Document Type

Article

Publication Date

2015

Publication Title

China Brief

Volume

15

Issue

20

Pages

11-14

Abstract

[Introduction] The recent stock market turmoil and the economic slowdown in China have kept analysts busy projecting where the economy is going and what the government will do. The Chinese government has also issued a number of reforms of state-owned enterprises and other aspects of the economy. However, these reforms and increased scrutiny by both regulators and investors will be futile unless larger problems with market fundamentals in Chinese companies are addressed.

While the world's attention has been fixed on what the Chinese government is going to do next, there has been a tendency to neglect market fundamentals and to forget about the very reason why people invest (or speculate, more appropriately in this case) in the stock market in the first place: the stocks we buy give us shares of ownership of a company that creates value for the owners by making products or services that people or companies want. And from selling these products/services the company we bought into will generate earnings, which, ultimately, will go to us the investors. This is why the ratio of a stock's price to it's earnings, or the P/E ratio, is one of the most important vital statistics of a stock market. At the end of September this year, the average P/E of stock markets worldwide was 17.7, while the P/E of the Shenzhen Stock Exchange was about 39, already substantially down from 69 in June. If the P/E is too high, which is the case of the Chinese stock markets, then people will not buy stocks because of their earnings, but because they think they can sell them with higher prices to the next buyer, which is speculation and creates bubbles in the market.

Rights

© 2015 The Jamestown Foundation: Global Research & Analysis.

Original Publication Citation

Li, S., & Park, S. H. (2015). Next focal point of China's stock market: Earnings-But can we trust the numbers? China Brief, 15(20), 11-14.

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