Thursday, May 17, 2007

The Mainland Chinese Bubble

Further to my earlier post here, Li Ka-shing says that Mainland Chinese equities represent a bubble right now. As Asia's richest resident, the 9th richest in the world, and a long history of success in business, his views should carry soem weight.

Equities are up 85% so far this year, and almost 300% over the past 12 months. The average P/E ratio in the CSI 300 is 43- suggesting an expected fundamental return (that is, ignoring capital appreciation) of 2.3% (in contrast, the average P/E in the HSI in Hong Kong is 16, implying fundamental returns of 6.25%). New brokerage accounts are being set up at a rate of 300,000 per day. This market is due for a crash... it's just a matter of time. See this story for more.

4 comments:

cksy said...

Just watched the TV news. I think the action taken by the People's Bank of China looks like a contractionary monetaty policy (increase lending and deposit rates, and bank reserves ratio too, to cool down the stock market)? Should I expect the growth of GDP slow down in the future?? And disinflation???

It's exciting to see what I have learned on TV!

James Yetman said...

Yes- any contractionary policy designed to slow down the growth of the stock market will also slow down GDP growth- in the short-run at least.

Mike said...

Dr. Yetman, really excited to come across your blog by chance. don't expect I can still learn from you though finishing your course last semester.

Regarding this issue, there seems to be a paradox here:
raise interest rate and appreciation expectation --> more capital inflows --> more bubble

it seems that PBOC has to keep on raising rate until it really deflate the economy. not sure whether they have the gut to do it.

Besides, PBOC seems to react to a asset bubble rather than inflation, at least i guess that's what on their mind (US pressure is another factor). is this not normal for a central bank to take action on asset inflation or it becomes a fashion now?

Mike
Your mecon student

James Yetman said...

Yes- this really is a dilemma... see my latest post... http://hongkongmacro.blogspot.com/2007/05/monetary-policy-and-dragon-slaying.html