[Asia Economics Special] Downgrading China growth

We believe that in the near term, the single most important shock to the Chinese
economy will be the likely slowdown (or even recession) of the EU and US
economies. China’s domestic issues, including inflation and macro policies, have
become far less important in the coming quarters. In this report, we analyze three
scenarios of EU/US growth outlook and quantify their impact on the Chinese
economy and markets. A key conclusion is that the probability of China GDP
growth slowing to 7% has risen to 15% (up from the previous 5%). As for market
outlook, we remain cautious for the coming months in light of the significant
uncertainty from Europe, but on a 12-month basis, we believe MSCI China will
likely be up from the current level, even if the EU/US enters a brief, mild recession.
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