We raised our 2012 GDP growth forecast from 8.3% to 8.6% on three upside risks to market and our earlier expectations:

1) Exports likely to outperform expectations
We raised our 2012 export growth forecast to 13% from 8%. The upward revision reflects stronger-than-expected demand from G3, a rise in China's export orders, and improvement in the operating environment for export firms.

2) Small businesses are outperforming expectations
Small businesses, accounting for over 70% of the employment for more than 90% of the firms in the manufacturing sector, have witnessed significant improvement in their operating environment in the past months. Small business PMI rose sharply from 45 in June 2011 to 55.2 in February 2012, the highest reading since the index's inception. This improvement is supported by falling accounts receivables, lower raw materials inflation, increasing profit margin, and rising export orders.

3) The economy is more insulated from real estate risk than market perception
Our study shows that the economy is much more insulated from the weakness in the real estate industry than the market's perception. In the current cycle (from January 2010 to February 2012), the correlation between the manufacturing PMI and the real estate PMI was only 0.12, vs. a correlation of 0.81 during the period of July 2008-June 2009. We estimate that the fall in the leading indicator for residential construction (floor space started) by 55ppt in recent months will likely translate into only a 2ppt deceleration in total real gross capital formation for a limited period of time this year.

Eoin Treacy's view My view – Investor sentiment has soured towards China over the last couple of years. The stock market has been disappointing, various scandals particularly with reverse mergers have sapped confidence among foreign investors, government efforts to curb property speculation have stoked fears of a hard landing and upcoming political change contributes an additional degree of uncertainty.

On the other side of the equation, the administration is beginning to relax some of its tightening measures, valuations are at levels from which important rallies have begun previously and stock market performance has been encouraging over the last couple of months.

The Shanghai A-Share Index retested the 2009 lows in late 2011 and has since posted its largest rally in more than year. The Index has broken the 10-month downtrend and closed the oversold condition relative to the 200-day MA. It has held the majority of its advance over the last two weeks and a sustained move below 2400 would be required to question medium-term recovery potential.

The Shanghai Property Index has successfully pushed back above its MA and is now testing the lower side of the overhead trading range.

The Shenzhen A-Share Index is primarily constituted by mid-caps and has rallied for the last 8 consecutive weeks; breaking the medium-term downtrend and closing the oversold condition relative to the 200-day MA. Provided it finds support above the January low near 800 on the next reaction, recovery potential can continue to be given the benefit of the doubt. .

The H-Share index in Hong Kong found at least short-term support in the region of the upper side of the underlying base, near 11,000, this week. A sustained move below that level would be required to question potential for additional upside.