Vindicating the Investment Value of Chinese Stocks
2007/7/11 23:47:16
Got back late. Spent 18 minutes on this casually written article. Make do with it, everyone. Logging off now. See you later.
Under the hype of certain people brainwashed by Wall Street, the investment value of Chinese stocks has been a perpetually questioned subject since the very day China's capital market was born. China's capital market has been deliberately portrayed by certain people as a cesspool of junk stocks and a den of speculation. The so-called "China's stock market is a casino" theory has been rampant.
Such rhetoric is nothing but economic colonial discourse manufactured through information asymmetry. All capital markets in the world have serious speculative behavior. Take Hong Kong's stock market — those so-called "penny stocks" and various warrants are a hundred times more speculative than anything in China's stock market. There, rising several-fold in a day, dropping 80%, going from a few cents to several dollars or even higher then crashing back to zero — is any of that hard to find? The same phenomena exist in European and American markets. Throughout the history of Western stock markets, severe speculation has been ten thousand times worse than anything China has ever seen. Even now — does China's stock market have a stock that rockets from 20 cents to several hundred dollars then crashes back to 60 cents? European and American markets do, and it happened recently. One can state with complete seriousness and responsibility: speculative behavior in China's stock market is actually below the normal average for capital markets. China's capital market has never exhibited speculative phenomena exceeding the average speculative levels of any country or region.
When confronting Wall Street's brainwashing, the response must be counter-brainwashing. This ID is rather lazy and doesn't have too much time. If anyone is interested, write a data-rich article comparing the history and current state of speculative behavior across various countries' capital markets, exposing the lies of certain people who whitewash so-called mature markets. That would be a meaningful endeavor.
Some might say we should aim for the highest standards and not learn from others' bad examples. Fine, no problem — let's examine the good aspects. Here, we must first make a distinction: when evaluating P/E ratios in any capital market, the subject is always the component stocks. In Hong Kong's stock market, the P/E ratios among "penny stocks" are far higher than those of junk stocks in China's market. When people cite Hong Kong's market P/E ratio, they're only looking at component stocks. The same applies to European and American markets.
In international markets, the most typical measure of a stock's investment value is not the P/E ratio itself, but the PEG ratio (P/E ratio divided by growth rate). Generally, as long as the PEG ratio is less than 1, the stock is considered reasonably priced. Currently, among China's market component stocks, the average growth rate exceeds 50%. Therefore, in China's stock market, a P/E ratio of 50 times is absolutely reasonable. Calculated another way: since the current interest rate is around 3%, a P/E ratio of 33 times means it matches the interest rate level. With a 50% growth rate, a stock with a 50x P/E ratio will have its P/E drop to 33 times after one year. This also proves, in reverse, the reasonableness of a 50x P/E ratio for Chinese stocks.
Some might object: "You're talking about forward P/E ratios." Of course — stock prices are the resultant force of all expectations, reflecting price expectations. The day China's corporate growth rate declines, the acceptable P/E ratio will naturally come down. Until that trend appears, of course we use the current foreseeable growth rate as the reference standard. Nobody is God, so don't play God and try to dictate the future.
Everything said above is the simplest of reasoning, but certain people deliberately refuse to acknowledge it — out of ulterior motives, nothing more. It can be stated clearly: after mid-year results are released, the average P/E ratio of the CSI 300 will be far below 50 times. The investment value of China's stock market is currently being massively underestimated.
On an even larger scale, since China's current enterprises represent the future of China's economy, and since the historical trend of China becoming a world economic power is irreversible, some of the world's largest companies will emerge from among these listed companies. Chinese enterprises will also go multinational. Right now, many of China's listed companies — even the largest-cap ones — when viewed from the perspective of becoming the world's largest companies, can only be considered small-to-mid-cap stocks, all growth stocks. As long as you're optimistic about China's economic future, there's no reason to lose faith in Chinese enterprises. Who can say that the greatest companies of the 21st century can't be Chinese? And it can be predicted with certainty: among the 500 greatest companies in the world in the 21st century, at least 100 will be Chinese, and these 100 companies are among the stocks currently trading on the Shanghai and Shenzhen exchanges.
Of course, Chinese enterprises have all kinds of problems. But all development occurs amid problems — companies without problems have long since died. The historic driving force brought by economic capitalization will propel Chinese enterprises into a great historical period of development. This is the core driving force behind the development of China's capital market. Without such historical vision, one is nothing but a pitiful worm brainwashed by others.