SHOWS: HONG KONG, CHINA (April 12, 2013) (REUTERS - ACCESS ALL)

SUNIL GARG, HEAD OF RESEARCH, ASIA-PACIFIC EQUITIES, J.P. MORGAN

1. REPORTER OFF CAMERA SAYING:

'You recently downgraded China. What made you bearish?'

2. SUNIL GARG SAYING:

'What makes me bearish? I think on one plane, if you look at the valuations in China, they look okay. They're not particularly onerous. And China is trading at a discount both on a historical basis as well as relative to regional and emerging market peers. But that's only one part of the story and you've got an economy that's recovering on a moderate basis. So those are all reasonable conditions which probably prevent some downside. But the biggest issue is what's going to drive the upside. I think we have an economy that is burdened with overcapacity across many sectors. We have an economy that essentially is the new administration is trying to slow growth down to more sustainable levels. All that means is that earnings growth is going to remain somewhat lackluster and under pressure. Last year after starting with a lot of optimism, earnings growth eventually came out close to 0%. Now, we're currently running at just under 10% EPS growth for the current financial year. And the revisions have been reasonably stable. But that doesn't look very attractive on a top-down basis. So the bearishness really is lack of confidence the market has in the earnings, a slowdown demand weakness, and overcapacity driving all of that.'

3. REPORTER OFF CAMERA SAYING:

'What do you need to see before bringing money back into China? Is that dependent on how much more there is to go in the stock market rally in Japan?'

4. SUNIL GARG SAYING:

'See, look. Markets will have a rotational aspect and I take a view that ultimately investors want to see growth and they want to see visibility in growth. Now, there are companies in China which can deliver that. And I think money will be attracted to those companies. But on a broad base, on an overall macro market basis, broad basis, I think the confidence in earnings and the visibility in earnings especially when you have policy headwinds, that's missing. So I think a clearer, more accommodative, supportive policy regime will help, and some clarity on earnings. So I think if China can deliver an earnings visibility story, then it doesn't matter whether Japan is in flavor or not. Money will find its way to growth rather than necessarily be a completely zero-sum game. There are many other markets to fund investments from.'

5. REPORTER OFF CAMERA SAYING:

'China's Q1 GDP data is out on Monday. What will it indicate?'

6. SUNIL GARG SAYING:

'See our house forecast for the first quarter numbers is 8.1%. And we are essentially looking at an economy that's recovering from last year, but at a much more moderate pace. So if you look at it on a sequential quarter basis, fourth quarter was a very strong rebound. I think this is going to be a more moderate recovery. But an economy that's continuing to recover. I think if you look at some of the sub-components like capital formation or fixed asset investment, we're broadly looking at stability versus previous months. That's what's our expectation for the Monday data releases.'