HSBC - China Inside Out

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					Macro
China Economics
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                                                                                                   Global Research



China Inside Out                                              Weaker-than-expected growth should
                                                               prompt more easing measures

More easing on the way                                        We expect another 100bp of reserve
                                                               ratio cuts, as well as tax breaks and
                                                               more fiscal spending in 1H12

                                                              These measures will likely fuel a recovery
                                                               in GDP growth to over 8.5% going into
                                                               2H12; our full-year GDP growth
                                                               projection of 8.6% remains intact

                                                             The reading of the HSBC Flash China Manufacturing PMI
                                                             dipped to a four-month low in March, pointing to slower-
                                                             than-expected growth momentum. The main culprit was a
                                                             dramatic slowdown in exports growth; at 7% y-o-y, exports
                                                             growth in the January-February period was only half as fast
                                                             as in December, as demand in crisis-hit European markets
                                                             dropped off. That, in turn, weighed on growth in industrial
                                                             production and wages in the manufacturing sector.

                                                             At the same time, the impact of sustained efforts to cool
                                                             down property prices has yet to fully unfold, with domestic
                                                             demand likely to come under pressure.

                                                             With the risks to growth to the downside, we expect the PBoC
                                                             to implement further easing measures soon. Coupled with
                                                             moderating inflation, the central bank has little excuse to do
                                                             otherwise. We expect these easing measures to primarily take
                                                             the form of quantitative easing through capital injection in open
                                                             market operations, as well as at least another 100bp of reserve
27 March 2012
                                                             ratio cuts in 1H12. Rate cuts are likely to be a secondary
Qu Hongbin
                                                             measure, with one 25bp cut expected towards the end of 2Q12.
Chief Economist, Greater China
The Hongkong and Shanghai Banking Corporation Limited        Additionally, Beijing has plenty of fiscal ammunition to support
+852 2822 2025         hongbinqu@hsbc.com.hk                 growth via spending and tax breaks, with RMB3trn in cash
Sun Junwei                                                   deposits (or 6.4% of GDP).
Economist
The Hongkong and Shanghai Banking Corporation Limited        As these stimulus measures filter through, growth should
+8610 5999 8234     junweisun@hsbc.com.cn                    start to bottom out in 2Q12 and rebound to over 8.5% in
                                                             2H12. However, given the recovery is likely to be far more
View HSBC Global Research at: http://www.research.hsbc.com
                                                             modest than the dramatic V-shaped reversal seen in 2009,
                                                             we believe the risk of a demand-pull inflation rebound is low.
Issuer of report:   The Hongkong and Shanghai Banking
                    Corporation Limited
                                                             Our full-year 2012 GDP growth projection of 8.6%
Disclaimer & Disclosures                                     remains unchanged.
This report must be read with the
disclosures and the analyst certifications
in the Disclosure appendix, and with the
Disclaimer, which forms part of it
    Macro
    China Economics                                          abc
    27 March 2012




Contents

More easing on the way          3   Commodity prices              24
Growth losing some steam        3

Inflation no longer a threat    7
                                    Money and credit growth       26
Further easing in 2Q12          8   Interest and exchange rates   28

Charts                         11   Employment and income         30

GDP                            12   Asset markets                 32

Industrial production          14   Data and forecasts            35
                                    China                         36

Private consumption            16
                                    Disclosure appendix           38
Fixed investment               18
                                    Disclaimer                    39
Trade                          20

Prices                         22




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   Macro
   China Economics                                                                                                                 abc
   27 March 2012




More easing on the way
 Weaker-than-expected growth figures should prompt China to
    introduce more easing measures
 We expect another 100bp of reserve ratio cuts, along with tax
    breaks and extra fiscal spending in 1H12
 These measures will likely fuel a recovery in GDP growth to over
    8.5% into 2H12; our full-year GDP growth projection of 8.6%
    remains unchanged



Growth losing some steam                                                    efforts to cool down property prices has yet to
                                                                            fully unfold. With the risks for the economy
Recent data flow – from exports to industrial
                                                                            remaining to the downside, further easing
production to manufacturing PMI to retail sales –
                                                                            measures are likely.
all point to China starting the year with slower-
than-expected growth.                                                       European crisis bites
The main culprit for this has been the sharp                                Exports growth decelerated sharply to around
deceleration in exports growth, as the Eurozone                             6.9% y-o-y in the January-February period, only
sovereign debt crisis has stifled demand from that                          half as fast as in December and one third as fast as
region. Meanwhile, domestic demand may yet                                  the average for 2011. In particular, the ongoing
weaken, as the impact of Beijing’s sustained                                sovereign debt crisis in Europe – China’s largest


 Chart 1. Exports to Europe started to fall, leading to a sharp deceleration of total exports growth

          (% yr)
  60
  45
  30

  15
    0
 -15
 -30
        96        97        98         99        00   01   02     03   04      05    06      07        08   09   10   11   12 *
                                                       Total exports                           Exports to EU
 Source: CEIC, HSBC * the first two months of 2012




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      China Economics                                                                                                              abc
      27 March 2012




    Chart 2. Eurozone still faces recession, pointing to further downside risks to Chinese exports

          (%y r, 3mma)
    60                                                                                                                       65
    50
                                                                                                                             60
    40
                                                                                                                             55
    30
    20                                                                                                                       50
    10                                                                                                                       45
      0
                                                                                                                             40
    -10
                                                                                                                             35
    -20
    -30              China ex ports (Lhs)        US ISM (Rhs, led by 2M)          Eurozone PMI (Rhs, led by 2M)              30
          98       99      00       01      02      03      04      05       06      07      08      09      10   11   12

    Source: CEIC, HSBC




exports destination, representing nearly 20% of                            Meanwhile, despite two rounds of longer-term
total exports – is starting to bite. Exports to the                        refinancing operations (LTROs) by the ECB to
EU contracted by 1.1% y-o-y in January-February,                           alleviate stress on Eurozone financial markets, the
compared to 6.5% y-o-y in 4Q11. Although                                   Eurozone remains mired in structural problems and
exports to Japan and US slowed at a milder rate,                           its economies are unlikely to avoid a mild recession.
total exports growth still tumbled to the lowest                           As such, we expect exports growth to remain in
level seen since the 2008 crisis.                                          the single digit to lower teens range for the rest of
                                                                           the year (our full-year forecast is still at around
Uncertainties still abound in external markets. On
                                                                           9%), or around half of the 20% growth recorded
the one hand, the stabilisation of the Eurozone
                                                                           for full-year 2011. With the pain in the Eurozone
sovereign debt situation and the marginal                                  unlikely to end any time soon, we expect China to
improvement in US data indicate a total collapse of                        launch further easing measures to buffer weaker-
exports growth as happened in 2008-09 is unlikely.                         than-expected exports growth.
However, the on the other hand, a meaningful
rebound in exports growth remains a remote
                                                                           External weakness drags IP growth…
possibility, with the developed world still                                The sharp slowdown in exports growth has
constituting nearly half of China’s exports. US ISM                        already begun to and will likely continue to weigh
                                                                           on industrial production (IP) and GDP growth. As
moderated again in February and the Eurozone PMI
                                                                           chart 3 shows, when exports slow to below 10%
revealed a faster pace of contraction in business
                                                                           y-o-y, GDP growth tends to decelerate to 8% or
activity in March (Chart 2). At the same time,
                                                                           even lower (as seen in 2000-01, when the dot com
another spike in oil prices poses a renewed threat to
                                                                           bubble burst and in 2008-09, when the global
consumer demand in developed markets. HSBC’s                               financial crisis occurred).
US economist Kevin Logan expects the underlying
growth in final demand to remain weak and US                               This time around, IP growth has already dropped
GDP growth for 2012 to be about the same as last                           to 11.4% y-o-y for the January-February period
year, at roughly 1.7%.                                                     from 12.8% y-o-y in 4Q11, in tandem with the
                                                                           sharp slowdown in exports growth. This pace of
                                                                           IP growth is historically consistent with around
                                                                           8% y-o-y GDP growth.


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   China Economics                                                                                                                                abc
   27 March 2012




Average new exports orders dropped to 48.9 in                          Chart 5. Exports slowdown slackens job markets
1Q12 from 51.3 (see chart 4). With new export                                (%y r,3mma)                                        (3mma)
orders in the HSBC Manufacturing PMI remaining                         60                                                                    55
below 50 for two consecutive months (despite the                       45                                                                    53
marginal improvement in the March flash reading),                      30
                                                                                                                                             51
                                                                       15
we expect to see continued downward pressure on                                                                                              49
                                                                        0
GDP growth in coming months.                                                                                                                 47
                                                                       -15
 Chart 3. GDP growth slows when exports growth decelerates             -30                                                                   45
                                                                             05        06    07      08     09             10   11    12
       (%y r)                                           (%y r)                          China ex ports (Lhs)
  40                                                             16
  30                                                                                    HSBC Manufacturing PMI-Employ ment (Rhs)
                                                                 14
  20                                                                   Source: Markit, CEIC, HSBC
                                                                 12
  10
                                                                 10
   0                                                                  Wage growth for manufacturing sectors has
                                                                 8
 -10                                                                  started to slow since 3Q11. The latest wage
 -20                                                             6
                                                                      growth number is not available yet; however, it is
 -30                                                             4
                                                                      unlikely to accelerate. This is likely to have been
       00 01 02 03 04 05 06 07 08 09 10 11 12                         a factor in slower retail sales growth in the first
             Ex ports (Lhs)      GDP (Rhs)
                                                                      two months of 2012, at 14.7% y-o-y, compared
 Source: CEIC, HSBC
                                                                      with 17.5% y-o-y in 4Q11.

 Chart 4. Exports facing challenges ahead                              Chart 6. Slower manufacturing wages weigh on retail sales

         (%y r,3mma)                                   (3mma)          25     (%y r)
  50                                                             60
  40                                                             55
  30                                                                   20
  20                                                             50
  10                                                             45    15
   0                                                             40
 -10                                                                   10
 -20                                                             35
 -30                                                             30     5

       05       06      07     08      09    10   11       12                06         07          08         09          10    11        12 *
                      China ex ports (Lhs)                                                      Av erage manufacturing w age
                      New ex port orders, HSBC PMI (Rhs)                                        Retail sales

 Source: CEIC, HSBC                                                    Source: CEIC, HSBC * The first two months of 2012




…and the job market is slackening                                     The effect of property tightening still
The exports slowdown has also started to trickle                      unfolding
through into the job markets. The employment                          Weak external demand aside, domestic demand is
sub-index of the March HSBC Flash                                     also under pressure, mainly due to the ongoing
Manufacturing PMI plunged to a post-March                             correction in the property market. The effects of
2009 low of 48.6, compared to 51.1 in February.                       the tightening is spreading, with housing prices
The average quarterly readings have fallen below                      declining y-o-y in 27 of 70 China’s largest cities
the 50 line for three quarters, since export growth                   in February (versus 15 cities in January) and the
rolled over from nearly 20% in 3Q11 to around                         decline in nationwide property sales accelerating
7% in 1Q12 (see chart 5).
                                                                      to 15% y-o-y in the first two months of 2012 from
                                                                      1% in 4Q12.


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      China Economics                                                                                                                  abc
      27 March 2012




And this only marks the start of the correction; as                   Chart8. Household’s willingness to buy houses at a low level

property sales (volume, as shown in chart 7)                          115                                                         25
normally lead property prices by around six                           110
                                                                                                                                  20
months, the accelerating decline of housing sales                     105

points to a further correction in housing prices.                     100
                                                                                                                                  15
                                                                       95
    Chart 7. Property correction just started                          90                                                         10

          (%y r)                                      (%y r)                04     05      06   07   08    09      10   11   12
    15                                                         150               Real estate climate index (Lhs)
    10                                                         100               % of urban households planning to buy house in the
     5                                                         50
                                                                                 nex t 3M(Rhs)
                                                                      Source: CEIC, HSBC
     0                                                         0

    -5                                                         -50   Will this cause a hard landing? In our view, the
         07        08      09       10       11      12              short answer is no. While a further property-led
                   Property prices for 70 big cities (Lhs)           slowdown will come through, the impact should
                   Housing sales v olume (Rhs, led by 6 months)
                                                                     be manageable.
    Source: CEIC, HSBC
                                                                     Public housing construction should play a key role in
Beijing signalled its resolve in further cooling                     cushioning the slowdown in property investment.
down the property market. At a press conference                      The central government has committed to spend
after the conclusion of annual National People’s                     RMB211.8bn on public housing this year, up 23.1%
Congress (NPC) sessions, Premier Wen Jiabao                          y-o-y. A total of 5m units of public housing are due
                                                                     to be completed and at least another 7m units will be
reaffirmed that China’s property prices are “still
                                                                     started by year-end 2012. Considering the 10m units
far from reasonable levels” and Beijing would not
                                                                     started last year, the public housing under
loosen property controls measures. This
                                                                     construction should top 18m units this year, or 20%
dampened speculation of a relaxation on property
                                                                     y-o-y more than in 2011. This should avert a total
tightening and resulted in an immediate dive in
                                                                     collapse of real estate investment.
the A-share stock index on the day.
                                                                     In our view, the negative wealth effect should be
Property investment is set to weaken from the
                                                                     limited, given the low leverage of Chinese
current pace of 27.8% y-o-y for the January-
                                                                     households. Mortgage loans represent less than
February period, due to tight credit policy to real
                                                                     15% of total loans in China and less than 10% of
estate developers and sluggish property sales. The                   urban households have mortgage loans (chart 9).
latter factor not only affects developers’ expectation               In addition, we believe households won’t fall into
of future demand, but also squeezes the funding                      negative equity, even with a 30% correction in
source from the buyer’s housing payment.                             housing prices, given the fact of: 1) a 30% down
As prices stop rising or start to fall in the first                  payment ratio since September 2010; and 2) more
                                                                     than 60% of mortgage loans were taken out before
quarter, only 14.1% of urban households have
                                                                     the middle of 2009 and property prices have
plans to buy a house in the next three months.
                                                                     accelerated since then. Last, but not least, retail
This is the lowest reading since 1999, according
                                                                     sales growth held up well when property prices
to the latest central bank survey (chart 8).
                                                                     contracted in 2009, underlining the resilience of
                                                                     household consumption demand (see chart 10).



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   China Economics                                                                                                                       abc
   27 March 2012




 Chart 9. Chinese households are still underleveraged                      Chart 11. CPI components within PMI stay muted

 8,000 (RMB bn)                                           (%) 8                  (%y r)
                                                                           10                                                       90
                                                                            8
 6,000                                                          6           6                                                       70
                                                                            4
 4,000                                                          4                                                                   50
                                                                            2
                                                                            0                                                       30
 2,000                                                          2
                                                                           -2
      0                                                         0          -4                                                       10

           00 01 02 03 04 05 06 07 08 09 10 11e                                 05     06     07   08     09     10      11     12
                                                                                      CPI (Lhs)
              Housing mortgage loan (Lhs)                                             HSBC China manufacturing PMI-Input prices (Rhs)
              % of urban households hav ing mortgage loans                            HSBC China manufacturing PMI-Output prices (Rhs)

 Source: CEIC, HSBC                                                        Source: Markit, CEIC, HSBC



 Chart 10. Real retail sales holding up well, despite the                Investors maybe worried about the risks of
 property prices correction in 2009
                                                                         inflation coming back again later this year, due to
      (%y r,3mma)                                 (%y r, 3mma)           higher oil prices, food price hikes, the monetary
 25                                                                 15
                                                                         easing both within the mainland and abroad, and
 20                                                                 10
                                                                         rising labour costs. However, the risk of a
 15                                                                 5    demand-pull inflation rebound remains remote, in
 10                                                                 0    our view, simply because the recovery this time
  5                                                                 -5   will be far more modest than the V-shaped
      06       07         08        09      10      11         12        recovery in 2009. We present our detailed
                      Retail sales (Lhs)                                 analysis supporting this view below:
                      Property prices in 70 big cities (Rhs)
                                                                          Higher oil prices will have a limited impact
 Source: CEIC, HSBC
                                                                           on headline CPI. Indeed, domestic gasoline
                                                                           prices have been raised twice so far this year,
Inflation no longer a threat
                                                                           reflecting rising global oil prices. This is
The good news is that inflation also fell faster                           likely to translate into notable sequential
than expected and is no longer a major policy                              increases for producer prices in the coming
concern in the coming months. Headline CPI                                 months. However, barring further sharp oil
decelerated sharply to a 20-month low of 3.2%                              price rises from unexpected geopolitical
y-o-y and PPI recorded zero growth in February.                            events, we estimate that an additional 10%
Despite the marginal pick-up for the December-                             increase from current prices is likely to add to
February period, March readings of price                                   another 0.5ppts to headline CPI. The
components in the HSBC Flash Manufacturing                                 inflationary pressures stemming from high oil
PMI remained in the contractionary zone, and                               prices are manageable due to four factors: 1) a
quite a distance away from the series’ long-term                           relatively high base print from last year; 2)
average. This means inflationary pressures are                             weak global growth outlook; 3) below-trend
broadly contained.                                                         domestic growth (which curbs the rate at
                                                                           which higher import prices feed into the
                                                                           general economy); and 4) the NDRC’s
                                                                           flexibility of delaying adjustments on
                                                                           domestic gasoline prices.


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      China Economics                                                                                                              abc
      27 March 2012




 Food prices are likely to be relatively contained,                      jobs each year, according to the Ministry of
  given the still benign supply and demand                                Human Resources and Social Security.
  balance. On the demand side, when GDP
                                                                     Chart 13. IP growth still outpacing wage growth
  growth slows, food prices normally follow suits
                                                                     20    (%yr)
  (as shown in Chart 11). On the supply side,
  following eight consecutive years of bumper                        15
  crop harvests, Beijing has redoubled efforts to
  boost agriculture production. In the 2012 budget,                  10

  the central government plans to spend                               5
  RMB1.23trn on agriculture, farmers and rural
  areas (aka “san song” in Chinese) in 2012, an                       0

  18% increase from the previous year.                                    06         07       08       09        10      11
                                                                                Av erage manufacturing w age (nominal)        IP
    Chart 12. Food prices should be contained when GDP
    growth slows                                                     Source: CEIC, HSBC


         (%y r)                                       (%y r)
    15                                                         25   Further easing in 2Q12
                                                               20
                                                                    Further easing measures are needed to stimulate
    12                                                         15
                                                                    domestic demand in a bid to counterbalance the
                                                               10
                                                                    weakness in external markets. With inflation
     9                                                         5
                                                                    moderating, the PBoC has few excuses not to step
                                                               0
     6                                                         -5
                                                                    up its easing efforts.
         00 01 02 03 04 05 06 07 08 09 10 11 12 *                   We expect the pace of further easing to quicken in
                         GDP (Lhs)   Food CPI (Rhs)
                                                                    2Q12 and mainly take the form of quantitative
    Source: CEIC, HSBC                                              easing. We see a few ways that quantitative easing
                                                                    can be carried out.
 Monetary easing should be modest. We do
  not expect a repeat of the strong stimulus seen                   The first is open market operations. The PBoC has
  during 2009, which led to excessive credit                        suspended bill issuances over the past few weeks.
  growth and a V-shaped recovery. We suspect                        The outstanding bills profile suggests the amount
  Beijing has learned from over-stimulation and                     of bills becoming mature each month should be
  the target of 14% M2 growth target for this                       much smaller than for the same period last year.
  year is well below the historical average. The                    For instance, the average amount in 2Q-4Q12 will
  modest growth rebound (as we expect) in                           likely be around RMB95bn, just a fraction of the
  2H12 is unlikely to exceed 9%, implying a                         average of RMB483bn in 2011. To smooth
  small negative output gap that curbs                              liquidity, in particular with the continuous slower
  inflationary pressures.                                           capital inflows, the PBoC may have to inject
                                                                    liquidity via the open market by reducing bill
 Labour wages growth is still slower than IP                       issuance and conduct reverse repo if needed.
  growth, implying declining unit labour cost;
  however, it is too early to claim that China is
  running out of labour. In the 12th Five-Year Plan,
  China will continue to face an oversupply of
  labour, with 25m job seekers versus 12m new


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   Macro
   China Economics                                                                                                        abc
   27 March 2012




 Chart 14. Open market operations                                 public housing and key ongoing projects at the local
           (RMB bn)                                               level. (See China NPC: Signs of fiscal easing,
  1,500
                                                                  published 7 March 2012).
  1,000
    500                                                           Despite slower revenue growth and the economic
      0                                                           slowdown, Beijing’s nearly RMB3trn of cash
   -500                                                           deposits (or 6.4% of GDP) has allowed it to push
 -1,000                                                           out bold tax reduction measures. The announced
 -1,500                                                           measures include:
          09             10         11             12
           Liquidity injection           Liquidity w ithdraw al    Personal income tax adjustments became
           Net position
                                                                    effective from September 2011, so an extra
 Source: Wind, HSBC
                                                                    60m people are now exempt.
Second, we expect at least two further reserve                     The threshold of VAT and business tax for
requirement ratio (RRR) cuts in 1H12, with the                      small companies was raised from 1 November
next one likely to come as soon as in the coming                    2011; 63% of those small, privately owned
weeks. It is essential to make additional across the                businesses are now exempt.
board easing to boost liquidity conditions and
stimulate demand. The open market operation is                     Exemption of 22 types of administrative fees for
not a substitute to RRR cuts. For example, the                      small- and micro-sized companies in 2012-14.
PBoC delivered the second RRR cut in February,                     The income tax for small companies with an
despite the large reverse repo conducted around                     annual taxable income below RMB60,000
the Lunar New Year.                                                 (equivalent to USD9,430) will be halved from
Meanwhile, it was reported in the media, including                  2012-15.
Bloomberg, that the PBoC used differentiated RRR                   The average tariffs on more than 730
management tools to allow a reduction of the RRR                    categories of imported goods will be lowered
for the local branches of Agricultural Bank of China.               to 4.4 % in 2012.
That said, these are marginal, targeted measures (to
                                                                    Chart15. Plenty of fiscal ammunition
boost lending to rural areas), which cannot replace
across the board RRR cuts.                                                   (RMB bn)
                                                                   3,500
                                                                   3,000
We also expect a 25bp rate cut around the end of                                  Fiscal deposits
                                                                   2,500
2Q12, when inflation should slow meaningfully.
                                                                   2,000
This, plus quantitative easing, should lower
                                                                   1,500
borrowing costs and boost investment demand.
                                                                   1,000
More importantly, China has plenty of fiscal                         500
ammunition, allowing for additional tax cuts and                        0
spending. The 2012 budget report sets a bigger                               99 00 01 02 03 04 05 06 07 08 09 10 11 12*
deficit (1.5% of GDP versus an actual 1.1% in 2011)                 Source: CEIC, HSBC

than last year. Fiscal expenditure is expected to rise
by 14.1% y-o-y, focused upon public housing, social               However, additional tax cuts could be considered
security, education and healthcare. A larger local                to support small companies and jobs. For instance,
bond issuance plan would help to boost funding for                the VAT reform could be extended to a wider


                                                                                                                            9
     Macro
     China Economics                                    abc
     27 March 2012




region once the Shanghai pilot scheme makes
initial progress, taxes on small companies could
be lowered further, and the exports tax rebates
process could be shortened. The VAT reform, if
rolled out across the whole country, would reduce
the tax burden by RMB100bn each year,
according to the head of State Administration of
Taxation, who also indicated that Guangdong
province would be considered for admittance into
the pilot VAT reform programme.

At the same time, there is ample room for fiscal
spending. On the one hand, there is still plenty of
slack in infrastructure development; China is far
from over-invested in this area (see China Inside
Out: What over-investment?, 14 February 2012). On
the other hand, China still needs to catch up with
developing infrastructure for social security and
education (schools, hospitals, and even school
buses). Government spending could be used as seed
money and investment rules could be deregulated to
allow private funding invest in such areas.

Monetary easing, plus tax cuts and fiscal spending,
should gradually filter through to stabilise domestic
demand in the coming months and generate a
modest rebound of growth in 2H12. We expect GDP
growth to bottom out gradually in 2Q12 from our
expectation of around 8% y-o-y in 1Q12 and speed
up to 8.8-8.9% y-o-y in 2H12, leaving full-year GDP
growth at around 8.6%.




10
Macro
China Economics     abc
27 March 2012




                  Charts




                       11
     Macro
     China Economics                                                                                                        abc
     27 March 2012




GDP
 China’s economic growth slowed to a 10-quarter low of 8.9% y-o-y
         in 4Q11 (9.1% y-o-y in 3Q11); seasonally adjusted, q-o-q growth
         eased to 2.0% in 4Q11 from 2.3% in 3Q11
 With the European crisis biting China’s exports, growth slows further
         in 1Q11, as the March reading of the HSBC Flash Manufacturing
         PMI dipped to a four-month low and was well below the 50 line
 Growth remains the top macro risk; it is likely to hit the cyclical
         trough in 1Q12 before starting to bottom out in 2Q12, when further
         easing measures filter through

 1. Long-term real GDP trend                            2. OECD leading index versus China real GDP

 18                                                     12       %yoy                                      %yoy        14

 15                                                      8                                                             13
                                                                                                                       12
 12                                                      4
                                                                                                                       11
     9                                                   0                                                             10
     6                                                                                                                 9
                                                         -4
                                                                                                                       8
     3                                                   -8                                                            7
     0                                                  -12                                                            6
         00 01 02 03 04 05 06 07 08 09 10 11                  00 01 02 03 04 05 06 07 08 09 10 11 12
                  %YoY               SAAR                          OECD leading (LHS)    Real GDP (RHS)


 Source: CEIC, HSBC                                     Source: CEIC, HSBC



 3. Service and manufacturing PMI                       4. Economic leading indicator versus business climate change

 65                                                     12      % yoy                                     % yoy    30

 60                                                      9                                                         20

 55                                                      6                                                         10

 50                                                      3                                                         0

 45                                                      0                                                         -10

 40                                                     -3                                                         -20

 35                                                     -6                                                         -30
         08            09             10   11                 00 01 02 03 04 05 06 07 08 09 10 11
                                                                         Economic leading indicator (LHS)
                      PMI - service         PMI - mfg                    Business climate index (RHS)

 Source: CEIC, HSBC                                     Source: CEIC, HSBC




12
  Macro
  China Economics                                                                                                                                                                                      abc
  27 March 2012




5. GDP, by region (nominal GDP, weighted)                                                                                        6. GDP, by industry

17            YTD, %yoy                                                                                                          21          YTD, %yoy

15                                                                                                                               18
13                                                                                                                               15

11                                                                                                                               12
                                                                                                                                  9
 9
                                                                                                                                  6
 7
                                                                                                                                  3
 5
                                                                                                                                  0
                                                                               Sep-09
     Mar-05
               Sep-05
                         Mar-06
                                  Sep-06


                                                    Sep-07


                                                                      Sep-08
                                                                      Mar-09


                                                                                        Mar-10
                                                                                                 Sep-10


                                                                                                                   Sep-11
                                           Mar-07


                                                             Mar-08




                                                                                                          Mar-11




                                                                                                                                        93     95     97    99   01    03   05   07    09    11
                          Bohai                                       YRD                                 PRD                                    Primary           Secondary           Tertiary

Source: CEIC, HSBC                                                                                                               Source: CEIC, HSBC




7. Industrial production                                                                                                         8. Commodity production

21            % yoy, 3mma                                                                                                         40          % yoy, 3mma
                                                                                                                                  35
18                                                                                                                                30
                                                                                                                                  25
15
                                                                                                                                  20
12                                                                                                                                15
                                                                                                                                  10
  9                                                                                                                                 5
                                                                                                                                    0
  6                                                                                                                                -5
  3                                                                                                                              -10
      01 02 03 04 05 06 07 08 09 10 11 12                                                                                               01 02 03 04 05 06              07 08 09 10 11 12
                                                                                                                                             Coal production              Electricity production
                         VAI

Source: CEIC, HSBC                                                                                                               Source: CEIC, HSBC




9. Construction sector                                                                                                           10. Confidence indices

3,000                   RMB bn                                                                        %yoy                  30   110
                                                                                                                                                                                                  64
2,500                                                                                                                       28   105                                                              62
2,000                                                                                                                       26                                                                    60
                                                                                                                                 100
                                                                                                                                                                                                  58
1,500                                                                                                                       24
                                                                                                                                  95                                                              56
1,000                                                                                                                       22
                                                                                                                                                                                                  54
                                                                                                                                  90
 500                                                                                                                        20                                                                    52
       0                                                                                                                    18    85                                                              50
              07                     08          09          10                                       11                                02      03   04    05 06 07 08 09 10 11             12
                                                                                                                                                           Consumer confidence (LHS)
                                     Construction output value                                        %yoy                                                 Future income confidence (RHS)

Source: CEIC, HSBC                                                                                                               Source: CEIC, HSBC




                                                                                                                                                                                                         13
     Macro
     China Economics                                                                                                                abc
     27 March 2012




Industrial production
 IP growth fell to 11.4% y-o-y in January-February from 12.8%
         y-o-y in December, translating into a 0.7% m-o-m seasonally
         adjusted growth rate in February, down from 0.9% in December
 The slowdown was driven by heavy industries, where growth
         dropped to 10.9% y-o-y in January-February from 13% in
         December, subtracting c1.5ppts from January-February’s IP growth
 As March’s HSBC Flash PMI dipped to a four-month low and was
         well below the 50 line for the fifth consecutive month, it points to a
         further slowdown of IP growth


 1. Industrial production vs. GDP                                  2. Industrial production growth trend

 21           %yoy                                %yoy        15   21      %yoy, 3mma                      %mom, 3mma          5
 19                                                           14   19
                                                                                                                               4
 17                                                           13   17
                                                              12   15                                                          3
 15
                                                              11
 13                                                                13                                                          2
                                                              10
 11                                                                11                                                          1
                                                              9
     9                                                        8     9
                                                                                                                               0
     7                                                        7     7
     5                                                        6     5                                                          -1
         01 02 03 04 05 06 07 08 09 10 11 12                            00 01 02 03 04 05 06 07 08 09 10 11 12
                   IP(LHS)         GDP (RHS)                                       %YoY                     SA, %MoM
 Source: CEIC, HSBC                                                Source: CEIC, HSBC



 3. Industrial production vs. manufacturing PMI                    4. Electricity production changes together with IP

 21           %yoy, 3mma                                 %    65   23      % yoy, 3mma                        % yoy, 3mma     35
 19                                                                21                                                         30
                                                              60
 17                                                                19                                                         25
                                                              55   17                                                         20
 15                                                                                                                           15
                                                                   15
 13                                                           50                                                              10
                                                                   13
 11                                                                                                                           5
                                                              45   11
     9                                                                                                                        0
                                                              40    9                                                         -5
     7
                                                                    7                                                         -10
     5                                                        35    5                                                         -15
         05      06       07     08   09   10    11      12             97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
                      IP (LHS)             Mfg PMI (RHS)                         IP                  Electricity production
 Source: CEIC, HSBC                                                Source: CEIC, HSBC




14
  Macro
  China Economics                                                                                                                                                                                abc
  27 March 2012




5. IP by industry                                                      6. IP by enterprises ownership

24          % yoy, 3mma                                                25            % yoy, 3mma
22
20                                                                     20
18
                                                                       15
16
14                                                                     10
12
10                                                                      5
 8
                                                                        0
 6
 4                                                                          01        02          03       04        05        06        07            08        09       10      11      12
       01    02   03 04 05 06           07   08    09 10 11 12                        SOE                                                              Collective ownership
                  Light industry                  Heavy industry                      Share holding enterprise                                         Foreign funded
Source: CEIC, HSBC                                                     Source: CEIC, HSBC




7. Manufacturing PMI breakdown                                         8. Industrial profit margin

90          %                                                          10            %
80                                                                      9
70                                                                      8
60                                                                      7
                                                                        6
50
                                                                        5
40                                                                      4
30                                                                      3
20                                                                      2
10                                                                      1
       05      06        07      08     09       10       11     12     0
            PMI Index              Output                 New Orders        99 00 01 02 03 04 05 06 07 08 09 10 11
            Input Prices           Output Prices                                     Industrial enterprise: pre-tax profit margin
Source: CEIC, HSBC                                                     Source: CEIC, HSBC




9. Mining, petroleum and natural gas extraction                        10. Manufacturing production

 30         % yoy                                                      40            % yoy
 25                                                                    35
 20                                                                    30
 15                                                                    25
 10                                                                    20
   5                                                                   15
   0                                                                   10
  -5                                                                    5
-10                                                                     0
       Apr-09
       Apr-07

       Oct-07


        Jul-08
       Oct-08


        Jul-09

       Jan-10


       Oct-10


        Jul-11
       Jan-07

        Jul-07

       Jan-08
       Apr-08


       Jan-09


       Oct-09

       Apr-10
        Jul-10

       Jan-11
       Apr-11

       Oct-11
       Jan-12




                                                                            Jan-07



                                                                                                  Jan-08
                                                                                         Jul-07



                                                                                                            Jul-08

                                                                                                                      Jan-09

                                                                                                                                Jul-09

                                                                                                                                              Jan-10

                                                                                                                                                            Jul-10

                                                                                                                                                                      Jan-11

                                                                                                                                                                               Jul-11

                                                                                                                                                                                        Jan-12




                          Coal mining & dressing                                             Food                                                            Textile
                          Petroleum & natural gas extraction                                 Electric M&E                                                    Transport'n equip
Source: CEIC, HSBC                                                     Source: CEIC, HSBC




                                                                                                                                                                                                   15
     Macro
     China Economics                                                                                                                 abc
     27 March 2012




Private consumption
 Retail sales growth decelerated to 14.7% y-o-y in January-February
      from 18.1% in December; despite easing inflation, retail sales real
      growth cooled to a six-month low of 10.8% from 13.8% in December
 Breaking down individual components showed that a slowdown
      was broad-based in the January-February period, spanning from
      staples to durables
 Consumer consumption is likely to remain resilient, thanks to a
      still steady job market and low leverage of Chinese households



 1. Retail sales trend                                                2. Consumer confidence

 25                                                             50    120       %
 23
 21                                                             40
                                                                      110
 19                                                             30
 17
 15                                                             20    100
 13
 11                                                             10     90
  9                                                             0
  7
                                                                       80
  5                                                             -10
                                                                            00 01 02 03 04 05 06 07 08 09 10 11 12
      00 01 02 03 04 05 06 07 08 09 10 11                                        Consumer confidence Satisfactory index
            %YoY (LHS)        SAAR, 3mma (RHS)                                   Expectation index
 Source: CEIC, HSBC                                                   Source: CEIC, HSBC



 3. Confidence in income                                              4. Confidence in prices

 65                                                                   90        %
                                                                      80
 60                                                                   70
                                                                      60
 55                                                                   50
                                                                      40
 50                                                                   30
                                                                      20
 45                                                                   10
      01   02    03   04     05 06 07 08 09           10   11              01       02   03   04   05 06 07 08 09 10            11
                           Current income sentiment                                                Current price satisfaction
                           Future income confidence                                                Future price expectation
 Source: CEIC, HSBC                                                   Source: CEIC, HSBC




16
  Macro
  China Economics                                                                                                                               abc
  27 March 2012




5. Retail sales, by sector                                             6. Retail sales in urban vs. rural areas

27        % yoy                                                        27          % yoy
24                                                                     24
21                                                                     21
18                                                                     18
15
                                                                       15
12
                                                                       12
 9
                                                                        9
     06          07          08       09        10     11         12
                                                                              06         07        08        09       10       11          12
                           Wholesale & Retail Trade
                           Accommodation & Catering Trade                                     Urban                            Rural

Source: CEIC, HSBC                                                     Source: CEIC, HSBC




7. Per-capita income vs. expenditure – Urban households                8. Per-capita income vs. expenditure – Rural households

25        per capita, % yoy                                            30          per capita, % yoy

20                                                                     25
                                                                       20
15
                                                                       15
10                                                                     10
 5                                                                      5

 0                                                                      0
     03     04        05      06    07     08   09    10    11         -5
                              Income                                          02     03 04 05           06    07 08 09 10 11
                              Disposable income
                              Consumption expenditure                               Cash Income              Cash consumption expenditure

Source: CEIC, HSBC                                                     Source: CEIC, HSBC




9. Expenditure, by product – Urban households                          10. Expenditure, by product – Rural households

30        %yoy                                                          40          %yoy
25                                                                      35
                                                                        30
20                                                                      25
15                                                                      20
                                                                        15
10                                                                      10
 5                                                                        5
                                                                          0
 0
                                                                         -5
-5                                                                     -10
     03     04   05      06    07        08    09     10 11                   03       04     05      06       07     08     09      10
            Food & housing                     Clothing                               Food & housing                    Clothing
            Transport & telecom                Service & others                       Transport & telecom               Service & others
Source: CEIC, HSBC                                                     Source: CEIC, HSBC




                                                                                                                                                  17
     Macro
     China Economics                                                                                                                     abc
     27 March 2012




Fixed investment
 Fixed asset investment (FAI) growth slowed to 21.5% in the
      January-February period from c22% y-o-y in 4Q11 and 23.8%
      y-o-y for 2011
 Investment at local levels cooled to 24% y-o-y in January-
      February from 27.2% in 2012, while investment backed by the
      central government contracted by 7.9% y-o-y in January-February
 Investment is likely to slow further, in our view, but the pace will
      likely remain steady in 2012, thanks to the accelerated
      construction of public housing and ongoing infrastructure projects


 1. FAI growth                                                      2. FAI, by enterprise ownership

 36                                                                 70         ytd, %yoy
 34                                                                 60
 32                                                                 50
 30                                                                  40
                                                                     30
 28
                                                                     20
 26
                                                                     10
 24
                                                                      0
 22                                                                 -10
 20                                                                       05       06      07       08   09    10       11          12
      05      06       07        08     09       10      11    12                  SOE                        Shareholding
                                  ytd, %yoy                                        Private enterprise         Foreign fund
 Source: CEIC, HSBC                                                 Source: CEIC, HSBC



 3. Construction vs. equipment purchase                             4. Number of projects started and under construction

 38        ytd, %yoy                                                60         ytd, %yoy
 36                                                                 50
 34                                                                 40
 32
                                                                    30
 30
 28                                                                 20
 26                                                                 10
 24                                                                  0
 22                                                                 -10
 20                                                                 -20
      05      06       07        08      09       10      11   12         05       06      07      08    09    10        11         12
                            Construction and installation
                            Equipment purchase                                     Under construction               Newly Started

 Source: CEIC, HSBC                                                 Source: CEIC, HSBC




18
  Macro
  China Economics                                                                                                                                                                        abc
  27 March 2012




5. FAI, by work type                                                     6. FAI in mining sector

70        ytd, %yoy                                                                  ytd, %yoy
                                                                         140
60
                                                                         120
50                                                                       100
40                                                                        80
30                                                                        60
20                                                                        40
10                                                                        20
                                                                           0
 0
                                                                               05         06     07                     08           09          10        11       12
     05          06      07     08       09         10     11     12
                 New Construction                   Expansion                            Coal                                                  Ferrous metal
                 Transformation                                                          Non metal                                             Electricity & heating

Source: CEIC, HSBC                                                       Source: CEIC, HSBC




7. FAI in manufacturing sectors                                          8. FAI in construction, real estate and transport

100        ytd, %yoy                                                     100        ytd, % yoy

 80                                                                       80

 60                                                                       60
                                                                          40
 40
                                                                          20
 20
                                                                           0
  0
                                                                         -20
-20
                                                                         -40
      05        06      07       08       09        10       11    12
               Chemical                             Non metal mineral          05      06       07                      08     09      10                            11     12
               Textile                              Electric M&E                    Real estate                           Construction                                Transport
Source: CEIC, HSBC                                                       Source: CEIC, HSBC




9. FAI, by infrastructure project                                        10. FAI, by source of financing

  100%                                                                     100%
     80%                                                                    80%

     60%                                                                    60%

     40%                                                                    40%

     20%                                                                    20%

      0%                                                                       0%
                                                                                                               Jul-08
                                                                                                                        Jan-09




                                                                                                                                                                       Jul-11
                                                                                                                                                                                Jan-12
                                                                                    Jan-07
                                                                                             Jul-07




                                                                                                                                 Jul-09
                                                                                                                                          Jan-10
                                                                                                                                                   Jul-10
                                                                                                      Jan-08




                                                                                                                                                            Jan-11




            04      05    06     07     08     09      10    11   12

     Railway       Highway     Urban public transit    Waterway    Air
                                                                           State budget               Domestic loan                Foreign capital                    Self raised

Source: CEIC, HSBC                                                       Source: CEIC, HSBC




                                                                                                                                                                                           19
     Macro
     China Economics                                                                                                              abc
     27 March 2012




Trade
 Combined January-February exports (to eliminate the Lunar New
     Year distortion) only expanded by 6.9% y-o-y, less than half of the
     14.3% y-o-y recorded in 4Q11 and one third of the 2011 average
 Imports growth for January-February only expanded by 7.7%
     y-o-y, sharply below the 20.6% y-o-y averaged in 4Q11
 China recorded a trade deficit of USD4.2bn in January-February,
     or nearly five times the trade deficit of USD0.85bn recorded in the
     same period last year; we expect a smaller trade surplus in 2012



 1. Overall external trade trend                                       2. Sequential growth in exports and imports

 80        %yoy, 3mma                               USD bn       40    25      %mom, 3mma
                                                                 30    20
 60
                                                                 20    15
 40
                                                                 10    10
 20                                                              0      5
     0                                                           -10    0
                                                                 -20    -5
 -20                                                             -30
                                                                       -10
 -40                                                             -40
                                                                       -15
         95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
              Trade balance (RHS)             Export (LHS)                   00 01 02 03 04 05 06 07 08 09 10 11 12
              Import (LHS)                                                          Export (SA)        Imports (SA)
 Source: CEIC, HSBC                                                    Source: CEIC, HSBC



 3. Exports to G3 and ROW                                              4. Imports from G3 and ROW

 50          %yoy, 3mma                                                100      % yoy, 3mma
 40                                                                     80
 30                                                                     60
 20                                                                     40
 10                                                                     20
     0                                                                   0
 -10                                                                   -20
 -20                                                                   -40
 -30                                                                   -60
         96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12                  96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
                  Export to G3            Export to ROW                            Import from G3             Import from ROW
 Source: CEIC, HSBC                                                    Source: CEIC, HSBC




20
  Macro
  China Economics                                                                                                                                abc
  27 March 2012




5. Taiwan’s new export orders as a leading indicator                   6. PMI new export orders vs. exports

80         % yoy, 3mma                                                  10 %mom, 3mma                                                 Pts   60
                                                                          8                                                                 55
60
                                                                          6
                                                                                                                                            50
40                                                                        4
                                                                          2                                                                 45
20                                                                        0                                                                 40
                                                                         -2                                                                 35
 0
                                                                         -4
                                                                                                                                            30
-20                                                                      -6
                                                                         -8                                                                 25
-40                                                                    -10                                                                 20
      95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12                 04  05      06    07         08        09    10     11     12
              Export            Taiwan's new export orders                     Export (SA, LHS)                   PMI new export orders (RHS)
Source: CEIC, HSBC                                                     Source: CEIC, HSBC




7. Exports – ordinary vs. processing trade                             8. Trade price index

100        % yoy                                                                  % yoy
                                                                       80
 80                                                                    60
 60                                                                    40
 40                                                                    20
 20                                                                      0
                                                                       -20
  0
                                                                       -40
-20
                                                                       -60
-40                                                                          06        07        08          09        10        11         12
      06        07         08        09        10       11       12               Export trade index value            Import trade index value
             Export - Ordinary trade             Export - Processing
Source: CEIC, HSBC                                                     Source: CEIC, HSBC




9. Exports, by major commodity                                         10. Imports, by major commodity

120        % yoy                                                        70 % yoy, 3mma
 90                                                                     60
 60                                                                     50
                                                                        40
 30
                                                                        30
  0
                                                                        20
-30                                                                     10
-60                                                                      0
      06         07        08         09        10        11     12    -10
                         Mineral fuel, lubricants & material
                         Manufactured goods                            -20
                         Machiery & transport equipment                    06        07          08          09       10        11          12
                         Misc. mfg articles                                         Iron ore                       Crude petroleum oil
Source: CEIC, HSBC                                                     Source: CEIC, HSBC




                                                                                                                                                   21
     Macro
     China Economics                                                                                                         abc
     27 March 2012




Prices
 February’s headline CPI eased to 3.2% y-o-y in February from
         4.5% in January, the lowest reading in 20 months
 The slowdown was mainly driven by food prices, which cooled to
         6.2% y-o-y in February from 10.5% in January, subtracting 1.3ppt
         from headline CPI versus an addition of 0.4ppt in January
 Inflationary pressures should continue to ease; higher oil prices
         should have a limited impact on headline CPI




 1. Consumer price trend                              2. CPI, by major segment

 10        %yoy                  %mom, 3mma    2.0    25         %yoy
     8                                         1.5    20
     6
                                               1.0    15
     4
                                               0.5    10
     2
                                               0.0     5
     0
 -2                                            -0.5    0

 -4                                            -1.0   -5
         01 02 03 04 05 06 07 08 09 10 11 12                06      07       08     09           10       11          12
               YOY (LHS)           MOM (RHS)                       Overall           Core                      Food
 Source: CEIC, HSBC                                   Source: CEIC, HSBC



 3. Urban vs. rural inflation                         4. Producer price index

 10       %yoy                                        15         %yoy                        %mom, 3mma               1.5
     8
                                                      10
     6                                                                                                                0.5

     4                                                 5
                                                                                                                      -0.5
     2                                                 0
     0
                                                                                                                      -1.5
 -2                                                    -5

 -4                                                   -10                                                             -2.5
         01 02 03 04 05 06 07 08 09 10 11 12                03    04     05 06 07   08      09        10 11 12
                  Urban             Rural                               YOY (LHS)                     MOM (RHS)
 Source: CEIC, HSBC                                   Source: CEIC, HSBC




22
  Macro
  China Economics                                                                                                                       abc
  27 March 2012




5. PPI, by industry (1)                                          6. PPI, by industry (2)

15         %yoy                                                  15          %yoy

10                                                               10
  5
                                                                  5
  0
                                                                  0
 -5

-10                                                               -5

-15                                                              -10
      01 02 03 04 05 06             07 08     09 10 11 12              01 02 03 04 05 06 07 08 09 10 11 12
            Light industry                   Heavy industry                 Producer goods    Consumer goods
Source: CEIC, HSBC                                               Source: CEIC, HSBC




7. Purchase and output prices                                    8. Fixed asset investment price index

20         % yoy                                                 20         % yoy
15
                                                                 15
10
                                                                 10
 5
 0                                                                 5
 -5                                                                0
-10                                                               -5
-15
                                                                 -10
      01 02 03 04 05 06 07 08 09 10 11 12
               PPI                                                     05       06       07       08    09      10      11        12
               Corporate goods price index                                    Overall index                   Equip, tool & instrum't
               Purchasing price index - raw materials                         Construct'n & install'n

Source: CEIC, HSBC                                               Source: CEIC, HSBC




9. Petroleum prices                                              10. Property prices

180        % yoy                                                 30         % yoy
150                                                              25
120
                                                                 20
 90
 60                                                              15
 30                                                              10
  0                                                               5
-30
                                                                  0
-60
      05       06     07      08       09       10     11   12   -5
                       PPI - petroleum and natural gas                 01    02     03   04   05 06 07 08 09 10             11    12
                       Import value index - petroleum                                         Residential property price
Source: CEIC, HSBC                                               Source: CEIC, HSBC




                                                                                                                                          23
     Macro
     China Economics                                                                                                 abc
     27 March 2012




Commodity prices
 PPI growth dropped sharply to a 27-month low of 0% y-o-y in
     February, down from 0.7% in January
 PPI growth for producer goods fell by 0.5% y-o-y in February,
     compared with 0.3% y-o-y in January
 PPI growth for consumer goods continued to decelerate to 1.7%
     y-o-y in February, compared with 2.1% y-o-y in January




 1. Wholesale price: Whorl steel                            2. Wholesale price: Electrolysed copper

 6,000        RMB / Ton                                     80,000        RMB / Ton

 5,500                                                      70,000
                                                            60,000
 5,000
                                                            50,000
 4,500
                                                            40,000
 4,000
                                                            30,000
 3,500                                                      20,000
 3,000                                                      10,000
         04     05    06   07      08   09   10   11   12            01 02 03 04 05 06 07 08 09 10 11 12

 Source: CEIC, HSBC                                         Source: CEIC, HSBC



 3. Wholesale price: Aluminium                              4. Wholesale price: Lead

 23,000        RMB / Ton                                    26,000        RMB / Ton

 21,000
                                                            22,000
 19,000

 17,000                                                     18,000

 15,000
                                                            14,000
 13,000

 11,000                                                     10,000
          01 02 03 04 05 06 07 08 09 10 11 12                        06          07   08    09        10   11   12

 Source: CEIC, HSBC                                         Source: CEIC, HSBC




24
  Macro
  China Economics                                                                               abc
  27 March 2012




5. Wholesale price: Zinc                       6. Wholesale price: Nickel

36,000        RMB / Ton                        450,000          RMB / Ton
32,000                                         400,000

28,000                                         350,000
                                               300,000
24,000
                                               250,000
20,000
                                               200,000
16,000                                         150,000
12,000                                         100,000
 8,000                                          50,000
         01 02 03 04 05 06 07 08 09 10 11 12              01 02 03 04 05 06 07 08 09 10 11 12

Source: CEIC, HSBC                             Source: CEIC, HSBC




7. Wholesale price: Diesel oil                 8. Wholesale price: Gasoline

9,000         RMB / Ton                        10,000      RMB / Ton
8,000                                           9,000
7,000                                           8,000
6,000                                           7,000
5,000                                           6,000
4,000                                           5,000
3,000                                           4,000
2,000                                           3,000
         01 02 03 04 05 06 07 08 09 10 11 12            01 02 03 04 05 06 07 08 09 10 11 12

Source: CEIC, HSBC                             Source: CEIC, HSBC




9. Retail price: Rice                          10. Retail price: Flour

5.50       RMB / Kg                            4.00       RMB / Kg
5.25
5.00                                           3.75
4.75                                           3.50
4.50
4.25                                           3.25
4.00                                           3.00
3.75
3.50                                           2.75
3.25                                           2.50
3.00
2.75                                           2.25
2.50                                           2.00
2.25
2.00                                           1.75
       01 02 03 04 05 06 07 08 09 10 11 12            01 02 03 04 05 06 07 08 09 10 11 12

Source: CEIC, HSBC                             Source: CEIC, HSBC




                                                                                                  25
     Macro
     China Economics                                                                                                                                            abc
     27 March 2012




Money and credit growth
 New lending slowed to RMB710.7bn in February, down from
         RMB738.1bn in January
 Lower new loans in February were driven by weak new loans to
         the household sector and a smaller amount of medium- and long-
         term loans to the corporate sector
 Broad money (M2) picked up to 13% y-o-y from 12.4% y-o-y in
         January, reflecting a rebound in deposits, but current M2 growth is
         still below 13.6% at end-2011 and the official 2012 target of 14%



 1. Loans vs. money supply                                  2. Deposits vs. loan growth

 40           %yoy                                          40         %yoy
 35                                                         35
 30                                                         30
                                                            25
 25
                                                            20
 20
                                                            15
 15                                                         10
 10                                                          5
     5                                                       0
     0                                                      -5
         98 99 00 01 02 03 04 05 06 07 08 09 10 11 12            01       02   03 04               05         06       07    08 09 10 11 12
                 M1             M2            Loan                             Deposit                                       Household deposit
 Source: CEIC, HSBC                                         Source: CEIC, HSBC



 3. FAI vs. loan growth                                     4. New renminbi loans

 55            %yoy                                         2100          RMB bn
 50                                                         1800
 45                                                         1500                             New RMB loan
                                                            1200
 40                                                          900
 35                                                          600
 30                                                          300
                                                               0
 25                                                         -300
 20
                                                                                                                                     Jan-11



                                                                                                                                                       Jan-12
                                                                      Jan-08



                                                                                        Jan-09



                                                                                                                   Jan-10




                                                                                                                                              Jul-11
                                                                               Jul-08



                                                                                                     Jul-09



                                                                                                                            Jul-10




 15
 10
  5                                                                                              Medium & long term
         04      05   06    07   08   09   10     11   12                                        Short term and bill financing
                       Loan                     FAI                                              New loan

 Source: CEIC, HSBC                                         Source: CEIC, HSBC




26
  Macro
  China Economics                                                                                                                                                                                    abc
  27 March 2012




5. PBoC open market operations                                           6. Consumer credit

2,000            RMB bn                                                  70            %yoy
                                                                         60
1,000
                                                                         50
         0                                                               40
                                                                         30
-1,000
                                                                         20
-2,000                                                                   10


                                                                              Jan-08
                                                                                        May-08




                                                                                                                                               May-10


                                                                                                                                                                 Jan-11
                                                                                                 Sep-08
                                                                                                           Jan-09
                                                                                                                    May-09
                                                                                                                             Sep-09
                                                                                                                                      Jan-10


                                                                                                                                                        Sep-10


                                                                                                                                                                          May-11
                                                                                                                                                                                   Sep-11
                                                                                                                                                                                            Jan-12
             08            09              10        11            12
              Liquidity injection               Liquidity w ithdraw al
              Net position                                                                                Consumer loan                                                      Loan
Source: Wind, HSBC (Data up to 26 March 2012)                            Source: CEIC, HSBC




7. Loan-to-deposit ratio                                                 8. Money supply vs. price level

95           %                                                           45            % yoy                                                                                % yoy              10
90                                                                       40                                                                                                                    8
                                                                         35
85
                                                                         30                                                                                                                    6
80
                                                                         25                                                                                                                    4
75
                                                                         20
                                                                                                                                                                                               2
70                                                                       15
65                                                                                                                                                                                             0
                                                                         10
60                                                                        5                                                    -2
     98 99 00 01 02 03 04 05 06 07 08 09 10 11 12                             98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
                       Loan-to-deposit ratio                                        M1 (LHS)          CPI (Lag by 6 months, RHS)
Source: CEIC, HSBC                                                       Source: CEIC, HSBC




9. M1-M2 gap vs. CPI                                                     10. Foreign reserves

 15          % yoy                                       % yoy     10    3,500                                                                                                                  55
                                                                         3,000                                                                                                                  50
 10                                                                8                                                                                                                            45
                                                                         2,500                                                                                                                  40
     5                                                             6
                                                                         2,000                                                                                                                  35
     0                                                             4                                                                                                                            30
                                                                         1,500                                                                                                                  25
  -5                                                               2     1,000                                                                                                                  20
                                                                                                                                                                                                15
-10                                                                0      500
                                                                                                                                                                                                10
                                                                                0                                                                                                               5
-15                                                                -2
                                                                                       00 01 02 03 04 05 06 07 08 09 10 11
         01 02 03 04 05 06 07 08 09 10 11 12
              M1-M2 gap (LHS)       CPI (RHS)                                                 USD bn (LHS)      %YoY (RHS)

Source: CEIC, HSBC                                                       Source: CEIC, HSBC




                                                                                                                                                                                                       27
     Macro
     China Economics                                                                                                                                                                           abc
     27 March 2012




Interest and exchange rates
 Quantitative easing via at least another 100bp of reserve ratio
     cuts in 1H12 is likely to be the major tool for supporting growth
 We expect a 25bp rate cut when inflation slows meaningfully to
     below 3% around the middle of 2012
 The pace of appreciation is likely to slow to c3% in 2012 from
     c5% in 2011, thanks to the fundamental change in the narrowing
     trade surplus-to-GDP ratio to just c2% in 2011 from a peak of
     7.5% in 2007



 1. Lending vs. savings rates                                        2. Required reserve ratio

 8     % p.a.                                                        23            %
 7                                                                   21
 6                                                                   19
                                                                     17
 5
                                                                     15
 4                                                                   13
 3                                                                   11
 2                                                                    9
 1                                                                    7
 0                                                                         06                 07          08        09          10     11                                              12
                                                                                                     RRR
     00 01 02 03 04 05 06 07 08 09 10 11 12                                                          Large depository institution
           1Y lending rate    1Y deposit rate                                                        Small and medium depository institution
 Source: CEIC, HSBC                                                  Source: CEIC, HSBC



 3. PBoC bill issuance and reference yield                           4. Interbank rate

 1,000      RMB bn                                      % p.a. 4     8            % p.a.
                                                               3.5   7
     800                                                       3     6
     600                                                       2.5
                                                                     5
                                                               2
     400                                                       1.5   4
                                                               1     3
     200
                                                               0.5   2
      0                                                        0     1
           Jan-06


            Jul-07

            Jul-08
           Jan-09

           Jan-10


            Jul-11
           Jan-05
            Jul-05

            Jul-06
           Jan-07

           Jan-08


            Jul-09

            Jul-10
           Jan-11

           Jan-12




                                                                     0
                                                                                                     Jul-07
                                                                                                              Jan-08
                                                                                                                       Jul-08




                                                                                                                                                  Jan-10
                                                                                                                                                           Jul-10
                                                                         Jan-06
                                                                                   Jul-06
                                                                                            Jan-07




                                                                                                                                Jan-09
                                                                                                                                         Jul-09




                                                                                                                                                                    Jan-11
                                                                                                                                                                             Jul-11
                                                                                                                                                                                      Jan-12




                      PBoC total bill issuance (LHS)
                      3M PBoC bill issuance ref. yld (RHS)                                      3M SHIBOR                                                    3M CHIBOR
 Source: CEIC, HSBC                                                  Source: CEIC, HSBC




28
    Macro
    China Economics                                                                                                                                                                                                  abc
    27 March 2012




5. Bond yields                                                                                                                                 6. Mortgage rate

5        % p.a.                                                                                                                                5.5        % p.a.

4
                                                                                                                                               5.0
3
                                                                                                                                               4.5
2
                                                                                                                                               4.0
1

0                                                                                                                                              3.5
    Nov-10
    Nov-08

    Mar-09
    May-09

    Nov-09

    Mar-10
    May-10




    Nov-11
     Jul-08


    Jan-09

     Jul-09


    Jan-10


    Sep-10
    Sep-08




    Sep-09




     Jul-10

    Jan-11
    Mar-11
    May-11
     Jul-11
    Sep-11
    Jan-12




                                                                                                                                               3.0
                                                      1Y treasury bond yield                                                                         02     03       04 05 06       07   08    09     10 11     12
                                                      1Y Policy financial bond yield                                                                                 5 Yr or Less                   Over 5 Yr
Source: CEIC, HSBC                                                                                                                             Source: CEIC, HSBC




7. Distribution of actual lending rate                                                                                                         8. Foreign exchange rate

                  %                                                                                                                            12         RMB
100
    80                                                                                                                                         11

    60                                                                                                                                         10

    40                                                                                                                                          9
    20                                                                                                                                          8
    0                                                                                                                                           7
                                                                                                    Sep-10
                   May-08


                                             Jan-09




                                                                           Jan-10
         Jan-08


                                 Sep-08


                                                       May-09
                                                                Sep-09


                                                                                         May-10


                                                                                                             Jan-11
                                                                                                                      May-11
                                                                                                                                 Sep-11




                                                                                                                                                6
                                                                                                                                                     03     04 05          06    07 08 09           10    11 12
         As Benchmark                                      10% below                                         10% above
         10-30% above                                      30-100% above                                                                                   RMB/USD               RMB/JPY100              RMB/EUR

Source: CEIC, HSBC                                                                                                                             Source: CEIC, HSBC




9. RMB spot vs. forward rate                                                                                                                   10. Effective exchange rate

                   RMB/USD                                                                                                                     25         %yoy
6.95
6.85                                                                                                                                           20
6.75                                                                                                                                           15
6.65                                                                                                                                           10
6.55
6.45                                                                                                                                            5
6.35                                                                                                                                            0
6.25                                                                                                                                            -5
6.15                                                                                                                                           -10
                                                                                                                        Sep-11

                                                                                                                                      Jan-12
          Jan-09

                        May-09

                                          Sep-09

                                                       Jan-10

                                                                  May-10

                                                                                Sep-10

                                                                                                  Jan-11

                                                                                                             May-11




                                                                                                                                               -15
                                                                                                                                                     96         98     00   02      04    06        08   10     12
                                      Spot                                                                 12M NDF                                                     REER                           NEER
Source: CEIC, HSBC                                                                                                                             Source: CEIC, HSBC




                                                                                                                                                                                                                       29
     Macro
     China Economics                                                                                                                  abc
     27 March 2012




Employment and income
 China created 12.21m new jobs in 2011 (overshooting the annual
         target of 9m) and the official urban registered unemployment ratio
         remained at 4.1% at end-2011
 As external demand weakens, this started to trickle through to job
         markets; we believe Beijing needs to act more decisively to
         stabilise growth and jobs
 Household income grew rapidly in the first three quarters of 2011,
         particularly income of rural households, which grew 13.6% y-o-y in
         real terms, almost double the rate of 7.8% for urban households


 1. Economic growth vs. unemployment                                  2. Creation of jobs

 15           %yoy                                         %    4.4   14,000       '000 person (YTD)                      %      13
                                                                4.3   12,000                                                     12
                                                                4.3   10,000                                                     11
 12                                                             4.2                                                              10
                                                                       8,000
                                                                4.2                                                              9
                                                                       6,000
                                                                4.1                                                              8
     9                                                          4.1    4,000                                                     7
                                                                4.0    2,000                                                     6
                                                                4.0         0                                                    5
                                                                                 Sep-08
                                                                                 Dec-08

                                                                                 Jun-09
                                                                                 Mar-09

                                                                                 Sep-09
                                                                                 Dec-09
                                                                                 Mar-10
                                                                                 Jun-10
                                                                                 Sep-10
                                                                                 Dec-10
                                                                                 Mar-11
                                                                                 Jun-11
                                                                                 Sep-11
                                                                                 Dec-11




     6                                                          3.9
         05      06        07   08      09     10     11
               GDP (LHS)             Urban unemployment rate (RHS)                  Urban new jobs (LHS)             GDP (RHS)
 Source: CEIC, HSBC                                                   Source: CEIC, HSBC



 3. Employment, by major industry                                     4. Real household income per capita

 800          mil person                                                        YTD, %yoy
                                                                      17

 600                                                                  15
                                                                      13
 400                                                                  11
                                                                       9
 200                                                                   7
                                                                       5
     0                                                                 3
              2003 2004 2005 2006 2007 2008 2009 2010                      06        07         08         09   10       11
               Primary       Secondary         Tertiary                                     Urban                    Rural
 Source: CEIC, HSBC                                                   Source: CEIC, HSBC




30
  Macro
  China Economics                                                                                                                                                                          abc
  27 March 2012




5. Economic growth vs. real wage growth                              6. Average wage growth

21        %yoy                                                       21            YTD, %yoy
19
17                                                                   18
15
13                                                                   15
11
 9                                                                   12
 7
 5                                                                    9
     02     03     04 05 06 07 08 09                   10   11            02         03         04        05         06        07         08            09            10        11
                 Real average wage growth (YTD)             GDP                                     Nominal                                                     Real
Source: CEIC, HSBC                                                   Source: CEIC, HSBC




7. Wage growth, by enterprise                                        8. Wage growth, by region

25        YTD, %yoy                                                  25            YTD, %yoy
                                                                     23
                                                                     21
20                                                                   19
                                                                     17
                                                                     15
15
                                                                     13
                                                                     11
10                                                                    9
                                                                      7
                                                                      5
                                                                                                                           Dec-05



                                                                                                                                               Jun-07
                                                                          Mar-02

                                                                                     Dec-02

                                                                                               Sep-03

                                                                                                        Jun-04




                                                                                                                                     Sep-06




                                                                                                                                                                       Dec-08

                                                                                                                                                                                  Sep-09
                                                                                                                  Mar-05




                                                                                                                                                             Mar-08




 5
     07              08          09           10             11
              SOE           Collective owned units          Others                        Eastern                            Central                                   Central
Source: CEIC, HSBC                                                   Source: CEIC, HSBC




9. Household income distribution – Urban                             10. Household income distribution – Rural

  100%                                                                    100%
                                                                           90%
     80%                                                                   80%
                                                                           70%
     60%                                                                   60%
                                                                           50%
     40%                                                                   40%
                                                                           30%
     20%                                                                   20%
                                                                           10%
      0%                                                                    0%
                  2006     2007      2008       2009        2010                              2006               2007               2008                2009                    2010
     <RMB25k          RMB25-55K      RMB55-85K         >RMB85K                 <RMB1K                   RMB1-2.5K                    RMB2.5-5K                             RMB>5K
Source: CEIC, HSBC                                                   Source: CEIC, HSBC




                                                                                                                                                                                             31
     Macro
     China Economics                                                                                                                  abc
     27 March 2012




Asset markets
 A further property market correction is likely to come through in
      the coming months, as the property tightening measures are
      unlikely to be lifted any time soon
 HSBC’s equity strategist expects the SHCOMP to reach 2,700 in
      2012, thanks to: 1) a pro-growth monetary policy stance; 2) faster
      financial sector reforms; 3) a soft landing in the property sector;
      and 4) rebounding profit growth, starting in 2Q12




 1. Stock indices                                                    2. Stock index vs. money supply

 6,000                                                               250       %yoy                                       %yoy   40
 5,000                                                               200                                                         35
                                                                     150                                                         30
 4,000
                                                                                                                                 25
                                                                     100
 3,000                                                                                                                           20
                                                                      50
 2,000                                                                                                                           15
                                                                        0                                                        10
 1,000                                                                -50                                                        5
      0                                                              -100                                                        0
          94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12           98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
                 Shanghai (SSE)               Shenzhen (SZSE)                         SSE index (LHS)         M1 (RHS)
 Source: CEIC, HSBC                                                  Source: CEIC, HSBC



 3. Price-to-earnings ratio                                          4. Market capitalisation, by stock exchange

 80       %                                                          40,000         RMB bn
 70                                                                  35,000

 60                                                                  30,000
                                                                     25,000
 50
                                                                     20,000
 40
                                                                     15,000
 30                                                                  10,000
 20                                                                   5,000
 10                                                                      -
      97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12                          06         07    08     09     10          11     12
                   SSE                    SZSE                                              SSE                    SZSE
 Source: CEIC, HSBC                                                  Source: CEIC, HSBC




32
  Macro
  China Economics                                                                                                                                                                                                  abc
  27 March 2012




5. Capital raised, by stock exchange                                                                                                  6. Real estate index

160           RMB bn                                                                                                                  108            2000=100
                                                                                                                                      106
120
                                                                                                                                      104

 80                                                                                                                                   102
                                                                                                                                      100
 40                                                                                                                                    98
                                                                                                                                       96
  0
       07                        08                   09                      10                      11                     12        94
                                                                                                                                            04          05        06    07     08      09     10    11       12
                                      SSE                                                  SZSE                                                                        Real estate climate index
Source: CEIC, HSBC                                                                                                                    Source: CEIC, HSBC




7. Property prices                                                                                                                    8. Property sales vs. money supply

14            % yoy                                                                                                                   140            % yoy                                         % yoy      45
12                                                                                                                                    120                                                                     40
10                                                                                                                                                                                                            35
                                                                                                                                      100
 8                                                                                                                                                                                                            30
 6                                                                                                                                     80
 4                                                                                                                                                                                                            25
                                                                                                                                       60
 2                                                                                                                                                                                                            20
                                                                                                                                       40                                                                     15
 0
-2                                                                                                                                     20                                                                     10
-4                                                                                                                                      0                                                                     5
     Jul-05


                        Jul-06


                                          Jul-07



                                                                     Jan-09


                                                                                       Jan-10
              Jan-06


                                 Jan-07


                                                   Jan-08
                                                            Jul-08


                                                                              Jul-09


                                                                                                 Jul-10
                                                                                                          Jan-11
                                                                                                                    Jul-11
                                                                                                                             Jan-12




                                                                                                                                      -20                                                                     0
                                                                                                                                            98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
                                                      Property price index                                                                       Property sales (YTD, LHS)      M1 (RHS)
Source: CEIC, HSBC                                                                                                                    Source: CEIC, HSBC




9. Property prices vs. money supply                                                                                                   10. Property investment vs. property started

2.0            % mom                                                                            % mom, 3mma 4                          80            YTD, % yoy
                                                                                                                                       70
1.5                                                                                                                              3     60
                                                                                                                                       50
                                                                                                                                       40
1.0                                                                                                                              2     30
                                                                                                                                       20
0.5                                                                                                                              1     10
                                                                                                                                        0
0.0                                                                                                                              0    -10
                                                                                                                                      -20
-0.5                                                                                                                             -1   -30
         Jul-05
        Jan-06
         Jul-06




                                                   Jan-09
                                                    Jul-09




                                                                                                                    Jul-11
                                                                                                                   Jan-12




                                                                                                                                                      Jan-06

                                                                                                                                                      Jan-07



                                                                                                                                                       Jul-08

                                                                                                                                                       Jul-09




                                                                                                                                                                                                         Jan-12
                                  Jan-07
                                   Jul-07
                                                   Jan-08
                                                    Jul-08



                                                                                       Jan-10
                                                                                        Jul-10
                                                                                       Jan-11




                                                                                                                                            Jan-05
                                                                                                                                                       Jul-05

                                                                                                                                                       Jul-06

                                                                                                                                                       Jul-07
                                                                                                                                                      Jan-08

                                                                                                                                                      Jan-09

                                                                                                                                                      Jan-10
                                                                                                                                                       Jul-10
                                                                                                                                                      Jan-11
                                                                                                                                                                                                          Jul-11




                       Property price index (LHS)                                                     M1 (SA, RHS)                                     Property investment               Floor space started
Source: CEIC, HSBC                                                                                                                    Source: CEIC, HSBC




                                                                                                                                                                                                                     33
     Macro
     China Economics                                                 abc
     27 March 2012




                       This page has been left blank intentionally




34
Macro
China Economics                 abc
27 March 2012




                  Data and forecasts




                                   35
     Macro
     China Economics                                                                                                                        abc
     27 March 2012




China
                                                                                        2007             2008      2009    2010    2011     2012f    2013f
Production, demand and employment
GDP growth (% y-o-y)                                                                    14.2              9.6        9.2    10.4      9.2      8.6     8.8
Nominal GDP (USDbn)                                                                    3,504            4,535     4,990    5,938   7,299    8,485    9,772
GDP per capita (USD)                                                                   2,665            3,432     3,758    4,428   5,416    6,265    7,179
Retail sales (% y-o-y)                                                                  16.8             21.6      15.5     18.5    17.1     17.0     18.0
Fixed Asset Investment (nominal, % y-o-y)                                               25.8             26.1      30.5     24.5    23.8     19.0     19.0
Net Exports (contribution to GDP growth, ppt)                                            2.5              0.8       -3.7     1.0     -0.5     -0.1     0.1
Industrial production (% y-o-y)                                                         16.0             12.9      12.9     15.7    13.2     12.5     13.2
Gross domestic saving (% GDP)                                                           51.0             51.4      51.8     52.6    51.5     51.0     50.5
Unemployment rate, average (%)                                                           4.0              4.2        4.3     4.1      4.1      4.3     4.3
Prices & wages
CPI, average (% y-o-y)                                                                   4.8              5.9       -0.7     3.3     5.4      2.9      2.6
CPI, end-year (% y-o-y)                                                                  6.5              1.2        1.9     4.6     4.1      2.8      2.2
Core CPI, average (% y-o-y)                                                              0.9              0.9       -1.1     0.9     2.2      1.0      1.0
Core CPI, end-year (% y-o-y)                                                             0.9             -0.4        0.0     1.7     1.6      0.9      0.8
PPI, average (% y-o-y)                                                                   3.1              6.9       -5.4     5.5     6.1      2.7      5.0
PPI, end-year (% y-o-y)                                                                  5.4             -1.1        1.7     5.9     1.7      5.5      5.0
Manufacturing wages, nominal (% y-o-y)                                                  16.2             15.8        9.9    15.3    13.0     12.0     13.5
Money, FX & interest rates
Central bank money M0, average (% y-o-y)                                                13.6             12.4      12.1     14.9    16.0     12.0     13.0
Broad money supply M2, average (% y-o-y)                                                17.5             16.7      26.5     23.7    16.4     14.3     15.8
Policy rate, end-year (%)                                                               7.47             5.31      5.31     5.81    6.56     6.31     6.31
5yr yield, end-year (%)                                                                 7.74             5.76      5.76     6.16    6.85     6.60     6.60
Real private sector credit growth (% Yr)                                                17.0             15.0      13.0     15.5    13.7     14.0     14.0
RMB /USD, end-year                                                                      7.30             6.82      6.83     6.62    6.30     6.12     5.92
RMB /USD, average                                                                       7.59             6.93      6.83     6.76    6.46     6.21     6.02
RMB /EUR, end-year                                                                     10.66             9.48      9.77     8.87    8.17     8.81     8.58
RMB /EUR, average                                                                      10.55            10.08      9.55     8.92    8.93     8.47     8.72
External sector
Merchandise exports (USDbn)                                                            1,219             1,429     1,202   1,578   1,899    2,070    2,318
Merchandise imports (USDbn)                                                            956.0           1,133.1   1,005.6   1,394   1,741    1,950    2,223
Trade balance (USDbn)                                                                  262.7             295.5     196.1   184.5   157.9    119.9     95.2
Current account balance (USDbn)                                                          372               426       284     305     201      170      160
Current account balance (% GDP)                                                         10.6               9.4       5.7     5.1     2.8      2.0      1.6
Net FDI (USDbn)                                                                         83.5             108.3      90.0   105.8   116.2    128.9    144.4
Net FDI (% GDP)                                                                          2.4               2.4       1.8     1.8     1.6      1.5      1.5
Current account balance plus FDI (% GDP)                                                13.0              11.8       7.5     6.9     4.3      3.5      3.1
Exports, value (% y-o-y)                                                                25.8              17.2     -15.9    31.4    20.3      9.0     12.0
Imports, value (% y-o-y)                                                                20.8              18.5     -11.3    38.6    24.9     12.0     14.0
International FX reserves (USDbn)                                                      1,528             1,946     2,399   2,850   3,181    3,450    3,600
Import cover (months)                                                                   17.7              18.9      27.9    24.8    23.1     23.4     22.4
Public and external solvency indicators
Commercial banks’ FX assets (USDbn)                                                    188.7            181.3     115.3    128.1   147.5    168.7    191.5
Gross external debt (USDbn)                                                            389.2            390.2     428.6    548.9   653.9    708.9    743.9
Gross external debt (% GDP)                                                             11.1              8.6       8.6      9.2     9.0      8.4      7.6
Short term external debt (% of int'l reserves)                                          15.4             11.6      10.8     13.2    15.0     15.2     15.4
Consolidated government balance (% GDP)                                                  0.2             -0.8      -2.8     -1.7    -1.1     -1.5     -1.4
Public Sector Debt (% GDP)                                                              37.3             35.5      45.0     44.4    40.1     39.7     38.3
Macro prudential indicators
Capital adequacy ratio                                                                   8.4             12.0      11.4     12.2    12.3      n/a      n/a
Non-performing loan ratio                                                                6.2              2.4       1.6      1.1     0.9      n/a      n/a
Household Debt/ GDP (%)                                                                 12.3             11.8      16.2     18.9    18.9      n/a      n/a
Total Credit/GDP (%)                                                                    98.5             96.6     117.2    120.4   115.8      n/a      n/a
Residential House prices (% y-o-y)                                                      14.8             -1.7      23.2      7.4     7.4      n/a      n/a
Loan/Deposit ratio                                                                      67.2             65.1      66.9     66.7    68.0      n/a      n/a
Stock Market Capitalization/GDP (%)                                                    123.1             38.6      71.6     66.7    45.5      n/a      n/a
Note: Industrial production is the output of all industrial companies with annual sales over RMB20m.
Source: HSBC, CEIC, IMF, ADB




36
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China Economics   abc
27 March 2012




Notes




                    37
     Macro
     China Economics                                                                                           abc
     27 March 2012




Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the
opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their
personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific
recommendation(s) or views contained in this research report: Hongbin Qu and Jun Wei Sun

Important Disclosures
This document has been prepared and is being distributed by the Research Department of HSBC and is intended solely for the
clients of HSBC and is not for publication to other persons, whether through the press or by other means.

This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer
to buy the securities or other investment products mentioned in it and/or to participate in any trading strategy. Advice in this
document is general and should not be construed as personal advice, given it has been prepared without taking account of the
objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on the advice,
consider the appropriateness of the advice, having regard to their objectives, financial situation and needs. If necessary, seek
professional investment and tax advice.

Certain investment products mentioned in this document may not be eligible for sale in some states or countries, and they may
not be suitable for all types of investors. Investors should consult with their HSBC representative regarding the suitability of
the investment products mentioned in this document and take into account their specific investment objectives, financial
situation or particular needs before making a commitment to purchase investment products.

The value of and the income produced by the investment products mentioned in this document may fluctuate, so that an
investor may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls
in value that could equal or exceed the amount invested. Value and income from investment products may be adversely
affected by exchange rates, interest rates, or other factors. Past performance of a particular investment product is not indicative
of future results.

Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment
banking revenues.

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that
company available at www.hsbcnet.com/research.

* HSBC Legal Entities are listed in the Disclaimer below.

Additional disclosures
1     This report is dated as at 27 March 2012.
2     All market data included in this report are dated as at close 26 March 2012, unless otherwise indicated in the report.
3     HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
      Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research
      operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier
      procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or
      price sensitive information is handled in an appropriate manner.




38
   Macro
   China Economics                                                                                                                    abc
   27 March 2012




Disclaimer
* Legal entities as at 04 March 2011                                                                                  Issuer of report
‘UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking Corporation
                                                                                                                      The Hongkong and Shanghai Banking
Limited, Hong Kong; ‘TW’ HSBC Securities (Taiwan) Corporation Limited; ‘CA’ HSBC Securities (Canada)
                                                                                                                      Corporation Limited
Inc, Toronto; HSBC Bank, Paris Branch; HSBC France; ‘DE’ HSBC Trinkaus & Burkhardt AG, Düsseldorf;
000 HSBC Bank (RR), Moscow; ‘IN’ HSBC Securities and Capital Markets (India) Private Limited, Mumbai;                 Level 19, 1 Queen's Road Central
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Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC
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                                                                                                                                                    [325235]




                                                                                                                                                              39
                                                                                                     abc

Global Economics Research Team
Global                                                    Global Emerging Markets
Stephen King                                              Pablo Goldberg
Global Head of Economics                                  Head of Global EM Research
+44 20 7991 6700    stephen.king@hsbcib.com               +1 212 525 8729     pablo.a.goldberg@hsbc.com

Karen Ward                                                Bertrand Delgado
Senior Global Economist                                   EM Strategist
+44 20 7991 3692   karen.ward@hsbcib.com                  +1 212 525 0745     bertrand.j.delgado@us.hsbc.com

Madhur Jha                                                Emerging Europe and Sub-Saharan Africa
+44 20 7991 6755    madhur.jha@hsbcib.com
                                                          Murat Ulgen
Europe & United Kingdom                                   Chief Economist
                                                          +44 20 7991 6782    muratulgen@hsbc.com
Janet Henry
Chief European Economist                                  Agata Urbanska
+44 20 7991 6711   janet.henry@hsbcib.com                 +44 20 7992 2774    agata.urbanska@hsbcib.com

Simon Wells                                               Alexander Morozov
Chief UK Economist                                        +7 495 783 8855   alexander.morozov@hsbc.com
+44 20 7991 6718   simon.wells@hsbcib.com                 Melis Metiner
Astrid Schilo                                             +90 212 376 4618    melismetiner@hsbc.com.tr
+44 20 7991 6708    astrid.schilo@hsbcib.com
                                                          Middle East and North Africa
Germany
                                                          Simon Williams
Lothar Hessler
                                                          Chief Economist
+49 21 1910 2906    lothar.hessler@hsbc.de
                                                          +971 4 423 6925     simon.williams@hsbc.com
France
                                                          Liz Martins
Mathilde Lemoine
                                                          Senior Economist
+33 1 4070 3266     mathilde.lemoine@hsbc.fr
                                                          +971 4 423 6928     liz.martins@hsbc.com
North America
                                                          Latin America
Kevin Logan
                                                          Andre Loes
Chief US Economist
                                                          Chief Economist, Latin America
+1 212 525 3195    kevin.r.logan@us.hsbc.com
                                                          +55 11 3371 8184     andre.a.loes@hsbc.com.br
Ryan Wang
                                                          Argentina
+1 212 525 3181     ryan.wang@us.hsbc.com
                                                          Javier Finkman
Asia Pacific                                              Chief Economist, South America ex-Brazil
                                                          +54 11 4344 8144    javier.finkman@hsbc.com.ar
Qu Hongbin
Managing Director, Co-head Asian Economics Research and   Ramiro D Blazquez
Chief Economist Greater China                             Senior Economist
+852 2822 2025      hongbinqu@hsbc.com.hk                 +54 11 4348 5759    ramiro.blazquez@hsbc.com.ar

Frederic Neumann                                          Jorge Morgenstern
Managing Director, Co-head Asian Economics Research       Senior Economist
+852 2822 4556      fredericneumann@hsbc.com.hk           +54 11 4130 9229    jorge.morgenstern@hsbc.com.ar

Leif Eskesen                                              Brazil
Chief Economist, India & ASEAN                            Constantin Jancso
+65 6239 0840        leifeskesen@hsbc.com.sg              Senior Economist
                                                          +55 11 3371 8183    constantin.c.jancso@hsbc.com.br
Paul Bloxham
Chief Economist, Australia and New Zealand                Mexico
+61 2925 52635      paulbloxham@hsbc.com.au               Sergio Martin
                                                          Chief Economist
Donna Kwok                                                +52 55 5721 2164    sergio.martinm@hsbc.com.mx
+852 2996 6621      donnahjkwok@hsbc.com.hk
                                                          Claudia Navarrete
Trinh Nguyen                                              Economist
+852 2822 6975      trinhdnguyen@hsbc.com.hk              +52 55 5721 2422    claudia.navarrete@hsbc.com.mx
Ronald Man                                                Central America
+852 2996 6743      ronaldman@hsbc.com.hk                 Lorena Dominguez
                                                          Economist
Luke Hartigan
                                                          +52 55 5721 2172    lorena.dominguez@hsbc.com.mx
+612 9255 2635      lukehartigan@hsbc.com.au
Sun Junwei
+86 10 5999 8234    junweisun@hsbc.com.cn
Sophia Ma
+86 10 5999 8232    xiaopingma@hsbc.com.cn

				
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