Chinese stocks: Chinese stocks have performed terribly in 2010 — on a par with those in troubled Spain and Greece. But after their 13 per cent fall, China equities are starting to look cheap compared with past measures.
True, worries about bubbles and inflation remain. But countervailing forces of liquidity and strong growth argue for a correction.
Property and banks were hit hardest. Beijing brought in a series of measures to control property prices that got investors worrying about stalling Chinese economic growth, since property is now the largest driver of the Chinese economy. As for the big lenders, investors are worried about an excess of future supply. China’s top three listed banks alone plan to raise up to 140 billion yuan ($20.5 billion), much of it in shares.
A sober analysis suggests these fears have been overdone. Shanghai stocks trade at about 18 times their expected 2010 earnings, compared with their historic range of 15 to 30 times.
China’s largest property developer Vanke now trades at 10.5 times estimated 2010 earnings versus the average of 14 times for Asia properties. Just a year ago, Vanke had a price-to-earnings ratio of about 25.
Yet two things point to a better performance. First, money remains loose. The broad money supply rose 22.5 per cent in March, even though Beijing has sucked some liquidity out of the system. Second, inflation is returning, though still only modestly. Chinese stocks do best when prices in the economy are rising. The market hit a record high in 2007 when inflation was a major concern.
Even Beijing’s attempts to cool down the property market, which hit the stock markets hard, could help them recover if successful. Investors’ money has to go somewhere. Negative real interest rates mean savings accounts don’t look very attractive, and investors have few other options. Stocks are a logical beneficiary.
Fears could return, say if Beijing leaves the property bubble to burst abruptly, inflation becomes unmanageable, or more mega-capital raisings emerge. But policymakers are hardly blind to these risks, as the raft of gentle tightening measures shows. With money plentiful and inflation still mild, Chinese equities’ status as the world’s underdog looks unjustified.
