We expect China's GDP growth at 7.8% in 2013 (versus 7.7% in 2012) and a mild inflation rate of 3.0% (versus 2.6% in 2012). Any form of easing of reversing the restrictions within the housing market would be an added bonus and should send A-share and H-share markets off to the races, but if the defaults in the shadow banking system deteriorate, notable downside risk could also follow.

Nonetheless, China still has numerous and very complex issues to contend with:

a) All sectors under coverage will need to contend with modest earnings growth prospects;

b) A banking sector which is fairly constrained from a LDR perspective;

c) A U.S. economy flirting with recession in the near term;

d) A potential accounts receivable and triangular debt problem as corporates substitute for weaker bank lending;

e) CNY appreciation, in our view, is unlikely to last; and

f) Given the wage inflation, China would appear to be yielding to lower cost venues.

Lower interest rates fuelled by weak economic activity and quantitative easing should continue to cause investors to seek equity-like returns versus the declining returns offered by fixed income and low rate bank deposits. It is our view that the cyclical sectors in mainland China will outperform those which are more defensive in nature.