Shanghai Composite Index to 6000 By 2008?

The Shanghai composite index just crossed 5100 (up by another 1.5%). My earlier prediction was that this index will reach 5000 by year end. While markets around the world are in turmoil, Chinese markets are holding very steady. There are many reasons for this anomaly - isolated markets, lack of futures trading and lack of short trading just to name few. These restrictions are going to remain in place at least till the markets are reformed.

My modified prediction is that the SSE composite index will reach 6000 - 18% higher than where it is trading now - by the Beijing Olympics in 2008. That would be a nice return of 18% in one year. Here is why I believe it is heading towards 6000.

1. The restrictions mentioned above are going to remain for some time as the Chinese government would like to slowly roll out market reforms to pop the bubble slowly
2. Almost anyone who has access to the market, including older people and housewives, is investing in stock market. Any major bubble-bursting would have major social implications and no one in China would like to see social unrest before the Olympics
3. China is still growing at 10+ %. So even if stock prices are out of step with fundamentals, the sheer growth would help fundamentals to catch up with stock prices
4. China is holding over $ 1 Trillion worth of reserves. The Chinese government is trying to find home of this cash (it invested $ 4B in Blackstone (BX) IPO). If needed, the Chinese government may have to invest in their own companies to avoid major crash

To avoid a major crash in the market, China should slowly allow Chinese people to invest in international markets which would help increase investing choices

For now, if you want to participate in this rally, you can try investing in MATTHEWS CHINA FD [MCHFX] or ISHARES TR FTSE INDX (NYSE:FXI) ETF

Disclosure: Author has a long position in some of the above-mentioned securities.