Chinese stock market: How far can the pig fly?

Caifu Magazine | by Caifu Global

Recently, a popular saying in China’s stock market emerged. It goes like this; “when the wind blows hard enough, pigs will fly.” Indeed, as a series of easy money policies came blowing in like the wind, pigs began flying in the Shanghai and Shenzhen stock markets. This started back in the summer of 2014 when financial stocks represented by securities dealers soared sky-high, with a stunning increase of several times over, within a short period of time. And now, since the beginning of this year, concept and subject shares on the Growth Enterprise Market (GEM) have been flying higher and higher, too.



However, financial stocks have stood still for over half a year since last year’s substantial rise. This has caused people to turn their concern to how much longer concept stocks will remain up in the air, at elevated levels. Optimistic investors believe that China’s economic future is in its emerging economy which will perform better and better; while, pessimistic investors think that current stock prices have long overdrawn on their potential and that too much continued speculation will lead to the market’s collapse sooner or later.

Those who are bullish about the Internet economy hold that the Internet will reconstruct the ecologies of many industries and change profit models. Therefore, it is outdated to measure a company’s value merely based on its price to earnings ratio (PE). More importantly, many liquidation models of the Internet have sprung up, such as Internet finance, Internet payment, and supply chain finance. As these models can bring in tangible profits, investors are willing to give higher valuations.

Optimists expect moderate bubbles to attract capital and talent to flow into the economy that will expedite industrial upgrading and development. Indeed, the Internet bubbles in the US in 1999 brought a large amount of capital and talent into the Internet industry, laying a solid foundation for America to stay ahead in information technology. Current Internet giants are those who have stood the test of cruel competition after market bubbles burst. Other countless Internet companies that were once brisk have disappeared with the wind when their bubbles popped.

We believe China’s new economy will nurture more Alibabas. But this is not likely to happen until after the bubble bursts because Chinese people tend to pile in and then pile out when doing things. During the current vigorous speculation in the new economy, it is still unclear where those investors who declared they would invest in emerging fields are heading. Yet today’s institutional and individual investors, especially company stockholders, are more concerned about trends in stock prices. For now anyway, it is hard to predict within the short term how much and how long prices will go up in the long run.

Once an enterprise, or several enterprises, wins the field in dominating those internet features that allow them to break the barriers of time and space, lagging competitors will have lost their opportunity. A case in point is that among the hundreds of e-commerce companies that have emerged, only Alibaba, JD, and just a few other companies have stood out.

Investors put too much confidence in the regulatory body to protect the stock market, so they go long in stocks without much hesitation. Some even believe such a crazy rise will last forever. The most worrying fact is that the main funds are taking advantage of the time lag in the regulation. These funds just want to make good money and leave before the stock market really plays its role.

Today, the average P/E ratio for the GEM index stands at 110, and the figure is 70 for the Small and Medium-sized Enterprise Board (SMEB) index (15658.101, 0.00, 0.00%). Similar to the super Internet bubbles in the US in 1999, China’s GEM is rising at a stunning speed, like an inflating balloon. Deflating this balloon in a well-ordered way will be difficult. And unpredictable, because we just don’t know when the pop will be heard.

It won’t take long before we see the registration-based system in place. Although the regulatory body will control the speed the new system will be implemented in the beginning to avoid its impact on the stock market, this system will irreversibly change the market for the long run. In response, we believe China will see a long-term bullish market and the emergence of many great enterprises. After the test of bubble bursts and the cruel competition that will follow, the winners in the new economy will overshadow the innumerable losers. Are you ready to take bets?