KEY POINTS:
The 14 per cent rally in Chinese stocks in the past two weeks has created some of the largest companies in the world by market capitalisation and defied a global rout that wiped more than US$3.3 trillion ($4.5 trillion) from equities worldwide.
The gains helped Industrial & Commercial Bank of China attain a market value that exceeds all but two US companies, Exxon Mobil and General Electric.
In banking, ICBC's US$285.2 billion market capitalisation dwarfs the US$233.8 billion of Citigroup, even though ICBC's US$6.5 billion in 2006 earnings were less than a third of the US bank's.
Relative prices indicate China's rally should be losing steam.
ICBC's Shanghai-listed shares trade at 38 times reported earnings, more than triple Citigroup's multiple of 11.
Shares in China's CSI 300 Index trade at 50 times profit, while those in the Standard & Poor's 500 Index trade at 17 times.
"It's more a matter of momentum rather than valuations," says Gabriel Gondard, who helps manage US$6.6 billion at Societe Generale's Fortune SGAM Fund Management venture in Shanghai. "There's a lot of liquidity flowing into the market."
The CSI 300 has more than tripled in the past year, driven by local investors seeking returns above the inflation rate, which reached a 10-year high of 5.6 per cent in July. Rules limiting the flow of money offshore have funnelled savings towards the country's stocks and mutual funds.
Trading by individual investors accounts for about 60 per cent of market volume, according to estimates by Shanghai-based brokerage Guotai Junan Securities. In the US, individuals account for only 5 per cent of trading.
China's plans to let more locals invest overseas will curtail stock gains over time, says Societe Generale's Gondard. For now, that money is fuelling gains in China.
The Government is expanding its so-called qualified domestic institutional investor, or QDII, programme that grants licences to move funds to offshore markets such as Hong Kong. Last month the programme was applied to all China fund managers after a trial period.
- Bloomberg
