This remains our most popular topic on China, i.e., the relationship between local equity prices, savings and liquidity in the economy. Thus, here is a reprint of our previous note updated with the latest data, with key points as follows:

China has an unprecedented household savings glut with more than a trillion dollars' worth of extra liquidity flooding into the financial system every year. So far this money has "nowhere to go" and has depressed interest rates and yields to rock-bottom levels. And the authorities have been unsuccessful both in trying to revive the property market and in pushing a bona-fide consumption boom.

The main "viable" channel left is the local A share market. The growth environment is weak and corporate earnings are flat - but then the domestic equity index has never been particularly correlated with growth in China, in part because of the overwhelming role of liquidity in pushing valuations around. With the combination of record-high excess liquidity and moderate multiples in the market today, this is a big potential "powder keg" indeed ... and a big reason why we hold the A share index in our own portfolio.