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Stock Strategist

Good News for China Investors

Our take on further liberalization in China's stock market.

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On Aug. 20, China's government announced that Chinese individual investors can now invest in securities listed on the Hong Kong Stock Exchange, triggering immediate market reactions in Chinese stocks. Since the announcement, the Hang Seng China Enterprise Index has shot up by 30%, and the Bank of New York China ADR Index has risen by 19% as of the close of trading on Sept. 4.

This move marked another milestone for China, which had previously banned capital inflows and outflows except for a handful of qualified institutional investors. Individual cash deposits within China total about $2.2 trillion--a sum that's more than double the total capitalization of so-called A shares, which are the stocks available to domestic Chinese investors. The news is especially welcome given how pricey locally traded Chinese stocks have become. The Chinese A-stock market soared to 5,251 after hitting the seventh-straight day of record closes on Sept. 4; with a forward P/E above 40, its valuation seems lofty. Compared with that level, the H-share market--made up of Chinese stocks that trade on the Hong Kong exchange--looks like a real bargain, with an average forward P/E of 18.

Iris Tan does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.