Posted on 10/29/2007 11:50:06 PM PDT by bruinbirdman
A Chinese vessel this week soared skywards, amid nervousness from ordinary folk that it could soon come crashing down to earth anytime soon.
No, I am not referring to the mainland’s stock market but to Wednesday evening’s launch of the country’s first lunar orbiter.
Crowds that gathered at the launch site in Sichuan province were told to prepare wet handkerchiefs to cover their noses lest the rocket exploded or crashed.
The launch of Chang’e I sparked plenty of analysis about whether an Asian space race was gathering speed.
About the only matter which generated more comment was the future trajectory of the Chinese stock market, whose benchmark index has climbed nearly sixfold over the past two years.
Many folk have been warning about the dangers of the Chinese stock market bubble. Although none – until this week – were called Warren Buffett.
On the day that the lunar probe was launched, the Sage of Omaha happened to be in China, albeit in Dalian on the other side of the country, visiting a subsidiary of his Berkshire Hathaway operation.
Speaking during the trip, Mr Buffett warned that investors should be “cautious” about the Chinese stock market.
“We never buy stocks when we see prices soaring. We buy stocks because we are confident of the company’s growth,” he said.
Cynics would point out that it is easier to allude to price bubbles after you have exited one of your flagship holdings and earned a sevenfold return: Mr Buffett was speaking days after Berkshire Hathaway sold its entire stake in PetroChina.
The market ignored the sage advice that day and closed up 1.2 per cent. Perhaps investors slept on his comments – the Shanghai index tumbled nearly 5 per cent on Thursday and finished the week nearly 9 per cent down.
The mainland markets sailed through similar bearish comments made this year by both Alan Greenspan and Li Ka-shing, Asia’s richest man.
The Hong Kong tycoon, a canny investor in mainland companies, in May confessed to being worried about the “bubble” in the Chinese stock market. The benchmark index then stood at 3,800. It closed yesterday at 5,589.
According to JPMorgan, the Chinese market is trading at 57 times 2007 earnings – more than double that of Hong Kong. However, views on where Chinese stocks go from here remain mixed.
Earlier this month Stanley Ho, the Macao gaming king signalled his bullishness about the Hong Kong market by predicting that once the flagship index breached 30,000 (it finally did yesterday, hitting 30,405.22) it would power towards 40,000.
Jing Ulrich, JPMorgan chairman of China equities, rates the A-share market as expensive but doesn’t believe it will crash – corporate earnings growth remains robust, the quality of listed companies joining the stock market is rising every month and the macro economy remains strong.
Ms Ulrich also points to two measures taken by Chinese authorities that she believes will help to gently deflate stock prices.
China has this year accelerated the numbers of companies allowed to join its domestic stock markets.
Initial public offerings are likely to raise a record $60bn this year, more than any market in the world, helping to mop up investor liquidity.
Beijing also took the landmark decision to permit investment in approved overseas markets, which will allow renminbi to escape the domestic pressure cooker.
Ms Ulrich estimates that around $90bn will be channelled overseas via this programme by the end of 2008 (around a third to Hong Kong).
The prediction that air will come out of the tyres gently will not, though, help the here and now in which investors operate.
The rapid rise in stock prices is affecting mergers and acquisition deals, such as the proposed investment by General Electric in to Shenzhen Development Bank.
Two years ago GE agreed to pay $100m for a 7 per cent stake. Various delays meant that the deal could not be completed until recently since when the SDB share price has climbed nearly eightfold. GE formally pulled out of the deal this week.
The rise is also a source of interest for overseas investment banks, many of whom are seeking to invest in domestic brokerages if, as expected, a ban is lifted next year.
Valuations of broking firms, such as Citic Securities, have shot up this year, on the back of record retail trading volumes.
There is a view among some usually well-informed dealmakers that China will not allow a stock market tumble until after the closing ceremony of the Beijing Olympics.
But that supposes that the Communist party is equipped to tame the stock market beast.
If Beijing is not entirely confident about successfully launching an unmanned lunar probe, that might prove wishful thinking.
How high can we launch them?
The best investment the Chinese ever made was in the Clintons.
And that "investment" continues to this very day.....
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