The Chinese stock market has recently been on a tear. As a result, its valuation has become stretched, leaving it vulnerable to a severe correction at some point down the road. Admittedly, at roughly 22, the price/12m trailing earnings ratio of the Shanghai Composite is still less than half its cyclical peak of around 49 in October 2007. And the ratio also remains lower than the high of about 29 that it reached in August 2009 after the index rebounded from its post-crisis slump. However, the run-up in the price/12m trailing earnings ratio through late-2007 took place against the backdrop of much more rapid economic growth in China (and elsewhere in the emerging world) than we are seeing today. And growth in China at least was still stronger in 2009 that it is now.
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