After the roller-coaster ride of recent years, China’s capital markets are showing signs of possible overheating again although the country is unlikely to slam on the monetary brakes before industrial and consumer sectors have shown a clear recovery, according toMerrill Lynch Global Wealth Management.

The MSCI China index of the country’s equities has logged total returns of almost 56 per cent since January this year, based on reinvested dividends, data shows.

“After an extraordinary comeback since last November, there are now some clouds on the horizon, including talk of threats of a policy response to the explosion of credit in China, and concerns that commodity prices may fail to rise in the second half of the year,” Bill O’Neill, portfolio strategist at Merrill, said in a briefing note.

“At the same time, though, markets within the group that have shown surprising resilience are now on a full valuation against their developed market counterparts. India and China equities are on a price-to-book ratio of 2.5 times, in contrast to Russia, which is on less than one,” he said.

He said that investors should regard China as a strategic holding in equity portfolios, in the same way Japan was viewed in the 1980s.

“Beyond China, we see a number of themes at work: rebalancing domestic demand to offset a loss of export growth in Russia and India, the threat of high inflation in India and resilience in the Brazilian banking system,” Mr O’Neill said.