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Steer Clear of Overvalued Chinese Shares

By Chris Lowe, Editor-at-Large on June 11, 2015

Chinese investors missed out big time yesterday…

The world’s largest global stock market index provider, MSCI, announced it wouldn’t be including China’s A-listed shares in its emerging market index for now.

The so-called A shares are denominated in the Chinese currency, the yuan. Foreigners can’t own “A” shares because of government restrictions.

Had MSCI decided to include the so-called A shares in its index, hundreds of billions of dollars of foreign capital would have automatically flowed into the Chinese stock market.

Let me explain…

Roughly $1.7 trillion of global assets track the MSCI Emerging Markets Index.

Right now, about 26% of the index (see below for the full breakdown) is allocated to Mainland Chinese “B” shares – those listed in foreign currencies and easily investable for overseas investors – and Hong Kong “H” shares. These are denominated in Hong Kong dollars and easily accessible for foreign investors.

061115-Emerging-Markets-Index-Weightings

An inclusion of “A” shares by MSCI in its emerging markets index would have increased the allocation to Chinese stocks from 26% to 40% – meaning an extra $238 billion pouring into the Chinese market.

MSCI says it will include “A” shares in its index once China has made it easier for foreigners to buy and sell Chinese shares without the current restrictions.

This didn’t faze investors in Chinese stocks. Today, the Shanghai Stock Exchange ended roughly flat for the session.

Is China investable right now?

Not according to the prudent philosophy of The Bill Bonner Letter. Bill again:

We guess about the future. But we invest in the present. At current prices, Chinese stocks are hardly better values than those of the U.S.

Right now, the Shanghai Composite Index – which includes “A” and “B” shares – trades on a price-to-earnings (P/E) ratio of 25. The S&P 500 trades on a P/E of 18.

P.S. Huge cross-border capital flows like this can impact currency markets too. And currency expert Jim Rickards has developed the hugely popular “IMPACT” system to predict and profit from these big swings.

Jim has created a webpage that allows you to learn about this strategy… and test it out. But he’s taking it down at midnighttonight. So, if you’re interested in learning more about how to make big gains on big currency moves, check it out here now. (Don’t worry. This is not one of those long promotional videos.)

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