By most conventional yardsticks, China's stock markets seem overvalued. But China isn't a conventional country and we suspect it will take a few more pump strokes before the bubble finally explodes. Or will it?

Bull markets like to climb a wall of worry and there are certainly plenty of people worried about China's soar-away domestic stock exchanges.

A warning from Alan Greenspan, another from the OECD and a third from their own government should have caused China's private investors to get the jitters. But its difficult to fold your cards when other gamblers are still at the table.

Some Chinese investors are now complaining they are only making 50% profits on stocks this year, much less than last, reports the Times.

But when China's government is prepared to turn its back on its own equity market then clearly it is a signal that only the foolhardy will ignore. China's decision to acquire a $3bn stake in Blackstone, the US private equity firm, is the first trickle in what is expected to be a flood of state funds seeking a safe home overseas, says the Financial Times ($) .

Surprisingly, there are still people prepared to make a bull case for investment in China's domestic equities.

The small but grandly-titled research house Bretton Woods Research argues in this SeekingAlpha story that China's domestic stock valuations are not excessive:

China's development is unprecedented and singular in world history, with 1m people being pulled up from poverty each month. On the whole, the optimism we see with Shanghai stocks look, dare we say, warranted for an economy growing at 10%+ clip (in GDP terms). “

According to the authors, China's stock markets will keep going up because there of the huge sums of money that are stashed away in savings accounts paying paltry returns.

Around 79% of China's personal finance assets are in such accounts, according to a McKinsey report,

Unsurprisingly, as the returns from domestic equity market start to roar ahead of those from savings accounts, more and more funds are withdrawn and invested in equities.

Its a high-risk game, of course, and private investors are notorious for investing at the market peaks rather than troughs. But in this respect, the behaviour of Chinese investors is no different from that of private investors in more developed equity markets.

Faced with a stark choice between a zero-risk investment paying a pittance and a high-risk investment that can produce annual returns of 100% of more, many Chinese opt for the latter.

Of course, it would be great if Chinese investors had access to broad spectrum of investment products, catering for varying risk profiles and returns. But they do not. China's fund management sector is underdeveloped with too many small domestic players and a culture that has yet to take onboard western concepts such as risk management and compliance.

Because of the weaknesses of the local players, western fund managers such as Canada's RBC see big potential in this market — see this EngagingChina story.

According to a recent McKinsey report, China is likely to become the fastest-growing asset management market in the world, with assets under management set to top $1,400bn within the next decade.

But at the moment, it looks like the bubbles are here to stay.

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