Shares trading on a PE of 46 are still way overvalued. China has specific issues relating to asset allocation and the choices available then may limit the fall but this should not detract from the overvaluation and small investors move in a herd it may be hard to reverse this downward trend in a hurry.
The question is whether a large deflation will have knock on effects across global stock markets.
Chinese stocks face biggest monthly drop since 1995 [China Post]
SHANGHAI -- Chinese stocks are poised for their steepest monthly decline in more than 12 years as the government deflates a bubble that caused prices to quadruple in a year.
The Shanghai Composite Index has fallen 16 percent in November, the most since February 1995, when Bloomberg started keeping records of the benchmark. Shares in the index trade at an average 46 times earnings, according to data compiled by Bloomberg. The MSCI Asia Pacific Index and the Standard & Poor's 500 Index are valued at 18 times.
While this year's rally turned Beijing-based PetroChina Co. into the biggest company by market value and made Industrial & Commercial Bank of China Ltd. the largest bank, five interest rate increases by the People's Bank of China and higher taxes on trading shares sent the index down 18 percent from its Oct. 16 record. The past five times the Shanghai Composite Index dropped 20 percent or more from a high, losses deepened to an average 35 percent before recovering, Bloomberg data show.
"The risk facing the stock market is considerable now, as the government is trying to squeeze an asset bubble," said Zhang Ling, who manages the equivalent of US$1.1 billion with ICBC Credit Suisse Asset Management Co. in Beijing.
U.S. billionaire Warren Buffett said last month investors should be "cautious" about China's stock market. Six months ago, Li Ka-shing, China's richest man, said it "must be a bubble."
The decline in China compares with a 21 percent decrease in Japan's Topix index from its February record to Nov. 22, the first of the world's 10 biggest stock markets to enter a bear market since the summer's U.S. subprime-mortgage collapse. A 20 percent drop within 12 months is considered by traders as the start of a bear market.
The two-year-old CSI 300 Index, which tracks shares on the Shanghai and Shenzhen exchanges, fell 21 percent from its Oct. 16 peak through Wednesday, and rose 4.2 percent Thursday. It's still the world's best-performing national index of the 90 benchmarks followed by Bloomberg.
"It's far too early to talk about a prolonged bear market as domestic demand is still strong," said Leo Gao, who helps manage the equivalent of US$2.3 billion at APS Asset Management Ltd. in Shanghai. "We could see a rebound when banks get their fresh quota of loans in the new year."