Under Deng Xiaoping’s leadership (1978 to 1992), China rapidly became stronger, richer and more modern. Several hundred million Chinese citizens were lifted out of poverty from a per capita annual income of less than US$100, prior to his reign.
Under current China’s leadership, as she continues to modernize and grow, with its own mix of markets and management, China has indisputably worked another miracle, but on an unimaginably vast scale. It's a record that even investors find incredible.
Over the past year, the Shenzhen market is up almost 200% with a PE (price to earnings) ratio slightly below 80 while S&P 500 Index is up 9% with a PE ratio of 19.
However the bulk of the demand for Chinese shares come from small, individual investors and they are credit-fuelled. Two-thirds of these newbie investors left school before the age of 15.
According to The Economist, Chinese investors opened 4 million new brokerage accounts, in a week in April 2015.
Technology stocks are heavily represented and hotly pursued in the Shenzhen index. China's highest-flying stock, Beijing Baofeng Technology Co., surged 4,200% in just 55 trading days after it went public and was valued at 715 times to reported earnings. In contrast, Alibaba was valued 55 times to earnings. Companies soon caught on, change their names, rebrand themselves as technology firms and then watch their valuations soar.
The stock market is looking decidedly bubbly. But many investors seemed not to worry. The authorities want a strong stock market and extolled the merits of owning stocks. It deemed a strong stock market will help support demand as property prices sag and growth in credit and investment slow. It continued to talk up share prices. The stock market frenzy that followed was unexpected. The valuations of many companies surged up to preposterous levels. Such wild scenario doesn’t usually end well.
It's only a matter of time before these small investors take a hit. Even the Great Wall of China cannot keep the bubble away.