Shanghai Stock Exchange – World’s Hottest Market Scores Another Hit

It’s official. Shanghai has clinched its place as the world’s hottest stock market, jumping an astonishing 100% from its low last year.

The demand for new equities in China was underscored today with another blazing IPO. Sichuan Expressway Co. tripled on its first day of trading as an economic rebound spurs demand for equities. Toll-road operator Sichuan Expressway’s 204 percent gain is China’s biggest debut rally since March 2008. Investors bid for more than 30 times the number of shares offered, according to the Shanghai Stock Exchange.

Initial public offerings have become a rarity on world stock markets since the global financial crisis hit. Successful IPOs are even less common. The exception is China which recently lifted a freeze on IPOs with world-beating results.

China State Construction Engineering Corp. starts trading in Shanghai on July 29 after drawing $270 billion worth of orders. That’s more than the market capitalization of Norway, Russia and at least 48 other nations. The company raised $7.34 billion in what then had been the world’s biggest initial public offering in 16 months.

The State Construction IPO was the fifth since China ended a nine-month moratorium on sales in June. It is the biggest worldwide since Visa raised more than $19 billion back in March of 2008.

Chinese investors are rushing to buy stocks as Beijing’s enormous stimulus plan and unprecedented bank lending continue to revive the world’s third-largest economy. Almost half a million stock accounts were opened in the week to July 17, according to Bloomberg, the largest number of new accounts since the Shanghai market was hit by the world financial crisis a year and a half ago. The Shanghai Composite index, which doubled in 2006 and 2007, remains 2,657.4 points below its peak of October 2007.
Although foreigners cannot buy shares in Shanghai directly they can participate in the Chinese stock boom through various mutual funds, but we at the China Stock Digest continue to warn against doing so. For instance, Sichuan Expressway surged in Shanghai to close, more than three times the price of its Hong Kong-listed stock.

Gains on the Shanghai Composite Index have made Chinese stocks the most expensive based on PE multiples since January 2008, according to Bloomberg data. Shares in the index now trade at 37.1 times earnings, triple November’s low. The IPO values State Construction rose to 51.3 times earnings.

These valuations are dangerously high and the Shanghai Index continues to hit new post-crisis highs almost daily. Clearly state stimulus funding and a flood of bank lending have sparked something of an investor frenzy in Shanghai. To old China hands, the stock market is starting to feel alarmingly like the bubble conditions which preceded the Shanghai bust of 2007-2008.

We feel there is no prudent reason to get involved in a potential bubble in Shanghai when Chinese equities are available at a fraction of the price in Hong Kong and New York.

The China Stock Digest model profile is now fully invested in what we consider the best growth companies available to western investors. Subscribers are reporting profits well above domestic indexes without the needless risk of using various funds to participate directly in Shanghai’s world-beating boom.

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Jim Trippon
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China Stock Digest