Chinese stock market and evaluation (1994 2005)

Using data of listed Chinese companies and applying fixed effect technique, we report some stylised facts about stock market valuation. Based on the Gordon (1962) present-value model, slow growing and frequently traded firms with fewer A shares have higher market valuations. Uncertainty measured by volatility of daily stock market returns has significant negative effect on stock market valuation. Higher risk perception leads to arbitrage and frequent short-term investment. The present market spread may allocate resources inefficiently and can have devastating effects on the economy. With steady and committed reforms, market might expand, allocate capital efficiently and help finance China's economy.