Calm waters can be shark infested. Earnings at Shanghai’s A-share listed companies rose 12 per cent from a year ago, on average, in the first half. These smooth results compare well with the flat performance in the same period last year. The performance of stocks in Hong Kong’s benchmark index paints a similarly tranquil picture. But do not be fooled: these figures obscure dangerously poor fundamentals.

The quality of earnings growth is deteriorating, especially outside the financial sector. Bank of America points out that in the first six months of this year, non-core earnings contributed more than half of the Rmb65bn in annual gains in pre-tax profits of companies listed in Shanghai. Much of this has come from investment income, as companies take advantage of the squeeze in liquidity in the shadow banking sector. Large groups can use their heft to borrow cheaply from official sources and lend at higher rates to those without the same access. Net debt at non-financial companies is rising.

Moreover, overcapacity, rising labour costs and the strengthening renminbi continues to hurt China’s manufacturers. And this is making it harder for them to collect cash. The days it takes companies to collect cash owed has risen to 35, up by a quarter in two years, according to BofA. Inventories are sitting around for longer, too. Depleting funds is making it harder to invest in capital expenditure – growth of which was flat in the first half from a year earlier, compared with 7 per cent growth over the same period a year ago. (At least this is in sync with excess capacity.)