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May 02, 2007
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Froth and bubble
Just keeping a track of these things for my book: "China didn't even the bubble, but...": New A-share trading accounts opened by frenzied mainland retail investors look set to exceed 10 million for the year next week when China's stock market resumes trading after the Labor Day holidays.And are you still puzzling why the A Shares (ie those listed on Chinese exchanges) are at such massive premiums to H Shares (shares in the same companies but listed in Hong Kong)? This might help: It is believed the new accounts would have become active immediately. Assuming each account holder invested a conservative 20,000 yuan (HK$20,302) into the A-share market, this translates into more than 4 billion yuan pouring in each day for the past three weeks - a staggering 60 billion yuan.As an example: Chalco is worth almost the same as Alcoa, based on its A shares. The A shares closed at 18.51 yuan, while the H shares closed at HK$9.29. The HK dollar is pretty close to parity with the yuan. So the A shares are double the H shares, but because there's not way to go short those A shares the arbitrage remains wide open (put that in your efficient markets theory). Here's a quote from the article: A shares, available only to mainland residents, trade at a premium to their Hong Kong counterparts as China's markets are flooded with funds but short on investment options, while investors in the Hong Kong market tend to be more rational and cautious, Yip said.Naturally this has lead to Hong Kong fretting that it will lose its status as the main centre for raising capital for Chinese firms. But if you're a Chinese firm, you're doing yourself a disservice if you don't offer shares into such a market. At least you can tell your grandkids you were there during the madness. Update: Over at Marginal Revolution, some bubbles can be good for the economy. And Philip Bowring on China's baby steps bubble. posted by Simon on 05.02.07 at 11:56 AM in the China economy category.
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