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.
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