Tags: china | market

Investors Banking on China Stock Bubble

By Julie Crawshaw   |   Tuesday, 07 Jul 2009 08:38 AM

Investors are bidding up the stocks of Chinese companies because they anticipate future growth that might not happen, Time magazine reported.

For example, when Chinese herbal shampoo maker Bawang International made its initial public offering, one brokerage received the equivalent of $129 million in orders for the shares within the first 10 minutes.

Indeed, a lot of the cash that's been sitting on the sidelines is piling into almost anything Chinese, driving stocks to lofty valuations. Bawang's IPO is expected to be priced at more than 20 times the earnings it reported as a private company last year.

Part of the reason may be figures such as those from the Organization for Economic Cooperation and Development, which recently revised its GDP growth forecasts for China from 6.3 percent to 7.7 percent in 2009 and from 8.5 percent to 9.3 percent in 2010.

The World Bank has also raised its 2009 China forecast from 6.5 percent to 7.2 percent, and projects that China will replace Japan as the world's second largest economy in two years.

Shang Fulin, chairman of the China Securities Regulatory Commission, said the government's stimulus spending, an increase in business momentum, flush liquidity, and strengthening expectations all underpinned the stock market in the first half, when the country's benchmark index soared 63 percent, Xinhua reported.

However, Shang added that it would take 'quite a long time' to overcome the difficulties in the wake of the global financial crisis and that China's economic recovery still wasn’t firmly grounded.

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