The CASS report explained that macro-economic development will provide a sound basis for stock market development. In 2007, China's national economy will sustain rapid and steady development, with the growth of GDP expected to exceed 9 percent. The CASS report holds that the world stock market will remain optimistic, with major stock markets keeping the momentum of growth, providing a sound external environment for the development of the domestic A share market.
Currently, the evaluation of listed companies is reasonable. By the end of September 2006, the price to earnings ratio (P/E ratio) of companies listed in the A share market was about 22, while the P/E ratio of companies in the Shanghai and Shenzhen 300 Index and Shanghai 50 Index was no more than 20. This suggests that listed companies are not overvalued. On the other hand, the revenue of listed companies will likely increase by about 20 percent in 2007. Therefore, if the current P/E ratio remains the same as that of 2006, Chinese stock markets can have the potential to develop 20 percent in 2007.
The rapid development of the Chinese stock market and the expectation that the renminbi will appreciate further should attract more capital to flow into the stock market, which will in turn push stock market development. Therefore, taking into account the sound business performance of listed companies, if the P/E ratio in the Chinese stock market increases 10 percent in 2007, the whole market will increase about 30 percent. It is estimated that the Shanghai Composite Index also will break the record highs of last year.
However, there are still some who doubt the bullish market prediction.
Hua Sheng, President of Yanjing Overseas Chinese University, pointed out that the surging 2006 stock market was resulted from multiple positive factors and that the prediction of the bullish market for 2007 is built upon the most ideal external environment.
Hua noted that many factors of the external environment are likely to change. For instance, the huge trade surplus will probably lead to more trade friction and could adversely affect the domestic economy at any time. The prices of international raw materials and precious metals have already peaked, and possible price falls may bring about structural adjustments. Meanwhile, rapid economic development is exposing serious problems including energy and resource depletion as well as environmental degradation. This calls for painful transformation of the current mode of economic growth.
Further, he warned investors, "Currently, there are much idle funds in the market. In fact, the financial crises in countries like Mexico and Thailand were largely caused by idle funds. We should always bear that in mind."
Finally, he pointed out that financial derivatives like futures will add uncertainty to the stock market.
Other experts disagreed with the CASS report, arguing that the listed companies are overvalued. On January 15, 2007, China Life Insurance Co. Ltd. closed at 43.45 yuan per share in the A share market with a 105.6 P/E ratio. Before China Life's astonishing performance, the stock price of the Industrial and Commercial Bank of China (ICBC) also reached 6.79 yuan per share on January 4 with a 56.58 P/E ratio. But the P/E ratio of Citibank was only 13.25 on that same day.
"The market is crazy and I don't know what to say," said Zhou Ming, an analyst with Guotai Jun'an Securities. "It is off track and it's obvious that institutional investors manipulated the market. I suggest small and middle investors should be cautious and let them play."
However, not everyone is as pessimistic.
"The market will remain bullish in 2007," said Gong Qiang, an analyst with China Merchants Securities. Gong argued that the most important element propelling the stock market rise is adequate capital. In the next two years or so, the expectation of renminbi appreciation will continue and more capital will flow into the Chinese market.
With regard to the overvalue of listed companies, Gong Qiang said, "There are some bubbles. But the P/E ratio of some other stocks like iron and steel and non-ferrous metals is still lingering around 10, which is a normal span and has room for future growth."
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