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The pork shop guide to investing

May 14, 2007 08:56 IST

Market pundits have been shaking their heads over the meteoric rise of Chinese stocks, which broke through the 4,000 point level on the benchmark Shanghai Composite Index for the first time Wednesday.

By standard measures like price-earnings ratios, Chinese markets appear to be at dangerously giddy heights, but many Chinese investors rely on another metric to guide their investment decisions - one based on the price of pork.

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Calculations like PE have proved to be too complicated for Chinese investors, mostly first-time buyers, more than a few as illiterate as the 60-year-old cleaning lady in the city of Chongqing who has recently become a media darling for her success in picking stocks.

PE ratios are also dismissed by many Chinese stock analysts as failing to reflect the unique development of the country's economy and stock markets.

By that metric, the domestic A-shares market looks perilously inflated, trading at a lofty 40 times earnings. (The last time the market collapsed into a long swoon in 2001, the PE ratio stood at 60.)

Instead, many Chinese use a more homely tool - call it the price-to-pork ratio.

The method compares share prices to the retail market price of pork, the most common meat staple in China.

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Pork is currently selling for about 8 yuan ($1.04) per jin, a traditional Chinese weight unit that is equivalent to 1.1 pounds. Any stock cheaper than a jin of pork is considered a decent buy.

By that yardstick, many Chinese stocks look far from expensive.

According to a popular Chinese investment Web site run by Panorama Network, as of Thursday there were 83 stocks cheaper than pork, and as many as 315 stocks close to that level, changing hands at below 10 yuan ($1.30).

That is close to a quarter of all stocks on the Shanghai and Shenzhen exchanges.

Comparing stock prices to pork may not be as crazy as it initially sounds. A key factor behind the great migration of Chinese savings from bank accounts to the stock market in the last year has been the rise in inflation, which has been fuelled in part by a climb in food prices.

Retail prices for pork have almost doubled in the last 12 months to an all-time high, and May is normally considered a slow season for pork.

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With inflation running at 3.3 per cent and savings accounts paying 2.79 per cent in interest, Chinese are effectively losing money on their bank deposits, the main form of investment in a country where the financial markets are in a fledgling state.

Hence, money has continued to pour into stocks, fueling an extraordinary rally that has seen the Shanghai benchmark index soar 50 per cent so far this year despite repeated official warnings, including recent comments by central bank governor Zhou Xiaochuan that he was concerned that there was a bubble.

In a country with a population of 1.3 billion, the number of stock trading accounts is nearing the 100 million mark. As of Wednesday, there were close to 93.9 million accounts, though as many as 20 per cent could be dormant.

Wednesday's rise was particularly spectacularly.

The Shanghai Composite Index reached 4,013.09 points, even as the Shenzhen Stock Exchange warned board directors and management at listed companies not to buy into their own shares.

The Shanghai Composite Index closed the morning session Thursday up 30.98 points at 4,044.06.

Many Chinese investors believe it could double in short order to 8,000 points.

Shu-Ching Jean Chen, Forbes