Ms Liem: The out-performance of the domestic A-share market appears to have been driven primarily by signs of stabilisation in the Chinese economy and buoyant liquidity.

We believe the policies of the Chinese government have helped to boost confidence of private investors and households. The government has moved rapidly to arrest the slowdown of growth through monetary easing as well as fiscal stimulus. It has also announced plans to boost technological upgrading and build a comprehensive social security network.

Despite a contraction in external demand, Chinese equity markets have been buoyed by early signs of recovery in China's domestic demand and industrial activities, as indicated by the pick-up in industrial production and the rising Purchasing Managers' Index (PMI) over the past few months.

Credit growth has been strong in response to increased funding needs for public spending. Fixed asset investment and retail sales have managed to remain resilient as a result.

If global demand remains weak, the recovery in China's economy is likely to be supported by government policies seeking to stimulate domestic consumption and investments.

Ms Wang: The surge in Chinese equities is largely the result of relatively cheaper valuations and signs of an initial economic recovery which boosted investor confidence.

Evidence points to a rebuilding of global inventory after many months of unprecedented de-stocking and record fiscal and monetary easing.

While there are risks that the rally may not be sustainable, stronger production should boost job levels and we should see further positive effects from the stimulus measures that have been implemented.

We are already seeing some very positive news in the shape of an improvement in credit markets and bank lending attitudes.

In particular, China's recent trade performance was assessed positively by the markets because the contraction in exports was less severe than consensus estimates.

Investor optimism was further stoked by the Purchasing Managers Index (PMI) data, which rose above the expansionary threshold of 50 in March, April and May, adding to growing evidence that the worst of the output slump may be over. While these could be sustainable markets drivers, perhaps a stronger factor is the infrastructure stimulus, which is generating demand.

Ms Liem: During the recent National People's Congress, China reaffirmed its 8 per cent growth target for this year and indicated that the government was prepared to spend more if necessary.

According to China's National Bureau of Statistics, the Chinese economy grew at an annual rate of 6.1 per cent in the first quarter of this year, led by domestic demand and helped by the Chinese government's policy responses.

Hence, while first quarter economic growth has fallen short of target, the government could come up with more stimulus measures to support economic growth in the near term to meet its growth objective.

Ms Wang: After the recent upbeat macro numbers and with stimulus-driven growth gaining visibility, a string of banks revised their growth forecasts for China's economy to above 7 per cent for this year.

The improvements already seen in production and investment data support this view.

Overall, the stimulus measures are in line with China's goal to transform itself from an export-based economy to one that relies more heavily on domestic demand. Subsequently, the Chinese government proposed to “revitalise” the 10 major domestic industries and introduced measures to stimulate its property markets. It is unclear whether China will see a hard or a soft landing, however, what is clear is that stimulating growth in the economy is a top government priority.

Ms Liem: China currently enjoys a strong fiscal position and its current account surplus gives it the flexibility to implement policies to stimulate growth.

Should the global economy weaken, China could turn to even more aggressive monetary easing and fiscal stimulus measures. For example, China could cut interest rates and the required reserve ratio in the banking industry to boost liquidity.

Ms Wang: China clearly has the capacity and willingness to take measures to promote economic growth. Lately, the government has surprised investors with its commitment and willingness to prevent a slowdown.

Its fiscal stimulus package worth 3 per cent of GDP in 2008 is higher than similar measures in the U.S. and Europe. The economic case for countercyclical policy conducted through infrastructure spending is relatively straightforward.

However, we believe that the government will not take measures in a hurry. Moreover, building additional industrial capacity in the face of falling prices could be value destructive, not just for Chinese businesses but for other countries in Asia as well.

Nonetheless, China needs to put more emphasis in building strategic transport links at an integrated level.

Ms Liem: Yes, the Chinese domestic stock markets have outperformed the Hang Seng China Enterprise Index (which comprises of H-shares listed on the Hong Kong Stock Exchange and included in the Hang Seng Mainland Composite Index).

Unlike the China-related companies listed in Hong Kong, which are available to both domestic and foreign investors, the Chinese domestic stock markets are available only to domestic investors and selected foreign institutional investors through the Qualified Foreign Institutional Investor scheme.

With the recent rebound, the MSCI China index is trading at forward price/earnings ratio of about 14 times while the domestic A-share market is trading at 19 times forward price/earnings ratio, a significant premium to its Hong Kong-listed counterparts. Due to the surge in liquidity and subsequent rally in the Chinese domestic stock markets, the valuation of China-related companies listed in Hong Kong have become more attractive relative to the domestic A-share market, and we believe that Chinese stocks will continue to take centre stage in the Hong Kong market.

Ms Wang: Both markets are fundamentally different. Foreign investors cannot trade A-shares unless they are licensed by the Chinese government (i.e. QFII license), whereas the Hong Kong bourse is open to global investors.

As different groups of China-related shares trade separately on different exchanges, pricing spreads can be significantly different. As A-shares have posted significant gains recently and valuations have increased, Chinese companies listed on the Hong Kong bourse are relatively more attractive at this juncture.

Ms Liem: In light of current conditions, we continue to favour stocks with strong balance sheets, earnings visibility and sustainable cash flow generation capability.

We like sectors that benefit from strong government support and domestic consumption sectors with good fundamentals. We also like sectors that are likely to benefit from increased public spending in China.

Ms Wang: There are a number of long term trends that I am predisposed to within the portfolio. These include consumption growth, continued investments and industrial consolidation and upgrading. These are long term trends that I believe offer a significant amount of growth potential in China, and I have positioned the portfolio towards these developments.

In terms of consumption growth, while in the near term we could see growth moderate given the global slowdown, there are many areas that still have growth potential and should benefit from rising urbanisation levels, the rising middle class, low penetration rates and people opting for lifestyle changes, such as increasing wine consumption. Attractive opportunities remain and it is companies with brand penetration that offer goods and services to the middle class that will benefit over the longer run.

China is undergoing a transformation, with continued changes in its economic model. Investment will continue to be one of the major drivers. There is still a significant amount of room for growth given the large amount of underinvestment, for example the under-developed railway system and potential for inner land investment.

Another trend that I am favourable towards is industry consolidation, where industry leaders are strongly positioned to benefit. Tougher markets will tend to drive out smaller inefficient players leaving the higher quality and proven companies to outperform. Furthermore, there are growing barriers to entry through environmental and safety concerns.

Ms Liem: We are structurally positive on the Chinese economy over the long term, as China has a large domestic market. With policy flexibility, it is likely to register the fastest growth in the global economy.

The aggressive policy stimulus is likely to bring about further recovery in economic growth in the second half of this year, making China standout in this global downturn.

While corporate earnings are likely to experience more negative headwinds in the near term, we reiterate our belief that China remains attractive as a market for investing in the longer term due to its sturdy economic fundamentals, proactive and competent macroeconomic management, shifting growth model and stable political environment.

Hence, we believe that China will remain the world's growth engine, which should bode well for Chinese equities.

Ms Wang: Stock markets in China should remain volatile in the near term as the global economic and investment outlook is still uncertain.

Global recession presents a challenging operating environment for companies this year. However, Chinese names could outperform world equities over the longer term given China's structural growth potential, favourable demographics and high saving rate. This should result in superior corporate performance and healthy growth in domestic consumption.

I am especially positive given the country's strong financial position and the room it has to apply monetary policy stimulus. I believe that firms with strong balance sheets, good execution strategies and solid management teams should grow their market share and emerge stronger.

Ms Liem: Protectionist domestic policies could affect China's exports and international trade markedly, weaken market confidence and delay the eventual economic recovery.

However, China opposes protectionism and has been active in pursuing trade agreements with other trading partners, like the European Union to engage in cooperation of mutual benefit to stimulate economic growth.

China also aims to shift their growth model from a resource intensive/export-led model to a consumption-led and more value-added model in the longer term. This strategy will help China to rely less on exports to achieve sustainable growth and to correct structural imbalances that plague China, the U.S. and China's other major trading partners.

However, while this is the right strategy for China in the long term, China would need to improve on its social security, medical and education systems, in order to encourage Chinese consumers to save less and boost domestic consumption.

Ms Wang: Overall, I believe protectionism would be a step back, and its impact will be felt globally and not just in China.

Ms Liem: A big chunk of new loans have been directed towards public spending, and are therefore relatively low risk. For example, medium- to long-term loans (mostly channelled to public sector infrastructure projects) accounted for 47 per cent of total new loans in March.

In addition, the Chinese regulators have been urging banks to employ strict risk-management policies. We do not see systemic problems of debt defaults due to increased lending in China at this stage, although we will continue to be watchful of such risk.

Ms Wang: We know that Chinese banks have been relatively insulated from the credit crisis due to a limited involvement in global capital markets. Investors have confidence in the Chinese financial system and there have been no cases of bank insolvency.

Credit expansion has helped stabilise the economy. New loans have soared in March, which is indicative of the expansionary monetary policy. Although loan growth in likely to moderate in coming months, non performing loans may rise but are unlikely to reach precarious levels.

Ms Liem: The key risk factors include a worse and longer-than-expected slowdown in the global economy, resulting in weak external demand and a protracted slowdown in the manufacturing sector.

Ms Wang: After the recent run-up in markets, current valuations are slightly above their historical averages. In addition, further supply-side and fund raising pressure could impact the market negatively.

After share placements such as the Bank of America selling China Construction Bank, there are some concerns about further share placements and new share issues. Such a supply overhang would weigh on short-term share price performance.

Furthermore, entities whose pre-IPO shareholder lock-in period recently expired or will expire soon, might want to sell these stakes given the incentive to boost cash positions in this environment. This again would exert downward pressure on the prices of stocks.