China's Bubble-icious IPOs

It's off to the races for investors in Chinese IPOs! China State Construction Engineering (CSCE) came to market in Shanghai on Wednesday -- and showed a stunning 56% first day gain -- rather impressive for the largest IPO globally since Visa (NYSE: V) went public last year. Demand for the shares wasn't lacking -- the retail portion of the offering was nearly 50 times oversubscribed! But that performance pales compared to Sichuan Expressway, which floated on Monday, registering a stunning 203% first-day gain.

It's contagious
The fever has spread to Hong Kong, where BBMG, Beijing's largest cement supplier, gained 56% on its Wednesday debut -- retail demand for shares exceeded supply by 775 times.

Chinese authorities ended a 10-month ban on IPOs in June, encouraged by strong market performance (the SSE Composite Index is up over 80% year-to-date).

What about Chinese stocks that are available to U.S. investors?
To answer that, I put together my own market-weighted index made up of the 43 Chinese companies traded on major U.S. exchanges with a current market value greater than $500 million. These are the results in terms of returns and valuation:

	Year-to-Date Total Return	Quarter-to-Date Total Return	Price-to-Book Value
Baidu (Nasdaq: BIDU)	169%	17%	22.00
Yingli Green Energy (NYSE: YGE)	129%	3%	2.78
Suntech Power (NYSE: STP)	65%	8%	2.46
JA Solar (Nasdaq: JASO)	14%	6%	1.23
Focus Media (Nasdaq: FMCN)	(7%)	5%	0.94
LDK Solar (NYSE: LDK)	(15%)	(1%)	1.66
Market-Weighted Average (43 stocks)	45.7%	10.3%	3.43
S&P 500	7.5%	10.9%	2.06*

Source: Author's calculations, based on data from Capital IQ, a division of Standard & Poor's. Returns and price-to-book multiples are as of July 30, 2009.
*Approximate value (price-to-book value multiple of the SPDR S&P 500 ETF (SPY)).

Bigger gains, more expensive
It's clear that U.S.-traded Chinese stocks have far outpaced U.S. stocks, even during the recent mini-rally. Furthermore, they're quite a bit more expensive on a price-to-book value basis as well. Ah, but Chinese companies promise untold growth, bulls will counter. Perhaps, but the other side of the coin is this: This set of companies -- let alone any one specific name -- also present higher risk than the S&P 500; investors need to account for that in valuations, also.

U.S. investors need to be wary, too
Why this bubble in China? Wei Jianing, an economist at the Development Research Center of the State Council, estimates that 20% of the unprecedented amount of credit banks have extended during the first half of the year has found its way into the stock market. For the BBMG IPO, Hang Seng Bank offered margin loans at a record low rate of 0.5%.

Once Chinese authorities move to cool the market, it could have a very nasty effect on stock prices. It is perhaps ominous that CSCE's strong debut didn't prevent the Shanghai market from falling 5% on Wednesday -- its largest decline of the year. Investors in Chinese stocks -- here and in China -- need to be wary.