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China stock rally comes to sudden halt as Shenzhen Exchange falls almost 13%

Shenzhen\'s recent stock rally has left the index looking more expensive than even the Nasdaq.

It is known as China\’s Silicon Valley and it is home to the earth\’s hottest stock market rally – a rally analysts worry is in the process of becoming undone.

Shenzhen, a town north of Hong Kong around the Chinese mainland, is the headquarters of China\’s biggest technology firms. Until last week, stocks on its tech-heavy stock market had surged a lot more than 100 percent this year alone, easily making it the best-performing stock market in the world.

The rally has come to a halt, however, with the Shenzhen Stock Exchange Composite Index falling nearly 13 percent last week. Tuesday was another day of volatile trading, with the index dropping 150 points – or two per cent – before recovering 200 points to finish the day up 1.18 percent at 2,774.64.

Most players, especially novice participants, only jumped on the bandwagon late in the game

The volatility in Chinese stocks (the Shanghai Composite Index fell 13 per cent last week too) has worried analysts, who fear that a bigger sell-off could be unfolding in China.

\”The sell-down on most major indices in China … shows that the breakneck equities rally this past year is starting to fracture, and a more aggressive meltdown to prices could easily gain momentum,\” said Nicholas Teo, a market analyst for CMC Markets located in Singapore.

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The Shenzhen Stock Exchange is one of China’s three stock exchanges, alongside the Shanghai Stock Exchange and Hong Kong Stock Exchange.

Shenzhen is known as China\’s first – and something of the most successful – Special Economic?Zones. The zones are administrative areas with less government regulation and more free-market oriented policies, made to boost economic growth making them more appealing for businesses.

Business has certainly flocked to the city, with the market cap of companies on the Shenzhen stock exchange well north of US$ 2 trillion. Shenzhen itself has a gross domestic product larger than the entire country of Portugal.

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In a means, the tech market boom is emblematic of Shenzhen\’s rapid rise for an economic powerhouse, given that the city was nothing more than a fishing village just three decades ago. Today it is home to 15 million people.

But the Shenzhen\’s huge stock rally leaves the index looking even more expensive compared to Nasdaq in the height from the tech bubble in early aughts. Nearly half from the Shenzhen Stock Exchange\’s listings trade at price-to-earning ratios of more than 100 times forward earnings.

Some valuations are downright eye-popping. Letong Chemical Co. Ltd. trades at 11,840 times forward earnings. Searainbow Holding Corp. trades at 10,400 times forward earnings. Dozens more are gone the 1,000 times forward earnings mark.

While the companies with big valuations are usually smaller, speculative companies, the index itself has returned to the valuation it saw throughout the financial crisis, trading in an average of 68.46 times forward earnings.

The Shenzhen has entered bubble territory at a time foreign investors have been increasingly relocating to get a piece of the action. China’s mainland stocks, known as A-shares, were off limits to foreign investors until recent government changes allowed limited buying.

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