When Even Bloomberg Makes Fun Of China's Stock Bubble

"I'm not sure how long this rally will last," warns one Chinese securities analyst, but adds, Chinese investors "tend to ignore important fundamentals" anyway. When even mainstream media is reporting on the epic farce that is the explosion of retail interest in Chinese stocks (and the concomittant surge in stock prices), perhaps it is time for the 'greater fool' to pull back a little. Perhaps the 'exuberance' is best summed up by the following from a security guard for Beijing's subway system, "low-priced stocks are less risky - big drops won’t result in huge losses for me - I don’t know much about investing, but the stocks my friends recommended have been soaring." Trade accordingly...

As Bloomberg reports, It’s Amateur Hour in the Booming Chinese Stock Market

The Chinese equivalent of penny stocks, assets that have long held an allure for amateurs, are trouncing the benchmark index.

 

Shares in China’s CSI 300 Index that were quoted below 5 yuan (81 cents) at the end of September have since jumped an average 63 percent. That compares with a 35 percent gain for all index stocks and 11 percent for those priced above 50 yuan.

 

That outsized rally reflects the growing market impact of inexperienced investors in a country where new stock accounts are opening at the fastest pace since 2007 and individuals comprise about 80 percent of equity trading.

Chinese individual investors are pouring back into the world’s hottest stock market...

While professional investors measure a stock’s worth relative to the company’s assets or earnings prospects, it’s the price appearing on computer screens that matters most to people like 35-year-old housewife He Mei. As she sees it, the math is simple -- low price equals low risk and lots of value.

 

“Expensive stocks are risky,” she said by phone from the southwestern city of Chengdu, the capital of Sichuan province. “Any drops will result in huge losses.”

 

He says she recorded a return of about 60 percent in her 300,000 yuan account since China cut interest rates in late November, versus 37 percent for the CSI 300. She bought her most profitable stocks at prices below 20 yuan and says she won’t touch shares above 50 yuan.

 

...

 

“Sophisticated investors will generally buy companies, not stocks,” Vincent Chan, the Hong Kong-based head of China research at Credit Suisse Group AG, said in an interview. “But for A-share investors, stocks are just stocks so they buy them when they’re still going up.”

 

“I’m not sure how long this rally will last,” Zhu Lixu, an analyst at Xiangcai Securities Co., said by phone from Shanghai. Some Chinese investors “tend to ignore important fundamentals,” Zhu said.

So the professionals are stayinmg away...

The market impact of individuals who ignore corporate fundamentals is driving away some of the region’s institutional investors, who are concerned speculative price moves will hurt performance, said David Gaud, a Hong Kong-based money manager at Edmond de Rothschild Group, which oversees about $158 billion.

 

“The market would need more institutionals and less leveraging on the retail side,” Gaud said. “This is not liquidity which is of good quality at the end of the day.”

But, as always, it's the unintended consequences of government intervention that are crucial...

China’s state media, which four months ago helped revive public interest in shares with a series of stories advocating equity investment, are now encouraging citizens to analyze company performance and pay more attention to risks.

 

“Investors should not focus solely on the change of stock price, but have to understand the market environment, the companies’ leadership, profitability and growth potential,” the People’s Daily, which is published by the propaganda department of the ruling Communist Party, said in an editorial this month.

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We leave it to Yuan Shuai, a security guard for Beijing’s subway system, to sum up exactly who is buying Chinese stocks (and why)...

“I feel cheap stocks are less risky -- big drops won’t result in huge losses for me,” Yuan said. “I don’t know too much about investing, but the stocks my friends recommended have been soaring in the past few weeks.”

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Does this look sustainable to you?