ChiNext punters playing with fire, state media says

PUBLISHED : Tuesday, 03 November, 2009, 12:00am
UPDATED : Tuesday, 03 November, 2009, 12:00am

Volatility on the mainland's new Nasdaq-style market has prompted a wave of finger-wagging from state-owned media, with analysts warning investors of the risks of speculating.

After surging on their debut on Friday, 20 of the 28 start-up companies listed on ChiNext saw their shares drop by the daily 10 per cent limit yesterday amid a wake-up call from leading news organisations, including Xinhua.

'Irrational gains on the first trading day will lead to a sharp fall soon,' Xinhua said. 'The risks are increasing that stock prices will fall below their offering prices in the near term amid a roller-coaster ride.'

Lining up to admonish the irrational exuberance were the People's Daily, the mainland's flagship newspaper, and securities newspapers including the China Securities Journal and Shanghai Securities News.

The first start-ups on the Shenzhen-based ChiNext including Huayi Brothers Media, the mainland's first publicly traded media production firm, made strong debuts on Friday, and all jumped at least 75 per cent with 90 per cent of the shares changing hands.

However, regulators are feeling queasy about the sky-high valuations of firms, fearing heavy profit taking could engulf the newly created board.

The newly listed stocks are now subject to a 10 per cent daily cap and analysts predict most will continue to drop by that amount in the coming sessions as fundamentals and growth potential are not enough to support the high prices.

ChiNext's 28 firms now trade at about 100 times their earnings for last year. On the Shanghai Stock Exchange, the average price-earnings ratio stood at 27 yesterday.

Mainland investors are accustomed to speculating on small-cap companies as they believe the high volatility of the stocks creates opportunities for chasing quick gains.

According to Shanghai Securities News, 252,600 retail investors bought a combined 423 million shares on the growth market on Friday.

'Irrational buying on ChiNext will result in heavy losses later,' the newspaper quoted Liu Jipeng, a leading mainland economist, as saying.

The securities regulator had been alert to the dangers of wild swings in equity markets before the launch of ChiNext.

Shang Fulin, the chairman of the China Securities Regulatory Commission, said preventing risks was the top task the regulator faced when launching the second board on the Shenzhen Stock Exchange.

That did not stop retail investors from boosting the stocks on Friday, even though the CSRC required mutual funds and brokerages to step out of the market.

The China Insurance Regulatory Commission has barred insurers from investing in ChiNext and they have not been allowed to subscribe to the initial public offerings, according to a fund manager with a Shanghai-based insurance company.