May 5 (Bloomberg) -- China is at risk of a stock market “bubble” that may burst as investor confidence in the nation’s economic recovery weakens and bank lending slows, according to China Galaxy Securities Co., the nation’s largest brokerage.
The Shanghai Composite Index has surged 50 percent since last year’s low on Nov. 4 amid signs the government’s stimulus measures are reviving the world’s third-largest economy. The gains have driven valuations on the index to 27.2 times earnings, the highest in a year and Asia’s third most expensive. These levels are “signs of a bubble,” Galaxy Securities strategists led by Teng Tai wrote in a report.
“China’s economy has bottomed but the recovery may be weaker than forecast,” the analysts said today. “Bank lending will have to slow down. This will cap the growth in money supply and affect the supply of funds for the stock market.”
China’s investors flocked to equities this year on optimism 4 trillion yuan ($585 billion) of government spending, five interest-rate cuts since September and a record 4.58 trillion yuan of new bank lending in the first quarter would cushion the economy from the global recession and bolster corporate earnings.
At the peak, investors opened more than 480,000 new share trading accounts in the week to Feb. 20, the fastest pace in 13 months and double the average in the past year. That figure dropped to 338,719 in the week to April 24, the most recent data.
‘Be Defensive’
“Investors should be defensive and cut equities exposure,” the Galaxy Securities analysts wrote, saying the market is likely to undergo a “N-shaped” trend.
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