China's `blind optimism' spurs stock bubble fears

China's stock market has become the most expensive in Asia, leading strategists at Citigroup Inc, HSBC Holdings Plc and UBS AG to warn investors to stay away.

Shares traded on mainland Chinese exchanges cost twice as much relative to earnings as they did 18 months ago, and double the average for emerging markets, after extending last year's 121 percent rally in the Shanghai and Shenzhen 300 Index. The surge sent their value above US$1 trillion for the first time and prompted the government to caution shareholders that "blind optimism" is driving gains.

China Life Insurance Co (中國人壽保險), the nation's largest insurer, has more than doubled since trading began in Shanghai on Jan. 9. The debut followed a stock sale in which investors ordered 49 times the available shares. Industrial & Commercial Bank of China (中國工商銀行), the No. 1 bank, has gained 70 percent since selling shares in October in the biggest-ever initial public offering. Demand for ICBC shares from individuals in China was five times that of institutional investors, according to bankers managing the sale.

"It's a warning sign every time you see retail investors in long queues for initial offers," said Lau Wing Tat, who oversees US$8 billion as chief executive officer of DBS Asset Management Ltd in Singapore.

"Retail investors don't set the trend and instead pile in when they think there's money to be made, often near the end of the rally," Lau added.

International investors are starting to gain more access to the local market in China, where economic growth is the fastest among the world's major nations and the yuan is strengthening.

DBS Group Holdings Ltd, Southeast Asia's largest bank, is among 55 foreign firms that have government approval to invest a total of US$9.55 billion in yuan-denominated securities, including so-called A shares. The bank owns a 33 percent stake in Changsheng Fund Management Co (長盛基金管理), a Beijing-based firm which manages 25 billion yuan (US$3.2 billion) of local assets.

The Shanghai and Shenzhen 300, tracking A shares on the mainland's two exchanges, jumped 10 percent last week to 2396.09, its biggest weekly gain in eight months. The index climbed as much as 3.5 percent today and is up 21 percent this year.

International investors can buy Chinese companies' H shares, listed in Hong Kong, without restriction. The Hang Seng China Enterprise Index of H shares has fallen 3.5 percent this year after gaining 94 percent last year.

The Shanghai and Shenzhen 300 is valued at 37 times profit, up from a low of 14.4 times in July 2005, and the H-share index at 20 times. The Morgan Stanley Capital International Emerging Markets Index, a global benchmark, is valued at 15 times.

Marc Faber, the Hong Kong based fund manager who predicted the US stock market crash in 1987, said in an interview on Jan. 8 that he would be "careful" about buying shares in China and forecast a tumble in emerging markets in the first quarter.

The surge in China A shares "makes you nervous," said Virginie Maisonneuve, London-based head of international equities at Schroder Investment Management Ltd, which oversee US$230 billion.