General impression: Sentiment is very weak, although not as pessimistic asfour months ago. Investors are complaining that it has been very difficult thisyear as markets are trendless. Consensus could be overthrown in a short timeand macro uncertainties are abundant. As such, investors prefer to sit on thesidelines for now. Said one investor, “Now might not be the time to enter themarket and I will wait. The fundamentals for China might not be as bad aspeople thought, but the return doesn’t justify the risk.” Interestingly, theprevalent inertia reminds us of mid-2014 (our feedback back then).

　　Economy: The most common question is how long the current recovery canbe sustained. Not surprisingly, most clients view it as another policy-drivenmini-cycle, which should be short-lived. We agree. However, we remindinvestors that the recovery in earnings growth could be more sustainable (topchart on left). On a positive note, three things are improving at the margin.

　　First, PPI deflation has eased and will continue to ease. Second, the propertysector is in an upcycle after two years of downcycle. Third, pressure fromcapital flows should ease vs last year (Dissecting China’s capital outflows in2015).

　　Policy: The “L-shaped” comment by the People’s Daily was taken negativelyby investors, who interpret it as: (1) No upside for the economy; (2) Pendingpolicy tightening; (3) Potential conflicts within the government. We are lesspessimistic. To be sure, in our 2016 outlook, we set 2016 GDP growth at6.7% with a flat quarterly pattern, based on our understanding that the overarchingtheme this and next year will be the political power reshuffle.

　　Therefore, policy makers prefer few surprises from the economic side. Assuch, we dismissed the hard landing fear in January but also ruled out a Vshaperecovery in March. That said, even if real GDP growth is flat, nominalGDP growth, which is more relevant to corporate earnings, contains moreupside. Indeed, nominal GDP growth has risen from 6.0% in 4Q15 to 7.2% to1Q16 and could accelerate further in the coming quarters (Fig 2).

　　Currency and capital flows: Compared to four months ago, investors arenow less worried about the RMB. Only one or two asked about the adequacyof FX reserves, which used to be a popular request four months ago. Our outof-consensus year-end USD/CNY forecast of 6.6 received less pushbackcompared to six months ago.

　　Bond default: Quite a few clients are concerned about the recent rise indefaults in China’s bond market. Does it mean that the economy is actuallyworsening faster than the headline numbers? Not really. Unlike the US, inChina the number of defaults reflects more the attitude of regulators than theunderlying fundamentals. Now regulators are willing to accept more defaultsfor better risk pricing. As a trade-off, they have to accept higher marketinstability. However, we don’t think another credit crunch like mid-2013 willhappen given liquidity tools such as SLO being introduced since then.

　　Risks: During the trip, investors were less worried about short-term risks butlong-term concerns linger. Previously, the fear was whether China couldleverage up given its high debt level. It did leverage up and the economy hasstabilized.