Investors are still gung-ho on China, seemingly oblivious to the obvious signs of overheating in local stock markets and repeated warnings that the bubble may burst.
Goldman Sachs yesterday joined the sky-is-falling-in crowd, saying a correction is possible in China's yuan-denominated A-shares, as the “risk of market euphoria is building. “
Another sign of euphoria is that the Chinese Initial Public Offering Indicator hit an historic high last month. The indicator, created by Xinhua Finance and the Milken Institute, rose to 244.5 from the previous month's score of 232.0.
The index uses weighted capitalisations and as companies are added to the index when they list, companies over 12 months old are removed.
Of the ninety-two IPO stocks included in the latest update to the indicator, 71 increased in price and only 19 declined. The rise is attributed mostly to the hefty weighting enjoyed by big banks like ICBC, Bank of China and Industrial Bank.
Chinese IPO euphoria is likely to infect western exchanges, argues the Financial Times, because the the number of Chinese companies selling shares in New York and London is set for a big jump this year, in spite of tighter offshore listing regulations introduced by Beijing.
Industry insiders say the most plausible reason for the influx is that a crop of investments by international private equity and VC funds is reaching maturity.
Talking about bubbles, EngagingChina heard an interesting interview ( WMA format;16:38 running time) with investment guru Jim Rogers on The China Business Show, which is run by Entrepreneur Magazine.
He is convinced that China is on its way to becoming the “superpower of the 21st century” in the same way that the 19th century belonged to the UK and the 20th century to the US.
To profit from China's ascent, he says western investors should invest in commodities. While he has owned shares in China for a number of years, he warns against the “incipient bubble” now developing in China's equity markets.
If the Chinese stock market doubles again this year I will have to sell it because then you are in bubble territory. Whenever there's a bubble it's going to end badly and when Chinese shop assistants are taking out loans to buy shares that is not a good sign.”
He also warns about China's real estate bubble, which is “not sustainable”, although he is believes that China's authorities are taking the right steps to rein in the twin equity and property bubbles.
Rogers is betting not just his money but his daughter's education on China's rise. When his daughter was born, he hired a Chinese nanny to ensure that she learnt to speak Chinese from the cradle.
In an interview with In Focus, the on-line publication of Credit Suisse bank, Rogers is asked how his daughter's Chinese lessons are going:
Very good. She is barely four years old, but she already speaks Chinese like a native. I've just bought her 25 DVDs in Chinese, as Chinese DVDs are hard to find in New York. We do not have a television at home. She only gets to watch Chinese stories on DVD. The most sensible skill that I can give to somebody born in 2003 is a perfect command of Mandarin.
Rogers is even considering relocating to a Chinese-speaking city for the full immersion experience.
As China's economy develops and 1.3bn potential consumers enter the world market, Rogers believes it will have “major consequences” although not necessarily all positive.
For example, the one thing that worries him the most about China's frenetic development is water problems. If China does not develop new sources of water very quickly, that could really cripple its future development, he warns. “I've seen many societies around the world disappear because they ran out of water.”
For western businesses and entrepreneurs engaging with China for the first time, Rogers' advice is:
Its like starting a business anywhere else in the world. You have to find something that people want and need and if you can produce it efficiently at right price you will make a fortune. It doesn't matter what it is.”
Rogers is best known for his hugely successful Quantum Fund which he founded with George Soros. He then took to his motorbike to explore the world and dig out new investment ideas, an exploit described in Investment Biker: Around the World with Jim Rogers.
Rogers travelled through China several times. He first got permission to take his motorcycle through Fujian province in 1986 and in 1988 he took his bike through the whole country. He repeated the motorcycle trip in 1990 as part of a round-the-world trip and in 1999 he did it again, this time in a car.
He now devotes most of his time to talking up commodities. Contrary to much of the investment establishment, he believes commodities are in a long-term bull market, due largely to China's insatiable demand.
The best way to profit from the rise of China is thus to buy commodities, he argues. Because the Chinese need commodities so desperately, “they will pay you on time, they will be nice to you, and they will take you out to dinner.”
You could of course also buy the shares of natural resource companies or companies that trade with China, but that expose investors to the stock market, management issues, the central bank, trade unions and a host of other complications.
Owning commodities themselves is the purest play on China's boom, he argues.
When asked about whether China's economic rise represent a win-win situation for the west, Rogers is pessimistic:
Unfortunately, history teaches us the opposite: oftentimes, when a new country ascended economically, sooner or later that coincided with the decline of the countries that were previously dominant and often conflict occurs. Hopefully, that won't happen so quickly this time. Sadly, however, there are incompetent politicians everywhere doing crazy thing.”
Rogers is publishing a book on China's stock market due out later this year. More at JimRogers.com