Forget Shanghai and its roaring stock market, there's a new centre for speculative excess in China. Nothing says sustainable capital formation like a stock index that trades at a valuation of 67.2 times earnings, is up 166% in the last year and whose components regularly see 500% rallies (and recently epic collapses). Welcome to Shenzhen.
With margin debt hitting new records and with over 20 million new retail trading accounts opened in the last 9 weeks alone, China has - without any doubt - gone full tulip-tard...
But, as Bloomberg reports, the greatest fools can be found not in Shanghai, but in Shenzhen, home of China’s hottest stock market, rallies of more than 500% aren’t unusual.
In Shenzhen, there are 103 stocks that rallied that much this year, compared with only four in the former British colony.
Among the 1,721 stocks on the Shenzhen Composite Index, four have declined this year.
The Shenzhen benchmark jumped 12 percent this week, the most since 2008, as turnover topped trading in both Shanghai and Hong Kong. Investors have piled into the non-state companies that dominate the Shenzhen bourse after the government pledged to support developing industries, including technology and health care, to shift the economy away from manufacturing and property development.
The 103 stocks in the Shenzhen 500 percent club trade at an average 375 times reported earnings, while their average market capitalization has risen to $3.5 billion, according to data compiled by Bloomberg. Many of them recently sold shares for the first time.
But it gets better... as the IPO bandwagon has created a monster bubble...
As we previously discussed, the best performer is Beijing Baofeng Technology Co., a developer of online movie players, which has jumped 3,822 percent since its initial public offering two months ago and made its chairman Feng Xin a billionaire.
Zhejiang Longsheng Auto Parts Co., which makes car-seat parts, has climbed about 1,600 percent in the past year to trade at almost 600 times profits.
Wanda Cinema Line Co.’s 1,047 percent rally since its January IPO turned it into a $22.1 billion company.
While moves in Hong Kong stocks aren’t limited by trading caps, companies on mainland bourses are only allowed to gain or fall by a maximum of 10 percent on a daily basis -- except on the first day of trading, when the shares can rise as much as 44 percent.
But - as many have discovered in recent days - it's not all ponies and unicorns,
What goes up... crashes to floor in a wealth-destroying frenzy...
It was all going so well, and then...
“Hanergy and Goldin are a good reminder for investors in China,” Ronald Wan, chief executive at Partners Capital International Ltd. said in Hong Kong.
“They have a close similarity with many stocks in Shenzhen which have rallied based on speculation rather than fundamentals.”
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“Valuations are ridiculously high,” Castor Pang, the head of research at Core Pacific-Yamaichi in Hong Kong, said by phone.
“The stocks surged too much and no one knows why.”
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But - who could have seen this coming - especially with these avid traders watching over these markets...