China's Stock Mania, Part Deux

♠ Posted by Emmanuel in , at 5/11/2007 06:28:00 PM
With China's stock markets extra-bubbly and government warnings coming out every day to the effect that loose money is ending up in equities, the government has decided to--what's the word--inflict (just kidding)--Chinese stock mania unto the rest of the world. With P/E ratios of Chinese stocks above 40x, it's about time:
China will let its banks buy shares overseas for the first time, diverting some of the country's 35 trillion yuan ($4.6 trillion) of savings from a local stock market where trading has surged sevenfold.

Commercial banks can invest as much as 50 percent of funds in the qualified domestic institutional investors program, or QDII, in overseas stock markets, the China Banking Regulatory Commission said on its Web site today. Investors need at least 300,000 yuan to buy such financial products, the regulator said.

This will help ``cool the very hot domestic stock market a bit,'' said Gabriel Gondard, who oversees $3.5 billion in Shanghai as a fund manager at Societe Generale venture Fortune SGAM Fund Management. ``Don't expect it to trigger a crash. Investors are still reluctant to invest overseas with booming stocks and expectations of currency appreciation at home.''

China wants more money to be invested abroad to slow the growth in the country's $1.2 trillion in currency reserves, which are flooding the domestic market with cash. Local investors have shunned QDII because they had been limited to lower yielding fixed-income and money-market products.

``The government is easing restriction on capital controls so that the central bank won't be the only institution to deal with the flood of foreign exchange coming in,'' said Tao Dong, Credit Suisse Group's China economist. ``The QDII was introduced to help mop up excess liquidity in the system.''

How manic is it in China nowadays, you ask? Get a load of this report on account openings for trading A-shares (those held locally):

A total of 4.79 million new A-share trading accounts were opened in April [2007], 853,500 more than the combined total for the previous two years, according to statistics from the China Securities Depository and Clearing Corporation.

On Tuesday, the first trading session after the week-long May Day holiday, nearly 370,000 A-share accounts were added, almost half of the number for the whole year of 2005.