(Agencies/chinadaily.com.cn)
Updated: 2007-10-16 14:50

Despite the 400 percent jump over the last two years in the mainland market, a Barren's article quoted Dator of US Global Investors as saying, "Given the way bubbles usually progress, the mainland market could theoretically double from these levels."

China's A shares may be up 120 percent this year, and foreign fund managers, for one, are still yearning for more Chinese stocks as predictions both optimistic and pessimistic abound regarding the future of the Chinese mainland markets.

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Chinese companies today sport some of the world's largest market caps. Warren Buffett sold his position last week, but PetroChina (PTR) is up 50 percent for the year, giving it a market value of $383 billion. (Rival BP's cap is $238 billion.) The market cap of China Life (LFC) is $246 billion, nearly five times that of MetLife (MET) or Prudential Financial (PRU). And if you combined the capitalizations of Cathay Pacific (CPCAY), Qantas (QAN.Australia) and American Airlines (AMR), it still wouldn't match AirChina's (753.HK) market cap of $33.1 billion.

Tom Naughton of PMA Investment Advisors in Hong Kong, who runs Sparx Asia Pacific Opportunities mutual fund (SPAPX) and Sparx Asia Pacific Equity Income fund (SPAIX) said "We're quite late in the day in the rally, but quite early in the bubble. Valuations aren't ludicrous, just expensive. They will get ludicrous before the correction." Naughton is still buying telecom China Mobile (CHL), among others.

For now, Ken Fisher of Fisher Investments is still quaffing the bubbly. "Everyone thinks China has run too far, too fast, so there is actually pessimism...as it keeps hitting new highs -- which is very bullish," he says. His favorites: infrastructure plays like Huaneng Power (902.HK) and Sinopec Shanghai Petrochemical (338.HK).

According to Barren's, speculation could be curbed if China sharply raise the value of its currency, which is pegged to the US dollar, or allow it to float. Keeping it artificially low has caused many economic distortions. Today, China sits on $1.4 trillion in foreign-exchange reserves and is trying to ease inflation by allowing some overseas investment.

Rising inflation had turned real interest rates negative and made equities and real estate hugely attractive to local investors, who had no foreign outlets for their money.

Here's the rub. Even as China's central bank finally raised rates trying to curb growth, the market has continued surging. And the US Federal Reserve's recent rate cut was taken as a green light for further speculation.

Already, profits have surprised on the upside -- in the first half, earnings of H shares, or mainland companies traded in Hong Kong, jumped 41 percent, according to China International Capital.