Chinese stocks don’t look as cheap on a valuation basis as they did in January 2019 before a 60 percentage point gain in the CSI 300 Index. As we explain below, China’s equity market valuation rose as currency risk shrank.

We are a long way from August 2015, when the People’s Bank of China less than adroitly devalued the RMB, settling months of worry about a currency crisis. China’s monetary policy is now in a sweet spot and China’s currency is more stable than it has been in years, with considerable remaining upside.

Unlike the US stock market, where the price/earnings ratio moves in lockstep with Federal Reserve policy, China’s equity market valuation reflects diminished risk and monetary stability. On a valuation basis, China’s market remains the cheapest among the world’s major stock exchanges, and it is supported by strong GDP and profit growth.

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