Perhaps the biggest real threat to China this year is one that only the most savvy fund managers mentioned: earnings growth. If inflation rears its ugly head any further, the Chinese authorities might be tempted to interfere with domestic prices (as they did in 2008) even if this is at the expense of the profitability of listed companies.

That is particularly worrying since consensus earnings forecasts for this year are already fairly optimistic. IBES numbers show that analysts forecast 23% growth, on top of 15% last year (Chart 10). Every sector except telecoms is forecast to see robust growth. Some of the strongest earnings growth is forecast for sectors such as energy, materials and utilities (Chart 11) which might be most vulnerable if the government moves to control prices.

As Steven Sun, our China strategist, argued in his report Much to learn from 2004 tightening, 28 January 2010, if HSBC's views are right and monetary tightening this year will be mild, we could be close to an excellent buying opportunity for Chinese stocks again.

He argued that 2004 is a good comparison for the policy normalisation likely to take place this year. In 2004, MSCI China fell by 21% after the authorities first began tightening. But stocks bottomed only one month after the first tightening, rose slowly about 10% over the following few months and then, when inflation peaked after six months, really took off. That could be the pattern this time too. This would suggest that sectors such as banks and, selectively, real estate, which have been most aggressively sold off in the past two to three months, look especially interesting again. We remain overweight China in Asia Pacific (but are only neutral in our global portfolio).

Eoin Treacy's view There remains considerable disagreement between the bulls and bears with regard to how both the Chinese economy and stock market are likely to perform. The degree of credibility lent to both camps by investors and the media is indicative of the stock market's ranging over the last six months. However, when we look at the charts, the bullish camp continues to look dominant

The Shanghai A-Shares Index was one of the early leaders following the Lehman bankruptcy and hit a medium-term peak in August. It has underperformed of late, as other markets continued to post new recovery highs but is now beginning to return to relative strength. The Index has sustained a progression of mostly higher or equal major reaction lows since September and is currently rallying from the psychological 3000. It pushed back above the 200-day moving average last week and a sustained move below 3050 would now be required to question scope for further higher to lateral ranging. The S&P/Citc300 Financials and the FTSE/Xinhua China A600 Banks Index are both performing in line with the wider market.

The Shanghai Property Index has experienced a more pronounced technical deterioration since January, but found support near 4000 from early February and broke upwards from the short-term range following the Spring Festival holiday. A sustained move below 4000 would be required to question scope for further higher to lateral ranging.

The S&P/Citic300 Consumer Discretionary and Consumer Staples sectors remain in consistent uptrends and would need to break the progressions of higher lows to question scope for further upside.

The S&P/Citic300 Healthcare Index deserves special mention because it is the only sector currently testing its highs. It has been consolidating below 4000, which also marked the 2008 high since December but has pushed upwards since the holiday and a sustained move below 3500 would be required to question potential for a successful upside break.

The healthcare sector remains a key potential beneficiary of China's shift of emphasis from infrastructure investment to promoting the domestic consumer economy. Widening health coverage and the social security net are key pillars of this policy. (Also see Comment of the Day on February 12th).