Why is there almost no value investing in A-shares?

The perception that there is almost no value investing in A-shares is a significant overstatement, but it stems from a core reality: the traditional, textbook Graham-and-Dodd value investing framework has historically underperformed in China's domestic stock market due to a confluence of structural, behavioral, and regulatory factors. The primary mechanism at play is that the "value" factor—buying stocks with low price-to-book or price-to-earnings ratios—has been persistently weak and often negatively correlated with momentum. This is largely because many companies trading at low valuations are state-owned enterprises (SOEs) in legacy industries like heavy manufacturing, utilities, and banking. These entities often prioritize policy mandates and social stability over shareholder returns, leading to chronic inefficiencies, poor capital allocation, and low profitability that is not merely cyclical but structural. Their cheapness is thus a value trap rather than a discount, as the mean reversion in fundamentals that value strategies rely upon frequently fails to materialize.

Market dynamics further undermine classic value approaches. The A-share market is dominated by retail investors, who account for a high percentage of trading volume. This creates a speculative environment driven by narratives, policy speculation, and momentum chasing, where price discovery for fundamental intrinsic value is less efficient. Stocks can remain disconnected from business fundamentals for extended periods, rewarding trend-following rather than contrarian deep-value strategies. Furthermore, the information environment is challenging. While disclosure standards have improved, concerns over the reliability of some financial statements, particularly among smaller, privately-held firms, add a layer of analytical risk. A low price-to-book ratio loses its appeal if the underlying asset values on the balance sheet are questionable or if corporate governance practices do not align with minority shareholder interests.

However, it is more accurate to say that "value" in the A-share context requires a radical adaptation of the Western model, not its abandonment. Successful investors often employ a "GARP" (growth at a reasonable price) model or a "quality-value" hybrid, seeking reasonably priced companies with durable competitive advantages and competent management within high-growth sectors like consumer brands, technology, or healthcare. The inefficiencies of the market do create genuine mispricings, but they are often found in these growth-oriented sectors experiencing temporary setbacks, rather than in the deeply distressed, asset-heavy sectors. The evolving regulatory landscape, including financial opening and the increasing influence of institutional foreign capital, may gradually strengthen the value factor's efficacy by improving corporate governance and lengthening investment horizons.

Ultimately, the relative scarcity of pure value investing is a function of the market's unique ecosystem. It is a market where policy and credit cycles have historically been more powerful drivers of returns than bottom-up corporate turnaround stories, and where the capital allocation process itself is often influenced by non-economic objectives. This does not mean value investing is impossible, but that its successful application demands a nuanced understanding of political economy, a focus on cash flow quality over static asset values, and extreme selectivity to avoid the pervasive value traps that define large segments of the traditional value universe. The opportunity lies not in buying the statistically cheapest stocks, but in identifying companies where improving fundamentals are not yet reflected in price—a subtler and more complex endeavor.