Credit Suisse has published a report that tries to quantify the scale of hidden, or unreported, income in China. The bank sponsored Professor Wang Xiaolu of the China Reform Foundation for this report, his second study of China's grey income and income distribution.

Professor Wang makes some startling and conclusions that if accurate have significant ramifications for how we should view China's economic development, Chinese consumption activity (see Pettis today for his dim view of Chinese consumption; not sure he has seen this report) the possible existence of property bubbles, and the challenges the Chinese government faces in maintaining social stability. If his data is correct, it may also mean that many of the concerns about Chinese government debt are overblown, as the government has much greater potential than expected increase revenue in the future, through optimizing the tax code and tax collection. Professor Wang concludes that:

David Fuller's view I do not know how anyone can accurately measure the size of China's grey economy, although it is bound to exist and I would assume that it is substantial. However if Professor Wang Xiaolu has produced an approximately accurate figure, it is indeed bullish for the Chinese economy.

Investors and pundits worry about all sorts of problems regarding China, not least bubbles. After years of China watching, I am primarily interested in four factors:

1. Monetary policy
2. Supply in the form of IPOs
3. Trend action for China's stock market
4. Valuations

If I allocate up to 10 points for each of these China's maximum bullish, albeit unsustainable rating would be 40, and 0 really would mean Armageddon.

China has tightened monetary policy but mainly via reserve requirements to curb property speculation and interest rates are below inflation. Score: 6

IPOs have been record breaking and a disaster in terms of stock market performance since July 2009. The main cause of this supply has been the government's requirement that China's banks strengthen their balance sheets. There are more IPOs in the pipeline but capital raising has almost certainly peaked and makes less sense at today's valuations. Score: 3

Trend action was bearish but has improved recently. Score: 3

Valuations improved as the stock market weakened because China's economy is still recording strong GDP growth. A yield for the Shanghai Composite Index above 2% has proved to be bullish and anything near 0.5% has been bearish. Today's level of 1.66% is supportive of equity prices. The p/e is probably more important with Chinese equities. It has previously paid to buy when historic earnings below a p/e of 20, as it is today. I have seen reports that estimated p/e is in the 10 to 12 range. Score: 7

Total: 19. I feel that I have rated conservatively but there is inevitably a subjective element to this exercise. Valuations have improved; monetary policy is still favourable and expectations for trend and supply improvements are reasonable. Today, I would much rather buy than sell Chinese equities. I have increased my personal investments in China to an overweight position recently.