Shares in China may be cheap, but they're likely to stay that way until the bad loans clogging up the mainland's financial system are cleared, a fund manager said.
"They've let so much credit pile up and a lot of that credit is now gunking up the system because it's turned into bad debt," said Patrick Chovanec, chief strategist at Silvercrest Asset Management, which advises on $13.9 billion worth of investments for clients. "A lot of credit expansion is going to evergreen bad loans instead of actually generating real growth."
Others are also concerned about bad loans being rolled over. "That sops up so much of the liquidity in that market," said Tony Nash, vice president at consultancy IHS, noting some reports indicate that half of the unconventional loans on the mainland go into rolling over the same unconventional loans.
It's a factor weighing on the mainland's stock markets. By many measures, China shares are trading at bargain valuations at 9.3 times 12-month forward earnings, a more than 22 percent discount to the long-term average, according to data from Nomura.