Shares surged again in Hong Kong yesterday. The Hang Seng is now 52.3 per cent up on the start-of-year position and 49.1 per cent up on the lows seen in August. And this morning it passed yet another all-time high. The index is now valued at 19.2 times earnings – that’s the kind of p/e ratio market crashes are made of. But, maybe this time things will be different.

There is one major reason for the surging index. Recently, the Chinese government announced it was relaxing rules on Chinese investors and that some will soon be able to invest in companies listed in Hong Kong.

Now in China, company valuations really are stretched: around three times the p/e ratios seen in Hong Kong, and the reason is this. Chinese savings are massive, while in the US and UK savings rates have been falling, with the savings ratio negative in the US. As for the UK, according to the National Institute of Economic and Social Research, the savings ratio, excluding change in net equity of households and pension funds, has been negative for two quarters in a row. But in China, savings are typically running at about 25 per cent of income.

The question is, what do the Chinese do with their savings? Until recently, the rate of interest was actually lower than inflation, so there was no incentive to put savings in the bank. Since then, interest rates in China have shot up, but so has inflation, so there is still little incentive to save. And so, the Chinese put their money on the stock market. Sure, valuations reached heady levels – now around 50 times earnings, but for a nation that has never been afraid to gamble, these highs are not enough to scare investors off.

Of course shares in China are overpriced. It reminds us a little of dotcoms in the late 1990s. The Internet was a good idea, with lots of growth potential, but markets got ahead of themselves. It’s like that in China now.

But, Hong Kong is a whole lot cheaper than China, and while p/e ratios might be at the level that would normally spark a crash when you consider the economy of China is growing at over 10 per cent a year, suddenly the valuation of Chinese companies listed in Hong Kong doesn’t seem quite so scary.

But here is an oddity. There are now 45 companies listed in both Hong Kong and China. And in China, shares in the same companies listed in Hong Kong are typically 35 per cent more expensive.

But then again, if you cast your eyes further afield, Chinese companies listed in Singapore are even cheaper. And then it becomes a political call. Do you think that, eventually, the Chinese government will let its investors invest in companies listed in Singapore too? If so, then it seems a fair bet this market#133;well you work it out. If you like this article, why not register for our daily newsletter? Or if you already receive the newsletter, then start spreading the news and tell your friends and colleagues. To register visit this link

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