Saturday, November 24, 2007

Is China stock market a bubble?

Is China Stock Market a bubble?
I read an interesting article about the Chinese ecomony the other day in BusinessWeek. The article really reinforced to me the point that I have been thinking about recently. Is the Chinese stock market it growing too fast and is it a bubble that will most likely burst? BusinessWeek points out that a large percentage of the businesses in China are playing their stock markets and investing in each other's IPOs. The growth of the companies profits is inflated by their stock market returns. If you remove the companies portfolio returns the profit is dramatically reduced. The article points out that the same thing happened to Japan years ago.

I think that it is perfectly okay for businesses to investing their extra cash into other companies and investments. However, the problem is, a lot of people in China and outside China do not realize how much of the profit these companies are generating comes from their ability to run a good business or are they currently just geting lucky investing in a hot stock market and riding a wave? A few questions to ask yourself about your portfolio?

  1. Do you have mutual funds that are investing in China?

  2. Do you have individual company stock that is invested in Chinese companies?

  3. Do you understand how much of the companies earnings are actually coming from the stock market versus the actual operating profit?

The bottom line is as Jim Cramer always says, make sure you do your home work before and during your investing. With the Chinese market up as much as it is I am afraid we are headed for a bubble. Checkout this book on investing in China

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