As the Chinese government made moves to suppress escalating lending growth driven by excess liquidity, it's worth comparing the similarities with the Japanese experience during it's boom years.
1) At its 2007 peak, the Shanghai A shares traded at more than 7 times book value. Japan's Nikkei index in 1989 peaked at 5 times. Chinese stocks has since halved in value
2) Price to earnings ratio of Chinese stocks using past 10 year average earnings (Graham and Dodds PE ratio) is 50X compared to about 15x in US
3) Residential real estate of Chinese cities is at a multiple of 15-20 times household income versus 12-15 times during Japan's real estate boom
4) Fixed asset investment as a proportion of GDP in China is currently 50% and Japan had similar growth rates then with 30-35% GDP
Finally a thought to hold:
A decrease to 10 year ago investment-to-GDP rates for China would have a disasterous effect on all emerging economies and countries exporting to China.
Eric Tan,
London
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