This is what I heard from a guest at “Market today” (China-CBN). Here is how it works: China Ping’an insurance (601318, 2318.HK) and China Life insurance (601628, 2628.HK, LFC) holds significant shares (more than 3%) from each other. Now they are buying shares from each other in the market, which will drive their stock prices higher. This in turn, will bring more profit (unrealized investment gains) to each company, according to the new accounting rules being effective this year in China. As a side note, investment gains exceeded many public companies’ original (main) business profit this year. For instance, Youngor (600177), the famous apparel maker, makes more money from the investment in Citic Securities (600030) than from shirts/jackets.
I’m not accounting expert, nor have I researched how similar things are counted in US GAAP. But my gut feeling tells me China new accounting rule is one reason for the China bubble right now. Because at the end of the day, those paper profit will be gone as fast as they come.
BTW, I’m just curious, when China Life (LFC) reports to SEC, what kind of accounting do they use?