Will The China Bubble Burst?

About a decade ago, you couldn't give Steel away. Companies the world over had stockpiles of it and its price lay stagnant. In the past two years, there has been a resources boom, fuelled mainly by the growth of China. How long will this last for? Will the bubble burst?

Great questions that have the attention of the world markets. This graph highlights the phenomonal growth of the Shanghai Index.



Last week, the Shanghai Index was down over 5% purely on rumours about a tightning on economic policy. Not a big news story by US standards but even something as arbitrary as that seemed to have caused a massive 5% swing.

Analysts from major banks in the US and Europe are going back and forth about when the Chinese stock price growth will end. A few of them are debating if it will.

Each side has an interesting and compelling argument. Which one is right... only time will tell.

Some of the arguments are...

* The Shanghai Index is trading at over 40 times earnings, whilst the Hang Seng is trading at nearly 3 times less
* The profit increases in Chinese companies is fueling the consistent increase in share prices
* Investors do not pay capital gains tax on profits, so it is stimulating investment
* Companies with dual listing on the Shanghai Stock Exchange and the Hong Kong Stock Exchange, are trading at higher PE Ratio in China than in Hong Kong.
* The main difference between the China bubble and the Tech bubble is China is supported by large income and cash holdings that Chinese companies are actually achieving
* The Chinese view Stock Markets as the only investment vehicle in which they can increase their wealth. Property is not seen seen as a wealth creation vehicle.

So whilst these arguments have been going back and forth over the last 12 months, the graph has shown consistent growth but with a couple of scary drops. Will a future drop be more permanent? We shall see.