Figure 5 shows the capex/GDP ratio for China and subsequent profit margins for the listed corporate sector (300 companies in the database in 2011). There is a clear inverse relationship, as supported by Figure 6. High capex/GDP normally leads EBIT margins for the listed sector by about four years. Since we already know what capex/GDP was, we should be able to make a guess at what that implies for EBIT margins 2-3 years from now. The projected EBIT margin for 2014 falls to 7.4% from 10.5% last year, using the regression equation in Figure 6. While no single factor determines margins, we think prior capex/GDP (or capex/sales) does a decent job. In China, we have also found that the real effective exchange rate leads the EBIT margin in China by about two years (see Figures 7 and 8). A competitive currency increases global demand for Chinese products and lifts margins with a lag, and vice versa. Given the prior strength of the Renminbi, the currency channel also argues for a projected decline in EBIT margins for the corporate sector in the coming two years, supporting the separate verdict from rising prior capex/GDP. Figures 9 and Figure 10 compare China's EBIT margins and assets turns with global levels – while China's current numbers have converged with those globally, on our projections, China's margins could fall to 7.4% and asset turns to 56% in the coming 2-3 years. (For sector details and global comparisons, see Appendix B.)

Eoin Treacy's view The above considerations have certainly weighed on the Chinese stock market over the last year. Slowing infrastructure development, reduced demand for exports, persistently high inflation and the attempted reining in of property speculation are among other issues that tempered investor appetite for equities.

The weakness of the stock market is not passing unremarked in Beijing. Lowering of transaction taxes, allowing the banking sector greater leeway in setting both interest and deposit rates, allowing the currency to weaken modestly and attempting to promote the consumer sector are all aimed at reinvigorating the domestic economy.

The Shanghai A-Share Index is currently trading at a P/E of 10.89 and a dividend yield of 2.73%. These both represent historic extremes from which impressive rallies have previously been initiated. However an additional ingredient which has so far been absent is considerable government support for the market. So far efforts to spark investor interest have been more tentative than overt. A clear commitment of support in the form of monetary easing or stimulative measures could act as a catalyst for demand dominance.

The Index has paused in the region of 2200 over the last week as its retests the late July low. A clear upward dynamic will be required to signal demand is returning to dominance while a sustained move above 2300 is needed to break the three-month progression of lower rally highs. A move above 2600 will be required to break the three-year downtrend.