The dramatic rise in Hong Kong share prices over the past two months has sparked fears the market is experiencing of a China-inspired bubble, with analysts warning it is about to burst.
With share prices on the main Hang Seng index having increased 36 percent since Aug. 22, crashing through the 30,000-point barrier briefly on Thursday, onlookers say all the warning signs of a severe tumble are evident.
Morgan Stanley on Thursday released a report downgrading its market view of Hong Kong to "cautious," saying: "We remain bullish on the fundamentals, but the magnitude of growth/returns/liquidity required to justify the current valuations has become untenable."
The report said that market valuations were now on average 22 times that of earnings, and the market, which is experiencing its longest bull run ever from its SARS-inspired low in April 2003, was overstretched.
Morgan Stanley believes this is comparable to the 2000 tech bubble.
"China stocks now have plenty in common with the NASDAQ bubble in 2000," it said.
It says there is a 30 percent chance the index could fall to 24,000 in the next three months.
David Webb, a shareholder activist who has been pushing for reform in the Hong Kong market since the Asian financial crisis, says the current picture is "very much" a bubble.
"This is the third China bubble in Hong Kong, after crashes in 1993 and 1997. The difference this time is there is also a huge bubble in the mainland," he said.
Webb runs a campaigning Web site -- Webb-site.com -- and a recent survey of users said that most people believed the market could fall back to 14,000 points.
The trigger for the record-breaking rise in recent months was the announcement by Chinese officials that they would allow mainland individuals to invest in Hong Kong.
Despite the lack of any concrete details of the scheme, supposedly limited to account holders at one bank in Tianjin, and with no firm date fixed for its implementation, money has poured into equities here.
Investors believe that the huge liquidity slopping around Chinese markets will quickly make its way here, bumping up prices and creating a replication of the soaring Shanghai market.
Webb disagrees. He believes the scheme will either be very limited, with nowhere near the level of liquidity many expect, or so successful it will drain cash from the mainland markets, triggering a correction there which will echo here, as the success of both markets is based on Chinese companies, often listed in both cities.
The Morgan Stanley report backs up the assertion, believing the liquidity has already arrived. Other onlookers believe Chinese cash has already made its way here, often illegally.
But others say the volatility in recent weeks has actually shown that there is solid support for the current valuation and there will be no repeat of the crash that hit the bourse 10 years ago.
However, Francis Lun, the general manager at Fulbright Securities, insists as long as companies continue to produce spectacular figures, the market here will keep thriving and any correction will be minor.
"Everything is slightly different from 1997, in that share prices are supported by earnings," he said.
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