China's stock exchange - revisited (updated 2/13)

It has clearly been a very difficult past 18 months for the Chinese stock market. While this is not entirely surprising given the bubble that I discussed in 2007 and the massive overall decline in world stock markets, the correction in China has been particularly harsh.

The chart below shows the SSE over the last two years. The index today is down 62% from its high and at its peak had declined 71%.


Further recent news shows that Chinese exports declined 17.5% YoY through January and imports declined a whopping 43%. While the China Daily calculates that about 1/3 of that import decline is due to the timing of Chinese New Year, the decline is still massive.

Given the decline in world demand for China's good and the rising job losses and deteriorating economy in China, is now the time to get out or get in to the stock market?

While I have less conviction that I would like, over the past month I have started to slowly dollar-cost-average into China's indexes. While I think it may be rough going for the short-term, I think now could be an attractive time to invest. I think a) China's government is much more likely to successfully implement a stimulus than the US government, b) although I don't have this data, I think the higher savings rates of Chinese middle-class consumers vs. American middle-class consumers will help buffer their internal consumption crunch somewhat, and c) the PE multiples of the SSE have declined to a much more reasonable level and at the last data I saw were actually below PE multiples of the US.

I also recently came across this quote from one of the leading global venture capital funds - again, no real data - but captures my sentiment well:

"Our investments in China are better positioned to survive a very prolonged downturn than companies in the U.S. Not only are the cost structures far lower, but the cultural familiarity with the challenge of survival makes the managements of most of these companies more resilient. (Bear in mind that even in good times the average savings rate in China's urban areas for high income earners has been close to 30%). Despite the many challenges that come with operating in different countries, we are relieved that we decided to reduce our overall dependence on the U.S. and can invest in markets that are growing more quickly and where there is a greater thirst for success"

Given the high likelihood that China's long term growth rate is substantially higher than the US, I am hopeful this will prove over the medium term to be an attractive buying opportunity.