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The China Bubble

I'm going to go out on a limb here and say that there is something seriously crazy going on with Chinese company valuation, and U.S. investors need to make sure they don't get swept up in the madness.

PetroChina Co. suddenly has a market valuation of $1 trillion, twice the size of ExxonMobil. The Chinese market has doubled this year and that kind of frenzy is unsustainable. The Chinese are among the world's most compulsive gamblers -- that's all they're doing i.e. throwing money on the roulette tables.

But a $1 trillion valuation for PetroChina is also nutso because it is based on the logic that the company sold a mere 2.2 percent of its share capital to domestic investors in a Shanghai initial public offering. Those shares rose to 43.96 yuan (or $5.90), meaning that if 100 percent of its shares were calculated at that rate, the total market cap would exceed $1 trillion.

What everybody seems to be forgetting is that it raised money in the Chinese currency, which isn't fully convertible to hard currencies. It's funny money. And 86 percent of its shares are still controlled by the government. That means the Communist Party is in the driver's seat, which means PetroChina is not going to perform as a Western multinational would. There is political interference.

What I also suspect is that five years from now, the investment community will wake up and discover that tens of millions or hundreds of millions of dollars has been misappropriated. Either the money was directed to other PetroChina-related projects or it ended up in someone's Singaporean bank account.

Having lived and worked in China, I'm all in favor of the Chinese continuing to make economic gains. They're working hard for it. But there are going to be bubbles and overshoots along the way. And a $1 trillion market cap for PetroChina is one of them.

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