The Shanghai Composite index has risen 17% since early December. Even so, a trailing price/earnings ratio under 13 and the backdrop of a strengthening economy suggest that prices could rise much further. The large number of potential investors still on the sidelines provides another reason to be optimistic. But reasons for caution abound. Strong GDP growth in China has not translated into reliable stock market returns in the past. The market is dominated by state-controlled firms, which often function more like arms of the government than profit-seeking institutions. And while economic momentum is healthy for now, with a government concerned about excess investment, GDP growth is more likely to underperform expectations over the next couple of years than beat them.
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