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2 November 2009



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Speculators Flood New Chinese Stock Exchange

A new stock exchange, ChiNext, opened on Friday in China, and the speculators were out in droves. The weakest performing of the 28 stocks rose 76%. As each of these issues appeared to be an IPO, the companies involved got robbed by their bankers. However, everyone in China said it was a good way to start trading. It would seem the Chinese Communist Party doesn't mind speculative froth. Peng Yunliang, an analyst for Shanghai Securities, said the exchange, "will help to upgrade industries, serving as a window for the world to know more about the Chinese economy." All the world needs to know right now is to stay out of this particular exchange until it matures some.

Be that as it may, the ChiComs are committed to ChiNext. "Launching ChiNext is a strategic decision made by the central government," said Shang Fulin, head of the Chinese securities regulator. He also acknowledged, "ChiNext faces relatively high risks of irrational trading, speculation and market manipulation."

This NASDAQ-style exchange does have some components that make one feel better about the trading. If prices swing up or down 20%, trading halts for half an hour. Another 30 minute break occurs if a stock is changed by 50%. Should an issue go 80% up or down, it can only only trade in the last 3 minutes of the session. Also, ChiNext is relatively small. The total market cap of the 28 companies in the ChiNext comes to about $10.2 billion. The Shanghai Exchange has a market cap of $2.5 trillion or so. Further, most of the action comes from retail accounts, so no fat block of stock is going to distort things.

Indeed, ChiNext is really too small for most institutions, and for those interested, these prices aren't very good value. Business Week noted, "Simon Murray (China) launched its $250 million SMC China New Market Fund on October 1, in part to invest on the new bourse. However its Shanghai-based chief investment officer Tony Yam says he [would] rather wait on the sidelines until the froth comes off the market. 'Some of these companies look interesting and have been purposely selected by the regulators as good quality or new sector companies," he told me [the Businessweek reporter] the night before the market opened. "But we are fundamentals driven and we have set entry level prices but right now they are not trading at cheap valuations'."

 Ben Kwong, head of research at brokerage house KGI Asia, stated, "The new board is catering upstart companies with a new business concept, which is prone to attract many investors, but the market will cool down after some time." Yes, and when it does, prices will fall, either in a gradual decline or a quick crash. The smart money in this particular situation is still on the sidelines.

© Copyright 2009 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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