China Strategy:Surf the Curve

Steepening of the US yield curve supports our overweight recommendation onChina equities and our preference for cyclicals and financials ahead of neweconomy and defensives. The steepening of the yield curve reflects higherglobal inflationary expectations (The Yield curveball) and supports our view thatreflation is a key theme for the China equity market (Inflation Nation). Our Hshareindex target remains 12,800 points, implying 32% upside. We recommendinvestors switch from Internet to Financials within the China market. We upgradethe consumer staples and utilities sectors, and downgrade the property sector.