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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. 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


From → Credit Analysis

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