Chinese equities weakened in March, with MSCI China down 6%, as
sentiment softened on renewed concerns over a hard-landing, heightened
political uncertainty and accounting irregularities in the results season.
We think this correction is a precursor to a second leg up. While
mutual funds and retail investors are not yet fully invested in Greater
China equities, improving risk appetite globally suggests more equity
funds may increase their allocations to China on the first signs of growth
stabilizing. Such a rally would be fuelled by hedge funds, which are
currently leaning heavily short (short ratio at over 12% at end-March).
Our China economists are sticking to a forecast of 8.6% GDP growth,
and expect growth to flatten in 2Q then improve as the PBoC begins to
ease more decisively to support the economy. Assuming RMB8trn new
lending in 2012 and a 30% allocation in 1Q and 2Q, we may have a
monthly average of RMB840bn in lending going forward (up 25% y-o-y).
Most importantly, we think the earnings revision cycle is about to
reverse, after seven consecutive months of downgrades. From a top-down



Watch that consensusEntering 2012, we are facing economic uncertainty on the grandest of scales. A year ago, policymakersand forecasters were cautiously optimistic that the worst was over. That view was clearly wrong. Evenbefore the eurozone crisis came to the boil, the pace of global growth was fading. Both the US and theUK had underperformed. Concerns over excessive emerging market inflation were replaced with worriesabout too little growth, particularly in China.The dominant issue, however, was – and still is – the eurozone. We argued in How to solve the euro’sproblems (Stephen King and Janet Henry, 20 September 2011) that a break-up could trigger another greatdepression. There can be no doubt that policymakers now recognise this risk. That is good news. However,despite signs of greater urgency to deal with the problem, investors remain mostly unconvinced.This loss of faith is reminiscent of the collapse in confidence in 2008, when the wheels came off theglobal economy. Back then, forecasters completely failed to grasp the gravity of the situation. The samemay be true today. Our own forecasts have already come down a long way – we’re now projecting a full-