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The Honolulu Advertiser
Posted on: Sunday, September 30, 2007

Americans going crazy for stock in China's boom

By Matt Krantz
USA Today

The feverish stock boom in China is making its way to U.S. shores.

The U.S. stock market might be fighting to shake off worries about a credit squeeze and a potentially slowing U.S. economy. But money is pouring into Chinese companies that trade on U.S. exchanges, as investors chase after an economy that is growing roughly three times as fast as that of the United States.

Through Thursday, the Shanghai class B market, which is open to foreign investors, is up 178 percent this year, while Hong Kong's benchmark index is up 38 percent.

"Optimism and mania have spread to all these markets," says Donald Straszheim, vice chairman of Roth Capital Partners.

While China's economic growth partly explains the enthusiasm, the interest in Chinese stocks is reaching head-turning proportions in U.S. markets.

  • Skyrocketing values of domestic shares of Chinese stocks. The 37 Chinese companies with shares listed on major U.S. exchanges have seen their shares rocket 72 percent this year on average, says Standard & Poor's Capital IQ.

    That doesn't include the 13 other Chinese companies that began trading after the first of the year. One of those, solar-cell maker JA Solar, is up 194 percent since its initial public offering on Feb. 6.

  • Staggering gains by individual Chinese stocks. Some U.S.-listed Chinese stocks are posting stratospheric results, including the nearly 694 percent gain in investor information company China Finance Online, and 292 percent and 400 percent gains by China Southern Airlines and China Eastern Airlines, respectively.

    On Thursday, the two biggest gainers on the New York Stock Exchange were Chinese American depositary receipts: China Eastern Airlines, up 16 percent for the day, and China Telecom, not far behind at 15 percent.

    China Finance Online is the top-performing U.S.-listed Chinese stock, largely because it's benefiting twice, says Alex Xu, analyst at Brean Murray Carret: The stock is gaining from the rush to buy Chinese investments, while the company is cashing in on Chinese citizens looking to jump into the stock boom.

  • Big jumps in values of China mutual funds and exchange traded funds. The iShares FTSE/Xinhua China 25 ETF is up 63 percent this year, and the Matthews China fund has returned 71 percent this year after gaining 65 percent in 2006, financial information company Morningstar says.

    Already this year, three China mutual funds and one exchange traded fund have opened, bringing the number of such funds to 28, says Bill Rocco at Morningstar.

    Some worry, though, that investors are overdoing it and blowing a few more gasps of air into an already taut bubble.

    "I would not be surprised to see a correction from these high levels," says Richard Gao, portfolio manager of the Matthews China fund. "Things are happening fast. Too fast."

    Valuations on Chinese stocks are getting high in comparison to their historical averages, Gao says.

    Chinese companies trading on Hong Kong's exchange, for instance, have price-earnings ratios of 25, which is twice their levels of just three years ago. (The P-E ratio tells you how expensive a stock is relative to earnings. Lower is better.)

    The fear is that the mania is being translated to U.S. shares because Chinese stocks listed on U.S. exchanges are linked to the shares trading in Asia.

    "It's starting to develop into something that bears a family resemblance to a bubble," Straszheim says.