Numbers Don’t Lie with China Stocks

Chinese stocks have fallen dramatically over the past four weeks, a slow-motion crash that has stoked concern about the Chinese economy and the potential for financial contagion.

Yet a look under the hood of the Chinese rally shows that the move can be explained in the context of two far more basic forces: The time-honored principles of valuation and of gravity.

A comparison of the Shenzhen A Shares Index to the index’s price-to-earnings ratio (the most commonly used measure of valuation) shows that the two charts are one and the same.