Something strange is going on in the Chinese stock market. Even as the country’s economy has slowed, stocks have surged about 147 percent in the last 12 months as individual investors have poured their savings and have borrowed money to put into the market.
The sharp increase in stock prices must worry China’s leaders, because it could put household finances and the financial system at risk of big losses. It is particularly troubling that the recent rally has been fueled by an explosion of margin lending, in which brokerage firms make loans to investors to buy shares. Total margin debt outstanding is five times the level it was a year ago, reaching 2 trillion renminbi ($322 billion) on May 27, Bloomberg News reported recently. The total borrowed to buy stocks is probably even higher, because some investors have presumably borrowed from banks and their families, too.
Stocks of smaller and less proven companies have had the biggest increases, which suggests investors are taking big risks in the hopes of fast gains. The average price-to-earnings ratio, a measure of how expensive stocks are relative to corporate profits, is 143 for companies listed on the ChiNext board of the Shenzhen stock market, which is dominated by smaller companies and tech stocks. One high-flying company on the market, Leshi TV, an Internet video service, has seen its stock jump almost 250 percent in the last year and has a P/E ratio of 358. By contrast, the ratio for larger companies listed on the Shanghai Stock Exchange is about 25. In the United States, the Standard & Poor’s 500 stock index has a price-to-earnings ratio of about 21.
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