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Are Chinese Shares a Buy? Here's the Answer...By Ian DavisMonday, August 18, 2008 It's a tale of two contests in China.
On one hand, we have the Olympics... which is a big success for the Chinese.
On the other hand, we have the Chinese stock market... which is a big disaster for the Chinese.
The index that tracks shares available to mainland Chinese investors, the Datastream 'A' Shares China Index, is down 58% from its October 2007 peak. Each time this index looks like it's ready to begin a sustained rally, it simply gets hammered again. Chinese investors may be happy watching the games, but they're losing a fortune in the stock market. And what about foreign investors?
Chinese stocks available to folks in the U.S. aren't doing quite as bad. But they're still a disaster. The Datastream China Index that tracks shares foreigners can buy (called 'B' shares) has fallen by 35% since its October peak:
Chinese Stocks Open to Foreign Investors May be Finding a Bottom
 Huge declines like this often create great values. In a bull market correction like this one, the earnings (the "E" in P/E ratio) often remain healthy, but share prices (the "P") go far beyond what anyone thinks is possible. Thus, you get stocks selling for low P/E ratios... say under 12.
As you can see from the next chart, we're not at "wash out" levels with Chinese shares. This chart shows the historical valuations of Chinese stocks. The black line is the P/E ratio, the blue line is the price-to-book ratio.
Foreignly Traded Chinese Stocks Are Much Cheaper Than Last Year… But Still Not a Steal
 China's P/E ratio has dropped to 16. This is still significantly higher than its long-term median of 10, but significantly lower than it was a year ago. Chinese shares also trade for a price-to-book ratio of nearly three, so they're not a screaming buy yet.
I think we can get this conclusion from today's charts: Chinese stocks have been clobbered in the past 10 months, so yes, there's a lot of pessimism. But I'd like to see shares sink to less than 12 times earnings and less than two times book value before buying. These levels typically market good buying opportunities for high-growth markets like China.
Right now though, I'd restrict my China dealings to just the Olympics.
Good investing,
Ian Davis
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