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Originally published May 30, 2007 at 12:00 AM | Page modified May 30, 2007 at 2:01 AM

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China's run-up echoes U.S. dot-com era

The similarities between China's stock-market rise and the U.S. dot-com bubble in the 1990s are hard to ignore. By most measures, stocks...

Greenspan on bubbles


Dec. 5, 1996, on tech stocks: "How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolong contractions?"

May 23, 2007, on China:

"It is clearly unsustainable. There is going to be a dramatic contraction at some point."

The similarities between China's stock-market rise and the U.S. dot-com bubble in the 1990s are hard to ignore. By most measures, stocks in China are overvalued. And the measures are based on reported earnings, which are easily inflated, analysts say.

Alan Greenspan, who chaired the Federal Reserve during the dot-com boom and bust, warned recently that a fall is coming.

Despite the froth, Chinese investors today have 100 million brokerage accounts, state-run media say.

"This has all the markings of a hyperventilative market," says Bill O'Grady, chief global investment strategist at A.G. Edwards. "It's very similar to the dot-com era, because you have prices that have started divorcing themselves from the underlying fundamentals of the asset."

In contrast with the dot-com bust, when many saw their nest eggs shrink, U.S. investors may be insulated from a Chinese decline.

Few foreigners can buy the "A" shares that locals are snapping up. Instead, they own heavily regulated "B" shares, issued by a more stable companies.

"It's good that we don't have a lot of opportunity in this market, because so much of it is being driven by speculative greed more than anything else," says Philip Dow, managing director of equity strategy at RBC Dain Rauscher.

Greenspan on bubbles

Dec. 5, 1996, on tech stocks: "How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolong contractions?"

May 23, 2007, on China:

"It is clearly unsustainable. There is going to be a dramatic contraction at some point."

While a downturn is likely, Dow and O'Grady still think it's worth investing a small amount in emerging markets, including China.

But while China quickly rebounded from Feb. 27's 8.8 percent drop in the Shanghai composite index, a prolonged loss, combined with government missteps, could result in civil unrest, O'Grady warns. That could send shivers through global markets.

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