The China-U.S. Equity Valuation Gap

Abstract

Before 2009, the market average price earnings ratio of Chinese firms is significantly higher than that of the U.S. firms, while after 2009, the valuation gap reverses. Using data from 1995 to 2018, we examine the dynamics and sources of valuation differentials between comparable Chinese and U.S. firms. The sectoral composition of the indices plays a minimal role but growth expectations, financial openness, financial development, and (changes in) the investor base, all contribute substantially to the cross-sector and time-series variation of the valuation differentials. Financial openness and changing growth expectations are the most important contributors.