Stocks News
- Frenzy over low-grade stocks a worry
Date: 10-May-2007 Sources: (Shenzhen Daily)
overall valuation of China's stock market is reasonable, but heavy demand for speculative shares is a worry, Ba Shusong, a prominent economist, said yesterday.
The authorities also need to pay attention to the fact that many investors rushing into the market for the first time are financially vulnerable and lack investment expertise, Ba said.
The domestic A-share market has more than tripled since the start of last year and now trades at an average earnings multiple that is much richer than that of developed markets.
The benchmark Shanghai Composite Index broke through the 4,000 barrier yesterday for the first time, ignoring a weekend warning by central bank governor Zhou Xiaochuan that a market bubble is a concern.
The index gained 1.6 percent yesterday and is now up almost 50 percent since the start of 2007. Ba said lower-quality Special Treatment (ST) stocks are up more than 125 percent over the same period.
Special Treatment shares are those of companies that have posted losses for two consecutive years and thus risk being delisted if their earnings do not improve. The shares, about 130 in all, are subject to tighter daily trading limits than normal.
'Although there is no obvious near-term risk of any bubble bursting, heavy speculation in junk stocks poses a threat that the market will develop structural bubbles,'said Ba, an analyst with the Development Research Center, a think tank under the State Council, or Cabinet.
'Some of the big jumps are a result of asset restructuring at some companies, but there is certainly irrational speculation in an impressive number of junk stocks,'Ba added.
He said the fate of the stock market depended on corporate earnings trends.
'Taking a long-term view, if companies can keep increasing profits, then the current valuation of stocks is reasonable,'he said.
Profits at domestic industrial firms surged 43.8 percent in the first two months from a year earlier. Profits in all of 2006 rose 31 percent.
Ba said the government should avoid interfering in the stock market, which he said might have unwanted repercussions.
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