China may be close to bottom but no sign of a bubble bursting

• Published in: The Financial times (London ed.)
• Main Author: Lynch, Jake
• Format: Newspaper Article
• Language: English
• Published: London (UK) The Financial Times Limited 08.04.2008
• Subjects: Big Four accounting firms; Earnings; Emerging markets; GDP; Gross Domestic Product; Investments
• ISSN: 0307-1766

In fact, it is hard to find evidence of a bubble at all. Take valuations: the benchmark CSI 300 index is now trading at 23 times 2008 consensus earnings forecasts. This is not cheap, but it is far from what we think of as bubble valuations and below its 10 year average of 30 times. How did we get from a multiple of 70 to 23 with a 25 per cent share price correction? First, bearish commentators were focusing on the smaller but more expensive Shenzhen market and looking backwards 12 months. Second, earnings grew 48 per cent in 2007 and the consensus forecast is for 32 per cent earnings growth this year. In other words, there is not enough "supply" of shares relative to high "demand" from savers (especially given today's negative real interest rates). Both supply of and demand for shares are likely to rise rapidly in coming years, inevitably resulting in high volatility. Does any of this matter for international investors? With 72 per cent of the market cap of the MSCI China already dual-listed in Hong Kong and Shanghai (and the percentages rising monthly) the answer is yes. Hong Kong investors closely watch the price movements of the listed A shares and the recent correction in the A-share market has been an important cause of the MSCI China's underperformance relative to other emerging markets.