The domestic stock markets are hitting one new high after another, riding a wave of investor sentiment that has more to do with herd mentality than solid accounting.Chinese companies are on the whole not famous for their transparency or commitment to corporate governance yet they continue to attract increasingly high levels of investment.
Over the first three weeks of January, the Shanghai Composite Index carried on from where it left off at the end of a stellar 2006, hitting a string of new highs.
After shares in China Life doubled in value on their first day of trading on January 9, the index spent the next week or so moving in both directions around the 2,800 mark. But come closing time on January 19, it was at 2,832.21, having again threatened its all-time intra-day high of 2,856.26 set two days earlier.
For many months now the consensus has been that China stocks are on the ascendancy. The Shanghai and Shenzhen bourses were two of the three top performers in the world last year, beaten only by Caracas, but talk of investing in China is usually followed by a disclaimer: there is too much liquidity.
Almost all investors and analysts will, sooner rather than later, conclude that there is just too much money floating around. Record numbers of people are investing, and doing so somewhat blindly: many stocks aren't covered by analysts and, even if they are, there may well be issues with disclosure.
Rather, much of the investment seems to be driven by fear of not being in China.
Beijing can't drop the ball
One argument often made is that, at this stage of the game, investments are reasonably safe since there is too much at stake for the government to allow any of the big share-issuing state owned enterprises to collapse. So the money continues to flow.
Investors – and this term now refers to a segment of the population ranging from taxi drivers to investment bankers – are riding a wave of greed and pouring money into the market while counting on this tenet of faith that the Chinese market "has" to go up in the months to come.
In fairness, China's newly regulated exchanges are stronger and better regulated than they have ever been. This year, Shanghai is expected to host more initial public offerings from Chinese companies than perennial favorite Hong Kong. And an increasingly more valuable yuan is driving the value of investments upwards in relation to the dollar.
What's more, these are uncharted waters. No economy in the history of the world has had China's potential for growth.
On the other hand, there are many investors taking short term positions, banking on the almost certain fact that stock prices will go up in the near future but also counting on getting out quickly. No one wants to be around if and when a spark of some kind ignites a blaze of panic, sending the money somewhere else and prices tumbling down.
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