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China flu fears unfounded Posted: Fri, 22 Jun 2007 [miningmx.com] -- FEARS of an emerging markets meltdown have stalked the markets ever since the main Chinese stock exchange lost 8.8% of its value on February 27. The plunge sent shock waves through the markets. But though there's agreement that Chinese shares are vastly overvalued, fears of other emerging markets catching Asian flu have faded. The question that arises is why the sharp fall in Chinese share prices in February set off those shock waves while a similar fall at the beginning of this month sent barely a ripple through the markets. The answer lies in the complexity of Chinese stock exchanges, as well as the measures that the Chinese authorities - government and central bank - are taking to cool the market. Though few reports mention this, you must remember that there are three types of ways in which Chinese companies can be listed: As A shares, which means they're registered in China in the Chinese currency, the yuan. Their investors are mainly Chinese residents and there are restrictions on foreign investment. Then there are B shares, which are registered in China in either Hong Kong dollars or US dollars. Foreign and local investors can invest in these shares, which form part of the global stock market indices compiled by Morgan Stanley Capital International (MSCI). Lastly, there are H shares - Chinese companies listed on the Hong Kong Stock Exchange. They are similar to B shares but tend to be larger, more mature companies. The initial sell-off of Chinese shares in February hit A and B shares and rocked other markets because MSCI shares were involved and because there were fears that the Chinese economy would cool off dramatically. The involvement of the MSCI shares led to investors reducing their appetite for risk, affecting all emerging markets. However, the drama was short-lived as the Chinese market proved resilient. Still, the prophets of doom kept hammering on about how overheated the Chinese stock market was. They pointed out that the Shanghai Stock Exchange index had shot up about 50% this year, after a 130% gain in 2006. However, it has emerged that the main concern about the Chinese market is the A shares. Since foreign investment in those shares is restricted, the ripple effects worldwide are contained. Hence the sell-off early this month caused little reaction. Stanlib economist Kevin Lings said: "Talk of a bubble in the Chinese market is scaring investors. However, the facts indicate that investors shouldn't be selling either their offshore or local equity portfolios because of this issue. It's only the local shares in China, called A shares, that have been soaring of late - and tumbling. To a large extent the 'bubble' issue is a purely domestic Chinese affair." Analysts say MSCI and H shares are offering good value. An anomaly exists in that some are listed as A and H; their earnings multiples are massive in the A market and far lower in the H market. That's prompted calls on the Chinese government to allow arbitrage so that domestic investors can buy the cheaper shares in Hong Kong. Click Here to subscribe to our daily newsletter
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