BIZCHINA> Index & Statistics
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BIZCHINA> Index & Statistics
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Stocks lose 4,200-point ground after sudden divings, 06/20
By Li Zengxin (chinadaily.com.cn)
Updated: 2007-06-20 16:07 As the stocks came back to the higher levels, some analysts began to worry about the bubbles in the market. However, others believe a simple judge from stock prices and positions of the market is not convincing. The index figure or average price to earnings (P/E) ratio is not sufficient to conclude whether the market is overheated, said Zhang Haiyu, director of the Finance Center of the Economic System and Management Institute under the National Development and Reform Commission. "Stock price is the net present value of a company's future earnings. Theoretically, the ratio of company's earnings to the interest rate is a proper share price. But the stock price is usually higher than that, as investors need to be compensated for the risks a stock bears and take into consideration of the expected growth of profits of the company. And the surplus part is seen as a bubble," said Zhang. Along with the rapid economic growth, Chinese companies have enhanced their profitability. Therefore, it is normal to see their share prices grow higher, said Zhang. "But that does not mean we don't need to watch the bubbles," Zhang added. "Rather than simply looking at the overall P/E ratio or how high the index reaches, we should compare the growth rate of P/E ratio with that of company's profitability. If the discrepancy between the two is not too big, it is acceptable," said Zhang. A potential threatening to the safety of the market and the economy on the whole, does not comes from the volume of the capital inflow, but from their sources, according to Zhang. Bank loans, if invested in the stock market, is highly dangerous. Unlike the capital inflow from deposits, banks loans invested in stocks are more vulnerable and may reduce liquidity, when there is turbulence in the stock market, said Zhang. China has recently punished local branches of eight commercial banks for issuing loans to clients for their speculative investment in the stock market. The biggest risk, however, comes from the structure of the assets diverted to capital flooding into the market. Residential and institutional deposits at banks should be loaned out to companies for their reproduction. There is a multiple effect from the original amounts of the deposits to the total loans. That is the generator of the economy growth, Zhang said.. The consecutive surges in share prices last week brought the daily new A-share account opening back to above the 200,000 mark on Monday. And the new fund accounts at over188,000 was bigger than that of June 1 and the largest since May 9. New account opening
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