World Markets

China bust? Fundamentals don’t support market: Expert

China's bubble trouble?

China's stocks are soaring, thanks to interest rate cuts by the government, but one market pro warned Tuesday that the fundamentals do not support the market right now.

"The fundamentals always win out at the end. What you have in China at the moment are very deep, structural problems that cannot be solved simply by reducing interest rates by 25 basis points," said Simon Male, head of Asian equities at Auerbach Grayson.

China has recently introduced a series of measures, including rate cuts and reduction in the amount of reserves commercial banks are required to hold, in an attempt to ease monetary conditions.

That has helped propel the country's stock market higher. TheShanghai Composite is at a seven-year high, up almost 150 percent in one year.

An investor and the electronic board at a stock exchange hall on May 25, 2015, in Beijing.
ChinaFotoPress | Getty Images

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Male told CNBC's "Closing Bell" that China faces several problems, including weak exports, a bad domestic loan situation, a demographic situation that is ending the country's advantage on cheap labor, and an economy that is badly structured, with domestic consumption that is too low.

"You don't solve those long-term structural problems by simple short-term interest rate cuts," he said. "It might well resolve itself in the long run but the market is telling you that we're going to see those earnings coming through in 12 to 24 months. I don't believe that's going to happen."

A-shares, which are shares of mainland-based companies that trade on Chinese stock exchanges, are trading at about 25 time forward earnings, Male noted. If bank stocks are removed, they are trading at about 40 times forward earnings, he added.

Mike Holland, chairman of the private investment firm Holland & Co., noted that China recently went through a "vicious" bear market where the market went from 60 times earnings to eight times earnings. Now, "it's a long way from being ridiculously overvalued."

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That said, he wouldn't necessarily jump into China's market.

"When something is up 100 percent in 12 months, generally you have to take a step back not forward," Holland said.

However, he thinks because the valuations of the Shanghai, Shenzhen and Hong Kong exchanges are starting to merge, there have been opportunities for the savvy investor.

"You actually have a very fertile area for shorting and going long," said Holland.

He also believes the Chinese government will continue its attempts to stimulate the economy.

"The economy, as we've talked to companies over the last couple years, has been slowing markedly. I think they're doing whatever they can … to move the economy along," he noted. "What we're seeing is a very strong self-interest in getting the economy going because they are worried about employment."

CNBC's Jenny Cosgrove and Silvana Henao contributed to this report.