To get a sense of how big China’s current stock market bubble is, I have gathered some facts reported by Bloomberg:

• The Industrial & Commercial Bank of China (ICBC) has a $285.2 billion market value that trails only Exxon Mobil and General Electric. That’s much bigger than Citigroup’s $233.8 billion market cap, despite ICBC’s 2006 earnings of $6.5 billion equal to less than a third of Citigroup’s.
• The CSI 300 Index trades at a PE ratio of 50 compared to the S&P 500’s 17.
• One estimate accounts trading by individual investors for 60% of market volume. In the US, individuals account for only 5% of total trading.
• The CSI 300 has risen 14% since July 23, the day before the credit markets sparked a sell off in global equities. The S&P 500 is down 7% since then.

It is clear that the Chinese stock market is an enormous individual investor driven bubble that makes US stocks looks dirt cheap in comparison. A trade I wish I could make would be to short the CSI 300 and go long the S&P 500. However, this is not possible since the CSI 300 contains yuan-denominated A-shares of companies listed in the Shanghai and Shenzhen exchanges which can’t be traded by foreigners.

One could instead trade the same companies listed in Hong Kong and Singapore, but according to Bloomberg calculations on June 11th, the A-shares are priced at a 54% and 65% discount on the Hong Kong and Singapore exchanges, respectively. This makes the valuation on Chinese shares much less expensive and the trade unattractive.

So while it is obvious that the mainland share prices will eventually crash, it is less obvious how to profit from it. Currently, the only action I can take is to sit back and watch it unfold.