Chinese Tech Bubble Dwarfs US Dotcom Bubble as Manic Buying Spreads to Hong Kong and to Macau’s Casino Stocks!

In addition to my late March post of “price to whatever ratio” where I show how the current Chinese stock bubble seem as integral to the government’s political actions which has resulted to valuations being blown out of proportions, this Bloomberg article finds that valuations of Chinese technology stocks has now dwarfed the US dotcom bubble of 1997-2000. (bold mine)

The world-beating surge in Chinese technology stocks is making the heady days of the dot-com bubble look tame by comparison.

The industry is leading gains in China’s $6.9 trillion stock market, sending valuations to an average 220 times reported profits, the most expensive level among global peers. When the Nasdaq Composite Index peaked in March 2000, technology companies in the U.S. had a mean price-to-earnings ratio of 156.

Like the rise of the Internet two decades ago, China’s technology shares are being fueled by a compelling story: the ruling Communist Party is promoting the industry to wean Asia’s biggest economy from its reliance on heavy manufacturing and property development. In an echo of the late 1990s, Chinese stocks are also gaining support from lower interest rates, a boom in initial public offerings and an influx of money from novice investors. 

The good news is the technology sector makes up a smaller portion of China’s equity market than it did in the U.S. 15 years ago, limiting the potential fallout from a selloff. The bad news is that any reversal in the industry will saddle individual investors with losses and risk putting an end to the Shanghai Composite Index’s rally to a seven-year high.

Wow 220 PERs!!! Philippine index managers must be drooling for local stocks to attain such levels.

Well overvaluations don’t just happen. Rather they are consequences from prior actions, or in particular, such are symptoms of deeper problems. And one of the major problem stems from government policies. And this has duly been imputed by the article which cites “lower interest rates”, and consequently, government support to the technology sector. 

The article shows how government subsidies feeds into the current mania.

China’s government is boosting spending on science and technology as a faltering industrial sector drags down economic growth to the weakest pace in 25 years. In March, Premier Li Keqiang outlined an “Internet Plus” plan to link web companies with manufacturers. Authorities also plan to give foreign investors access to Shenzhen’s stock market, the hub for technology firms, through an exchange link with Hong Kong.

Among global technology companies with a market value of at least $1 billion, all 50 of the top performers this year are from China. The sector has the highest valuations among 10 industry groups on mainland exchanges after the CSI 300 Technology Index climbed 69 percent in 2015 through Tuesday, more than three times faster than the broader measure…

Technology companies have posted the biggest gains among Chinese IPOs during the past year, helped by a regulatory ceiling on valuations for new share sales. Beijing Tianli Mobile Service Integration Co. is the top performer among 147 offerings during the period after surging 1,871 percent from its offer price to trade at 379 times earnings… 

Valuations in China are now higher than those in the U.S. at the height of the dot-com bubble just about any way you slice them. The average Chinese technology stock has a price-to-earnings ratio 41 percent above that of U.S. peers in 2000, while the median valuation is twice as expensive and the market capitalization-weighted average is 12 percent higher, according to data compiled by Bloomberg.

The idea that technology represents a small segment of the equity markets misappreciates the perspective that risks of imbalances have been a systemic issue.

Proof? From the same article

The use of margin debt to trade mainland shares has climbed to all-time highs, while investors are opening stock accounts at a record pace. More than two-thirds of new investors have never attended or graduated from high school, according to a survey by China’s Southwestern University of Finance and Economics.

Money has flowed into Chinese stocks in part because the central bank is cutting interest rates to support growth, something the U.S. Federal Reserve did in 1998 to revive confidence amid Russia’s sovereign debt default and the collapse of the hedge fund Long-Term Capital Management.

Symptoms of policy induced credit fueled asset (stock market) manias have been ubiquitous: margin trade are at all time highs combined with massive formal banking loans and shadow banking funds being funneled into stocks as retail punters enroll in record rates. Market participants then stampede into the price bidding hysteria or indulge in excessive speculation to pump up asset (stock market) prices to levels where valuations don’t seem to matter at all.

Yet systemic issues will have systemic ramifications.

To add icing to the cake, media portrays Chinese stock market irrationality on the increased participation from societal strata with lower educational background.

While education may somewhat help, the reality is that what demarcates between lemmings or people falling for the herding behavior trap and independent thinking is self-discipline which is a personal trait.

As I have pointed out numerous times here, throngs of well-educated or even high IQ people have been mesmerized by the illusions of prosperity from government sponsored bubbles or have even fallen victim to Ponzi schemes. As example, Queen Elizabeth chastised the economic industry for being blind to the 2008 crisis. 

Bubbles essentially pander to the emotions and egos rather than to logic. Thus self-discipline has mainly been about controlling emotions and egos (this is theoretically known as Emotional Intelligence) and hardly about education.

Anyway, to compound on the Chinese version of the modern day dotcom bubble has been an IPO bubble that includes small and medium scale enterprises

From Nikkei Asia (April 3; bold mine)

On Thursday, the China Securities Regulatory Commission approved an unprecedented 30 companies for listing on the Shanghai and Shenzhen stock exchanges. It previously had maintained a moderate pace of initial public offerings to avoid upsetting market dynamics. But the frenzied run-up in stock prices seems to have eased oversupply concerns and encouraged the regulator to let loose.

Investors responded by lifting the Shanghai index to a seven-year high Friday. Bullishness is particularly apparent in the Shenzhen market. Seventeen of the 30 companies approved for IPOs will list on its ChiNext board for startups. The ChiNext index advanced 1.4% to a record 2,510. The average component is trading at nearly 100 times earnings.

ChiNext is a benchmark patterned after the NASDAQ listed at the Shenzhen Stock Exchange.

Wow average PERS at 100x!

Yet aside from monetary easing, price manipulation of IPOs have been used by the government to ramp up the public's interest in the stock market last year.

So even while another Chinese company, Cloud Live Technology group reportedly defaulted on her domestic debt last week, where the Chinese government via the PBOC injected 20 billion yuan ($3.28 billion dollars) most likely to ease pressures in response to such default, the stock market mania has been intensifying.

Chinese stocks used to be correlated with price actions of commodities (chart yardeni.com). Not anymore. Chinese stocks have mutated into mainly a central bank-Chinese government liquidity play with little relevance on the real economy. Such signifies another sign where the stock market fundamental functions of price discovery, and as discounting mechanism, has almost entirely broken down.

And Chinese stock market bubble has even percolated to Hong Kong. Hong Kong’s stocks as measured by the Hang Seng Index have virtually exploded to record highs!

Aside from the rationalized gap between mainland and Hong Kong stocks, fund flows via the Shanghai-Hong Kong connect, the Chinese government again has been attributed as a major influence. 

From the Wall Street Journal: Adding to investor confidence Thursday was an article in the state-run China Securities Journal headlined “Go! Buy Hong Kong Stocks!”, signaling to some analysts that the mainland government is encouraging the rally.

And to include today’s gains (+3.8% yesterday and +2.7% today), in two days, Hong Kong’s stocks has spiked by 6.5% and by over 10% since mid March!

The mania appears to be spreading.

Stocks of Macau’s casinos have also skyrocketed by about a stunning 10% in two days!

Aside from yesterday's dramatic twist of events, today MGM China Holdings (HK:2282) closed +5.44%, Galaxy Entertainment Group (HK:27) +5.56%, Melco Crown Entertainment (HK: 6883) +2.21%, Sands China Ltd. (HK: 1928) +5.92%, Wynn Macau Ltd. (HK: 1128) +8.69% (!!), and SJM Holdings Ltd. (HK:880) owner of Grand Lisboa, +5.13%.

Spectacular volatility!

Paradoxically, this has been happening even as Macau's gaming industry in March suffered another monumental collapse in terms of monthly gross and accumulated gross revenues!

It’s becoming clearer that the Chinese government appears to be bent on substituting or replacing a bursting property bubble with a stock market bubble. They seem to be buying time and anchoring on hope that new bubbles will not only offset the old ones but generate real growth.

Unfortunately, all bubbles end in tears.

Yet the above events represent added accounts of record stocks in the face of record imbalances at the precipice.