The sharp fluctuation of two Chinese bank stocks in the past few days indicated that an investment bubble is developing among Chinese financial stocks due to the massive flow of funds into the A-share market.

With the exuberant performance of the stock market in 2006 attracting an increasing flood of funds into the A-share market, the market has grown massive enough for investors to begin seeking short-term profits by taking on blue chips when they used to speculate on comparatively smaller stocks.

This has caused the share prices of bank stocks to climb astonishingly high compared to their book value.

The Industrial and Commercial Bank of China (ICBC) and Bank of China, two of the country's major commercial banks, had respectively jumped 76 percent and 37 percent by yesterday from their listing last year, much higher than the growth rate of their foreign counterparts such as Citigroup and Bank of America, which respectively saw 15 percent and 35 percent rises in 2006.

With a price per share hitting as high as 6.7 yuan on January 4, the first trading day of 2007, the ICBC for the first time became No 1 in terms of market value among all the listed banks in the world.

While it takes at least five years for Chinese banks to catch up with the world's leading banks in term of market performance, risk management skills and corporate governance, the heavy speculation in Chinese financial stocks has allowed their value to draw level in close to 70 days.

This indicates that investors' fever has gone far beyond the bank's real value. World leading investment banks such as Morgan Stanley and JP Morgan have already issued warnings against a developing bubble in Chinese financial stocks, urging investors to stop pursuing financial shares.

Their warnings were followed by the central bank's announcement that it was raising the amount of funds commercial banks are required to hold in reserve in a bid to dampen the overheating stock market.

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