U.S. Stocks Overpriced? Compared To What?

Worried that your U.S. stocks could be over-priced? You should be. They may be. Still, American shares are government-insured bank deposits compared with what’s going on in markets across the Pacific.

In China, speculators pony up for shares of government-controlled companies that have nothing better to do with the money than speculate in shares of other publicly held concerns.

Hong Kong stock prices seem to set records every day. Underlying the boom in stocks, however, is a boom in real estate. You may as well bet your money on a $100 million movie.

Nobody would accuse the Japanese stock market, or Japan’s economy, of outperforming the world in recent years. Yet, the shares in Tokyo’s benchmark Nikkei 225 Index sell at 116 times their companies’ earnings. We think U.S. stocks are high now with the price/earnings ratio on the shares in Standard & Poor’s 500 Index at 22.9.

Market bubbles in China and Hong Kong are expanding toward each other. China’s current economic growth rate is 9.4 percent, and that’s slow by recent standards. Come July 1, Hong Kong, long a British colony, reverts to China’s control and investors bet that money-savvy Hong Kong will help the new parent’s economy get even better.

People swallow the story that China’s government will sell assets to its burgeoning companies cheap. That leads to frantic buying of Chinese conglomerates in the Shanghai and Shenzhen - and in Hong Kong, where these companies are called “red chips.”

There seems to be no concern that the new China may be as corrupt as the old though even the Chinese government has trouble curbing cheaters.

China’s brokerage houses were just banned from borrowing on government bonds - because they were using the money to manipulate stock prices. The president of Shenzhen Development Bank this month was sacked and barred from the financial market for five years after the bank illegally speculated in its own shares. “We feel very distressed,” the bank said later.

Stock speculators feel no pain, thus far. An index of Shanghai-traded shares available to foreigners is up 24 percent so far this year.

Chinese companies prop up each others’ stocks even if they do it legally. Concerns like Guangshen Railway Co. and Ng Fung Hong Ltd. have raised a total of $7 billion from stock sales this year. But instead of expanding, they buy other companies’ shares. They are more money managers than industrials.

“More and more companies are putting money in the market - and markets can come down,” said Andy Mantel, a legitimate money manager with Shanghai Growth Investment Ltd.

Hong Kong’s stock market is far more developed than China’s, of course. And on the surface, there appear to be no excesses. Shares in the benchmark Hang Seng Stock Index trade at 17.4 times their earnings and the index’s rise of 13 percent so far in 1997 trails the 20 percent or so of the major U.S. stock indicators.

But Hong Kong’s stock/real estate market reminds you of Japan’s markets a decade ago - before real estate and stocks flopped.

Property prices in Hong Kong are up 15 percent this year, following a 40 percent rise last year. Most Hong Kong-based companies derive a fair share of their profits from real estate. Sure, Hong Kong is a tiny place and real estate is at a premium, but Japan was a small place too.

Tung Chee-hwa, who becomes Hong Kong’s chief executive when China takes over, says surging apartment prices in Hong Kong are one of his major concerns. That may not bode well for real estate profits.

That also raises the bigger question of how else China might interfere with the free Hong Kong economy.

Keep your investment worries at home.