Abstract

Chinese stocks have been hammered of late with the Shanghai Composite’s cumulative loss since the June 12th peak now at 28%, and both the Shanghai ‘free float’ excluding the illiquid state-owned portion of the market and the Shenzhen index down by about one-third. Policymakers are actively attempting to prop up the market but so far have had only limited success. However, while these are large percentage declines, they only take the Shanghai Composite back to mid-April levels and the Shenzhen Composite back to late-March valuations and hence around the time we issued this paper saying valuations at that time were not yet a bubble. The market then added another nearly 40% gain by the time it topped in mid-June and that clearly changed our minds by very rapidly stretching valuations into uncharted waters.