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The (U.S.) China Stocks Party Goes On

Looking at the moderate drop in U.S.-traded Chinese stocks, you could be forgiven for thinking that investors haven't quite grasped the reality of the country's slowdown.

The 65-member Bloomberg China-US Equity index, which is strongly weighted toward Internet companies, has fallen 10 percent in the six months through May 20. That compares with a 26 percent slump in the ChiNext index of emerging and technology companies traded in Shenzhen.

The decline has pushed Chinese stocks in the U.S. to an average of 28 times this year's estimated earnings, from almost 42 times at the peak of the country's stock boom in early June. By comparison, the ChiNext's valuation topped out at more than 80 times and has since slumped by more than half to 33 times.

In theory, high P/E ratios reflect the prospect of superior growth. Investors bet that revenue and earnings at these smaller companies will increase at a rate that will eventually justify their valuations.

That assumption is being tested. For one thing, the names that dominate U.S. listings are no longer small: Alibaba, the biggest, has a market cap of $194 billion. The largest company on the...