CHINA US Focus - Perspectives shaping the world's most important bilateral relationship

TO stabilize economic growth, the Chinese government recently initiated various stimulus measures. This could be a short-term positive for China bank shares, in our view. In addition, it appears increasingly likely the government may lower interest rates, on top of "window guidance" and reserve requirement ratio cuts, to encourage borrowing and to force bank lending.

These should be positives for an economic rebound. However, we believe resorting to investment stimulus and rates cuts are contrary to what China needs in the long run, namely economic rebalancing to consumption-driven, higher equilibrium interest rates and deleveraging of the economy.

While bank shares rallied post the 2008-stimulus announcement, they underperformed the market both in terms of share prices and valuations since the start of the 2008 stimulus. We see a short-term upside in China bank shares, but maintain our 12-18 month range-bound 2-Neutral sector view. A major downside risk to this short-term outlook is further deterioration of the Europe debt crisis.

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