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July 3, 2003
Dictating A Bubble?

Whether it is U.S. stocks, the global bond market, or real estate prices, some analysts have been warning that ‘bubbles’ could be forming. You could say bubble-talk is reaching bubble proportions itself. 

However, when it comes to bubbles one area not mentioned very often is Chinese Stocks. This probably has something to with the fact that foreign investment in Chinese stocks has historically been confined to the Nation’s ‘B’ share market (until recently foreigners were unable to purchase shares in more highly regarded ‘A’ market).  Nevertheless, with Warren Buffett showing interest in a Chinese ADR, and fund managers and banks now clamoring to enter the ‘A’ market as Qualified Foreign Institutional Investors, China’s stock market is sure to catch more headlines in the future. 

Buffett Buy Sparks Optimism

In early May, when Warren Buffett’s Berkshire announced that it had increased its stake in PetroChina, Bloomberg asked a simple question:

“Could Buffett be signaling a turning point in sentiment towards China?”

Given the rally in PTR and other Chinese ADRs since the Buffett announcement, it would appear that this question has been asked and answered.


Incidentally, for those investors who believe Chinese stocks (major ADRs) are surging because the SARS epidemic is clearing, you only need to look at volume trends. Companies like China Southern Airlines may not be exploding (shares are up 30% since May but down on the year), but volume has been on an uptick since the Buffett news. As for PTR, it is fairly obvious that Mr. Buffett has some clout in determining volume trends: from the chart below, can you guess when Buffett purchased PTR?

Symbol

China Based ADRs -- Company Name

% Change YTD

Avg. Vol. Last Year

Avg. Vol. Last Qtr.

SOHU

Sohu.com

434%

996,900

2,672,800

SINA

SINA Corporation

235.7

1,735,600

4,301,400

NTES

Netease.com, Inc.

222.3

781,500

1,880,700

JCC

Jilin Chemical Industrial (ADR)

59.5

1,800

2,000

ACH

Aluminum Corp. of China Limited (ADR)

55.8

7,100

4,700

CBA

Brilliance China Automotive Hldg. (ADR)

53.1

10,800

10,100

HNP

Huaneng Power International, Inc. (ADR)

48.3

41,600

63,200

PTR

PetroChina Company Limited (ADR)

40.5

143,300

425,400

CHA

China Telecom Corporation Limited (ADR)

34

186,700

120,500

SHI

Sinopec Shanghai Petrochemical (ADR)

25.3

8,600

8,600

BYH

Sinopec Beijing Yanhua (ADR)

19.1

2,000

1,700

YZC

Yanzhou Coal Mining Co. (ADR)

17.8

1,500

2,200

CEO

CNOOC Limited (ADR)

12.3

43,600

36,200

GSH

Guangshen Railway Co. Ltd (ADR)

7.6

5,600

11,300

CHU

China Unicom Limited (ADR)

0.3

158,400

240,700

CHL

China Mobile Limited (ADR)

-0.7

362,000

531,300

CEA

China Eastern Airlines (ADR)

-2.1

2,800

5,600

ZNH

China Southern Airlines Limited (ADR)

-4.8

6,100

14,600

It may be too early to argue that all Chinese stocks are in a bubble.  After all, PTR – one of China’s highest yielding and safest stocks in the sense that it has hard assets in crude and natural gas – is not exactly at risk of seeing a collapse because its share price has reached unsustainable highs. Rather, if no major external event rocks China, there is little doubt that the reported fundamentals of a PTR are more attractive than that of an Exxon.

Nevertheless, China’s slightly profitable internets have been on a mania-like tear this year, as have many other ‘infrastructure’ type company’s with questionable earnings. With Wall Street analysts free to rate these company’s as buys without reprisal, maybe the sky is the limit? Maybe the 1990s in U.S. can be repeated all over again in China simply because foreign investors take notice of the size and growth of the Chinese economy all at once?

Whatever the case may be, Buffett’s purchase combined with an increasingly ‘free’ financial marketplace in China has already caught the attention of many investors (both foreign and domestic). Growth and optimism have helped fuel what is estimated to be a price-to-earnings multiple of 40 in China's 1,200 A shares, and so long as growth an optimism remain a collapse may not be imminent.  Can the State control optimism?...
 

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