Houston Community News >> Chinese Year of the Bubble

5/29/2007-- CHINA'S CSI 300 Index rose above 4000 for the first time, driven by a surge in new investors who are ignoring warnings of a bubble to enter a market which has doubled this year.

"There is lots of liquidity flowing into the market," according to Fan Dizhao, who helps manage about $US1.8 billion ($2.2 billion) at Guotai Asset Management in Shanghai. "Even fund managers dare not sell their shares at this stage, as no one knows when the rally will be over."

The benchmark CSI 300, which tracks yuan-denominated A shares listed on China's two exchanges, Shanghai and Shenzhen, closed at 4083.96, up 98.71 on the previous day's close.

Investors opened more than 300,000 accounts a day last week, even as former Federal Reserve Chairman Alan Greenspan called the rally unsustainable and said the market may undergo a "dramatic contraction".

China's myriad small investors have clearly forgotten the short but sharp shakeout on the market in February, triggering near panic across the world's share markets.

China Merchants Bank, the nation's third-biggest publicly traded lender, rose 0.41 yuan, or 1.9 per cent, to 21.53.

China Petroleum & Chemical, Asia's biggest oil refiner, also known as Sinopec, jumped 0.59 yuan, or 4.8 per cent, to 12.99. China International Marine Containers, the world's largest maker of freight containers, gained 3.17 yuan, or the 10 per cent daily cap, to 34.82.

Households are shifting funds into the stock market, seeking better returns than they can get on their bank deposits.

The central bank's benchmark one-year deposit rate, a ceiling for deposit rates commercial banks can offer, is 3.06 per cent - little more than the nation's 3 per cent inflation rate. The CSI 300 has risen 198 per cent in the past year.

Investors opened 362,719 accounts at brokerages on May 24, the fifth straight day the tally has exceeded 300,000, according to figures on the China Depository & Clearing Corp's website. So far this year, 20.9 million accounts have been opened, four times the amount in 2006, the clearing house's data shows. The CSI 300 is now valued at 46 times earnings, making the mainland market the most expensive in the Asia-Pacific region.

Dr Greenspan last week joined central bank Governor Zhaou Xiaochuan and Asia's richest man Li Ka-shing in warning of a bubble on China's stock market. The index fell 0.5 per cent the day after Dr Greenspan's comment. It resumed its gains the next day, closing 1.7 per cent higher.

The CSI 300 has climbed 15 per cent since May 6, when the central bank's Mr Zhou said he was concerned about stock valuations.

It also rose to a record after billionaire Mr Li on May 17 said the market "must be a bubble".

China's stock market regulator last week ordered brokerages to make investors sign a declaration that they are aware of the risks when opening stock-trading accounts.

The nation's Ministry of Education warned university students to not get involved in stock trading, because they would be unable to bear the losses should their investments turn sour, the official Xinhua News Agency reported this week.

Most students didn't have stable incomes and were economically dependent on their parents for money, limiting their ability to cope with failed stock investments, the report said, citing ministry spokesman Wang Xuming.

The pace of gains on the stock market has added to speculation that China's government will take measures to cool down the frenzy.

"Some investors simply keep buying shares, since there were no crackdown measures by regulators," said Fan at Guotai Asset Management.

(Contributed by Bloomberg)