With Shanghai Market Down 45%, The Ghost of Christmas Yet to Come

Two years ago the Shanghai Composites was at 1,300. It got over 6,000 last October and trades at about 3,300. At its recent 52-week low, it was off almost 50% from its peak. According to The New York Times “there are worries that a prolonged downturn could reverberate through China’s financial markets — especially since a large number of corporations had aggressively shifted money, sometimes secretly, to play the market.”

Pundits and professional will give a lot or reasons that the market has dropped as much as it has. The biggest concern should be that the theory that stock markets presage the economy by six months. If so, China is in trouble.

The fact that the stock market in Shanghai faces is that the 10% GDP growth in the country will fall-off if exports to the US and Europe are blunted by recessions in those regions. With inflation running at 8% in China, it needs rapid growth so that the locals can keep up with the rising prices of food and real estate.

The other factor undermining China stocks is that their P/Es and price-to-sales ratios have made it to the realm of lunacy. Baidu (BIDU), the search engine company which trades in China and the US, has a P/E of 106 and a price-to-sales of 38x. And that is after losing 40% of its value. Google’s price-to-sales is 9x.

The conventional wisdom, which is probably right for once, is that a country cannot do well with its stock market off by almost half in a very short period of time.China may be an exception, but that has not been proved.

As Dickens wrote, the market in China is The Ghost of Christmas Yet to Come .

Douglas A. McIntyre