23 October 2018
A-share investors are still wary of potential risks amid stalling economic growth. Photo: Reuters
A-share investors are still wary of potential risks amid stalling economic growth. Photo: Reuters

Looking at A shares through their P/E ratios

The China Securities Regulatory Commission (CSRC), the nation’s top securities regulator, has held discussions with MSCI and FTSE, as well as with several global institutional investors, about regulatory and technical issues related to the inclusion of A shares in these global indices.

It seems that some parties are running out of patience in view of the long time it is taking for A shares to be included in these global benchmarks.

Following the talks, the CSRC said authorities would further improve the Qualified Foreign Institutional Investor (QFII) scheme, optimize the Shanghai-Hong Kong Stock Connect program and work on the proposed Shenzhen-Hong Kong stock linkage.

The Chinese government will also help tackle technical issues that hold back international institutional investors and the inclusion of A shares in the MSCI and FTSE indices. The moves are aimed at helping global investors tap into A-share market.

The CSRC will also step up communication with global organizations, a sign that authorities will deepen reform in the short term.

It seems that the central government is very keen to attract global investors to help improve the country’s investor make-up. That’s certainly good news for individual investors as it will help restore their confidence in the stock market.

CSRC officials said on March 20 that the recent stock market rally is a sign that investors recognize the financial risk is manageable and domestic economic growth has already touched the bottom.

Also, the market rally reflected a combination of deepening reform, sufficient market liquidity, declining interest rate, and improving earnings of small and medium-sized companies.

A steady equity market will restore confidence in China’s economic growth, expand the scale of direct financing and accelerate economic restructuring.

Nevertheless, investors are still wary of potential risks amid stalling economic growth. Also, some listed companies have high valuations and excessive dependence on leveraging.

Investors should not follow those who have sold properties or secured bank loans to speculate on the stock market. They should make sensible investment and rely on their own resources.

The CSRC vows to step up supervision and continue maintaining market order. It will also crack down on market manipulation and other irregularities to protect investors.

The capital flow indicates massive inflow from bank-stock transactions. As of March 13, 1.18 trillion yuan (US$189.87 billion) of capital flowed into the market through this channel, equivalent to a daily net inflow of 26.3 billion yuan.

Also, margin trading business has posted steady growth. By March 16, margin trading accounted for 16 percent of the daily trading in the Shanghai and Shenzhen markets, close to the level seen last December. Meanwhile, total outstanding borrowings for margin trading reached 1.29 trillion yuan, up 0.26 trillion yuan from the end of 2014.

In terms of valuation, the price-earnings ratio of A shares is around 25 times in Shanghai and Shenzhen. The main board’s P/E ratio stays at 21 times, the SME board at 64 times and the growth enterprise board at 96 times.

The constituents of SSE 50 Index and CSI 300 record a P/E ratio of 12 times and 16 times respectively.

Meanwhile, Dow Jones has a P/E ratio of 16 times, FTSE 100 at 20, DAX 30 with 18, CAC 40 at 20, and Nikkei 225 at 21. These global benchmarks have similar valuations as the China market.

Currently, mainland financial, mining and property plays post a P/E ratio of 11, 17 and 22 times respectively. Around 700 stocks have P/E ratio of over 100 times.

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Senior investment banker

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