Der Doomsday Bären-Thread

International investors are starting to gain more access to the local market in China, where economic growth is the fastest among the world's major nations and the yuan is strengthening.

DBS Group Holdings Ltd., Southeast Asia's largest bank, is among 55 foreign firms that have government approval to invest a total of $9.55 billion in yuan-denominated securities, including so-called A shares. The bank owns a 33 percent stake in Changsheng Fund Management Co., a Beijing-based firm which manages 25 billion yuan ($3.2 billion) of local assets. Others with approval to invest include Goldman Sachs Group Inc., Morgan Stanley and Yale University.

International investors can buy Chinese companies' H shares, listed in Hong Kong, without restriction. The Hang Seng China Enterprise Index of H shares has fallen 4.7 percent this year after gaining 94 percent in 2006.

The Shanghai and Shenzhen 300 is valued at 35 times profit, up from a low of 14.4 times in July 2005, and the H-share index at 20 times. The Morgan Stanley Capital International Emerging Markets Index, a global benchmark, is valued at 15 times.

Marc Faber, the Hong Kong-based fund manager who predicted the U.S. stock market crash in 1987, said in an interview Jan. 8 that he would be ``careful'' about buying shares in China and forecast a tumble in emerging markets in the first quarter.

The surge in China A shares ``makes you nervous,'' said Virginie Maisonneuve, London-based head of international equities at Schroder Investment Management Ltd., which oversee $230 billion and has permission to invest in China's domestic market. ``I won't be surprised to see a correction, and I would see that as a buying opportunity.''

Cheng Siwei, vice chairman of the Standing Committee of the National People's Congress, the Communist Party-controlled parliament, warned investors against ``blind optimism'' in local capital markets that are relatively underdeveloped, the state- owned China Securities Journal reported Dec. 30.

China's policy makers are trying to stem the boom. Banks were urged to stop lending money for stock investments and to recall outstanding loans, the China Banking Regulatory Commission said in a Dec. 31 document sent to the lenders and obtained by Bloomberg News.

The People's Bank of China, the central bank, ordered banks to boost reserves four times in the past year to reduce money available for investment. Banks now must set aside 9.5 percent of deposits after a half-percentage-point increase on Jan. 5.

Chinese leaders' concerns haven't shaken Mark Mobius, who oversees $30 billion in emerging-market equities at Templeton Asset Management Ltd. in Singapore. Prospects for rising consumer demand make China attractive, Mobius said in a Dec. 21 interview.

On the mainland, no one is moving into stocks faster than individuals, who are restricted from buying abroad. Ding Xiulan, a retired engineer from Shanghai, put half of her savings in shares and is counting on more gains in 2007.

``The market outlook still looks quite solid,'' said Ding, 67, whose holdings include ICBC and Baoshan Iron & Steel Co., the country's biggest steelmaker. ``Stocks offer much higher returns than China's other limited investment options, such as property and bonds.''

Chinese investors pumped about 150 billion yuan into mutual funds and spent 100 billion yuan on stocks in the last six weeks of 2006, Credit Suisse Group estimates. Mainland funds held 580 billion yuan of assets at the end of June, it said.

Money is also pouring into Chinese stocks from international buyers. Funds focused on China took in $1.3 billion during the first two weeks of the year, almost triple the amount for the rest of Asia excluding Japan, according to Emerging Portfolio Fund Research Inc. in Boston. Half of the record $22.4 billion invested in emerging-market funds last year went to China funds.

``Sentiment in both the A-share and H-share markets is really very elevated, and consequently so are the risks,'' said Ajay Kapur, Citigroup's chief global equity strategist, based in New York.

Edmond Huang, an analyst for UBS in Shanghai, said Jan. 15 that the Shanghai Composite Index may fall as low as 2185 this year. His projection is 23 percent below last week's close for the index, tracking the bigger of China's two stock exchanges.

HSBC's Garry Evans says there's a 30 percent chance of a ``major correction'' in the first half.

This isn't the first time the China story has excited investors. So-called red chips, or Hong Kong companies with their main operations in China, were surging a decade ago.

The Hang Seng China-Affiliated Corporations Index of red chips more than quadrupled in 18 months and peaked on Aug. 27, 1997, at about 250 times earnings. The index plunged 86 percent in the next 12 months and is still almost 50 percent lower than its all-time high.

When the red chips were rallying, the yuan was pegged to the dollar. The link has since been broken and the currency's gains may encourage investors to own yuan-denominated assets.

The yuan has appreciated 6.3 percent against the dollar since July 21, 2005, when the peg ended, and surpassed the Hong Kong dollar on Jan. 11 for the first time in 13 years.

``There are investment flows going into China in anticipation of a further strengthening of the yuan,'' said Elan Cohen, a Singapore-based money manager at JPMorgan Private Bank, which has $350 billion in assets.

`Much stronger economic growth in China than elsewhere'' may also lift share prices, Cohen said. Gross domestic product will probably rise about 10 percent for a fifth straight year in 2007, according to Yao Jingyuan, chief economist at the National Bureau of Statistics.

Growth prospects and the potential for yuan gains are already reflected in share prices, said Michael Kerley, who helps manage $2 billion of Asian stocks at Henderson Global Investors Ltd. in London.