Published November 9, 2009

Wild start for China's Nasdaq-style board

Warning of correction as investors display irrational exuberance

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(BEIJING) China's new Nasdaq-style market saw a week of wild yo-yo swings as frenzied investors sent the start-up shares to 'ridiculously' high levels, analysts said yesterday, warning that a correction is on the cards.

The 28 stocks on the ChiNext board in the southern boomtown of Shenzhen repeatedly tripped circuit- breakers in place to curb rampant speculation as keen buyers ignored warnings from regulators to trade in a 'rational' way.

After a massive debut surge for all shares on Oct 30 - with some soaring as much as 210 per cent amid feverish buying - subsequent sessions saw stocks see-sawing up and down by the 10 per cent limit in place on all Chinese bourses. 'I think it was crazy - the rise was ridiculously high,' said Peter Lai, a director of DBS Vickers in Hong Kong. 'Chinese investors are not very rational.'

Yan Li, a Beijing-based analyst at Southwest Securities, said the casino-style trading 'shows that investors lack an understanding of the risks'.

'Traditionally, Chinese investors tend to chase after new stocks, and such a trend will continue. I think the ChiNext board is very likely to see big fluctuations in the future,' Ms Yan said.

Ahead of the start of ChiNext trade, the chairman of the China Securities Regulatory Commission (CSRC), Shang Fulin, cautioned investors by saying start-up stocks have potential for strong growth - but also unstable financial results.

The long-awaited board is expected to give small and medium-sized companies access to financing and encourage private equity firms and venture capitalists to back start-ups, in the tradition of New York's Nasdaq.

The first 28 companies to list on the board, ranging from movie producers to medical equipment makers, raised about 16 billion yuan (S$3.26 billion) in their initial public offerings (IPOs) - more than double initial forecasts.

Market observers had been worried that ChiNext would draw funds away from the main boards and depress share prices.

But so far, the second board appears to have had little impact on main board trading, with China's benchmark Shanghai Composite Index finishing at its highest closing level in nearly three months last Friday.

Analysts, warning of the risks of excessive speculation and overinflated stock prices on the new board, pointed to the price-to-earnings ratio of some companies, which exceeded 100 - compared with about 30 on the main board. -- AFP