MSCI China’s trailing PE of 9 is lowest of the major EMs. It is not rated
as a growth market. This is rational. The three inflection points for its
economy and returns are demographic, 2008/9 stimulus and June 2011
peak in the property market bubble.
 Japan’s and Taiwan’s late ’80s bubbles are good analogies. Both
countries had excess savings (large current account surplus), momentum
in equity and property markets plus demographic challenge. Unlike the
Western property bubbles, household leverage was modest. But credit to
GDP was high. Equity markets peaked three to four years prior to
property prices. Equity valuations corrected faster than property prices.
The deflation in property prices was a multiyear event.
 The post bubble period in Japan and Taiwan for equities investors was
challenging, characterized by a self defeating market timing herd. The
track record of H and A-shares is poor. Both Chinese savers and the
government need an equity investment culture.
 All is not lost. The deflation in Chinese equity valuations was rapid.
Even if economic growth slows to 3-6% it will still be higher than EM
average, let alone DM. We believe modest changes in governance,
particularly a progressive dividend policy, can convert a trading market
into a destination for long term savings. The fiscal burden will grow due
to an ageing population, slower growth and the need to subsidize low
return assets. Privatization of SoEs could help this but only if there are
local and international investors willing to buy.
 On pages 7 to 12, we compare monetary, economic and market
characteristics of Japan, Taiwan and China. The time period is 10 years
around the equity market bubble. Property price appreciation in China
was faster. Chinese apartment prices are a third of Japan’s but per capita
GDP was a tenth of Japan’s at the bubble!