Source: Bloomberg

Financials continued to lead gains in the Hang Seng China Enterprises Index, with securities firms in front. Citic Securities rose 8%, China Galaxy Securities rose 6%, Haitong Securities rose 4.4%, and Huatai Securities rose 3.15%, in the top four places for daily returns.

The overnight rise in H-shares brings the year-to-date gain to 9.9%. In valuation terms, though, H-shares do not look expensive. The trailing price-earnings ratio has risen from 6 at the 2016 trough to 10, but the forward-looking P/E (based on Bloomberg’s survey of analysts’ earnings forecasts) is still at 8.45, less than half of the forward P/E of the S&P 500.

China’s market, to be sure, is riskier than America’s and should trade cheaper: It is still dominated by retail investors with hair-trigger responses, and suffers from concerns about governance and excessive debt levels. The question always is, how much cheaper should China trade? Again, the fact that this year’s rally is concentrated in financials shows that global investors have increasing confidence in China’s monetary management and China’s growth prospects.

At the 2015 peak, HSCEI traded at a multiple of 11. That implies a price level for HSCEI 40% higher than at present. The inclusion of Chinese shares in the MSCI indices this year also gives overseas institutional investors more reason to buy Chinese stocks. Conclusion: Buy the HSCEI, especially financial and consumer stocks.