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The Shanghai Composite moved up moved from 1,330 two years ago to over 6,100 last October. It was a dizzying rise. But, since its peak, the index has fallen to 3,300.
Investors who bet on the exchange have lost 45% of their money in a short time. Some of the key China stocks traded in the US have also dropped sharply. The shares of China search engine Baidu (NASDAQ: BIDU) hit a 52-week high of just over $429 and now trade at $273. The company still has a P/E of 105.
The Shanghai market has been dented for two reasons. First, if stock markets are leading indicators, investors in China are worried about rising inflation and falling exports to the US as the economy here slows. For a country where GDP rises 10% most years and inflation by almost as much, a share drop in growth could do huge damage to the China economy. According to The New York Times, "there are worries that a prolonged downturn could reverberate through China's financial markets."
The other issue with China stocks is that their valuation got to be separated too much from the measures in other countries. Baidu still trades at 37 times sales and that number was closer to 50x. By contrast, Google Inc. (NASDAQ: GOOG) has a multiple of 9x sales.
China needs its middle class to do well. They drive much of the consumption of goods and services inside the country. With the stock market down this much, they may not be feeling as prosperous as they did a year ago.
Douglas A. McIntyre is an editor at 247wallst.com.
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