July 17 (Bloomberg) -- China’s stock market may surpass the U.S. as the world’s largest by value in three years as state- owned companies sell new shares and the nation’s 1.4 billion people put more of their money into equities, Mark Mobius said.

“The Chinese population is just dipping its toe into equities and they’ve got a long way to go,” Mobius, who oversees about $25 billion of emerging-market assets as executive chairman of Templeton Asset Management Ltd., said in an interview with Bloomberg Television in London. State-owned companies are “coming up with more huge” initial public offerings, he said.

China’s market is valued at $3.2 trillion, compared with $11.2 trillion in the U.S., according to data compiled by Bloomberg. The Standard & Poor’s 500 Index, a benchmark for U.S. equities, has gained 3.9 percent in 2009, while China’s 4 trillion-yuan ($586 billion) stimulus package lifted the Shanghai Composite Index 75 percent this year.

China last month approved its first IPO since September, ending a nine-month ban by regulators. Guilin Sanjin Pharmaceutical Co. and Zhejiang Wanma Cable Co., the first two Chinese companies to go public this year, surged 64 percent and 139 percent, respectively, since they began trading this month.

Sanjin, China’s largest maker of herbal lozenges, raised 910.8 million yuan in a sale that was 500 times oversubscribed. Wanma, which supplies cable to the nation’s top electricity distributor, raised 575 million yuan after investors applied for 638 times the stock available.

‘Somewhat Overvalued’

While China’s mainland-traded stocks, known as A shares, are “somewhat overvalued,” the market will move higher as earnings climb, he said. China’s gross domestic product will expand 8 percent this year as the stimulus package boosts consumer spending, Mobius said.

“We can expect corrections along the way” for emerging markets, Mobius said. “I would expect a more steady, jagged movement upwards.”

China’s stock market overtaking the U.S. “is possible, but I think people need to understand the difference between the Chinese equity markets and the U.S. equity markets,” said Donald Straszheim, a former Merrill Lynch & Co. chief economist who runs Los Angeles-based Straszheim Global Advisors. State- owned companies “dominate” the Shanghai stock exchange while the U.S. stock market consist of private companies, he said.

U.S. Decline

The U.S. equity market’s value declined 41 percent from a peak of $19.1 trillion in July 2007 as the nation’s worst financial crisis since the Great Depression dragged down financial and consumer shares. New York-based securities firm Lehman Brothers Holdings Inc. and automaker General Motors Corp. both filed for bankruptcy as credit markets froze.

The U.S. economy is now “out of the woods” and doesn’t need another stimulus package, Mobius said. Russian stocks are “very undervalued” and should be a “big holding” for investors as markets recover, the fund manager said.

Stocks and bonds in emerging markets have rallied on speculation the global economy is recovering. Bondholders have recouped their losses from the credit crisis as a rally in debt from Argentina to Ukraine pushed JPMorgan Chase & Co.’s benchmark EMBI+ Index to a record today.

The MSCI Emerging Markets Index of equities in 22 countries has climbed 38 percent this year as commodities that sustain developing economies rose. That compares with a 6.6 percent gain for the MSCI index of developed markets.

Stocks in Russia, the world’s largest energy supplier, trade at less than half the price relative to earnings compared with global peers. The Micex Index is valued at 7.5 times reported earnings, compared with 16.2 for the MSCI EM index.

To contact the reporters on this story: Michael Patterson in London at mpatterson10@bloomberg.net; Francine Lacqua in London at flacqua@bloomberg.net.

Last Updated: July 17, 2009 15:51 EDT