China's GDP growth does not translate into Chinese share performance as China's state-dominated and investment-led GDP growth policy continues squeezing the Chinese corporate sector's profitability, causing a decoupling in share price performance relative to China's GDP growth. This trend is exacerbated by declining manufacturing activity (see here and here) and poor corporate audit standards, which belie the 'China growth story' and conspire to create a classic value trap for investors in Chinese equities.

U.S. and European Indices
Have Consistently Outperformed the Shanghai Composite

Despite the enduring European Union fiscal crisis, China's Shanghai Composite consistently underperforms both the U.S. and European markets as China's political economy, with its emphasis on non-economic investment-led growth, continues to marginalize the profitability of exchange-listed companies, rendering the country's stock markets unappealing to foreign investors. The government's investment policies act to constrain private equity investment since the domestic stock market fails to deliver an

A recent article appearing in Risk Review Magazine entitled, “Reassessing China’s Sovereign Risk” (see link below), reveals that the economic story coming out of China may be too good to be true.

China's state banks approved a combined 4.58 trillion yuan in new loans during the first quarter of 2009, a remarkable cash surge equal to the total amount of bank lending for all 2008. Chinese state-owned banks Industrial & Commercial Bank of China Ltd., China Construction Bank Corp. and Bank of China Ltd. tripled first-quarter lending to $670 billion as part of a government stimulus package.

ICBC advanced 636.4 billion yuan ($93.3 billion) of new loans in the first quarter, almost quadruple the amount extended in the same period a year ago and more than the bank’s total lending last year. China Construction offered 521 billion yuan of new credit in the first three months, compared with 161

Certain recent developments in conjunction with prevailing global economic trends appear sufficiently serious to warrant a current economic assessment of the People’s Republic of China [PRC] and a review of China’s sovereign credit risk.

U.S. ECONOMIC TRENDS

The U.S. economy is experiencing a significant contraction as U.S. consumer spending continues to decline. Housing prices have plummeted as the rate of both residential and commercial mortgage delinquencies continues to increase. At the end of the first quarter of this year, nearly nine million borrowers held mortgages exceeding the value of their homes, and this number is expected to increase significantly. The U.S. economy shed 80,000 jobs in March according to the U.S. Department of Labor, the largest loss in five years. Average U.S. household debt is 85% higher than in 2001, and continues to increase as consumers take on greater levels of debt in response to rising commodity prices, particularly