Boston, MA -- (SBWIRE) -- 08/31/2012 -- Core Views China's real GDP came in at 8.1% year-on-year (y-o-y) and 7.2% quarter-on-quarter (q-o-q) on a seasonally adjusted basis in Q112, much weaker than consensus expectations. Unlike the situation facing the economy in Q109, when a recovery in exports combined with a fiscal stimulus programme resulted in a V-shaped recovery, this time we expect continued lacklustre growth even as the central banks is likely to loosen monetary policy. As such, we are sticking with our 2012 growth forecast of 7.5%. We continue to see gradual weakness in the Chinese yuan from its current lofty levels, and expect it to trade closer to the 12-month non-deliverable forward, which is signalling expectations for currency weakness. Indeed, the yuan is richly valued and the Chinese economy is facing multiple structural and cyclical headwinds, both at home and from overseas, which suggest downside pressure on the unit should prevail this year. China's disinflationary trend should continue to be supported over the course of the year from the lagged impact of weaker money supply growth and a slowing economy. However, an increase in input prices and fuel price hikes suggest that some upside may be in store for consumer price inflation in the near term before downside pressure resumes in H212, allowing room for interest rate cuts. The ousting of Chongqing municipality leader Bo Xilai has created some near-term uncertainty that is likely to weigh on equity markets as fears mount that Chongqing's breakneck economic growth rate will suffer. That said, we view the news as a positive for China's longer-term political and economic health as it may suggest that reformists within China's elite are grabbing the balance of power in the long struggle between the rival political factions. Major Forecast Changes We have not made any major forecast changes to China's economic outlook since our Q312 Business Forecast Report. While a stabilisation in the official purchasing managers' index suggests risks to our growth forecast are to the upside, the Q112 7.2% q-o-q annualised real GDP growth outturn supports our view for a hard landing. Key Risks To Outlook The main downside risk to our economic outlook remains another collapse in external demand, such as the one that occurred at the height of the global financial crisis. This would seriously undermine growth in trade-dependent industries and hasten a fall in the property market, potentially leading to an outright recession. On the upside, there is a risk that interest rate cuts by the People's Bank of China could help to stimulate credit growth, keeping real GDP growth stronger than we forecast. The major political risk comes from a rise in social unrest and a surge in public demonstrations against government corruption, inflation and housing affordability, which could be triggered by overseas events or an economic slump. While we do not see the rule of the Communist Party of China (CPC) as being at risk, such events would still have a

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