The investment opportunities in China are considerable, but at certain times Chinese shares seemed expensive as speculation took hold and the risks appeared to outweigh the benefits. Today there are signs the market is more realistically priced. One way to gauge the sentiment of local investors is the difference in price between "H shares" (the shares of Chinese companies listed in Hong Kong) and the shares of the same companies listed on the local "A share" market - which are the only ones available to the Chinese themselves. Historically, the "A" shares have often traded at a hefty premium to the "H" shares as local investors clamoured to own them, but for the first time in almost four years they are at a slight discount - shown by the blue line below the level of 100 in the chart below:
Source: Bloomberg
By way of comparison, in early 2008 the index hit a level of 200, which meant the "A" shares were twice the cost of ‘H’ shares; a sign of exuberance on the part of local investors and a sign the market was over-hyped. Interestingly, buying at points in 2006, the previous occasions when "A" shares were at a discount to "H" shares, would have led to good returns from the market. However, past performance is no guide to the future, and it’s also worth noting the premium narrowed significantly in 2008 ahead of a further major downturn in the Chinese market.
The comparative pessimism of Chinese investors is encouraging as it provides evidence the Chinese stock market as a whole is not overheated. It’s a notoriously volatile area, but in my view the market is beginning to price in slower economic growth and look better value.
