Chinese Stocks to Trail World for Fifth Year: Chart of the Day

Chinese stocks may trail global peers for a fifth straight year as higher borrowing costs hurt earnings and a flood of initial public offerings divert funds from existing shares, according to Bank Julius Baer & Co.

The CHART OF THE DAY shows the Shanghai Composite Index’s lowest price-earnings ratio on record versus the MSCI All-Country World Index has failed to lure investors. The Chinese benchmark gauge has underperformed the global measure every year since the start of 2010, the lower panel shows, while the number of new accounts opened to trade shares in the most-populous nation has dropped 94 percent from the 2007 peak.

The Shanghai gauge lost 5 percent this year through yesterday in the worst start since 2002, as Bank of China Ltd. touched a record low and China Life Insurance Co. fell for seven of the past eight days. A cash crunch in the interbank market last month spurred Chinese companies to offer bonds at the highest yields since the 1997 Asian financial crisis, while the securities regulator has approved about 50 IPOs to end a more-than yearlong freeze in first-time sales.

“There are concerns about liquidity, with IPOs restarting,” said Kelvin Wong, an analyst at Julius Baer in Hong Kong. “There’s a lack of interest in big-cap names like banks and insurers. Stocks will still have quite a positive return this year but may underperform global markets.”

The Shanghai Composite traded 39 percent below its level at the end of 2009 on Jan. 10 and was valued at 7.9 times estimated earnings, a record low and about half the 14.3 multiple of the MSCI All-Country World, which jumped 36 percent in the period. Investors liquidated about 52,000 stock accounts in the week to Jan. 3, leaving a record 119 million empty or dormant, according to regulatory data compiled by Bloomberg.

Investors may return to the market if the government provides greater clarity on sweeping reforms announced in November and regulators improve corporate governance, Wong said. The economy probably expanded 7.6 percent in 2013, according to a State Council report, the weakest pace in 14 years.