Made in China:Strategy,Market view key points;Banks,deleveraging Series 4;CPIC,TravelSky

We became bullish on Chinese equities in March 2016 as we expected a cyclical recovery (see Joining the dots: Inventory, demand and prices point to a cyclical recovery, 3 Mar, 2016), and we have been reiterating this out-of-consensus view since then (see Industrial reflation amid weak CPI to expand equity valuations, 13 Jul, 2016 and 2017 China Equity Outlook: Hearing the Rooster Crow, 8 Dec, 2016). We notice that more investors and analysts are joining force as the MSCI China index rallied 25% YTD, thanks to a 13% expansion in 12m forward P/E and a 10% upgrades in 12m forward EPS. We maintain our positive outlook. (Yuliang Chang - 852 2203 6195) .

    Financial deleveraging has made progress: banking asset growth has softened; shadow banking and WMP have decreased; and the credit-to-deposit ratio has started to moderate. However, we do not think the process is close to the end, as the government has not fully achieved its deleveraging goal or reached its tolerance level. We expect tightening to continue till 4Q17 or beyond, keeping market rates elevated. While this helps lower systemic risks, the likely near-term impact is slower credit growth, higher shadow banking credit risk and earnings/capital pressure for smaller banks. Thus, we stay neutral on the sector with a clear preference for deposit-funded banks (i.e. the Big Four). (Hans Fan - 852 2203 6353) .

    We attended CPIC’s 2017 Open Day in Yinchuan today. The company highlights the improvement of its life business since its transformation to a customer-oriented model which started in 2011, and is quite positive about the value growth going forward. (Esther Chwei - 852 2203 6200)