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Get Ready for the Chinese Bubble to Burst

Jan. 31, 2007 8:08 AM ETFXI, PGJ, CAF8 Comments
John Bethel profile picture
John Bethel

I used to enjoy reading Paris-based Michael Sesit when he penned his weekly "Global Player" column at The Wall Street Journal Europe. Then Sesit joined Bloomberg and I've come across this column of his on the emerging markets, including China.

Are there risks? You bet. Strategists at Citigroup Inc., UBS AG and HSBC Holdings Plc are advising clients to be wary of China, whose Shanghai and Shenzhen 300 Index has soared 155 percent in the past 12 months, including 26 percent in 2007. At 38 times projected 12-month earnings, the index's price-earnings ratio is more than double the MSCI Emerging Markets Index's 15.

And, over at Maoxian, The Chairman offers up an illustration of What It Will Look Like When the Chinese Stock Bubble Bursts.


This article was written by

John Bethel profile picture
John Bethel (http://networkingstockblog.com/by/author/john-bethel/) is a freelance writer who has managed his own portfolio for the last 11 years. We’re normally wary of non-professionals, but John’s articles — published on his blog Controlled Greed (http://controlledgreed.typepad.com/) — are a useful and thoughtful source of investment ideas. The focus is value. His stated time horizon is 3-5 years, and his analysis pays close attention to classic valuation metrics. Mr Bethel owns every stock he writes about, in contrast to the recent trend in sell-side firms to prohibit analysts from taking positions in stocks they write about. We think that having “skin in the game” is a good thing, as long as ownership of stocks under discussion is clearly disclosed. Blog URL: http://controlledgreed.com (http://www.controlledgreed.com/)

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Comments (8)

To me there are too many foreigners who make comments about the Chinese stock market without even understanding it. Just because the stock curves look like the US internet bubble of 2001 does not mean it is going to follow the same pattern. But I must say after such a ramp up, a pull back of 30-40% would only be normal, rather than a castatrophe.

Now with the 1st quarter 2007 results in, over 1400+ public companies reported net earnings growth of 45%+. We are not talking about PE of 1800 of EBay in 2001. China Mobile is still trading at a reasonable PE with a 25% growth rate. Look at Guangshen Railway it will continue to grow because it is partly owned by the government. From time and time, the government will divest routes to that company. The same can be said for China Life and Huaneng Power.

When the economy is growing at least 8%+ for the next five years, the big caps will grow their earnings at multiples of economy growth. Look at the earnings of BoaSteel, went up 154% from last year. It will not grow another 150%+ next year, but 20%-40% should be expected. This is something you cannot get with the US stocks.
I don't believe the Shanghai and Shenzhen markets are the right metric for non PRC-resident investors in measuring bubbles or time lines. Most of us own H-shares and Red Chips traded in Hong Kong or as ADRs in NY. The market price correlations between mainland exchanges and those used by US retail investors do not correlate well, nor are the underlying fundamentals of companies listed each, the same.

One getrs an entirely different picture comparing corporate P/E and PEGs in markets catering to different investor groups. Certainly some good Chinese stocks became overbought, eg China Life, and are in the process of correcting, but to suggest that FXI and many of its components are in a bubble, without presenting rationale as to why, seems unfair.
A bubble breaks because it's filled with too much air. Too many internet companies in 2000 had no earnings and little in sales. Hype blew up the bubble. Chinese firms in the fxi have both earnings and in most cases , hi growth. Look at Apple and Google! Hi earnings and hi growth of sales & earnings. China is growing at 10% per year and the leading firms are growing 20-30-40%+ Growth and earning are not "Hot Air". If you want to argue that Chinese growth is going to start to fall, than we start to be concerned about PE's.
John Gaats profile picture
Can you be specific on when the bublle is going to burst. Or how it is going to happen? I know that Chinese investors are insane. But all stock investors are insane. Can they become sane one day and bubble burst? My own experience is that the bursting itself is quite insane. Can you justify nasdaq falls from 4000 to 2000 all of sudden. Can sane people do it in a sane manner?
Other than passing rumors, can you present your own evidences. I think it is cheap to distribute rumors like this in New York when most people do not understand China
Yah, you're right. Investors don't actually do anything useful, if you think about it. They just buying stock and selling it. It's like a big gambling game for them. They're trying to get something for nothing, and they're all convinced they deserve it. They feel as capital itself it actually meritable. That's an insane frame of mind to begin with. Timeline is more valuable than the idea that the herd will follow itself.
02 Feb. 2007
Brian, I recommend you learn to speak and write proper English before expecting anyone to take your ideas seriously. I am an investor and entrepreneur, and you simply don't know what you are talking about.
I apologize for my broken state of mind while it approaches midnight as I program my computer. I honestly didn't know just how syntactically inept I become when I finally call it a day and wind down in my somewhat lame blogging hobby here. It's interesting to see what it takes for me to finally stop programming for the day. I can't even form an English sentence. Gees.
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