August 30, 2007
China Market, ETFs Now Larger than Japan

By Carl T. Delfeld

Despite volatility and weakness in most markets and the exchange-traded funds that track them, China's market and ETFs such as the iShares China (FXI) and the SPDR S&P China (GXC) have surged ahead like a powerboat slicing through turbulent waves. Both ETFs are up more than 4.5% this morning in early trading.

At the close of trading on Tuesday, the 1,481 companies listed on the mainland had a market value of over $3 trillion while Hong Kong added about another $1.7 trillion.

The Geoff Dyer of the Financial Times reports from Shanghai that the Japanese market capitalisation was $4,700bn at the close of trading on Tuesday while the combined value of the Chinese market was $4,720bn. The Industrial and Commercial Bank of China, which began trading in Hong Kong and Shanghai last October, is now the biggest bank in the world in terms of market capitalisation while China Life is the biggest life insurer.

One concern raised by the article is that a number of analysts outside mainland China have recently pointed out that up to half the earnings growth at listed Chinese companies in the first six months of the year came from the rising stock market which is due to large crossholdings between mainland companies. A market turndown would obviously hit corporate profits hard. This situation reminds me of the Japan bubble which burst in 1989. However, keep in mind that the Japan bull run and crazy valuations went for a very long time before coming to a screeching halt.

There are several classes of shares of Chinese companies listed in Hong Kong, including H shares which are mainland registered companies and red chips which are incorporated in Hong Kong and controlled by the Chinese government.

(Source: SeekingAlpha)