Growing Chinese Stock Market Bubble Prompts Regulatory Caution

The China Securities Regulatory Commission (CSRC) has become increasingly concerned about the booming stock market in the country. The regulatory body cautioned three major fund companies on Wednesday, prompting them to step up their risk control practices.

Since the beginning of the year, the value of the ChiNext index on the Shenzhen Stock Exchange Stock Exchange A stock exchange, also known as a securities exchange or bourse represents is a facility where stockbrokers and traders can buy and sell securities.This includes shares of stock, bonds, exchange-traded funds (ETFs), or other financial instruments. By extension, stock exchanges can also provide facilities for the issue and redemption of such securities and instruments and capital events including the payment of income and dividendsStock exchanges have developed into a permanent fixture in the fin A stock exchange, also known as a securities exchange or bourse represents is a facility where stockbrokers and traders can buy and sell securities.This includes shares of stock, bonds, exchange-traded funds (ETFs), or other financial instruments. By extension, stock exchanges can also provide facilities for the issue and redemption of such securities and instruments and capital events including the payment of income and dividendsStock exchanges have developed into a permanent fixture in the fin Read this Term, which is known as the "Chinese NASDAQ" has spiraled out of control. The benchmark was trading at an all-time high on Tuesday before the CSRC announcement.

The index has surged almost 118% since the beginning of the year to trade at 3,197 points at the time of writing. A slew of overvalued stocks has prompted a number of analysts to issue warnings about an overheating NASDAQ style tech bubble in China.

The three fund management companies which were cautioned by the regulator are notorious for their aggressive positions in ChiNext. The index ballooned higher than 15% in the last three trading sessions up until Tuesday.

The average P/E ratio of stocks traded on ChiNext exceeds 100 times. Some companies are valued at tens of thousands or even hundreds of thousands of their P/E ratio.

Over the weekend, the People's Bank of China (PBoC) cut the official benchmark interest rate to 5.1%, which is a 25 basis points reduction. The move prompted even more inflows into the already steaming hot tech sector of the Chinese stock market.

The reminiscence of the NASDAQ dot-com bubble is beginning to raise alarm bells amongst a number of prominent analysts. While the Chinese economy has been losing steam its stock market continued to defy gravity in recent months.

With the government ultimately remaining the lender of last resort, it is reasonable for regulatory authorities to warn funds on unsuitable investments. The property market boom has already prompted public funds to be committed to bailing out private investment funds overexposed to the real estate bubble in the country.