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Shanghai Acting Like It's 2007 Again

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HONG KONG (MarketWatch) -- Early warning signs suggest a bubble could be building in China's stock market, although it's too early to know whether this warrants an immediate exit from Chinese equities, analysts said in a recent research report.

Credit Suisse analysts cited similarities between the Chinese share picture today and that prior to the Shanghai Composite's topping out above the 6,000-point level 22 months ago. That top marked the start of a steady drop to below 1,750 by late last year.

Specifically the broker pointed to an economy glutted with excess liquidity, a surge in openings in stock-trading accounts, and a turnover-to-market-cap ratio that was nearing 2007's level.

The Chinese stock market "is clearly expensive now, but has not yet reached a full-blown bubble as in 2007. If a healthy market correction does not happen in the next few months, and the market continues to surge ahead, fundamental investors should start to worry," analysts headed by Vincent Chan said in the note, released Friday.

The brokerage cautioned that excess liquidity, as gauged by the amount of cash and equivalents and the rate of economic growth, was now more abundant that at any time since the early 1990s. The number of new stock trading accounts opened by retail investors climbed to 700,000 a week, the fastest pace since early 2008, albeit well below the highs of 1.5 million a week seen in 2007.

"This lays the perfect foundation for the building up of an asset bubble," Chan said.

Most worrying, Shanghai's market turnover surged to a record 427 billion yuan ($62 billion) on July 29, a day that coincided with the debut of China State Construction Engineering Corp. /quotes/comstock/28c!e:601668 (CN:601668 6.40, +0.03, +0.47%) , which saw tremendous buying interest. See full story on CSCEC's initial public offering.

Still, other measures -- such as the stock market capitalization to the nation's gross domestic product -- were in line with global averages.

Chan said valuations on a forward-price-to-earnings basis, although expensive when compared to averages from late 2003, were nowhere near the market's lofty heights seen in 2007.


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