More Warnings For China Stocks!

First it was Hong Kong's tycoon Li Ka Shing who issued the warning about a potential unsustainable China stock market bubble. Next was former US Federal Reserve Chief, Alan Greenspan, who also issued a similar warning, causing any further global stock market optimism to put on hold.

A check on the statistics revealed the following startling facts:
- prices on China's bourses have jumped about 55% since January and more than tripled since the start of 2006
- Number of brokerage accounts set up to buy mainland shares and mutual funds amounted to 327,019 on 16 May 2007;
- Investors opened a record 385,121 new accounts on May 8.

The frenzy buying was a result of investors riding on China's booming economy which has grown a minimum of 10% for the last four years and improving corporate earnings. As in any over heating stock market, it is often unsustainable. (Reminds me of the buying frenzy during the 1993 Super Bull Run of KLCI which thereafter came tumbling down!) Nervous authorities have struggled to clamp down on irregularities and to cool the investor frenzy. China's central bank raised interest rates and bank reserve requirements as well as widened the currency's trading band last Friday but investors ignored the moves, sparking 3 consecutive days of record gains this week.

Could this be a signal of an upcoming major and healthy correction? Time will tell. A slump in China's stocks may be felt beyond its borders. Bear in mind that a record 9.2% plunge on Feb. 27 triggered a five-day rout that wiped more than $3.3 trillion from the market value of equities worldwide. Perhaps it may be wiser to stay defensive or hold cash at this present moment.