Profits rose on average by 71 per cent in the first six months of the year for the more than two-thirds of listed Chinese companies that have already published results. But operational profit growth was only about 35 per cent, according to Jerry Lou, equity strategist at Morgan Stanley.
So up to half of the heralded earnings growth of companies listed in Shanghai and Shenzhen may have originated from piling into the country’s red hot stock market. Almost a third of those companies’ income in the first half was non-operational, up from 13 per cent in 2006, and much higher than most developed markets where non-core income usually accounts for less than 10 per cent of total profits
Chinese and Indian stock markets are going to be great opportunities for a long time, but they will also have far greater volatility than we in the developed markets typically experience.