble trouble." If shares keep rising, the government will probably introduce a stamp duty on stock purchases, Mr Cheung wrote.
For Pau Morilla-Giner, the chief investment officer at London & Capital Group Ltd, mainland markets have become too speculative for international money managers to take part. Swings in the Shanghai gauge over the past 30 days are bigger than every other market worldwide except Greece, according to data compiled by Bloomberg.
"It smells like a bubble, it looks like a bubble, and it walks like a bubble," Mr Morilla-Giner said in an interview on Bloomberg Television in London. "Steer clear, that is the trade."