BCA CHINA INVESTMENT STRATEGY

HIGHLIGHTS

The Chinese economy’s cyclical recovery remains intact, and financial markets do
not appear to have fully discounted the improving growth outlook. Stay long stocks.

Searching for new sources of growth will be the Chinese authorities’ main focus in
the coming years, and identifying a new set of winners will most likely become the
next big investment theme.

Increasing investments in inland provinces, long-term priority of infrastructure
construction, increasing technology innovation and the Chinese authorities’ consumption- boosting strategy will likely provide exciting opportunities for investors.



SEARCHING FOR NEW SOURCES OF GROWTH
Greater China equities continue to consolidate following the trend-setting American bourses. Renewed weakness in financial markets will likely cast a shadow over investors’ fragile confidence, and doubts over China’s ongoing growth recovery will probably mushroom in the coming weeks. However, amid heightened financial market volatility, we are leaning against being overly pessimistic. In our view, the Chinese economy’s cyclical recovery remains intact, and financial markets do not appear to have fully discounted the improving growth outlook, as discussed in detail in our previous Bulletins.1 Stock prices should continue their uptrend once the nearterm volatility passes.

A more important issue is the Chinese economy’s structural growth outlook, the visibility of which remains unclear at the moment. The global financial crisis proved that China’s previous export-driven growth model has likely outlived its usefulness, but it is uncertain whether China will be able to find a new growth model that will take the economy back to the double-digit growth rates it experienced in the recent past. What is certain is that searching for new sources of growth will be the Chinese authorities’ main focus in the coming years, and identifying a new set of winners will most likely become the next big investment theme.

“Muddle Through” And Investment Strategy
Overall, we continue to maintain our “muddle through” forecast for the Chinese economy: growth has made its lows in the past two quarters, but it is unrealistic to expect a quick return to “business as usual”. The basic features of the growth recovery that have been unfolding since late last year have not changed: First, strong domestic demand – mainly spurred by government policies – continues to offset weak external demand. Bank lending remains strong, capital spending continues to accelerate and the consumer sector remains resilient. The property market has also shown signs of recovery, which in turn will likely encourage spending in the real estate sector and add fuel to the ongoing capital spending boom. The export sector remains the weakest link in the economy, but barring further major external shocks it will become less of a drag on growth in the coming months.