Industry restructuring: Industry restructuring is imperative for China, due to: 1) demographic changes; 2) intensifying global competition; 3) weakening competitiveness of its manufacturers; and 3) increasing social unrest. Presumed next-generation leaders Xi Jinping and Li Keqiang will likely be judged by their success in: 1) pushing industries up the value chain; 2) implementing M&A activities; 3) fostering tertiary industries; and 4) advancing privatization. China's industry restructuring over the next decade will present threats and opportunities to Korean industries that serve the nation as its biggest clients.

Women, children, and elderly to lead consumption: In recent times , China has seen dramatic changes in major consumer groups and consumption patterns, and going forward, women, children born to the so-called “little emperor” generation, and a growing elderly population are likely to wield increasing influence on consumption. To gain dominance in the Chinese consumer market amid stiffening competition, we believe Korean companies need to establish strong brands and distribution channels, thereby preemptively targeting women, children, and the elderly in markets likely to grow and in which they can compete. Such markets include smart devices, small-tomedium cars, online shopping, cosmetics/fashion, travel (outbound demand to Korea), educational/game content, healthcare, and coffee/beverages.

Eoin Treacy's view This report does an excellent job of highlighting the sense of anticipation associated with the decadal shift in China's power structure. The next administration will be judged in how successfully it raises the standard of living for China's nascent middle classes. Moving up the value chain in terms of manufacturing, promoting the services sector and concentrating on improving human capital can all be expected to continue to play a role in achieving these goals.

Further development of the financial system is equally essential. The development of a liquid corporate bond market would help ease pressure on the banking sector to act as an arm of government in promoting industry. Reliance on private pools of capital has been an issue for small to medium-sized businesses and a number have gone bust due to usurious interest rates. A healthy corporate bond market would also create more competition for funding and reduce costs to business.

The introduction of a property tax would also help to contain speculative interest in the housing market and would succeed in creating a funding mechanism for local government without the necessity of selling parcels of land for development. Positive movement in any of these sectors should help to act as a positive catalyst for confidence in the financial sector.

The removal of the 2009 stimulus weighed heavily on the banks, industrials and developers that dominate the Shanghai A-Share Index. Its retreat over the last two years has allowed valuations to improve substantially and dividend yields are back to historic highs. Nevertheless while the value proposition is becoming increasingly more attractive a catalyst is probably needed to reinvigorate demand. The conclusion of the leadership transition will remove a certain amount of uncertainty and has the capacity to positively affect investor sentiment provided the tone adopted by the new administration is market friendly.

The Index has returned to test the region of the December lows and has at least paused. It found support today above the 2200 area today and some additional follow through tomorrow would bolster the view that demand is beginning to reassert dominance. A sustained move above the MA, currently near 2460, would be required to confirm a medium-term bullish outlook.