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Strategy & Macro
CICC Macroeconomy Weekly                                       Page 4
Accelerated Economic Downturn Forced Change in Government Policy Stance
Chiina’s lowest PMI index since 2005, and first YoY declines in power generation volume and fiscal revenue (since 1998 and 1996, respectively) all indicate that the Chinese economy faces much greater challenges now than in 1998. On this evidence, we lower our GDP growth forecast to 8% for 4Q08 and to 9.3% for FY08. The accelerated economic downturn has forced the Chinese government to change its policy stance, and the State Council announced over the weekend that it would adopt expansionary fiscal and "moderately loose" monetary policies. We estimate that government investment may boost 2009 GDP growth by 1.8ppt.
Strategy: First Step Away from Bear                            Page 6
Domestic Demand Outlook and IR Cuts
The outlook for the Chinese economy and stock market depends on whether state policies can effectively stimulate domestic demand, of which real estate is a key part. Whether latent demand for property becomes real demand depends on home affordability. Continued IR cuts could raise home affordability to the 2003~2005 level. Historical data from overseas markets show that the real estate industry can help buffer an economic downturn as interest rates are cut. Real estate stocks may be the first to bottom out if the property market stabilizes due to deep rate cuts and declining home prices.
CICC Strategy Weekly (A+H)                                      Page 9
The A-share market was relatively calm last week. As expected, the government announced ten stimulus measures, and these may provide some inspiration to stock markets in the near term, being especially positive to real estate and infrastructure-related sectors. The effect won’t last long, however, and it remains to be seen where the money will come from and be invested. The HK market rallied amid bearishness early last week. Investors are advised to sell deep cyclicals which have rebounded a lot, although expectations of stimulus policies may drive them a bit higher. External demand will be unavoidably weak in the next few years and whether the policy mix can successfully boost economic growth will be important for the future economic / market trend.
China Economy: Inflation Moderated due to Faster      Page 11
Economic Downturn: October CPI and PPI Data