Looking forward, we believe that economic activity will recover further in the remainder of the year and first half of 2014. We expect China to grow 7.7% in 2013 and 8.5% in 2014 (Figure 8). Our forecasts reflect a positive inventory trend, better domestic demand, an increase in the velocity of money (due to the rise in business confidence), faster real estate investment (given about a 30% yoy increase in land sales measured in GFA in 1H this year) and infrastructure investment, as well as an improvement in G3 demand for China exports. This August's PMI reading showed signs of healthier demand conditions in the Chinese economy, indicated by the large increases in August PMI sub-index readings of raw material prices, new orders and new export orders.

In the coming 6-9 months, we expect the recovery will most likely be led by stronger investment by real estate developers and infrastructure spending. The third plenary session of the Party Congress in November, which will announce a major package of economic reform (e.g. with further deregulation measures), should give another boost to business confidence, in our view. Recentlyannounced policy measures will begin or continue to unleash their positive impact on the economy. The growth-supporting measures announced lately include the expansion of the pilot program of securitization of credit assets, which aims to activate the stock of liquidity, exemption for micro firms from VAT and business tax, the set-up of the Railway Development Fund to speed up railway construction, and policies to encourage private sector investment in urban infrastructure, subways, and environmental projects.

Eoin Treacy's view The Chinese administration has been leaning on some of the country's traditional growth engines in an effort to deflate the dual property and infrastructure investment bubbles. To a greater or lesser extent this checked the advance in property prices, but the most acute effect of tightening was on leveraged corporates and SMEs who depended on access to cheap credit. This created demand for shadow banking products and private lending networks which have more recently been targeted by the administration. Against this background, the consumer sector continues to expand and services represent an increasingly important segment of the economy.

One of the primary results of tightening has been a valuation contraction on the stock market with the Hong Kong listed H-Shares Index at historic P/E of 8.01 and dividend yield of 3.95%. The Hang Seng Index has a P/E of 10.23 and yields 3.39%. These valuations are competitive on both relative and absolute comparisons with just about anywhere.

The H-Share Index retested the lower side of its 18-month range in late June and continues to hold a progression of higher reaction lows. A sustained move below 9750 would be required to question potential for continued higher to lateral ranging.