UBS: China to surprise on the upside

As 2016 draws to a close, however, those worries have proven largely unfounded (for now). We believe that the cyclical growth momentum in China will continue, and that the broader market still remains too pessimistic on China’s ability to sustain its current pace of growth at around 6.5%.

While housing indicators are slowing from very strong growth rates, low real interest rates continue to underpin credit growth elsewhere in the economy and there is clear evidence of a pick-up in infrastructure spending. Importantly, there are also signs of private sector growth starting to improve - supported by pricing power that has been largely absent for the past four years. Given operational leverage, higher prices are driving a strong recovery in industrial profits in China which are now growing at an annualized year-to-date pace of 8.4%. With a significant transition of political leadership slated for late 2017, we believe the Chinese authorities are strongly motivated to ensure recent demand momentum continues.

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