Over the past decade, private wealth in China has expanded at a staggering 18%
CACR by our estimate. However, people are becoming increasingly unhappy. As
we write, guards are posted at the gates of kindergartens in major cities across
the country to prevent random killing of defenseless children and Premier Wen
has promised to address “deeper” issues behind such crimes. Broadly speaking,
we believe this will likely be bad for property price and property related investment
but helpful on consumption. We recommend buying the consumer sector in
general and department stores and food retailers in particularly after considering
valuation. On the other hand, after the expected relief rally in the market, we
should further cut our exposure to property and investment driven sectors
including steel, cement, non-ferrous, construction machinery and dry bulk
shipping. Appendix IV contains our latest sector by sector recommendations.

We believe a rapidly widening gap between haves and have-nots has much to do
with the rising social tension and a sky rocketing property price is arguably the
sharpest chisel creating this divide. Moreover, other than in a few sectors such as
high end auto, overall wealth effect in China appears negative to us because ever
rising property price is forcing the middle class to save more. Viewed in this
context, we can understand the government’s determination to hold back property
price increase while boosting personal income.