The Shanghai index has increased by four-and-a-half times since January 2006 and Chinese shares are valued at historically high price/earnings ratios – around 50. Growth in earnings could justify these high ratios: it is vibrant at 26 per cent a year since 2002.
But it is worrying that the cost of capital is not being covered at 73 per cent of Chinese listed companies, according to data on nearly 1,000 provided by Infinancials, a supplier of data and models on listed companies. They are destroying value, but their shares are nevertheless rated at a price-to-book ratio (PBR) of around 4.9. This is sustainable only if return on capital employed (Roce) improves dramatically.
