111. Investing in China

China Historical GDP Growth

Historical GDP of China in billions of national currency. The GDP in local current prices has grown at the annual rate of 11.58% over the past 8 years. This growth rate includes the effect of price inflation and it is NOT the real GDP growth rate. Current Annual GDP: $12,987 billion US dollars or 81,892 in billions of national currency.

Historical Stock Market Cap

Historical total market of China in billions of national currency. This value is normalized using the data published by WorldBank.  Shanghai Composite Index is used for the normalization. It is an index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange. 

Historical Ratio of China Total Market Cap over GDP (%)

The Ratio of Total Market Cap to US GDP:

The above comparison makes clear that the US stock market is overpriced over China  stock market by a factor of 3.

Predicted and Actual Returns

From the equation presented on the U.S. market valuation page, 

Investment Return (%) = Dividend Yield (%) + Business Growth (%) + (Re/Rb)(1/T)-1

We can compute the predicted and actual returns of the China stock market over a given time period, T. In the calculation, we set T to equal eight years, the approximate length of a full economic cycle. The calculated results are presented in the chart below. The green line indicates the expected, or predicted return if the market ratio trends near the average ratio of 148% over the next eight years.

The stock market of China is expected to return 28.5% a year for the coming years. This is from the contribution of economic growth in local current prices: 11.58%, Dividend Yield: 1.55% and valuation reverse to the mean 15.42%. 

This analysis shows clearly that investments in the USA will be negative, while investments in China are significantly positive.  For example:

The rapidly rising stock price of Alibaba illustrates the rise of lead-edge stocks in China.