The world keeps watching Shanghai. Increasingly, investors in western markets grimace at big falls or whoop at sudden gains. Between 2005 and 2007, the correlation between daily movements in the Shanghai Composite Index and the S&P 500 averaged a statistically insignificant 0.22. Over the past two and a half years it has almost doubled, to 0.43.

Enough. Shanghai is a gigantic pool of liquidity: $1,707bn of shares traded in the year to May is more than the London Stock Exchange and Deutsche B?rse put together. Yet the comparisons should end there. Shanghai has the lowest free float among big world benchmarks, at 30 per cent, on Goldman Sachs estimates. If companies cannot be bought, it follows that equity prices do not reflect fair value – merely the number of shares that can be traded, and the amount of money chasing them. Year-on-year growth in the M1 money supply in China has fallen by a quarter, from 39 per cent in January to 30 per cent in May. Not coincidentally, the SCI was off 27 per cent in the first half.

Domestic investors frustrated at the fixed returns on bank deposits and loans have two outlets for speculative capital gains: real estate, on which they pay tax, and shares, on which they do not. (Bonds, which are priced off official loan rates and hardly traded in the secondary market, are a poor substitute.) Making money from equities remains a delicate matter of second-guessing liquidity policy, while getting in on as many initial public offerings as possible. For observers, the temptation may be to join the dots between the sinking benchmark – down yesterday for a seventh day, the longest losing streak in two years – and other indicators like the Baltic Dry, bobbing at a nine-month low. It is one they should resist.