(Bloomberg) -- China is at risk of a stock market “bubble” that may burst as investor confidence in the nation’s economic recovery weakens and bank lending slows, according to China Galaxy Securities Co., the nation’s largest brokerage.The Shanghai Composite Index has surged 50 percent since last year’s low on Nov. 4 amid signs the government’s stimulus measures are reviving the world’s third-largest economy. The gains have driven valuations on the index to 27.2 times earnings, the highest in a year and Asia’s third most expensive. These levels are “signs of a bubble,” Galaxy Securities strategists led by Teng Tai wrote in a report.
“China’s economy has bottomed but the recovery may be weaker than forecast,” the analysts said today. “Bank lending will have to slow down. This will cap the growth in money supply and affect the supply of funds for the stock market.”
China’s investors flocked to equities this year on optimism 4 trillion yuan ($585 billion) of government spending, five interest-rate cuts since September and a record 4.58 trillion yuan of new bank lending in the first quarter would cushion the economy from the global recession and bolster corporate earnings.At the peak, investors opened more than 480,000 new share trading accounts in the week to Feb. 20, the fastest pace in 13 months and double the average in the past year. That figure dropped to 338,719 in the week to April 24, the most recent data.
‘Be Defensive’
“Investors should be defensive and cut equities exposure,” the Galaxy Securities analysts wrote, saying the market is likely to undergo a “N-shaped” trend.New loans dwindled to 400 billion yuan last month, Caijing magazine reported yesterday. Earnings have yet to recover. Net income at the 1,624 companies listed on the Shanghai and Shenzhen stock exchanges fell 26 percent in the first quarter from a year earlier, the Shanghai Securities News reported May 4.“I’d be cautious on the A-share market, which has seen a sustained run,” George Hoguet, global investment strategist at Boston-based State Street Global Advisors, said April 20, referring to China’s local-currency stocks. “For China’s rally to continue, we need to see improving macroeconomic data coming not just out of China, but a slowdown in the rate of decline in the U.S.”China’s economy grew at 6.1 percent in the three months to March 31, the slowest pace in almost a decade, as recessions in the U.S., Europe and Japan curbed demand for the nation’s exports. The U.S. economy contracted at a 6.3 percent annual rate in the fourth quarter and 6.1 percent in the first three months of 2009, according to the U.S. government.
Developers Surge
Property stocks paced gains on the Chinese index this year on speculation demand for housing will recover. Poly Real Estate Group Co., China’s second-biggest publicly traded developer, jumped 83 percent. The company said yesterday apartment sales in the first four months of the year tripled.The Shanghai index advanced 0.3 percent to 2,567.34 at the 3 p.m. close today.Galaxy Securities joins China Asset Management Co., the nation’s biggest fund company, in saying the country’s stocks are overvalued. Wang Yawei, who oversees China Asset’s investment committee, pared his equity holdings in the first quarter and said last month the stock market was driven by “speculative trading.”This isn’t the first time a surging Chinese stock market has drawn warnings over valuations. In mid-2007, when the Shanghai Composite was priced at about 40 times earnings, investor Marc Faber, former U.S. Federal Reserve Chairman Alan Greenspan and Li Ka-shing, Asia’s richest man, all warned of a “bubble.”The index gained a further 59 percent between the end of June 2007 and its peak of 6,092.06 on Oct. 16, 2007, when stocks fetched 48.7 times earnings. The gauge plunged 72 percent to the trough on Nov. 4 as the global recession cut the country’s growth.
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