Banking & Finance

Bulls in the China shop

Shanghai market continues its ascent

It was a slightly unexpected question. Bawang shampoo is supposed to fight hair loss – thanks to its herbal properties – so a journalist asked the company chairman and its CFO which kind of Bawang shampoo they used. Chen Qiyuan and Huang Shanrong looked slightly embarassed. Not surprising, since both have receding hairlines.

Embarassing yes, but in this hot market it didn’t dent any of the enthusiasm for their IPO, which listed on the Hong Kong stock exchange last week. Bawang saw its shares surge by a third on its debut, after part of the issue was over 400 times subscribed (see WiC22).

Investors are currently clamouring for new Chinese stocks – and there are no shortage of IPOs. Chinese thenardite producer Lumena Resource saw it stock soar 19% on its first trading day on June 17. Hing Lee, a furniture maker, jumped 39% on its June 22 debut.

Anticipating a rush of new investors into the market, local brokerage China Everbright Securities set up a public stand in Shanghai last month to help investors open new accounts, reports the China Daily. The response was overwhelming, acccording to Wang Yue, a manager at the bank.

Little wonder: the Shanghai benchmark index is up over 60% since the start of the year (MSCI World, on the other hand, is only up 2.92%).

“There are two factors that underlie the rally in Shanghai’s stock market: one is optimism about economic recovery and the other is available liquidity,” confirms Chen Wen Zhao, stock market analyst at China Merchants Securities in Shanghai.

Is the renewed enthusiasm justified? Perhaps. But some analysts are worried that another stockmarket bubble may be inflating.

China is flush with investment dollars. The country’s interest rates are typically low (the one year deposit rate is only 2.25%) and the government continues to restrict its citizens from sending money overseas. That means there are few other investment options.

A similar set of circumstances drove the Shanghai Composite Index to an all time high of 6,057 in late 2007.

Then, in early 2008, the bubble burst, with warnings of a huge sell-off seeing prices plummet. The global economic crisis added to the panic and prompted a further plunge. The Shanghai index fell to 1,717 last November — a 70% drop from its earlier peak.

The recent market euphoria certainly smells like 2007 again, says AsianInvestor.com.

And some financial firms are keen to seize the opportunity. China Universal Asset Management, a Shanghai-based fund house founded in 2005, recently raised Rmb9.1 billion ($1.3 billion) for it’s new index fund – a record amount for the little known asset management firm.

But such data has got China’s central bank worried. The Wall Street Journal reported that the People’s Bank of China aims to drain about Rmb10 billion from the money market this week.

“China’s central bank plans to sell an unusually large amount of bills to drain liquidity from the market after a surge of bank lending in June heightened concerns over asset-price bubbles,” commented the newspaper.


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