By Geoff Dyer in Shanghai

The Chinese stock market is now bigger in terms of market value than the Japanese market if Chinese companies listed in Hong Kong are taken into account, underlining the dramatic surge in the country’s financial markets over the last 18 months.

The rapid rise in the value of Chinese companies is partly due to a strong rally during August, when most other markets around the world have seen panic selling because of concerns about a credit crunch.

While many analysts on the mainland argue that the continued surge in the market is a reflection of the underlying strength of the economy, overseas analysts view the fact that the Chinese market is now worth more than the Japanese as a further sign that mainland stocks are dangerously overvalued. “It just goes to show what a huge bubble has been created,” said Fraser Howie, author of a book on the Chinese market who compiled the data. “All reality has been suspended in China.”

While the Japanese market capitalisation was $4,700bn at the close of trading on Tuesday, he said, the combined value of the Chinese market was $4,720bn.

The milestone is the latest in a series of records that the Chinese markets have been establishing this year. On some days, turnover on the mainland markets has exceeded the combined turnover in the rest of Asia.

Industrial and Commercial Bank of China, which began trading in Hong Kong and Shanghai last October, is now the biggest bank in the world in terms of market capitalisation while China Life is the biggest life insurer.

Although earnings at Chinese companies are growing much faster than Japanese ones, Japan’s economy was still 63 per cent larger than China’s in 2006, according to World Bank figures.

Zhong Hua, analyst at Changjiang Securities in Shanghai, said the mainland market could see corrections but he did not think it was a bubble.

“With a long-term perspective in mind, current valuations in China are not overvalued,” he said. “We are confident about the Chinese economy over 10 and 20 years.”

A number of analysts outside mainland China have recently pointed out that up to half the earnings growth at listed Chinese companies in the first six months of the year came from the rising stock market.

This was attributed to the large crossholdings between mainland companies. As a result, earnings could drop sharply if the market falls.

China Life recorded investment income of Rmb24.07bn ($3.2bn) in the first half compared with net profit of Rmb23.29bn.

At the close of trading on Tuesday, the 1,481 companies listed on the mainland had a market value of $3,003bn.

There are several classes of shares of Chinese companies listed in Hong Kong, including H-shares (mainland registered companies), “red chips” (mostly incorporated in Hong Kong and controlled by the Chinese government) and a number of other mainland-based businesses such as Nine Dragons Paper, which are incorporated outside China.

According to Mr Howie, the value of these shares was $1,690bn.

Copyright Fund China 2009.

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