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Many investors seeking to cash in on mainland's booming economy are scooping up H shares - Hong Kong-listed Chinese firms that derive the bulk of their earnings on the mainland - and boosting the H-share index to new highs.

The index closed up 0.99 per cent, or 49.71 points, at 5,077.92 last Friday.

It is up a hefty 145 per cent over the past year.

Rumours are swirling that Warren Buffett, a world-renowned stock market investor, has purchased a large share of China Life Insurance Co Ltd through Morgan Stanley.

China Life's share price hit HK$6.10 (78 US cents) last Friday, after the rumours broken. The shares were up about 70 per cent from their IPO (initial public offering) price of HK$3.59 (46 US cents) when China Life debuted on December 18.

If the rumours are true, it would not be the first time Buffett has favoured Chinese stocks.

Last April, his company bought a large number of PetroChina Co Ltd shares. To date, those shares have earned Buffett a HK$2.3-billion (US$295.2-million) profit.

Buffett is likely hoping for a repeat, and China Life's recent good performance suggests share prices could rise sharply, said Liu Jingde, a senior analyst with Beijing Securities Co.

China Life has tremendous potential in the H-share market, as the company holds a leading 45-per-cent market share in China's insurance market.

The firm's share of the market has been growing rapidly since the central government replaced its cradle-to-grave welfare system with the social insurance system, Liu told China Business Weekly.

Confidence in the Chinese mainland's economy will prompt more Hong Kong and overseas investors to spend their money on H shares, Liu said.

The H-share index will continue rising, at least until it hits 7,000 in June or July, he estimated.

"The H-share market is still a safe place for investors, although it is at the high end," Liu said.

Major investors tend to leave their money in the market, for about one and a half years, even if they have made a substantial profit, and that ensures there is abundant capital in the market.

Attracted by the huge profits offered by the H-share market, more small investors will jump into the market.

Hundreds of small Hong Kong investors lined up outside bank branches last month to apply for China Life shares, Liu said.

The market had not seen that kind of zeal since the dotcom bubble burst a few years ago.

Some experts worry the latest "China frenzy" could result in overheating in some segments of the market.

"It (the booming H-share market) is the result of speculation," said Yi Xianrong, director of the Chinese Academy of Social Sciences' Financial Development Institute.

Skyrocketing share price does not correspond with the company's performances, Yi said.

"China Life is one of the worst performers among the listed companies, although the company's share price has been rising for the past month," Yi said.

Buffett does not have to worry about China Life losing money, as the firm is State-owned and, therefore, unlikely to suffer major losses, Yi told China Business Weekly.

Investors might sell H shares "immediately," and those who have not entered the market might stay away.

"The bubble is forming," Yi said.

Liu, however, dismissed such concerns, arguing it is still too early to talk about the bubbles.

The price-earnings ratio (PE) of the shares is healthy, at around 10 to 12 times, Liu said.

There is still room for the PE ratio to grow to 15 times, he added.

When the PE ratio reaches 20 times, the bubble starts to form, Liu said.

The ratio is the current market price of a company's ordinary shares divided by its most recently published earnings for equity per share.

Furthermore, many mainland corporations have improved their quality.

"Unlike the information technology firms, many Chinese companies have solid businesses. Their earnings are also supported by huge domestic demand," Liu said.

In spite of the heated debate, Chinese mainland enterprises consider Hong Kong to be a wonderland.

"IPOs will continue in Hong Kong this year, provided there is no bad news, such as an outbreak of severe acute respiratory syndrome or terrorist attacks," said Richard Sun, a senior analyst with PricewaterhouseCoopers, an international auditing firm.

"More Chinese firms will seek listings in Hong Kong. They will be more diverse and the size of their offerings will be increasingly massive," Sun predicted.

Funds raised from IPOs in Hong Kong could reach HK$100 billion (US$12.8 billion) this year, with up to 80 per cent of that from Chinese mainland-based financial and insurance firms waiting to tap international capital markets, Sun added.

(Business Weekly 01/13/2004 page4)