After what has been a breathtaking month of solid performances registered by the major Chinese stocks indices, a pull-back could reasonably be expected.

A break from mahjong

For starters, indices there have grown by between 15% and 25% on average in April alone. Then there are the worrying anecdotes about taxi drivers, housewives and pensioners giving up their daily mahjong sessions to spend afternoons at the trading rooms of local brokerages. This suggests a heightened state of speculative fervor amongst novice retailers. Finally, we’re heading into the end of month and, with it, possible window-dressing manoeuvers by funds’ portfolios. It’s a lot to take in, all ahead of a long weekend! Many quarters of the investment community continue to support a bullish view for Chinese stocks. After all, they have only started to waken up this past year after an almost five-year slumber. Furthermore, the rationale backing these calls are reasonable as valuations for Chinese stocks - especially those listed in HK - are by no means stretched. In fact, despite a roughly 18% month–to-date gain, the Hang Seng China Enterprise Index - commonly known as the ‘H’ Shares Index - is trading at only 11X PER.

Mind boggling

Still, the recent numbers are mind boggling. In the last three months, turnover in certain Chinese exchanges has tripled. Over the last 12 months, both the Shenzhen and Shanghai indices have doubled. More than 10 million stock accounts have been opened this year, one million of which were achieved over a two-day period earlier on. Many of these new accounts belong to inexperienced retail punters who do not care about PEs nor NAVs, only the ‘target’ levels for their newly acquired positions. It remains to be seen whether this is a stock market bubble in its infancy or simply a spell of ‘irrational-exuberance’. We shall see whether investors there have the stomach to withstand the sharp drops often associated with raging bull markets. PS: A liquidity drain may also weigh on the secondary markets next week with a busy IPO calendar on the books. 11 billion is estimated to be raised in new offerings alone, ex- secondary placements issues.
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