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China Company Earnings Revisited

September 26, 2012

Many, many moons ago we had written a detailed piece  Credit Entropy and the China Credit Syndrome.

https://crediteye.wordpress.com/2011/05/11/credit-entropy-and-the-china-credit-syndrome/) which talked about the ultra poor returns on capital employed for Chinese companies.  This, we said, would lead to high NPAs for Chinese banks.

The poor returns are no longer a matter of opinion.  The Shanghai Index is probably the only major stock index that is down this year.  Over the last 5 years, the returns have been -66%, while over the last 3 years, they have been -27%.  This year, though Spain is in the throes of a deep recession, the Spanish index, at -5%, has outperformed the Shanghai Index.

There is a real threat that China will go the Soviet way- it just is not possible for a society to badly misallocate capital for an extended period of time and yet survive.

PS: Quick Quiz Question: True or False-   The Athens stock market outperformed Shanghai in 2012.

Answer: True.  If you got it right, don’t hesitate to pat yourself in the back

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From → Credit Analysis

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