Disappointment inevitable for those buying into China's froth

The prudent sit on the sidelines. Optimists recognise the froth, but hope to get out in time by selling to a greater fool before the bubble pops. Those greater fools insist it is different this time and high valuations are justified by great opportunities.

Each approach faces serious problems - problems buyers of Chinese shares are having to face as the excess in domestic stock markets spills over into Hong Kong.

Sitting on the sidelines sounds prudent when a third of Shanghai stocks with earnings estimates, and half of Shenzhen's, trade at above 50 times forward earnings estimates. One clear sign of fizz: of 1,541 stocks trading in Shenzhen, 270 have at least doubled in price this year, and another 662 rose more than 50 per cent. Only three are down.

Global investors may find it easy to avoid onshore China, but the froth is creeping into Hong Kong. Eight years ago China's last equity bubble inflated at least twice as much as this one has, with non-financial shares reaching eight times their book value, against three times so far. Those who steer clear will need an unshakeable commitment to miss out on easy money, of the kind which destroys careers in fund management.

There is a lesson from the dotcom era for optimists, too: timing the exit from a bubble is almost impossible. When the market turns down, those who bought knowing prices were unreasonable all rush out at once; bargain-hunters are unlikely to appear until prices have plunged. Those who think they are smart enough to get out in time must prove more adept than George Soros, the hedge fund manager caught out when the bubble burst in 2000, even though he knew shares were wildly overpriced.

The greater fools think themselves realists. China's economy is changing, offering opportunities to new tech, consumer stocks and even train manufacturers looking to benefit from the new "silk road". Hopes of looser monetary policy provide extra fuel for shares. And foreigners may have to buy in later this year, if China's onshore stocks are added to the benchmark emerging index.

Even if China manages to pull off the best economic transformation in history, disappointment is inevitable for most who buy the froth. Bubbles always burst eventually.

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