There are about 70 million retail investors in mainland China, 70 percent of whom have invested less than US$15,000 in the domestic equity market.
Retail investors are usually momentum followers.
The bullish market sentiment has driven up the P/E ratio of new shares several dozen times — up to 650 times for some companies.
That reminds us of the dot-com bubble in the United States in 2000.
At present, most Chinese investors have been doing margin trading or short selling.
The market tumble in the past two weeks stemmed from tightening measures against margin trading in which investors treat the stock market as a casino.
That said, are A shares overvalued?
The Shanghai market has a forward P/E ratio of 16 times, similar to that of the Dow Jones.
By contrast, NASDAQ has a forward P/E ratio of 22.2 times and the Russell 2000 about 27.7 times. The US healthcare sector’s forward P/E ratio is 18.5 times while the biotech sector is an expensive 51.19 times.
The US market classifies stocks to cater to investors with different risk appetites.
The mainland market comprises blue chips, the Growth Enterprise Board and an over-the-counter board.
Still, it makes me wonder why foreign investors would reduce their holding at the high end of the market given that both A shares and H shares have been benefiting from Beijing’s monetary easing.
It’s possible foreign investors might be short selling the Greek debt crisis in a bid to suppress Hong Kong and mainland stocks and buy into a cheaper market.
They have warned that A shares have to drop to 3,000 points to make the market affordable.
In recent days, A shares have struggled to stay above 4,000 points, the level at which the market present a buying opportunity.
The market is watching the Greek referendum to be held on July 5.
There’s an even chance Greece will choose to stay in the eurozone or leave.
If its citizens agree to the terms of a eurozone bailout deal, the crisis will recede into the background at least temporarily.
If not, the nation could eventually exit the eurozone.
Investors should watch closely for any new moves by the European Central Bank, particularly any emergency lifeline to maintain liquidity in the Greek banking system.
Also, they should look at the credit spreads between bonds in Italy, Spain and Germany.
Chinese margin traders have been forced to liquidate their positions.
Also, China’s top securities regulator have approved a new batch of listings while the Chinese central bank has resumed reverse repos to pump more liquidity into the market.
Mainland and Hong Kong investors should have learned valuable experience from this round of market ups and downs.
There is still room for further monetary easing, which would support the bull cycle for equities and bonds.
Investors should not change their long-term view despite the short-term market fluctuations.
This article appeared in the Hong Kong Economic Journal on July 2.
Translation by Julie Zhu
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