Thursday provided another reminder that global market movements – unlike, say, deflation or mobile handsets – are not made in China. Two days after China’s domestic equity market fell out of bed, Ping An Insurance shares leapt 42 per cent on their debut. Sure, it sells insurance in the world’s biggest market, but that alone hardly justifies a price-to-book multiple that is four times the industry’s global average. Investors outside China value shares in Ping An, which is partly owned by HSBC, at a 28 per cent discount to the new mainland price. Such valuation gaps exist among many of China’s dual-listed stocks. China Life, Ping An’s bigger rival, is 40 per cent cheaper in Hong Kong.
International norms clearly do not apply, even though China’s domestic-currency “A” share market now has a capitalisation of $1,400bn. Stocks trade largely on sentiment, which can turn on a dime: witness Air China, which was forced to scale back its initial public offering last summer due to tepid demand. Structural constraints persist. Domestic investors have few investment options, so in good times huge oversubscription levels are more or less guaranteed – along with top-dollar prices and impressive first-day pops. Since the start of the decade, Chinese IPOs have consistently produced high average one-day returns. So far this year the average pop is 70 per cent, compared with 22 per cent in neighbouring Hong Kong and 44 per cent in Japan, according to Dealogic.
A sentiment-driven market spiralling higher – even after Tuesday’s correction, the Shanghai “A” share market is in positive territory this year and up 114 per cent in the past 12 months – looks like a classic bubble. Regulators have warned as much, and may well intervene. But the bursting, like the bubble, will be essentially domestic. Foreigners have less than $10bn in the market, or about the same as in a mid-sized private equity deal, and should have more pressing things to fret about than Chinese share prices.
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