Reuters Edge

Chinese investors reject Greenspan warning

SHANGHAI (Reuters) - Alan Greenspan’s warning about a bubble in China’s stock market was met by disagreement, resentment and conspiracy theories among many Chinese investors on Thursday -- suggesting the bubble may continue building.

A man walks past an electronic board at a stock exchange in Wuhan, capital of central China's Hubei province May 24, 2007. REUTERS/Stringer

Stock markets around the world were hit by concern that China might crash after the former U.S. Federal Reserve chairman said the bull run was “clearly unsustainable” and there would be “a dramatic contraction at some point”.

But Shanghai's main stock index .SSEC, which has nearly quadrupled in 18 months, slipped only slightly on Thursday, closing 0.54 percent lower at 4,151.133 points after dropping 2 percent at one stage.

Local analysts and fund managers said stocks might stay soft in coming days as the market digested more of this year’s 57 percent gain.

But most firmly rejected the idea of a plunge on anything like the scale which Greenspan described.

“The Chinese market is something that Greenspan does not know very well,” said analyst Zhou Fengwu at Orient Securities.

Among the individual investors who account for some 80 percent of market turnover, which is running at nearly ten times year-ago levels, there was anger at what was seen by many as a foreign effort to interfere in China’s markets.

“Imperialists and their running dogs don’t want to see a strong China -- don’t be fooled by foreigners,” read one anonymous but typical posting on, a popular online forum for investors.

Many people in China recalled that Greenspan’s warning about “irrational exuberance” in the U.S. stock market in 1996 did not prevent that market from rallying for the rest of the decade.

Analysts at Chinese brokerages argued that China’s bull market was unique -- even as they acknowledged that similar claims for the U.S. dotcom bull run in the late 1990s ultimately proved false.

“Compared to global markets, China is different,” said Zhang Yong, an analyst at Merchants Bank. “The market structure is unique, so the foreign point of view may be mistaken.”

One important difference is that encouraged by regulatory reforms, tens of millions of Chinese investors are only just waking up to equities and starting to put money in the market.

Meanwhile the domestic, tradable share floats of many of China’s top companies remain relatively small -- so demand for their shares far exceeds supply, an imbalance which is unlikely to shift decisively any time soon, analysts said.

Shanghai stocks are now at about 44 times 2006 earnings, much more expensive than foreign markets. But that is still well below levels near 60 times hit during the last bull run, and with corporate profit growth of 25-30 percent expected this year and quite possibly in coming years, valuations do not look so high.

Most importantly, the government is keen to develop a strong stock market to promote economic reforms, list top companies and wean corporations off excessive reliance on bank loans.

While authorities show signs of wanting to cool speculative excesses, Chinese investors view as ridiculous the idea that the government -- which still wields great influence over fund flows through administrative steps and moral suasion -- might permit a crash that could destroy its plans.

One development on Wednesday that contradicted Greenspan’s warning, analysts said, was China’s agreement with the United States to lift the ceiling for foreign institutional investment in its stock market to $30 billion from $10 billion.

Although fresh inflows of foreign money are unlikely to increase rapidly because individual funds must apply for licenses, the decision to raise the ceiling was taken as a sign that Beijing still viewed the stock market benignly.

In fact, the decision fuelled a popular conspiracy theory -- that foreign financiers were trying to push down the market so foreign institutions could buy Chinese stocks at cheaper prices under the new ceiling.

Greenspan’s warning “is not hard to understand -- it’s for the benefit of the U.S.”, said another posting on

In the early stages of the bull run, Chinese investors were often led by foreign investors. Portfolio flow data in recent weeks shows some foreign funds temporarily cutting back their exposure to China because of concern that stocks are too high.

Now, however, so much new Chinese money has now entered the market that even a mass pull-out of foreign funds -- which few expect given China’s long-term potential -- might not hurt stocks much.

Foreign institutions’ holdings of Chinese stocks under the investment ceiling are only around 1 percent of the Shanghai and Shenzhen exchanges’ combined capitalization.

Total foreign investment, through legal and illicit channels, is considerably bigger -- a study by the Chinese Academy of Social Sciences, reported by Hong Kong’s South China Morning Post on Thursday, suggested global hedge funds had invested as much as $50 billion in Chinese stocks.

Even that amount, however, is tiny compared to the market’s capitalization of $2.4 trillion.

Such comparisons are supporting a belief that the market’s fortunes will be determined by domestic Chinese forces, not by opinions or valuations from abroad.

“Foreigners are jealous when they see all the Chinese people earning money on the stock market,” said another investor in an online posting. “The U.S. index can reach 12,000 points -- why can’t China’s index reach just half that level?”