The current P/E (price-earnings) ratio of the Shanghai stock market is 15.45 (12/31/2021). The CAPE ratio is currently 18.11. The ratios have been calculated using the SSE Composite Index which is considered as the benchmark index for the Chinese stock market. Compared to historical averages, the shares traded on the Shanghai Stock Exchange would appear to be slightly undervalued but the Chinese stock market has been characterized by extremely high valuations and price bubbles so the historical average valuation multiples might not represent the entire picture.
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Shanghai Composite Index – P/E (TTM), CAPE Ratio & Dividend Yield
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The roller coaster ride of the 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.
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.