Price/earnings ratio, Hang Seng China Enterprises Index. Source: Bloomberg

The price-earnings ratio for the Hong Kong Stock Exchange Hang Seng China Enterprises Index (+3% overnight) is at 9%, or half the 18% level of the S&P 500. Chinese stocks historically trade cheaper than developed-market stocks because China is inherently riskier. The US, Europe and Japan worked the leverage out of their systems after the 2008 crash (although dodgy Italian bank loans and state debt remain a concern, along with a few other problems in the European periphery).

China is only now tackling an excessive debt buildup in the corporate sector, with a strong tailwind from surging corporate profits. Equity market analysts surveyed by Bloomberg expect the highest earnings growth in China among any major market, and as risks diminish, the price-earnings multiple for Chinese stocks should continue to rise. Asia Unhedged remains an unabashed China bull.