China Stocks trading at biggest discount in 5 years

Source: Bloomberg

China stocks, trading at their biggest discount to global equities in more than five years, may extend the world’s worst two-year loss into 2012 as economic growth slows and money supply tightens.

The CHART OF THE DAY shows the spread between the price-to- estimated earnings ratios of the Shanghai Composite Index and the MSCI AC World Index of developed and emerging nations since 2005. Companies in Shanghai traded at a record-low 10.41 times on Dec. 22, the biggest discount to the global gauge’s ratio since April 13, 2006, data compiled by Bloomberg show. The bottom panel tracks China’s quarterly gross domestic product growth and monthly M2, a broad measure of money supply.

“The growth outlook is pretty bleak next year as the government won’t increase money supply aggressively or introduce a huge stimulus plan because inflation is still at a pretty high level,” said Zhang Qi, an analyst in Shanghai at Haitong Securities Co., China’s third-largest brokerage. “Without faster economic growth, the stock market will continue to fall.”

China’s gross domestic product growth will slow to 8.5 percent in 2012, the least in 11 years, according to the Organization for Economic Cooperation and Development. The nation’s money supply expanded 12.7 percent in November, the smallest monthly change in a decade. Government officials are weighing benefits of stimulus against concerns over elevated house prices and local-government debt.

The Shanghai Composite Index (SHCOMP) has plunged 34 percent since 2009, the worst performer among the world’s biggest 15 markets, compared with 1.1 percent loss by MSCI’s global gauge. The value of stocks traded in Shanghai slumped to the weakest level in three years on Dec. 26.

When the Shanghai Composite last traded at such a discount to the MSCI World Index (MXWD)in April 2006, GDP growth of as much as 14 percent helped the stocks gauge more than quadruple in 18 months. A 72 percent rout in stocks spurred by the global financial crisis was reversed in late 2008 by 4 trillion yuan ($633 billion) of stimulus, which drove money supply (CNMS2YOY) up by a monthly average of 26 percent in 2009.