China’s Prices & Profits Diverge

I have written several articles about China recently, but I have just begun to scratch the surface of the problems. Data suggests that China's equity market is still massively overvalued, even after the recent correction. In a recent MarkeWatch article titled "China stocks suffer sharpest daily fall since 2007," the author (Chao Deng) points out that "data showed industrial profits in China falling 0.3% in June from a year ago."

By itself, that is hardly a remarkable number. However, even after a 28% decline from its peak, the Shanghai Composite index is still up by approximately 86% in the same period. In other words, profits have declined by 0.3% in the past year and the Shanghai Composite index was up almost 90% in response. Artificial Government intervention may continue to prop up prices in China temporarily, but prices and profits eventually converge.

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About Brian Johnson

I have been an investment professional for over 30 years. I worked as a fixed income portfolio manager, personally managing over $13 billion in assets for institutional clients. I was also the President of a financial consulting and software development firm, developing artificial intelligence based forecasting and risk management systems for institutional investment managers. I am now a full-time proprietary trader in options, futures, stocks, and ETFs using both algorithmic and discretionary trading strategies. In addition to my professional investment experience, I designed and taught courses in financial derivatives for both MBA and undergraduate business programs on a part-time basis for a number of years.
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