CHINA – P/E & CAPE Ratio of Shanghai Stock Market

The current average P/E (price-earnings) ratio of Shanghai stock market is 16.87 (3/31/2017). The Shiller PE ratio is currently 18.05. Based on the averages, the shares traded on Shanghai stock exchange would appear to be slightly undervalued but Chinese stock market has been characterized by extremely high valuations and price bubbles.

Shanghai Stock Market - P/E, CAPE & Yield



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China Shanghai Stock Market Average PE CAPE Ratio Graph Chart

The roller coaster ride of Chinese stock market

Chinese stock market has never been suitable for the faint-hearted. Shares have been traded in Shanghai only for three decades but during that time the market has been experiencing some of the worst bubbles the world has ever seen. Between January 2006 and October 2007, the average price-earnings ratio of Shanghai stock exchanges increased from 17 to 70. It only took nine month for the P/E ratio to drop below 20 again. Compared to the previous bubbles, the valuations at the end of 2015 were quite modest. P/E ratio only doubled between 2014 and 2015 which barely even count as a bubble when previous price increased are taken account. During January 2016, the total market cap of SEE dropped from 29,519 billion to 22,946 billion yuan. The markets have stayed restless in February and only to bravest are buying Chinese equity at the moment.

One reason for the chaos in the Chinese stock market is the lack of institutional investors. Chinese government is restricting international investors from directly owning mainland listed shares. A large portion of the shares are held by individuals with little experience in investing who have been buying stocks with borrowed money and high expectations. This has been creating price bubbles that the government has not been able to control. The price control mechanisms that the authorities have been implementing in order to stabilize share prices are only making the situation worse. Only true solution is modernizing the whole Chinese stock market and opening mainland exchanges fully to foreign investors.

Earnings of Shanghai listed corporations

Earnings of Chinese companies have been steadily rising. Only in 2009, during the height of the global financial crisis, the earnings decreased compared to the previous year. The graph below shows the amount of earnings “belonging” to the Shanghai listed shares. This means that for companies who have also H-shares listed in Hong Kong stock exchange, the number includes only the earnings allocated to their mainland listed A-shares. In 2015, the total earnings were 1,669 billion yuan.

Earnings of Shanghai Chinese Stock Market Graph Chart

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