There are good reasons for Chinese bank earnings to trade at roughly one-third the price of American bank earnings, namely governance, transparency and political risk. As the chart shows, China Construction Bank has traded with at a price-earnings ratio of between 4 and 6, while American banks (in the KBW Bank Index) show a P/E of over 16.
With Chinese governance improving and leverage starting to shrink in China’s over-geared corporate sector, the reasons for Chinese bank earnings to trade cheaply are starting to diminish. There’s no good reason why the major Chinese banks shouldn’t trade at 8 to 10 times earnings over the next couple of years, which implies a price gain of 25% to 60% (not including dividend yields of over 4%).
Chinese banks may not have the gravitation-defying aura of Tencent or Alibaba, but the reasons to buy them are more transparent: Their stocks are cheap and likely to get less cheap over time.