The China Bubble Thing

These two factoids won’t settle the debate as to whether China’s stock markets are currently in a bubble, but I thought it was worth putting them out there — one bullish, one bearish:

  1. While the Shanghai Composite is up a fairly staggering 158% year-to-date — and 188% over the last five years — the five-year return works out to an annualized return of 123%. Granted, that isn’t tiny, but it also isn’t utterly daunting either. After all, with profits doubling in many Chinese companies year-over-year, and with the Shanghai Composite having been flat from 2002 to late 2006, it can, perhaps, be forgiven for a playing a little catch-up, can’t it?
  2. China Life, PetroChina Co., China Mobile Ltd., Industrial and Commercial Bank of China Ltd. and China Petroleum and Chemical Corp. are now in the list of the world’s 10 biggest companies by market value. Only two of those are in the top 50 by sales.

To add to point 2, China stocks can learn from their dot-com counterparts. When you have a frothy stock valuation the way to make sure it doesn’t end badly, or to at least make that less likely, is to buy things. Now.


  1. Do you have a typo or am i really missing something in this post? How can 158% YTD = 13% annualized. If something is up x% in 11 months, then the annualized figure must be GREATER not SMALLER.
    Or is your annualized figure missing a time period — did you mean from 2002 or something as you then talk about?)

  2. Paul, some of the Chinese CEOs get it. Here is a quote from Wang Xiaochun, Chairman/CEO of Tonjitang Chinese Medicines (NYSE: TCM):
    “[The] Traditional Chinese Medicine (TCM) industry is a highly fragmented sector in China, with over 1,500 manufacturers but an average annual sales of less than RMB100 million each. We expect consolidation to occur in the coming three to five years, and we consider Tongjitang to be uniquely positioned to be a leading consolidator in this sector. Our publicly traded shares, traded on the NYSE, could be an effective M&A currency.”
    Fast growth, rich stocks, fragmented industries – maybe the Chinese markets aren’t quite as irrational as some think.

  3. China’s growth is astounding, they are only in the first inning of their industrial revolution and presently consume only a fraction of the oil the US does…however their appetite for oil (and everything else) is voracious as 2 billion people enter the modern world …things will be in high growth mode for a quite a while (with sizeable retracements I’m sure) and watch commodities while this happens—oh yeah plus the dollar is taking a tumble…pk

  4. Vijay Veerachandran says:

    Paul might be of your interest. Actually this is not completely off topic. Indian markets are valued at astronomical levels too..
    Here is the proof from the worlds richest man of today in an Indian.
    Mukesh Ambani is world’s richest man worth more than Bill G and Carlos.

  5. Michael Gardner says:

    +188% over 5 years means 2.88^.2, not 1.88^.2, so compound return is 24%, not 13%.

  6. My typo. Ugh. Now fixed, but point still stands.