Cheap Equities: U.S.-Listed Chinese Stocks as Buying Opportunity

NEW YORK (The Street) --- Chinese stocks listed on U.S. exchanges present an inviting scenario: they currently trade at a 42% discount to the S&P 500 at a time when most observers say the world's second-largest economy is no longer in danger of an abrupt slowdown in growth.

The People's Bank of China this week demonstrated its willingness to smooth any bumps as the country undergoes a massive structural transition to an economy driven by consumers rather than exports. As interbank borrowing costs surged, the PoB offered 180 billion yuan ($29.8) in short-term loans to ease pressure.

In response, the Shanghai Composite jumped by 2.16% on Wednesday, its largest one-day gain in more than two months. Despite the attractiveness of the number, many investors steer clear of the Shanghai market, citing a lack of transparency and volatility. Shanghai lost 11% last year as China adjusted to a lower growth model while other equity markets surged, the US and Japan foremost among them.

Instead, fund managers cite the Hang Seng or other exchanges with Chinese stocks as a better way to access the China growth story.

The chart above shows a massive reversal in the valuation of Chinese stocks listed in New York over the past year. Last January, they traded at a 37% premium to the S&P/500 as US markets fretted over the debt ceiling and concerns around European stability lingered. Fast-forward 12 months and the S&P/500 trades at a 58% premium to listed Chinese stocks after notching a 26% return in 2013 amid growing confidence in the domestic economic recovery.

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