《【Note by TL】The Simple Truth About China#39;s Market》.docxVIP

Markets/ Finance January 18 — January 24, 2016 38 The Simple Truth About China’s Market €It’s not just clumsy trading rules that have made the mainland’s stocks so risky €“They’re trying to prop the market up above sustainable valuations” “This is insane,” said Chen Gang, chief investment officer for Shanghai Heqi Tongyi Asset Management, on Jan. 7, the day stock trading in China lasted only 29 wild minutes before market circuit breakers shut it down. Unlike some would-be sellers that day, he says he unloaded all his firm’s equity holdings by the time the exit door closed. The circuit breakers, put in place just a few days before, called for an all-day trading halt if shares dropped 7 percent. Those rules have taken much of the blame for China’s latest market chaos. The China Securities Regulatory Commission said they had a “magnet effect”—as shares fell, people may have rushed to get sell orders in while they still could, pulling prices down to the trigger point even faster. (Announcing last call to a bar full of drinkers tends not to encourage moderation, either.) The focus on poorly designed trading curbs may, however, distract from a less exotic source of risk: speculation. The median stock on mainland exchanges still trades at about 57 times earnings—at least twice as expensive as any other major market. (Leading China stock indexes don’t look nearly so pricey but are weighted to financial companies, which tend to carry lower valuations.) In spite of currency insta- bility and concerns about slowing eco- nomic growth, investors are treating the typical Chinese company as if its potential is somewhere between that of Google and Facebook. A boom in initial public offerings made parts of the stock market look more like a lottery. Shares of Beijing Baofeng Technology, a devel- oper of online video players, soared 4,200 percent in 55 trading days after going public on the Shenzhen stock exchange in March. (The stock then dropped 31 percent before suspendin