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Reform will unlock China’s growth potential


The transition to a new party leadership in 2012 should facilitate bolder reform and further unlock China’s growth potential, says Yiqian Jiang, fund manager, DWS Invest Chinese Equities fund…

We believe that fears of an economic hard-landing will prove unwarranted as the Chinese economy is poised to complete the last stage of “soft-landing” in first half of 2012, setting the stage for recovery in the second half of the year. Macro policy crossed an inflection point in the fourth quarter of 2011, turning from tightening to moderately accommodative. We expect policy turnaround to precede economic change by around six months, when the equity market will go through a bottoming stage.

Key macro policy predictions for 2012

14% in money supply growth, 8 trillion Renmimbi in new loans, and six more cuts to the Required Reserve Ratio.

Active fiscal policy with increased support for agriculture, social housing, education, culture, and healthcare.

Structural tax cuts and income reforms to reduce inequality, curtail property speculation and boost consumption. Gradual resolution of local government financing issues and its impact to the banking sector.

Biggest risk factor to watch – the European debt crisis.

We forecast retail sales to grow by 16% in 2012, similar to 2011 levels. Declining inflation has led to an acceleration of real consumption growth for five consecutive months since July 2011. Furthermore, automobile sales growth has stabilised and service consumption growth is strong – encouraging signs of consumer optimism. Most importantly, we believe that the Chinese government’s desire to implement income distribution reform is the key to unlock further growth momentum in income and consumption.

We maintain that the normalisation of China’s valuation versus the global average represents a window of opportunity where global investors no longer need to pay a premium for the China growth story. Furthermore, significant social and economic changes and active government reform agenda will lead to sweet-spots of growth.

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