Why Taiwan's stock market may be a better bet than China's

Every dog has its day, says Lex in the FT. And so it is with China. After five years in which the market halved in value, in the last two and a half months Shanghai's A market rallied 15%. What's going on?

One answer is "seasonal exuberance: stockmarket rallies are as common as fireworks at new year" (lunar new year was two weeks ago). But some bulls reckon there's more to it. Thanks to the market reforms of 2005, they say, the massive overhang of government-owned shares (which make up two-thirds of the market) can now start to be dismantled, which should increase confidence and liquidity and keep the upward momentum going.

But the bulls are probably wrong. Not only will it take years to sell down the stock overhang, but "plenty of worthless stocks" will remain on the market and many corporate dividend yields look "unsustainable". The dog days, says Lex, aren't over. So if China's own markets aren't worth investing in, how can we get exposure to Chinese growth?

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The obvious answer is via the commodity markets, says MoneyWeek editor Merryn Somerset Webb in The Sunday Times. But there is also another market close by mainland China that "might be worth betting on as a China play": Taiwan.

The Taiwanese market regularly underperforms the rest of Asia. But much of that underperformance is due to political tension with China, which may not last much longer, says Christopher Wood of CLSA. The main opposition party, the KMT, is more China-friendly than Taiwan's current government and is widely expected to win Taiwan's next election in 2008. And that, say CLSA, could mean diffusion of tension and rising business links, something that in turn would make Taiwan where the shares followed by CLSA trade on an average p/e of only 12 times "the world's next big China play". The best way to get exposure to the market is via the recently launched MSCI Taiwan iShare (see www.ishare.co.uk for more information).