David Fuller's view This item follows on from my review of Asian leaders in yesterday's Comment of the Day.

My contention remains that China's stock market underperformance since August 2009 has been mainly due to supply from the release of previously non tradable shares by the Chinese government. This supply was approximately twice as large as all the new equity floated on Wall Street last year. Consequently, I maintain that it was a much bigger headwind for Chinese equities than the property bubble and increases in bank reserve requirements.

China's issuance of previously non tradable shares has declined considerably since last November, suggesting that the government has achieved its objective and will not try to prevent renewed strength in equities. This makes sense because valuations are historically attractive, as you can see from this overlay chart of the Shanghai A-Share Index (white line) and its historic PER (red line).

On the two previous occasions when China's historic PER was at today's levels, shares did well although the 2009 rally was choked off by the supply mentioned above. Bloomberg's PER data does not extend as far back as the early 1990s, but the chances are that the historic PER was in the 15 to 18 range back then. Since China's economy has continued to grow at a rapid rate, estimated at between 7 and 9 percent for 2011, the forward PER for Shanghai A-Shares is probably around 15.

Will it be déjà vu all over again for China's stock market, in terms of a catch-up rally similar to what we saw in 2006? Probably, although I will add the same caveat applying to most other stock markets - provided commodities and crude oil (Brent & WTI) in particular do not spike again.

This remains my biggest concern. However even in this event it would probably only consign China's main share indices to additional ranging before these pattern fulfil their medium to longer-term upside potential. Have a look at these weekly and daily charts for the Shanghai A-Shares (weekly & daily), Shanghai Composite Index (weekly & daily), Hang Seng China Enterprise (H-Shares) (weekly & daily) and Hong Kong Hang Seng (weekly & daily).

Most of us who are not citizens of China invest in the country via the H-Shares and the Hang Seng. Sustained breaks above previous resistance near 14,000 and 25,000, respectively, would open the door for at least tests of the former highs. Closes beneath the March reaction lows shown on the daily charts above would be required to delay significantly this potential.