The best guide to mainland share performance over the past decade has been Beijing's monetary policy settings. Tight policy caps upside, while loose policy lifts prices. That relationship broke down at the tail end of last year and is troubling equity analysts at Bank of America Merrill Lynch as by their measure, Beijing policy settings are their tightest in a decade despite recent interest rate cuts. If the relationship between policy and prices reasserts itself, a collapse in share prices could follow. Meanwhile, a massive increase in corporate debt to about US$12.5 trillion at the end of last year, from US$1.4 trillion in 2000, shows how sensitive companies are to tight policy conditions. Calculated on an enterprise value to earnings before interest, tax, depreciation and amortisation basis, Chinese shares trade at 27 times, compared with 12.2 in the United States, 10.7 in Europe and 8.4 in Japan. Surprise, surprise, Chinese shares are at risk.
