China Stock Market Bubble -- Or Not?

Robert Hsu, August 25, 2009

In this Issue:

Is There a Bubble in China?
Limited Downside for the Rest of 2009
Keeping Up with China's Growing Demand for Energy
An Aggressive Acquisition Strategy
Opportunities in Healthcare

There has been a lot of talk recently about there being a bubble in China. In fact, one of the number-one questions that I received at the San Francisco MoneyShow over the weekend was if China's stock market is becoming a bubble, especially after seeing the A-Share market in Shanghai skyrocket more than 80% from the beginning of the year to early August.

Well, I addressed much of these concerns with my China Strategy and Asia Edge readers in last week's issues. But I understand the most investors in China are worried about the same issues -- so it's worth discussing again.

First, let me just say that all of this bubble talk is overblown. We must understand that the Chinese government is taking steps to prevent a full-blown stock market bubble as well as a deep sell off.

Much of the pop in the Chinese markets was caused by excess liquidity this year -- Chinese banks lent out more than $1 trillion in the first two quarters. Chinese policymakers are just as concerned as investors in this parabolic run up, so they have allowed a new wave of IPOs to enter the market to soak up the excess liquidity.

This drain on liquidity is what caused the Chinese stocks markets to take a healthy -- if not drastic -- breather over the past couple of weeks. Since August 4, China's A-Share market has dropped 16%. Considering this recent pullback, the Shanghai stock market's current PE ratio is below 30. That's under the market's historic average.

A PE ratio around 30 coupled with the Chinese government's continued monetary easing and the country's 8% GDP growth is giving Chinese stocks a very reasonable valuation. And when you consider that Chinese stocks listed in New York are generally cheaper than Shanghai-listed shares, you can see there's still plenty investment opportunity for China investors.

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China Stock Market Bubble -- Or Not?

In this Issue:

Is There a Bubble in China?

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