For value-focused real money investors who do not have a mandate to structure positions through derivatives (or view options in a similar light to WMDs), the first point to make is that the overall market in China, and financial sector in particular, has been de-rating for some time but is not yet cheap in our view (Figure 15 and 16). China was trading at fully-fledged bubble multiples in 2007 (financials were approaching 6x book value) and have been working off the excess for the better part of four years. In Minsky parlance, we are yet to reach the revulsion phase of the cycle which typically marks the bottom. For all the issues discussed earlier, we continue to think there are firm grounds for this sector to cheapen further (both in an absolute and relative sense). Relative to the late-2007 peak, China financials have derated from 5.7x to 1.8x book and from 35x to 10x trailing earnings (Figure 16). However the post-financial crisis experience in a number of regions (Japan twenty years ago, and more recently the US and Europe) cautions that book value tends to impart a gravitational pull on stock prices in the aftermath of a bubble. For instance, financials in both Japan and Europe currently trade 0.8x book, and 1x in the case of the US and UK - less than half the levels of five years ago in each case. This is also consistent with the more general empirical behaviour of equities to overshoot on the downside following a bubble, before chopping sideways at historically depressed multiples for a considerable period of time as restructuring takes place. Against this backdrop, we would not be surprised to see investors apply similar multiples on the book value of China's financials. For the past eighteen months, the book multiple on Shanghai and Hong Kong listed property stocks has also been tracking sideways at 2x and 1.3x respectively (Figure 17). We think the investment community is justified in demanding a significant risk premium from this sector as well as the banks, and we should also note that short interest in related property and bank stocks has fallen back down to low levels in recent times. For the asset allocation community, we stick to our long-held view that underweighting/shorting China's banks relative to the heavily cashed up, modestly valued, strongly branded and globally focused non-financial large caps in the US and Japan, retains considerable appeal.

Eoin Treacy's view The chart on page 10 comparing the price falls in Tier I city property prices with advances in Tier II and Tier III cities and those on pages 22&23 showing China's consumption of industrial commodities as a percentage of global demand are well worth a look.

China remains a polarising subject with some predicting its imminent demise counterbalanced by those who see the emergence of the next global superpower. Economic reforms instituted more than 30 years ago have resulted in a dramatic transformation. I agree with Brad Jones that the likelihood of China avoiding a deep recession indefinitely is remote. The more important question is when such an event might occur.

The fact that the Chinese government's tightening measures have succeeded in curtailing Tier I city property price increases but not yet those of other cities suggests that policy makers are going to have a tricky time ahead. Soft landings for property markets are rare and China's banks are already pressured following the extension of a record amount of credit following the 2008 credit crisis. Reserve ratios in excess of 20% should help to cushion the fallout from any correction in property markets but this is still an unknown. With continued monetary tightening and stubbornly persistent inflation the risk attached to the wider property market has increased.

The Shanghai Property Index rallied impressively from the 2008 low but has halved since its late 2009 peak and remains largely rangebound above 3000. A sustained move above 4000 would be required to indicate a return to medium-term demand dominance. The FTSE Xinhua A600 Banks Index has had less extreme moves but has a broadly similar pattern.

Sectors offering exposure to the growth of personal consumption on the Chinese mainland are performing considerably better. For example the S&P/Citic 300 Consumer Staples Index remains in a relatively consistent medium-term uptrend. Broadly speaking the wider market Shanghai A-Share Index is not expensive with an historic P/E of 15.76. This has been a valuation at which investor interest has been stoked in the past.

The Hang Seng Property Index has been ranging around 3000 for nearly 2 years. The Hang Seng Financials Index has also been largely rangebound but has exhibited a downward bias over the last 7 months. A sustained move above 3600 is required to indicate a return to demand dominance.

China accounts for more than 70% of global iron-ore demand as well as more than 60% for copper and aluminium annually. As a result companies such as BHP Billiton and Rio Tinto could potentially be considered bellwethers for the Chinese economy. BHP Billiton has been ranging mostly above the 2008 and 2010 peaks since early this year and has completed a reversion towards the 200-day MA. It needs to sustain a move above 2500p to confirm the return of demand dominance in this area. Rio Tinto has been consolidating mostly above 4000p for the last year. It is currently mid range and a sustained move below 4000p would be required to question medium-term upside potential.