China Stocks Rally to Falter on ‘Non-existent’ Profit, Xie Says

By Chua Kong Ho

Feb. 19 (Bloomberg) -- China’s stocks rally that’s made the Shanghai Composite Index the world’s best performer this year will falter as profits are “non-existent,” according to independent economist Andy Xie.

The Shanghai measure has gained 21 percent this year, the most among 90 global stock gauges tracked by Bloomberg. The index is valued at 17.4 times earnings, the most expensive among the so-called BRIC markets of Brazil, Russia, India and China.

The rally will run out of steam as “profits are non- existent and valuations are still expensive,” Xie, former chief Asian economist at Morgan Stanley, said in an interview yesterday. He correctly predicted in April 2007 that China’s stock market was a “bubble” and would burst.

The Shanghai Composite peaked on Oct. 16 that year and tumbled more than 70 percent to its trough on Nov. 4, 2008, as the nation’s exports shrank and economic growth slowed.

Investors opened 427,460 new accounts to trade stocks last week, according to data posted on the Web site of China Securities Depository & Clearing Corp. yesterday, almost double the number in the previous week and the most since the five days to March 28.

The rally has fueled concern that companies are using loans to speculate in stocks after new lending rose by a record 1.62 trillion yuan ($236 billion) in January as part of a government drive to boost the world’s third-largest economy.

As much as 660 billion yuan of new lending may have been converted by companies into term deposits or used to buy equities, Li Huiyong, Shanghai-based analyst at Shenyin Wanguo, said in a phone interview this week.

‘Rampant Practice’

“It’s a rampant practice,” said Xie. “Here you are borrowing at 1.5 percent and the stock market rises, so you put your money into stocks and hope to get out after making 20 percent.”

The nation’s 3-month deposit rate stands at 1.71 percent, after the central bank cut interest rates five times in 2008 to stimulate growth.

Chinese banks have the ability to monitor how loans given to companies are used, making it unlikely that credit is funneled into the stock market, Industrial & Commercial Bank of China Ltd. and Shanghai Pudong Development Bank Co. said yesterday.

To contact the reporter on this story: Chua Kong Ho in Shanghai at kchua6@bloomberg.net