China's 'blind optimism' spurs stock bubble concern
By Chen Shiyin and Zhang Shidong (Bloomberg)Updated: 2007-01-26 11:26
Red Chips
This isn't the first time the China story has excited investors. So-called red chips, or Hong Kong companies with their main operations in China, were surging a decade ago.
The Hang Seng China-Affiliated Corporations Index of red chips more than quadrupled in 18 months and peaked on Aug. 27, 1997, at about 250 times earnings. The index plunged 86 percent in the next 12 months and is still almost 50 percent lower than its all-time high.
When the red chips were rallying, the yuan was pegged to the dollar. The link has since been broken and the currency's gains may encourage investors to own yuan-denominated assets.
The yuan has appreciated 6.3 percent against the dollar since July 21, 2005, when the peg ended, and surpassed the Hong Kong dollar on Jan. 11 for the first time in 13 years.
"There are investment flows going into China in anticipation of a further strengthening of the yuan," said Elan Cohen, a Singapore-based money manager at JPMorgan Private Bank, which has $350 billion in assets.
'Much stronger economic growth in China than elsewhere' may also lift share prices, Cohen said. Gross domestic product will probably rise about 10 percent for a fifth straight year in 2007, according to Yao Jingyuan, chief economist at the National Bureau of Statistics.
Growth prospects and the potential for yuan gains are already reflected in share prices, said Michael Kerley, who helps manage $2 billion of Asian stocks at Henderson Global Investors Ltd. in London.
"Areas of value are few and far between now," he said. "There's just a bit too much hype."
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