An epic bubble might be building, but it's less frothy in China, investor says

The Charging Bull bronze sculpture located on Broadway at the Financial District of Manhattan.

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While there may be signs of a bubble forming in global markets, that frothiness is less likely in China, the chairman of Chinese investment management firm Citic Capital told CNBC on Thursday.

“Overall, clearly, there is bubble around the world. China, I think, is less so because of … capital control. Second, (the) government is very determined not to create a real estate bubble. So, the banking sector’s been given very specific instructions not to increase lending,” said Zhang Yichen, who is also the chief executive of Citic Capital.

Chinese authorities have clamped down on the country’s property sector as debt risks for property developers mounted last year.

“So overall, we’re still relatively comfortable in China,” he told CNBC’s “Squawk Box Asia” as part of CNBC’s coverage of World Economic Forum’s Davos Agenda.

High-profile investors have recently warned of a massive bubble forming on Wall Street as they grow concerned that smaller traders may be getting carried away with speculative trades.

“There has been increased evidence of bubbles in pockets of the market — most recently reflected in Wednesday’s “flash mob” activity by retail traders in some of the most heavily shorted stocks (largely by hedge funds),” the financial research arm of Charles Schwab wrote in a Jan. 27 note.

“The trading activity is yet another sign of extremely frothy sentiment, which has been building in earnest since last fall. Lately, it has entered a unique new phase driven by retail traders,” the note warned.

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A handful of stocks recently staged epic performances with retail investors driving shares of GameStop up 1,500% in two weeks. But the rally was divorced from company fundamentals.

Instead, at-home traders were encouraging each other to buy up stock and call options on the Reddit chat room “wallstreetbets.” Besides GameStop, these investors also targeted other heavily shorted names including AMC Entertainment and Bed Bath & Beyond.

Short selling is a strategy in which investors borrow shares of a stock at a certain price in expectations that the market value will fall below that level when it’s time to pay for the borrowed shares.

Amateur investors enthusiastically piling into these companies drove up prices, pressuring hedge funds short selling those stocks to cover losses by buying more shares. That short covering tends to further the rally.

This behavior is unnerving many on Wall Street as mounting hedge fund losses could spill over to other areas of the market. Some also believe this buying frenzy could be an ominous sign for a market at record highs.

“The warning signs are the surge in SPACs, extreme returns in unprofitable tech stocks, margin debt at a record high and r/wallstreetbets now as important as regulatory news providers for equity traders,” research firm TS Lombard said Wednesday.

SPACs, or special purpose acquisition companies, have soared in popularity in the last couple years. They have no commercial operations and are established solely to raise capital from investors for the purpose of acquiring one or more operating businesses.

With reporting from CNBC’s Stephanie Landsman and Yun Li.

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