I thought this was an interesting blip from the Economist that tries to understand if China’s share prices are already overvalued. CR Capital has been more aggressive in picking up shares in Brazil than China lately largely because valuations are higher but that does not mean that Chinese shares are indeed overvalued. Pessimists think a correction in China is coming and here is why.

The massive rally in the Chinese stockmarket has raised questions over whether equities are already in bubble territory. Price-earnings ratios can be subject to distortion, especially at turning points in the cycle. Another approach is to look at the ratio of prices to asset value, or price-to-book. Despite having risen this year, this measure has yet to reach its 2007 peak. Paying a premium to book value (the current ratio is around 2.6) can be justified if companies are earning high returns on equity. Dylan Grice, a strategist at Société Générale, says that assuming a 10% hurdle rate, the current 17% return on equity warrants a price-to-book ratio of 1.7. This leaves equities, if not in bubble territory, more than fully priced.

It's a legitimate concern

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