IT is going to take more than the world’s deepest stock market selloff to turn China into a destination for international bargain hunters.

    Even after a 40 percent tumble in the Shanghai Composite Index over the past 12 months, valuations for China’s domestic A shares are three times as expensive as every other major market worldwide. The median price-to-earnings (P/E) ratio on the nation’s exchanges is 59, higher than that of U.S. technology shares at the height of the dot-com boom in 2000.

    One year after China’s equity bubble peaked, valuations have yet to fall back to earth as government intervention keeps stock prices elevated at a time of shrinking corporate profits. For money managers at Silvercrest Asset Management and Blackfriars Asset Management who predicted last year’s selloff, China’s weak economic growth and fragile investor sentiment mean it’s too early to jump back into the US$6 trillion market.

    “We do not own any A shares,” said Tony Hann, the London-based head of equities at Blackfriars, which oversees about US$270 million. The firm’s Oriental Focus Fund has outperformed 83 percent of peers this year. “The bull case seems to be that I can buy at this P/E because someone else will buy it from me at a higher P/E. The biggest risk is that investor psychology on the mainland changes.”

    There’s plenty for investors to be worried about. After expanding at the weakest pace since 1990 last year, China’s economy shows few signs of recovery. Earnings at Shanghai Composite companies have declined by 13 percent since last June, while corporate defaults are spreading and the yuan is trading near a five-year low.

    The gloomy outlook is a stark contrast to the mood this time last year, said Pan Lizhi, a 54-year-old retiree in China’s Hunan Province.

    Like many of the country’s 106 million individual investors, Pan traded shares almost every day during the bubble, hoping to ride a boom fueled by explosive growth in margin debt. Now, she spends most of her time watching TV. Of the 320,000 yuan (US$48,860) in her brokerage account, all but 6 percent is parked in cash.

    “I don’t foresee a bull market in the coming year,” Pan said.

    Brokerage analysts are more upbeat. They still see gains for Shanghai Composite companies, with share-price targets signaling a 13 percent rally over the next 12 months. Potential catalysts for gains include this month’s MSCI Inc. decision on whether to include mainland shares in its international indexes and the anticipated start of a Hong Kong-Shenzhen exchange link.

    Bulls say the downside for share prices is limited by government intervention. China Securities Finance Corp. (CSF), the agency armed with more than US$480 billion to prop up the market last summer, still owns at least US$77 billion in mainland equities, according to exchange filings. The true scale of government support is almost certainly even bigger, with cash from CSF and other State funds flowing into the market through multiple channels that don’t always show up in public disclosures.

    Not everyone is concerned about China’s valuations. While the market’s median price-to-earnings ratio is an appealing metric to some analysts because it downplays the impact of low-priced bank stocks with big index weightings, others prefer an aggregate measure that gives more influence to the largest companies. On that basis, the Shanghai Composite trades at 16 times reported earnings, cheaper than the S&P 500’s multiple of 19.

    “China’s actually quite attractive,” said Sam Polyak, a Boston-based money manager at Fidelity Management & Research Co., whose US$71 million Fidelity Total Emerging Markets fund invests in A shares through the Shanghai-Hong Kong exchange link. (SD-Agencies)