Is China Overvalued or Undervalued?


We live in a most peculiar financial landscape, which involves the unsustainable being pretty much accepted as status quo: central banks that have injected record-breaking amounts of liquidity into the financial system in correlation with keeping interest rates either at (pretty much) zero or even negative, asset bubbles which have emerged across the board as a result of this unorthodox environment (from bubbles involving exotic assets such as cryptocurrencies to stock market bubbles, real estate bubbles and so on), populism that has seen staggering victories across continents and the list could go on and on.

Under such circumstances, the average investor is left scratching his head.

Tech stocks which have been considered overvalued as a result of the fact that sustained profits seem all but a pipe dream have oftentimes skyrocketed further, much to the shock of “old school” observers.

Economically unstable and deeply indebted countries which used to be considered beyond saving ended up being able to borrow at rates similar to those the United States was paying.

Cryptocurrencies went from being considered worthless to the other extreme, from someone wanting to sell 10,000 bitcoins for a mere $50 (for the entire “package” of 10,000 bitcoins, not each) and not finding buyers or 10,000 bitcoins being used to buy two pizzas to bitcoin prices in 5-digit territory.

In this economic Twilight Zone, can we even tell what overvalued and/or undervalued is?

Also, where does that leave China?

As a straight-to-the-point answer, we would like to point out (no pun intended) that speaking in absolutes is anything but wise and that analysis needs to be conducted on a timeframe to timeframe basis. For example, a pointless random cryprocurrency might be worth $1 per unit today, $5 tomorrow, $10 two months from now but $0 20 years into the future. Is it undervalued or overvalued?

From a short-term perspective or if you will the perspective of someone who wants to buy that altcoin and quickly sell it, a valid case may very well be made that it’s overvalued today. From a longer-term perspective, things stand quite a bit differently and the lack of fundamentals should make any investor worth his salt question the staying power of the asset in question.

The same principle is valid when it comes to China.

There are, of course, let’s call them China permabulls who believe Chinese assets are always ridiculously undervalued compared to their true potential and that prices should only go up across the board, with any downward movement being nothing more than reckless manipulation aimed at curbing “rational” organic growth.

Despite the fact that our business name is (with and emphasis on “China” of course), we do our best to stay away from permabull territory. As such, no, we do not believe that “all things China” are always undervalued or that prices should only go up. Therefore, from a short-term perspective, a valid argument can be constructed which revolves around the fact that not only is China not “hot” (in the spotlight), it has actually been through a relatively difficult period (for obvious reasons) and reverberations have been felt across most Chinese assets.

To put it differently, scenarios which involve the under-performance trend persisting for a while are not outside the realm of possibility and we could easily get behind them… but that is not necessarily a bad thing.

In our view, we can consider the Chinese equation the exact opposite of the one involving the previously mentioned useless cryptocurrency. While the cryptocurrency in question is “hot” and as such susceptible to being “pumped” on a short-term basis, it lacks fundamentals and ultimately staying power, thereby representing a very risky to the point of unwise long-term bet.

With China, it tends to be the other way around. From trade wars and an under-performing stock market to epidemics, weakness can easily be identified and it is precisely this climate of weakness which makes us believe that yes, short to mid-term buying opportunities at lower prices will most likely present themselves in a wide range of situations.

But again: there is absolutely nothing wrong with that. On the contrary.


Simply because the long-term fundamentals are clearly on China’s side, with there being little in the way of a compelling narrative which revolves around China turning its back on its economic success trajectory. Or, to provide a more let’s call it plastic metaphor, you cannot simply unleash the productive capacity of roughly 1.4 billion individuals and then put it back in the proverbial box. While not impossible, it is quite unlikely.

As such, it is quite difficult for us to envision a longer-term scenario which does NOT involve China becoming the world’s #1 economic superpower in terms of nominal GDP.

Is smooth sailing guaranteed, however?

Just like the road toward economic domination when it comes to the United States was paved with anything from economic calamities to civil war, China will have its share of challenges to face if history is to provide any guidance.

Perhaps it will embrace a new politico-economic model.

Maybe other types of game-changing narrative shifts will occur.

At the end of the day, nobody knows. What we do know however is that the likelihood of China’s long-term fundamentals evaporating just like that are remarkably low.

As such, we believe that any short to mid-term weakness needs to be seen as an excellent buying opportunity, an opportunity to acquire assets with strong long-term fundamental at deeply discounted prices. While not a foolproof recipe for success (there is no such thing), a reasonable portfolio allocation in the direction of China will prove to be a decision you will not regret in our opinion.

Is China overvalued?

When it comes to the short-term dimension, perhaps.

Is China undervalued?

When it comes to the long-term dimension, most definitely.

What you do with this perspective moving forward is, of course, entirely up to you. Should you and/or your organization require assistance when it comes to putting together a game plan, however, we are only a message away.