The renewed slide in the Shanghai Composite Index yesterday has set nerves a-jangle. For China bears, the 20 per cent fall since August 4 – twice as severe as the three corrections in the run-up to the 2007 crash – is evidence that this year's lending splurge is channelling capital in the wrong directions. For bulls, a brief pause this week in the sell-off indicates China's recovery will not be easily derailed.

The problem with both views is that the SCI's gyrations have never borne much relationship to the wider economy. Launched in 1991, Shanghai yawned its way through the Asian financial crisis and the first half of this decade, when China was reporting average GDP growth of 10 per cent. The oft-cited correlation with monetary conditions is tenuous, too. True, turnover seems to track net new lending this year. But between February and June 2007, when daily turnover almost tripled, monthly new loans halved.

Technical indicators suggest the next move in the SCI should be up. And on pure valuation grounds, Shanghai is unstretched. Relative to the equivalent H-shares in Hong Kong, Shanghai's A-shares are now a quarter more expensive. The three-year average premium is about a third.