Bad Time To Invest In Mainland China?

Includes: EWT, FXI, PGJ
by: John Bethel

If you can believe news reports, stocks trading in mainland China are really getting overheated. My exposure to the Middle Kingdom is of the indirect kind -- companies like General Motors (NYSE:GM) or 3i Group [III/LN] having some business there --- but it seems as though now is surely not the right time to get in on the Chinese mainland.

Shares traded on mainland Chinese exchanges cost twice as much relative to earnings as they did 18 months ago, and double the average for emerging markets, after extending last year's 121 percent rally in the Shanghai and Shenzhen 300 Index. The surge sent their value above $1 trillion for the first time and prompted the government to caution shareholders that "blind optimism'' is driving gains.

If someone wanted to "get in" on China now -- and I'm NOT saying anyone should, since I'm not -- my humble advice would be to stick to the indirect approach. Something like Templeton's Jeff Everett told Barron's several weeks ago -- to look at banks in Taiwan instead of those trading on the mainland.

Or look at what Templeton's Mark Mobius says in the linked Bloomberg article:

While prospects for rising consumer demand make China attractive, H shares offer a better value than mainland stocks, according to Mark Mobius, who oversees $30 billion in emerging- market equities at Templeton Asset Management Ltd. in Singapore.

"The valuations are beginning to look stretched'' in A shares, Mobius replied in an e-mail to Bloomberg News.

Templeton, which was approved to invest in mainland shares in 2004, hasn't received a final allotment authorization from the government that would allow the firm to start buying and selling shares, according to data compiled by Bloomberg.