China: China Braces For A Bubble

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Take the nation's largest life-insurance company, China Life, which trades in Shanghai, Hong Kong and New York City. On Jan. 31, its shares had a price-earnings ratio of around 70 (a stock's P/E ratio shows the amount investors are paying for each dollar of per-share earnings). That's a richer multiple than investors are shelling out for fast-growing Google.

Nor are high prices confined to a few Chinese stocks. Webb estimates that the average P/E for "A" shares (stocks available to mainland investors on China's Shanghai and Shenzhen bourses) is 34; the current P/E for U.S. stocks in the S&P 500 Index is 18. Want more proof? A report by investment bank JPMorgan notes that of 37 Chinese companies listed jointly in Shanghai and Hong Kong, eight trade on the mainland at valuations at least double those quoted in Hong Kong. "The risk-reward picture is unhealthy at the moment," says Frank Gong, JPMorgan's chief economist for China. "The market has undoubtedly moved ahead of itself."

Not surprisingly, comparisons are being drawn between China's stock boom and the U.S. dotcom bubble. Certainly there are similarities, such as a frenzy for initial public stock offerings. As investor demand for Chinese stocks has increased, so has the list of mainland companies eager to cash in on the mania by going public. In 2006, Chinese firms raised more than $53 billion in the Hong Kong and Shanghai markets through IPOs and secondary share offerings, up from $24 billion the year before. Among them was the largest IPO in history, November's $22 billion listing in Hong Kong and Shanghai by the Industrial & Commercial Bank of China (ICBC). Despite the fact that Chinese banks are known for their lack of transparency and weak management, ICBC was a wild success. In Hong Kong, its share price at one point soared 70% above its initial offering price of 39¢. That pushed the bank's market cap so high that for a while it was valued as the second largest financial institution in the world, behind Citigroup.

The appetite for China stocks has encouraged other big corporations to tap the market. Analysts say they expect China Mobile, the world's largest mobile-phone company, to issue additional shares this year. Ping An Insurance, China's second largest life insurer, and oil-and-gas conglomerate PetroChina are also expected to issue more shares. There is no way all can be winners, says Nicholas Yeo, a fund manager for Aberdeen Asset Management. "One of these large IPOs last year would have been impressive," Yeo says. "But can they keep pulling them off? Probably not."