CHINESE STOCK MARKET CONTINUES 
TO RISE WITH NO LET UP
by Monty Guild
Guild Investment Management, Inc.
August 23, 2007

Somebody forgot to tell the Chinese and Hong Kong stock markets that there was a global liquidity crisis. China has not yet declined as world markets have fallen, and after a short reaction Hong Kong has come back strongly.  Why have these two Chinese markets so thoroughly outperformed other markets?

Answer:  Uninterrupted liquidity and a lot of confidence.

Liquidity is available because the Chinese economy is booming.  The money supply is growing at over 20% per annum, and the impact of inflation is being experienced by the average Chinese citizen.  The Chinese want to protect themselves from inflation and enjoy the benefits of the capital appreciation that they see their neighbors enjoying.

The stock market is a very easy way for the average Chinese person who is getting some money to protect it from inflation and make capital gains, so many people have invested in a relatively limited number of public companies.  

The logic of the Chinese investor is that the Chinese government will protect the market until after the summer 2008 Olympics.  They believe that China wants to put their best image forward to the world as the world focuses on the Beijing Olympic Games.  The Chinese citizenry reasons that part of putting on their best face is having a booming stock market. 

 Because there are few outlets for the person with a few thousand dollars to protect him or herself from inflation, the stock market is very highly valued.  

HONG KONG IS A DIFFERENT AND PERHAPS A MORE ATTRACTIVE SITUATION

In order to limit the over-valuation of Chinese stocks, the central government has decided to let a few institutional investors, and eventually the public, invest 'overseas' in Hong Kong.

This is a potential huge boon for Hong Kong stocks, especially those which also trade in China.  The average P/E (price to earnings) ratio in Hong Kong is less than half of the average P/E ratio in China; even for companies that trade in both locations.

Our sources in Hong Kong tell us that the process will be gradualistic.  Some investors will be given the OK by the Chinese government without fanfare.  If the process is debugged and begins to run smoothly, more and more investors will be allowed to invest in Hong Kong. The plan is that over the long-term all Chinese will enjoy the ability to invest externally.

© 2007 Monty Guild
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