"There are some warnings about credit in China. Don't know if you have read this, but would love to hear your views. Some analysts also point to a
relative overvaluation of the Chinese currency vs USD that could also contribute to a lacklustre performance of the Chinese market in USD terms."

Eoin Treacy's view Thank you for this question and article by Ambrose Evans Pritchard for The Daily Telegraph. Here is a section:

"The credit-driven growth model is clearly falling apart. This could feed into a massive over-capacity problem, and potentially into a Japanese-style deflation," said Charlene Chu, the agency's senior director in Beijing.

"There is no transparency in the shadow banking system, and systemic risk is rising. We have no idea who the borrowers are, who the lenders are, and what the quality of assets is, and this undermines signalling," she told The Daily Telegraph .

While the non-performing loan rate of the banks may look benign at just 1pc, this has become irrelevant as trusts, wealth-management funds, offshore vehicles and other forms of irregular lending make up over half of all new credit. "It means nothing if you can off-load any bad asset you want. A lot of the banking exposure to property is not booked as property," she said.

Property prices in almost all of China's major conurbations rallied in the first half of the year which has deterred the PBOC from easing monetary policy. Concurrently, weak demand growth in China's export markets and the strength of the Renminbi have pressured the domestic economy. Since containing speculation in the property market has been one of the primary aims of tightening, we can anticipate additional measures to temper investor appetite but measures to protect the banking sector are also required.

One of the results of central bank tightening over the last number of years has been growth in the shadow banking sector. It is therefore notable that C hina's version of the TED spread (3-month interbank rate – 3-month government yields) spiked higher in the last few days. This is generally taken as an indicator of increased stress in the banking sector and a clear downward dynamic will be required to temper anxiety.

The FTSE Xinhua A600 Banks Index extended its recent decline and dropped below the 200-day MA this week. A clear upward dynamic and sustained move above 10,000 will now be required to indicate a return to demand dominance.

Valuations in the banking sector remain attractive in nominal terms. For example Bank of China listed in Hong Kong has an estimated P/E of 4.68 and yields 7.19%. However, since there is little visibility on the scale of non-performing loans, investors are not currently willing to take these fundamentals at face value. This suggests that some form of catalyst is required to restore investor confidence and reignite bullish participation.