China’s market bubble just keeps inflating. The benchmark Shanghai Composite Index has hit a record 5,000, marking a 400% rise over two years. Its market value, including Hong Kong-listed mainland firms, hit $4.7trn this week, eclipsing Japan’s. Foreigners can’t buy local stocks so they can’t sell them either, said The Economist. China is “smugly insulated” from global jitters.
Local analysts have insisted that rocketing earnings growth justifies the market’s sky-high p/e of 38. Profits at the two-thirds of companies that have published results jumped by 71% in the first half. But half the growth was due to the booming stock market, thanks to the large crossholdings between mainland companies. If the market turns down or even levels off, “earnings will evaporate”, warned UBS’s Edmond Huang.
Four interest-rate hikes have done nothing to temper retail investors’ growing enthusiasm for stocks, since interest on bank accounts remains negative. Fearful of a political backlash if the bubble bursts, the government has taken only small steps towards cooling the market. If it “really wanted” to stop it rising, it “wouldn’t have let it hit 4,000”, reckoned Xu Yinghuhi of Guotai Junan Securities. It seems the market’s performance has become “a political badge of honour”, said Eoin Treacy on Fullermoney.com. That suggests the upswing could endure “at least until The Olympics”.