China Equity Strategy - Jun-30-2009
Published by: Citigroup Investment Research
Date: 2009-6-30
Total Pages:  140

Ample Liquidity to Back Economic Recovery, Higher Asset Prices
 Loose monetary stance to continue — China is likely to maintain a loose
monetary policy that exceeds market expectations. The uneven recovery in the
economy will prevent the government from tightening policy too early. Chinese
banks are in a good position to sustain the current lending momentum.
 Local govt-led infrastructure projects, housing development to drive investment
— After local government funding problems have been sorted out, FAI projects
have picked up. More important, a much stronger recovery in the property
market has prompted developers to resume construction activity. As public and
private investments pick up, we believe the trend is of better quality, more
sustainable and would have a bigger multiplier impact on the overall economy.
 Consumption momentum set to catch up — Although consumer confidence has
stabilized, momentum is still lagging behind. Along with policy support, positive
wealth effects and potential loosening of consumer credit should help
consumption momentum catch up.
 Investment strategy — Earnings expectations are being raised since late 1Q09,
led by property and banks. Industrial earnings upgrades could follow if the
economy manages some reflation. Markets have begun to trade toward the high
end of their historical range but could overshoot on ample liquidity. Our top
picks list has a financial and consumer bias.