Method in madness of China stock valuations

By Charlie Zhu - Analysis

SHANGHAI (Reuters) - China has the world's largest commercial bank, its biggest aluminum maker, its No. 2 oil firm and its fourth-largest investment bank. It has five of the world's 10 biggest companies, versus three for the United States.

Never mind that outside their home markets, the companies' business operations are dwarfed in size and sophistication by Western and Japanese giants.

Soaring prices on the Shanghai Stock Exchange have propelled listed Chinese firms' capitalizations -- including shares held by government and institutional investors that have not yet become freely traded -- to the top of global tables.

For some investors, particularly foreigners, that's a sign Chinese share prices are ludicrously high.

But with China's economy on track for its fifth consecutive year of double-digit percentage growth, the market is simply looking farther into the future to value stocks, others say. And that future justifies such prices -- except perhaps for resource stocks.

"The current A-share bull run is very similar to what happened previously in Japan, Korea and Taiwan," when those economies and markets took off in the 1980s and 1990s, says Miao Junwei, CEO of ABN AMRO TEDA Fund Management.

Shanghai's stock market is up five-fold since the start of 2006. It is trading at above 40 times projected earnings for this year, dwarfing the S&P 500's .SPX 16 times. But it is still well below the 70-plus hit by Taipei at its peak in 1990, for example.

While the yuan currency keeps appreciating against the dollar and profit growth remains strong -- and there's no sign of this changing -- many blue-chip prices may continue climbing, and an extended pull-back is unlikely, Miao believes.