China: China Braces For A Bubble

A market correction is not inevitable, says Peter Alexander, chief analyst for Z-Ben Advisors, a Shanghai investment consultancy. He argues that Chinese companies are stronger and more efficient than they were a few years ago. "It's dangerous to bet against China," he says. Also, if China Life and banks that fueled last year's blockbuster IPOs are excluded from the picture, Shanghai stocks trade at prices comparable to those of Asian firms listed on other regional bourses. In fact, some of China's smaller manufacturing and textile companies are still relatively undervalued. "Judging from history, the stock market doesn't bust when the buying is concentrated on blue-chip names," says Lan Xue, head of China research for Citigroup. "It's when the buying goes into the second line, third line, fourth line [companies]--the speedy names--this is what would get me more worried." Xue predicts that the bull market will continue for at least one to two years.

That's what China's new investors think too. Punters who gathered to swap stocks and stories at the Beijing branch of the China Galaxy Securities brokerage house on Jan. 29 weren't letting a small drop in the market that day dampen their spirits. "I guess the fluctuation will go on for a while, maybe another month or so," says Jiang Yulan, a trading aficionado, "but in a long term, the price will be going up by the end of this year."

So confident are the assembled san hu that they don't regard their activity as serious business. They use wan, Chinese for "play," to describe it. If the market tanks, the san hu won't be the first to discover that investing is not a game.

DON'T LOOK DOWN [This article contains charts. Please see hardcopy of magazine.]

The Chinese market has soared over the past six months, but overpriced shares could end the winning streak

Hang Seng China Enterprises Index Jan. 30 9,771.66

Shanghai Composite Index Jan 30 2,930.562

Source: Yahoo! Finance