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Merrill Lynch says time to pare Chinese holdings

Merrill Lynch & Co's China chairman said investors should pare their holdings in China, where the benchmark stock index has rallied 84 percent this year.

"Valuations are too high and it's getting out of control," Liu Erhfei (劉二飛) told a private equity conference in Beijing. "This is a good time to exit, which by definition means it's a bad time to invest."

Li Ka-shing (李嘉誠), Asia's richest man, and central bank Chairman Zhou Xiaochuan (周小川) have warned that a stock market bubble may be building. A more than doubling of the CSI 300 Index in the past six months has made Chinese stocks the world's most expensive, at 43 times reported earnings, Bloomberg data showed.

China's stock valuations "must be a bubble," Li, chairman of Hong Kong property developer Cheung Kong Holdings Ltd (長江實業), said on Thursday. "As a Chinese, I'm worried about the stock market in China."

Some of the stocks trade at 50 to 60 times earnings, he said.

On Feb. 27, Chinese stocks plunged the most in a decade, triggering a global selloff, on concern that the Beijing government would clamp down on speculation. Investors have since shrugged off those jitters, and the CSI 300 has climbed 48 percent.

Competition among buyout firms for minority stakes in Chinese firms has intensified after the government imposed stricter rules on overseas buyouts in September. The value of announced foreign acquisitions in China fell 11 percent to US$27.5 billion last year, Bloomberg data showed.

Even so, China's strong economic growth is attracting buyout funds flush with cash after raising US$32 billion globally last year.

Excessive valuations "doesn't mean you shouldn't invest long term, but take some of the money off the table," said Liu, who's leading Merrill's private equity push into China.

Blackstone Group LP, the world's largest buyout fund, in January tapped former Hong Kong financial secretary Antony Leung (梁錦松) to run its business in China, Hong Kong and Taiwan. The same month, Oaktree Capital Management LLC hired former JPMorgan Chase & Co Asia Pacific chairman Ralph Parks.

"There is increasing competition from both domestic and international investment companies and there's lots of money chasing deals out there," said Kei Chua, partner at CCMP Capital Asia.

Also see story:
HSBC official warns of bubble burst

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