Reduced PE ratio of Chinese stocks attracts investor attention

The Chinese A-share market has become enticing as the price earning ratio (PE ratio) of Hushen 300 Index, which reflect the whole fluctuation of China's Shanghai and Shenzhen Stock Exchanges, and is now about half of that of their equivalents on the US stock market, China Securities Journal reported.

The PE ratio of Hushen 300 Index stands at 14.20 times, and it would lower to 10.92 times if potential compensation rate of 30 percent in the ongoing reform to solve the split share structure was taken into account, according to the newspaper published by Xinhua.

Experts say the lower the PE ratio, the more attractive the shares will be to investors.

About one-fifth of the total shares listed in the two markets have been chosen as samples of the Hushen 300 Index, accounting for 60 percent of the market value in China's stock market.

Citing figures released by the Shenzhen Zhongzheng Investment Consulting Co., the newspaper said the PE ratio of the Standard & Poor 500 Index, which covers shares of 500 major US listed companies, stands at 19.19 times. The PE ratio of Hang Seng Index of blue chips on Hong Kong stock market Dow Jones Industrial Average of blue chips and Nasdaq Index is 15.34, 17.8 and 47.56 times. The Composite Stock Index of the Shanghai Stock Exchange, which covers yuan-denominated A shares and foreign-currency B shares, slumped to new lows in at least six years on Monday after closing down at 1,070.84 points. Some real estate fund and overseas institutional investors are positive about the A-share markets, according to the article.

Liu Erfei, chairman of the China region of Merrill Lynch & Co.,said no stock market better than the Chinese one in terms of market prospects despite its existing problems, according to the newspaper.

Merrill Lynch is trying to set up joint venture investment firms on the Chinese mainland and trying to get investment quota of QFII (qualified foreign institutional investors) from the Chinese regulator for investment, he said.

The US company likes to see their investment quota increase by 10 times because it sees great business opportunity, said Liu.

Foreign investors cannot invest in the Chinese A-share stock market unless they are given QFII quota.

Nicole Yuen, head of China equities for UBS, said, "This (reform) is an important substantial step forward of A share market,though it is just the very beginning,"

"I got calls from our customers asking how to invest more in the A share everyday since the reform was launched," she said.

China Securities Regulatory Commission initiated the reform of floating non-tradable shares last month, also known as the reform to solve the split share structure, which refers to the existence of a large volume of non-tradable state-owned and legal personal shares. It has been widely viewed as one of the major problems blamed for the sluggish Chinese stock market The split share structure means only about one-third of the shares in domestically listed firms float on the markets. This puts public investors in a worse position than the actual controllers in making corporate policies and disposing of the firms' profits and assets.

The Chinese economy has been growing by an annual average of 9.4 percent in the past 27 years, while the domestic stock markets, far from being an economic barometer, were down nearly by half during the past four years since 2001.

Source: Xinhua