Why China will get the economic jitters in 2H13

It's not just inflation hitting 3.5%.

According to BofAML, 1H13 could bode well for China, but the firm calls for more caution on 2H13.

Here's more from BofAML:

Why? Headline GDP and industrial earnings growth may peak in 1H and slow in 2H, while CPI inflation could accelerate in 2H and even hit the 3.5% government inflation target.

Home prices may rise faster in spring 2013 and trigger a new round of concern on stricter tightening in 2H. The current honeymoon with China's new leaders and the high expectations on structural reforms could be cooled down after spring time.

Top new leaders in Beijing in 2H may have to curb an investment boom by new local governments in the name of urbanization. Finally, perpetual China bears will likely launch a counterattack in mid-2012 when growth peaks and inflation rises, with focus on favorite issues such as shadow banking, government debt, over-investment and property bubbles.

New leaders' main policy mandate is to deliver stability. For 2013, China could set 7.5% GDP growth target, 3.5% CPI inflation target and 13.0% M2 growth target. Policy will remain supportive of growth, but will be marginally tightened towards end-2013 on concerns of rising inflation, rising home prices and financial system risks.

New leaders like neither big slowdown nor overheating. Beijing is unlikely to be too aggressive in stimulus in 2013, so investors should be wary of the sell-side's ratcheting up of growth forecasts.

2013 is for preparation instead of implementation. We mentioned above that people could turn more realistic on new leaders' capacity for reforms in 2013. To be sure, we are confident that the new leadership could be quite reform-minded and might eventually achieve more than what the people have expected.

However, regardless of those new leaders being deemed as reformers or conservative, major structural reforms are quite unlikely. That said, new leaders might still start some reforms in areas with the least resistance and strongest support, and we believe abolishing the one-child policy tops the new government's reform agenda.