China Strategy:Perfect report card

Quarterly corporate cash flow review.

China equities turned in what we believe to be a perfect report card for 3Q16.

Sales revenue growth rebounded, profitability and cash flows surged, debt levelsdeclined, dividend payouts reached record levels and private enterprisesoutgrew SOEs. Capex continued to be cut in 3Q16 and we now expect a “capexcatch up” to help sustain growth in 2017. Credit tightening remains the major risk,but only when inflation hits higher levels, in our view. We continue to recommendinvestors overweight cyclicals and non-bank financials as the sectors with thegreatest earnings upgrade potential.