Analysts warn of free-trade bubble

Excitement over plan for Shanghai special zone has seen some stocks double in price, but investors may be expecting too much

PUBLISHED : Tuesday, 03 September, 2013, 12:00am
UPDATED : Tuesday, 03 September, 2013, 3:53am

Analysts are warning of a bubble on the mainland market as punters exploit the excitement over the Shanghai free-trade zone to drive up stock prices.

Some stocks have more than doubled in the past few weeks, even though the zone is yet to be officially launched.

Shanghai-based CTS International Logistics has surged 142 per cent in the last two weeks, while Shanghai International Port has jumped 91 per cent. The key Shanghai Composite Index has gained 1.5 per cent during the same period.

"We are seeing a big bubble forming in some stocks," said Li Jun, Shanghai-based strategist at mainland broker Central China Securities. "Some companies, such as port operators or property developers, may indeed see some benefits from the plan. As for the rest, it is still quite hard to see how they will benefit."

The speculative spree is spreading beyond Shanghai to firms based as far afield as Zhejiang, Guangdong and Chongqing, with investors betting free-trade zones will be set up in these provinces as well.

Tianjin Port has jumped 36 per cent in the two weeks starting August 19, while Chongqing Yukaifa, a property developer in the southwestern city that has been aggressively attracting foreign capital in recent years, has risen 19 per cent.

"This is pure speculation," Li warned. "Investors are hoping for too much.

"It remains to be seen whether this free-trade-zone idea will work for the real economy, or will become just another excuse for local governments to ask for favourable policies from the central government."

But analysts say there are some real beneficiaries of the new scheme, such as Shanghai Industrial Holdings, which focuses on infrastructure.

Jefferies analyst Christie Ju wrote in a report last week: "Shanghai's free trade zone is strategically important for the city's growth, and we expect Shanghai Industrial to benefit in the long run." She set a target price of HK$30 for the stock. It closed at HK$25.75 yesterday.

The punters will not stop at the Shanghai free-trade zone, Li said. "News about the developing domestic futures market or the push for urbanisation progress could become the next themes."

Yao Peng, a fund manager with HFT Investment Management (HK), said the yuan-denominated A-share market is caught between two extremes.

On the one hand, it is weighed down by overcapacity concerns, even as excessive capital continues to flow to companies that are expected to grow very quickly. The Growth Enterprise Market board for small-cap, high-growth firms has shot up 70 per cent this year.