<P><FONT size=5>ML 美林：对A股市场泡沫的看法</FONT></P>
<P><FONT size=5>The beginning, not the end, of China’s asset price bubble</FONT></P>
<P><FONT size=5>Investment Strategy | China25 May 2007 11页</FONT></P>


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<P>&#1048708; How big is China’s A-share market bubble?<BR>This question is as hot as the A-share itself. In our view, we are seeing the<BR>beginning, not the end, of the A-share bubble. True, forward-looking P/Es at 37x<BR>for 2007 and 29x for 2008 are already way above those for the H-share and other<BR>emerging markets. But we think consensus earnings forecasts are overly<BR>conservative (p4: Chart 3 and Table 2; p5: Charts 4 and 5). As long as there is no<BR>fundamental deterioration in the earnings outlook, there should not be any derating<BR>of the A-share market. As long as there is no de-rating, we believe the Ashare<BR>market bubble will get bigger in the coming 6-12 months, swelled by<BR>liquidity and investors irrational exuberance. Already, we note that the bubble is<BR>starting to cross over into the property market in China and the H-share market in<BR>Hong Kong.<BR>Government intervention to limit bubble size<BR>The best way to prevent the bubble from getting bigger is for the People’s Bank of<BR>of China (PBOC) to contain liquidity by hastening its hike of reserve requirement<BR>ratio, the Ministry of Finance to increase stamp duties for stock trading, and<BR>further down the road, to impose capital gains tax at different rates for different<BR>durations of stock holdings.<BR>Market volatility won’t have much negative wealth effect<BR>Official cooling down measures have come slower than what we have anticipated,<BR>but are still likely to be implemented within the coming six months, which will<BR>cause market correction. Also, market sentiment could be hurt by US concerns<BR>from time to time or possible tension with Taiwan early next year.<BR>Concerns over negative wealth effect should not be exaggerated, in our view</P>