J.P. Morgan:China Strategy——Correction: a buying opportunity for year 2008  11月25日

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• While we voiced caution in October, we believe the correction in
November has created good entry levels for investors to buy
MSCI China for 2008. Despite US growth risks, the risk to China’s
growth remains on the upside for 2008 in our view. We agree with
the PBoC governor’s stance that a US slowdown would have little
impact on China. An external slowdown would reduce the risk of
more aggressive macro control policies, and create a healthier
environment for China to adjust for a more sustainable and domesticdemand-
driven growth. We believe there is abundant fiscal and
monetary policy cushion for China to fend off a US slowdown.
• The Fed’s more aggressive easing on worse-than-expected US
slowdown would further limit the scope for the PBoC to hike
rates. In such a scenario, accelerated Rmb appreciation and
allowing more domestic liquidity outflows would be the only
effective policies for China to deal with excess liquidity and
potentially rising inflation pressure coming from oil and food. The
monetary environment should remain very accommodative for growth
in China, and continued Rmb appreciation should firmly keep China
as the most favorable reflationary trade.
• Given the aggressive CIT cuts effective January 1, 2008, there could
be an artificial slowdown in reported profit growth toward the end of
this year, but the upside surprise could come in 1H08 as companies
manage to minimize their tax payments. Given the market
expectation, we believe the surprise to MSCI China 08 EPS could still
be on the upside. The recent A-share correction is more technical than
anything else, and a very healthy one. History tells us that buying
into corrections caused by macro control fears should enable
investors to outperform the market.