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If You Are A Chinese Stock Market Investor, Do Not Look At This Chart

Tyler Durden's picture




 

The bubble cries are getting louder when it comes to Chinese stocks which, thanks to a surge in liquidity and exorbitant leverage, are in the midst of a truly epic rally that has quite a few observers concerned. BNP for instance, recently described the situation as a “self-feeding domestic frenzy” before offering the following rather ominous assessment: 

“Margin purchases are now accounting for almost 20% of equities daily turnover which itself has soared to wholly unprecedented levels in another sign of self-feeding speculative frenzy. What happens next is clearly an ‘unknown-unknown’. By definition detached from fundamentals, speculative bubbles are inherently re-enforcing in the short-term and frequently last longer than expected. The longer they continue, however, the larger the eventual bursting.” 

There appears to be little doubt that this particular speculative bubble has indeed before “re-enforcing,” because as we showed last week, the pace at which Chinese investors are creating stock accounts has accelerated with nearly 1.7 million accounts created in the last week of March alone (up 50% from the previous week which itself saw a 58% spike from the week before). Compounding the problem is that many new market participants lack even a junior high-level education suggesting that they may not be adequately assessing the risk factors. As we put it: “We certainly don’t see what could go wrong here. Last month alone, a new investor base the size of Los Angeles — many of whom may be only semi-literate — piled into Chinese equities which have nearly doubled in the space of 8 months on the back of margin debt that can now be measured as a percentage of GDP and volatility is at a 5-year high. Everything should be fine.”

Given all of this, it’s not exactly surprising (although it is scary) that Chinese tech stocks appear to be more overvalued (at a shocking 220 times profits) than tech stocks were in the US leading up to the Nasdaq collapse. Here’s Bloomberg:

The world-beating surge in Chinese technology stocks is making the heady days of the dot-com bubble look tame by comparison.

 

The industry is leading gains in China’s $6.9 trillion stock market, sending valuations to an average 220 times reported profits, the most expensive level among global peers. When the Nasdaq Composite Index peaked in March 2000, technology companies in the U.S. had a mean price-to-earnings ratio of 156.

 

Like the rise of the Internet two decades ago, China’s technology shares are being fueled by a compelling story: the ruling Communist Party is promoting the industry to wean Asia’s biggest economy from its reliance on heavy manufacturing and property development. In an echo of the late 1990s, Chinese stocks are also gaining support from lower interest rates, a boom in initial public offerings and an influx of money from novice investors.

 

The good news is the technology sector makes up a smaller portion of China’s equity market than it did in the U.S. 15 years ago, limiting the potential fallout from a selloff. The bad news is that any reversal in the industry will saddle individual investors with losses and risk putting an end to the Shanghai Composite Index’s rally to a seven-year high.

 

“Chinese technology stocks do resemble the dot-com bubble,” Vincent Chan, the Hong Kong-based head of China research at Credit Suisse Group AG, Switzerland’s second-biggest bank, said in an interview on April 2. “Given stocks fell 50 to 70 percent when that bubble burst in 2000, these small-cap Chinese shares may face big corrections when this one deflates.”

...and a few more shocking statistics: 

Among global technology companies with a market value of at least $1 billion, all 50 of the top performers this year are from China. The sector has the highest valuations among 10 industry groups on mainland exchanges after the CSI 300

 

Technology Index climbed 69 percent in 2015 through Tuesday, more than three times faster than the broader measure.

 

The CSI 300 technology gauge fell 2.2 percent at the close, the most among all industries and its largest decline in almost two weeks. The broader index advanced 0.8 percent.

 

Technology companies have posted the biggest gains among Chinese IPOs during the past year, helped by a regulatory ceiling on valuations for new share sales. Beijing Tianli Mobile Service Integration Co. is the top performer among 147 offerings during the period after surging 1,871 percent from its offer price to trade at 379 times earnings.

 

Valuations in China are now higher than those in the U.S. at the height of the dot-com bubble just about any way you slice them. The average Chinese technology stock has a price-to-earnings ratio 41 percent above that of U.S. peers in 2000, while the median valuation is twice as expensive and the market capitalization-weighted average is 12 percent higher, according to data compiled by Bloomberg.

 

“It’s a bubble in the making,” Teng Bingsheng, an associate dean at the Cheung Kong Graduate School of Business in Beijing, said in an interview on Tuesday. “Valuations are extremely expensive.”

Topping it all off, it now appears as though China’s bubble is set to spill over into Hong Kong thanks to the kind of stretched mainland valuations described above. As we reported earlier: “China's Shanghai Composite briefly rose above 4000 for the first time since 2008, but it was the surge in the Hong Kong stock market that showed the Chinese bubble is finally spilling over, in the form of a blistering rally on the Hang Seng which rose nearly 4% on immense volume which at 250 billion Hong Kong dollars ($32 billion) was three times the average daily volume over the past year and nearly 20% more than the previous record volume day in October 2007, at the height of the pre-financial crisis bubble.”

And here’s the only chart you need to understand how this will end:

 

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Wed, 04/08/2015 - 20:50 | 5973557 Pinto Currency
Pinto Currency's picture

 

 

Now what if China and the BRICS introduce a sound gold currency while the Western central banks destroy our currencies?

Wed, 04/08/2015 - 20:53 | 5973568 Gods
Gods's picture

I'm puting my head back in the sand maybe this will blow over.

Wed, 04/08/2015 - 21:02 | 5973598 fockewulf190
fockewulf190's picture

Your head will be baked like a potato stuffed under a pile of hot coals, as the fiscal nuclear blast vaporizes your ass and melts the sand to glass. 

Wed, 04/08/2015 - 21:28 | 5973690 DeadFred
DeadFred's picture

A novel visual image, but I probably could have done fine without it.

Wed, 04/08/2015 - 22:06 | 5973787 CapnJackDaniel
CapnJackDaniel's picture

I just want baked potato for lunch now. 

Wed, 04/08/2015 - 22:41 | 5973879 Laowei Gweilo
Laowei Gweilo's picture

same for the chart...

 

I mean, how often are these goal [axis] seeked prediction charts ever right?

 

ZH has been using them to predict market crashes for 6 years and we're still waiting.... lol

 

 

(that said, great article and I agree with everything... it's just these charts, while interesting, are always laughably wrong)

Wed, 04/08/2015 - 21:29 | 5973695 max2205
max2205's picture

Chinese adr's screemed today but lots still 50 to 30% off us market highs.    This is gonna be wild.

but it looks like most peaked last year.

 

 

Wed, 04/08/2015 - 23:08 | 5973963 blowing winter
blowing winter's picture

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... www.globe-report.com

Wed, 04/08/2015 - 20:53 | 5973566 yogibear
yogibear's picture

Who is the Chinese counterpart to William Dudley of the NY fed.  That person can keep buying stocks just like Dudley.

Wed, 04/08/2015 - 21:07 | 5973614 fockewulf190
fockewulf190's picture

I wonder if CCTV has their own CNBS like channel whipping up the masses to buy buy buy.  

Wed, 04/08/2015 - 21:21 | 5973666 thecrud
thecrud's picture

To bad you were not in on that trade, seeing as more money was made then well ever.

Wed, 04/08/2015 - 20:54 | 5973572 Savyindallas
Savyindallas's picture

It's different this time. Chinese QE will easily support valuations of 500 to 1 PE ratios. Greenspan, bernanke and Yellen have proven that money truly does grow on trees. The Naz never should have collapsed. It was not a bubble. Or maybe it was a bubble, but bubbles are good. Who says they have to pop. If it starts to deflate, the Chinese Central bank can just keep printing and buy more stawks. It can go on forever. Am I not right?  

Wed, 04/08/2015 - 21:02 | 5973593 Oldwood
Oldwood's picture

Since when should stock values reflect anything besides what another muppet is willing to pay?

It is so funny to watch people ruminating over "fundamentals" like they mean anything more than tea leaves in the bottom of a cup.

Come on boys and girls! Place your bets! "Muppets Wonder" in lane three looks like a winner!

Wed, 04/08/2015 - 20:55 | 5973578 Raging Debate
Raging Debate's picture

Its awsome. We get to suck Chinese dick instead of American. Just dont tell me you know how to rule a planet when 1/2 half to live in poverty alll the time.

Wed, 04/08/2015 - 21:20 | 5973656 thecrud
thecrud's picture

So you liked it better when it was more than 3/4.

Wed, 04/08/2015 - 20:59 | 5973590 TheAntiProgressive
TheAntiProgressive's picture

I called the Krug, and he says "All In!!!!".  It is different in China.

Wed, 04/08/2015 - 21:00 | 5973591 ali-ali-al-qomfri
ali-ali-al-qomfri's picture

h'ou chuizi shiqi - monkey hammer time

Wed, 04/08/2015 - 22:05 | 5973781 Apostate2
Apostate2's picture

(shaking head)

Try again

 

Wed, 04/08/2015 - 21:07 | 5973613 BoPeople
BoPeople's picture

Who will the Chinese people blame when it collapses?
Who will the Chinese government blame when it collapses?
Who will the Chinese banks blame when it collapses?

... There will be scapegoats. There may be war. There may be revolution. China is not Japan. However, I think the global banking empire is treating it as if it is the same.

The Chinese might surprise people and annihilate Switzerland or Israel ... or both.

Wed, 04/08/2015 - 21:12 | 5973616 FieldingMellish
FieldingMellish's picture

ZH still trying to call tops. Meanwhile gold continues to drop like the stone that it is.

Wed, 04/08/2015 - 21:49 | 5973734 Fukushima Fricassee
Fukushima Fricassee's picture

It's going to drop you one day soon, when China shoves inflation up Yellen and Obama's dirty ass holes .

Wed, 04/08/2015 - 22:07 | 5973778 FieldingMellish
FieldingMellish's picture

Yeah sure, just like in January of last year when ZH posted article comparing the S&P today with the Dow in 1929. oops! 15 months of missed gains. The only thing falling is PMs and commodities as the ever-lambasted USD soars. Will it end.. maybe one day but not when ZH says it will and probably not for a very long time. Meanwhile, ZH sheep keep plwing their money into sinking assets.

Wed, 04/08/2015 - 23:11 | 5973972 sun tzu
sun tzu's picture

Just like those who called a top in the NASDAQ in 1999. They missed out on a year of gains and the 80% losses that followed LOL

Thu, 04/09/2015 - 04:52 | 5974444 Aussiekiwi
Aussiekiwi's picture

I think you mean dropping like a Gold Ingot

Wed, 04/08/2015 - 21:08 | 5973617 kiwimail
kiwimail's picture

Don't you love to watch parabolic curves revert to norm?  BOOM!!!

Wed, 04/08/2015 - 21:12 | 5973632 thecrud
thecrud's picture

So go long for Chinees QE.

Wed, 04/08/2015 - 22:34 | 5973851 walküre
walküre's picture

Chinese Muppets will get slaughtered soon.

Thu, 04/09/2015 - 04:51 | 5974442 Aussiekiwi
Aussiekiwi's picture

Bullish for Soylent Green stocks!

Wed, 04/08/2015 - 22:50 | 5973886 Yen Cross
Yen Cross's picture

 There's going to be another round of $usd selling over the next 12-24 hours. A .080-.150% (1-1.5%) move in the USDX.( Before Friday).

 Based on some of the majors and crosses in F/X there's going to be some $usd softening into Friday.

Wed, 04/08/2015 - 23:40 | 5974082 tarabel
tarabel's picture

 

 

Kind of ironic to think that the first country needing a bailout from China's shiny new AIIB might well be... China.

Thu, 04/09/2015 - 06:53 | 5974548 Hammy27
Hammy27's picture

If you do such comparisons, please us same scales on both charts. It's a very long way to go (+10-15%) till the very same top... Missleading information at it's finest... just to spread a little panic :D haha.

Anyway, if you believe in this scenario, then please put all your "gold" into this trade and short it like hell (and make it public, papertrading doesn't count!)... you will be one of the richest in 3-4 years ;-)

If you don't... pls stfu

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