From the early days of China’s stock markets, in the ’90s and early noughties, Chinese stocks traded at valuation premiums to U.S. peers.
Then, from 2009 onward, they moved to discounts and today are significantly cheaper; what’s been going on?
Geert Behaert of the Columbia Business School (et al. from Tsinghua U.) have some answers but I think the researchers have missed the #1 reason which I’ll toss in as my own two pennyworth at the end.
What the researchers decided to test was whether it was composition (remember China used to be very bank-heavy a while back), financial openness or changing growth expectations that could be fingered as factors affecting the change?
To cut a long story short what they found was that it seemed to be a combination of reduced growth expectations for Chinese stocks PLUS their greater integration with global capital (that values them lower than domestic Chinese investors) that account for most of the change.
The work is solid and the academics add a useful dimension to understanding this shift. However, as a practitioner I would add I think they’ve missed the 800lb-gorilla riding the elephant in the room, supply.
The U.S. public stock market in recent years has suffered from a well documented supply shortage. Not only have new issues become a rarity the total number of listed stocks has shrunk dramatically and those that remain have (in aggregate) reduced share-counts significantly.
Investors in China have suffered over the same period a Niagara, tipping into Victoria-Falls deluge of paper. In recent years much of this has been for companies either with listings elsewhere and no need of capital or (I’m thinking here especially of Shanghai’s Star Market most lately) companies whose listing has been prompted by political rather than financial necessity.
It’s this difference in supply/demand dynamics that in my view has set back Chinese stocks’ valuations. Why investors have queued, and queued again for paper that hasn’t provided reliable returns is perhaps the bigger mystery?
As I write however there are more trucks loaded with yet more paper on the horizon and buyers seem as keen as ever. Mysterious indeed?
The research in full can be accessed via this link The China-U.S. Equity Valuation Gap.
Happy Sunday.