At first glance, the recent slide in Chinese share prices that has left Shanghai in bear market territory looks inconsistent with the country’s economic recovery, says Jing Ulrich, managing director and chairman, China equities and commodities at JP Morgan.

She notes that in the first quarter, China’s year-on-year GDP growth rebounded to 11.9 per cent. Impressively, corporate earnings were up 63.5 per cent from a year earlier.

But she says investors are finding little cause for optimism amid the government’s gradual tightening of monetary policy and exit from last year’s supportive real estate policies. Property construction accounts for 22 per cent of China’s fixed investments and supports demand in many downstream industries.

“As a reflection of current investor sentiment, subscriptions to new fund launches this year have been more than offset by redemptions of existing funds. Moreover, about a third of this year’s A-share IPOs have fallen below their issue price – during the boom years, IPOs were seen as a one-way bet.

“But after falling 20 per cent from November’s high, stock valuations look undemanding. The forward price-to-earnings ratio for the Shanghai Composite is 15.2, compared to a three-year average of 22.9.

“Even so, investor confidence could remain subdued until signs emerge that recent policy action has been sufficient to achieve the government’s intended results.”

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