'Nervous'

The Shanghai and Shenzhen 300 is valued at 37 times profit, up from a low of 14.4 times in July 2005, and the H-share index at 20 times. The Morgan Stanley Capital International Emerging Markets Index, a global benchmark, is valued at 15 times.

Marc Faber, the Hong Kong-based fund manager who predicted the U.S. stock market crash in 1987, said in an interview Jan. 8 that he would be "careful" about buying shares in China and forecast a tumble in emerging markets in the first quarter.

The surge in China A shares "makes you nervous," said Virginie Maisonneuve, London-based head of international equities at Schroder Investment Management Ltd., which oversee $230 billion and has permission to invest in China's domestic market. "I won't be surprised to see a correction, and I would see that as a buying opportunity."

Cheng Siwei, vice chairman of the Standing Committee of the National People's Congress, warned investors against "blind optimism" in local capital markets that are relatively underdeveloped, the state-owned China Securities Journal reported Dec. 30.

Bank Restrictions

China's policy makers are trying to stem the boom. Banks were urged to stop lending money for stock investments and to recall outstanding loans, the China Banking Regulatory Commission said in a Dec. 31 document sent to the lenders and obtained by Bloomberg News.

The People's Bank of China, the central bank, ordered banks to boost reserves four times in the past year to reduce money available for investment. Banks now must set aside 9.5 percent of deposits after a half-percentage-point increase on Jan. 5.

While prospects for rising consumer demand make China attractive, H shares offer a better value than mainland stocks, according to Mark Mobius, who oversees $30 billion in emerging- market equities at Templeton Asset Management Ltd. in Singapore.

"The valuations are beginning to look stretched" in A shares, Mobius replied in an e-mail to Bloomberg News.

Templeton, which was approved to invest in mainland shares in 2004, hasn't received a final allotment authorization from the government that would allow the firm to start buying and selling shares, according to data compiled by Bloomberg.

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