ANZ RESEARCH GREATER CHINA ECONOMICS WEEKLY INSIGHT

14 MAY 2013 GREATER CHINA ECONOMICS CHARTBOOK China: Aprils activity data indicates that growth momentum remains sluggish. As the risk of inflation diminishes on the near-term horizon, we believe the monetary policy stance has turned more supportive to growth. As central banks in the region cut interest rates and used intervention to ease the pressures of currency appreciation, we see an increasing likelihood for the PBoC to cut the policy rate by 25bps. This will reduce the incentive for capital inflows which may actually risk overheating the property sector. After all, real estate prices are determined by the supply-demand conditions and the sector is still subject to other property tightening measures. However, monetary policy alone will have limited impact on the economic rebalancing. To some extent, an overly supportive credit policy is likely to worsen Chinas overcapacity problems. We thus argue that China should accelerate the structural reforms to sustain economic growth, such as reducing tax burdens on the services sector, deregulation and encouraging competition, interest rate liberalization, and deepening capital market developments to regain growth impetus. Taiwan: The economy contracted in Q1 on weak demand from major markets including China, the US and the EU. However, investment rose strongly as the global electronic cycle continued to support Taiwans electronic producers. However, the weak yen has started to dampen export orders on valuation effects when expressed in USD terms. CONTRIBUTORS
Li-Gang Liu Chief Economist, Greater China LiGang.Liu@anz.com Raymond Yeung Senior Economist, Greater China Raymond.Yeung@anz.com Hao Zhou China Economist Hao.Zhou2@anz.com Louis Lam Economist, Greater China Louis.Lam@anz.com

INSIDE
Data Preview and Review Greater China Chartbook China Taiwan Hong Kong China Liquidity Report Forecasts Important Notice 2 3 4 11 15 20 21 22

Hong Kong: GDP flattened in Q1, in line with the downside surprise we saw for China and Taiwan. Private consumption held up and was the biggest contributor to helping the citys state maintain positive growth. However, attention should be paid to any sharp correction of property prices as it forms a large part of household wealth. CHINA MARKET LIQUIDITY REPORT The PBoC resumed the issuance of the 3-month bills for the first time since December 2011, to offset capital inflows as overseas investors pump money into the country to take advantage of the yuans rise. CHART OF THE WEEK Chinas strong credit extension failed to translate into activity growth
China - Total Social Financing (RMB bn)

RESEARCH@ANZ.COM
9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0

RMB Loan

Foreign Currency Loan

Entrusted Loan

Banker's Acceptance Draft

Trust Loan

Total Social Financing

Jan-Apr 2012

Jan-Apr 2013

Sources: CEIC, ANZ

Net Corp Bond

NonFinancial Equity

ANZ Greater China Economics Weekly Insight / 14 May 2013 / 2 of 23

DATA PREVIEW & REVIEW

GREATER CHINA ECONOMIC DATA CALENDAR
DATE 14-18 May 18 May 20 May 20 May 20 May 21 May COUNTRY China China Taiwan Taiwan Hong Kong Hong Kong DATA/EVENT Actual FDI (y/y) Property Prices Export Orders (y/y) Current Account Balance (USD) Unemployment Rate sa CPI - Composite Index (y/y) PERIOD Apr Apr Apr Q1 Apr Apr CONSENSUS 6.20% -----LAST ---6.60% 15.96Bn 3.50% 3.60% TIME (HK/SG) 9:30 16:00 16:20 16:30 16:30

Source: Bloomberg

WEEK IN REVIEW
DATE 07 May 07 May 07 May 07 May 08 May 08 May 08 May 09 May 09 May 10 May 10 May 10 May 10 May 10 May 10 May 10 May 13 May 13 May 13 May 13 May 13 May COUNTRY Taiwan Taiwan Taiwan Hong Kong China China China China China China China China China China Hong Kong Hong Kong China China China China China DATA/EVENT Trade Balance (USD) Exports (y/y) Imports (y/y) Foreign Reserves (USD) Trade Balance (USD) Exports (y/y) Imports (y/y) CPI (y/y) Producer Price Index (y/y) New Yuan Loans (RMB) Money Supply - M0 (y/y) Money Supply - M1 (y/y) Money Supply - M2 (y/y) Total Social Financing (RMB) GDP sa (q/q) GDP (y/y) Industrial Production YTD (y/y) Industrial Production (y/y) Fixed Assets Investment YTD (y/y) Retail Sales YTD (y/y) Retail Sales (y/y) PERIOD Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr Q1 Q1 Apr Apr Apr Apr Apr CONSENSUS 1.57bn 3.10% 0.30% -16.15bn 9.20% 13.00% 2.30% -2.30% 755.0bn 12.00% 11.00% 15.50% 1.5trn 0.50% 2.70% 9.50% 9.40% 21.00% 12.60% 12.80% ACTUAL 2.27bn -1.90% -8.20% 306.5bn 18.16bn 14.70% 16.80% 2.40% -2.60% 792.9bn 10.80% 11.90% 16.10% 1.75trn 0.20% 2.80% 9.40% 9.30% 20.60% 12.50% 12.80% LAST 3.20bn 3.30% 0.20% 303.8bn -0.88bn 10.00% 14.10% 2.10% -1.90% 1060.0bn 12.40% 11.90% 15.70% 2.54trn 1.20% 2.50% 9.50% 8.90% 20.90% 12.40% 12.60%

Source: Bloomberg

ANZ Greater China Economics Weekly Insight / 14 May 2013 / 3 of 23

GREATER CHINA CHARTBOOK

OVERVIEW: STRONG CREDIT EXTENSION FAILED TO TRANSLATE INTO ACTIVITY GROWTH China: While Chinas activity data improved somewhat in April, growth momentum remains sluggish. The improvement in the headline industrial growth figures is largely due to a low base effect of last year. Trade growth remained strong in April, following a surge in the past two quarters. However, we doubt the strong external performance. The trade data defies the weak trade data reported in other regional economies. Our previous study (ANZ Greater China Insight, 7 May 2013) indicates that exporters/importers may use cross-border trade for financial gains. CPI inflation rebounded modestly to 2.4% y/y in April, from Marchs 2.1%, slightly higher than market expectations (2.3%). However, PPI declined by 2.6% y/y in April, compared with -1.9% in March, reflecting the recent pullback in raw material prices. Credit and money supply grew strongly in April, suggesting that domestic monetary conditions have been subject to strong pressure from capital inflows. We believe that the mild inflation outlook, together with sluggish domestic demand, has set the right conditions for a rate cut. The RMB is under significant appreciation pressure owing to the widening interest rate differentials between RMB and other key currencies in the world, especially after the recent ECB, RBA and BoK's rate cuts. Lowering the interest rate differentials will help dampen the capital inflows, while falling inflation will offset the risk of negative carry in deposit rates. Meanwhile, the PBoC could allow banks to raise their deposit rates to up to 1.2 times the policy rate. This policy will not only push forward interest rate liberalisation but also reduce the possibility of a negative real interest rate. Taiwan: Q1 GDP contracted 0.81% saqr, as global economic recovery failed to gain traction. Weak external demand dragged on the economy, reflecting the slowdown in Mainland China and the EU. We believe momentum will pick up mildly in Q2 and accelerate through the rest of the year, in conjunction with the pick up in China and the US. Domestically, investment should continue to be the main driver, as investment from electronic producers remains upbeat. Hong Kong: Hong Kongs headline GDP grew 2.8% y/y in Q1. Sequentially, the economy barely expanded with a 0.2% q/q sa gain. This is in line with the downside surprise we saw for China and Taiwan. Private consumption held up and was the biggest contributor to helping the citys state maintain positive growth.
17 15 13 11 9 7 5 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13

China - Domestic Demand Indicators (y/y)

10 8 6 4 2 0 -2 -4 -6 Oct 10 Jan 11 Apr 11 Jul 11

China - Inflation (y/y)

Oct 11

Jan 12
C PI

Apr 12
PPI

Jul 12

Oct 12

Jan 13

Apr 13

Industrial Production, y/y

Real Retail Sales, y/y

14 12 10 8 6 4 2 0 -2 -4 -6 Jun 10 Sep 10

Taiwan - Contributions to GDP Growth (ppt)

15 10 5 0 -5

Hong Kong - Contributions to GDP Growth (ppt)

Dec Mar 10 11

Jun 11

Sep Dec Mar 11 11 12

Jun 12

Sep 12

Dec Mar 12 13

-10 Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12 Dec 12 Mar 13

Private C onsumption Investment Net Exports

Government C onsumption C hange in Stocks y/y

Private Consumption Investment Net Exports

Government Consumption Changes in Inventories Total, y/y

Sources: Bloomberg, CEIC, ANZ

ANZ Greater China Economics Weekly Insight / 14 May 2013 / 4 of 23

CHINA
REAL ACTIVITY: THE ACTIVITY DATA IMPROVED MODESTLY ON BASE EFFECTS Industrial production growth rebounded to 9.3% y/y in April, but was weaker than expected, compared with Marchs 8.9%. Meanwhile, electricity production rose 6.2% y/y, up from 2.1% in the previous month. Fixed asset investment decelerated to 20.6% y/y in January-April, below consensus forecasts, versus 20.9% in January-March, indicating that Chinas fiscal spending could have slowed in the month. Retail sales grew in line with market expectations, gaining 12.8% y/y in April, 0.2ppt higher than March. On a m/m basis, while industrial production picked up modestly in the month, retail sales and fixed asset investment slowed in April. The official Purchasing Managers Index eased again to 50.6 in April, suggesting that Chinas economic recovery remains tepid.
China - GDP Growth
20 18 16 14 12 10 8 6 4 2 0 2005 -5 2006 2007 2008
y/y

China - Contribution to GDP Growth

20 15 10 5 0

2009

2010

2011

2012

2013

02

03

04

05

06

07

08

09

10

11

12 13Q1
GDP, y/y

q/q, saar

C onsumption

Investment

Net Exports

25 20 15 10 5 0 -5 Apr 10 Jul 10

China - Electricity Production and Industrial Production (y/y)

19 17 15 13 11 9 7 5

28 27 26 25 24 23 22 21 20 19 18 Oct 10 Jan 11

China - Fixed Asset Investment (ytd, y/y)

Oct 10

Jan Apr 11 11

Jul 11

Oct Jan 11 12

Apr 12

Jul 12

Oct Jan 12 13

Apr 13

Apr 11

Jul 11

Oct 11

Jan 12

Apr 12

Jul 12

Oct 12

Jan 13

Apr 13

Electricity Production

Industrial Production (RHS)

25

China - Retail Sales (y/y)

China - Official Manufacturing PMI

61 59 57

20

55 53

15

51 49 47

10 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13

45 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13

Headline

New Orders

New Export Orders

Sources: NBS, CEIC, ANZ

ANZ Greater China Economics Weekly Insight / 14 May 2013 / 5 of 23

CHINA
EXTERNAL TRADE: TRADE REMAINED STRONG ON HOT MONEY INFLOWS Trade growth remained strong in April, following a surge in the past two quarters. Export growth increased 14.7% y/y in April, compared with market expectations of a 9.2% gain and Marchs 10.0%. Imports grew 16.8% y/y in April, following a 14.1% gain in the previous month, and higher than consensus of a 13.0% gain. China registered a trade surplus of USD18.2bn, compared with a deficit of USD0.88bn in March. Our previous study (ANZ Greater China Insight, 7 May 2013) found that much of the strong growth performance was due to the sharp increase in Shenzhen-Hong Kong cross border trade. Meanwhile, the port throughput data remained soft for the past few months, suggesting that the real demand has not yet recovered. The inconsistency between port throughput and the headline trade growth shows that many Chinese exporters could have over-invoiced their trade value to take advantage of the interest rate differentials between onshore and offshore markets, and the RMBs steady appreciation since July last year.
China - Trade Developments
50 40 30 20 10 0 -10 -20 -30 -40 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 50 40 30 20 10 0 -10 -20 -30 -40 35 30 25 20 15 10 5 0 -5 -10 Oct 10 Jan 11 Apr 11 China Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13

China's exports vs regional exports (y/y, 3mma)

Trade Balance, $bn (RHS)

Exports, y/y

Imports, y/y

Hong Kong

Korea

Taiwan

60 50 40 30 20 10 0 -10 -20 Oct 10 Jan 11

China - Exports by Destination (y/y, 3mma)

50 40 30 20 10 0 -10

China - Imports by Origin (y/y, 3mma)

Apr 11

Jul 11 US

Oct 11 EU

Jan 12

Apr 12 NIE

Jul 12

Oct 12

Jan 13

Apr 13

Oct 10

Jan 11

Apr 11

Jul 11 US

Oct 11 EU

Jan 12

Apr 12 NIE

Jul 12

Oct 12

Jan 13

Apr 13

ASEAN

ASEAN

240 220 200 180 160 140 120 100 Oct 10 Jan 11 Apr 11

China - Trade Balance ($bn 12m rolling sum)

0 -10 -20 -30 -40 -50 -60 -70

0 -20 -40 -60 -80 -100 -120 -140 -160 -180 -200 Oct 10 Jan 11 Apr 11

China - Trade Balance ($bn 12m rolling sum)

Jul 11 EU

Oct 11

Jan 12 US

Apr 12

Jul 12

Oct 12

Jan 13

Apr 13

Jul 11

Oct 11

Jan 12

Apr 12

Jul 12

Oct 12

Jan 13

Apr 13

Japan (RHS)

ASEAN-5

AU+NZ

NIE ex HK

Sources: Bloomberg, CEIC, ANZ

ANZ Greater China Economics Weekly Insight / 14 May 2013 / 6 of 23

CHINA
PRICES: INFLATIONARY PRESSURES REMAIN SUBDUED CPI inflation rebounded modestly to 2.4% y/y in April, from Marchs 2.1%, slightly higher than market expectations (2.3%). Food and rental costs rose 4.0% and 2.9% respectively in April, from 2.7% and 2.9% in the prior month. Meanwhile CPI rose 0.2% m/m, compared with a 0.9% decline the prior month. PPI declined by 2.6% y/y in April, compared with -1.9% in March, reflecting the recent pullback in raw material prices. CPI inflation will likely stay below 3% in May again but start to rebound somewhat in the second half of the year due to the low base effects. However, overall inflationary pressures this year should remain abated given that the economy is unlikely to see a strong pick-up in the next few quarters.
China - Inflation (y/y)

10 8 6 4 2 0 -2 -4 -6 Oct 10 Jan 11 Apr 11 Jul 11

7 6 5 4 3 2 1 0

China - Contribution to Inflation (y/y)

Oct 11

Jan 12
C PI

Apr 12
PPI

Jul 12

Oct 12

Jan 13

Apr 13

-1 Oct 10 Jan 11 Apr 11

Food

Jul 11

Oct 11
Housing

Jan 12

Apr 12
Medical

Jul 12

Oct 12
Other

Jan 13
CPI

Apr 13

China - CPI Inflation

8 6 4 2 0 -2 -4 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 y/y Oct 12 Jan 13 Apr 13 -1 0 1 2

China - PPI Inflation

10 8 5 3 0 -3 -5 -8 -10 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 y/y Oct 12 Jan 13 Apr 13 -2 -1 0 1 2

m/m (RHS)

m/m (RHS)

China - Real Interest Rate

8 6 4 2 0 -2 -4 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13

China Food Price Index

230 220 210 200 190 180 170 160 150 140 Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr 09 09 10 10 10 10 11 11 11 11 12 12 12 12 13 13

CPI, y/y

Deposit Rate

Real Interest Rate

Sources: CEIC, ANZ

ANZ Greater China Economics Weekly Insight / 14 May 2013 / 7 of 23

CHINA
MONETARY POLICY: MILD INFLATION AND SLUGGISH GROWTH PAVES WAY FOR A RATE CUT The mild inflation outlook, together with sluggish domestic demand, has set the right conditions for a rate cut. The RMB is under significant appreciation pressure owing to the widening interest rate differentials between RMB and other key currencies in the world, especially after the recent ECB, RBA and BoK's rate cuts. Lowering the interest rate differentials will help dampen the capital inflows, while falling inflation will offset the risk of negative carry in deposit rates. Meanwhile, the PBoC could allow banks to raise their deposit rates to up to 1.2 times the policy rate. This policy will not only push forward interest rate liberalisation but also reduce the possibility of a negative real interest rate. New yuan loans were RMB792.9bn, lower than Marchs RMB1.06trn, but higher than the market expected. Social financing, a measure of funds raised by entities in the real economy, amounted to RMB1.75trn in April, an increase of RMB783.3bn from last year. By the end of April, the broad measure of money supply (M2), which covers cash in circulation and all deposits, increased 16.1% y/y to RMB103.3trn, compared with Marchs 15.8%.
China - PBoC 1-year Lending Rate
8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 2006 2007 2008 2009 2010 2011 2012 2013 24 22 20 18 16 14 12 10 8 6 4 2006 2007 2008 2009 2010 2011 2012 2013

China - Reserve Requirement Ratio

China - M2 and Credit

25 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0

China - Total Social Financing (RMB bn)

20

15

RMB Loan

Foreign Currency Loan

Entrusted Loan

Banker's Acceptance Draft

Trust Loan

10 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11

M2, y/y

Jan 12

Apr 12

Jul 12

Oct 12

Jan 13

Apr 13

Total Social Financing

Credit, y/y

Jan-Apr 2012

Jan-Apr 2013

1,200 1,000 800 600 400 200 0 Apr 10 Jul 10

China - New Yuan Loans (RMB bn)

1,000 800 600 400 200 0 -200 -400 -600 -800 -1,000

China - PBoC Weekly Open Market Operations (RMB bn)

Liquidity Injection

Liquidity Withdrawal

Oct Jan Apr 10 11 11

Jul 11

Oct Jan Apr 11 12 12

Jul 12

Oct Jan Apr 12 13 13

03 Dec

17 31 Dec Dec

14 Jan

28 Jan

11 Feb

25 Feb

11 25 Mar Mar

08 Apr

Net Corp Bond

22 Apr

C B Bill Matured C B Bill Net

Repo Matured Repo

Reverse Repo Rev. Repo Matured

Sources: Bloomberg, CEIC, PBoC, ANZ

NonFinancial Equity

ANZ Greater China Economics Weekly Insight / 14 May 2013 / 8 of 23

CHINA
EXCHANGE RATE: RMB STRENTHENED SIGNIFICANTLY ON LOWER PBOC FIXING The CNY exchange rate broke 6.15 last week against the USD, as the PBoC set a strong fixing. The offshore CNH also appreciated significantly. In our view, the RMB exchange rate should see weakening bias going forward if the hot money inflows were under control. We reiterate our view that an overly strong RMB, especially amid a weak economic recovery and a weak yen, is not in Chinas interests. If it is the strong RMB that attracts such speculative capital inflows, the PBoC will need to de-peg from the USD and return to its exchange rate policy back of referencing a basket of currencies.
USD/CNY
6.45 6.40 6.35 6.30 6.25 6.20 6.15 6.10 Mar 12

China - CNY and CNH Spot

6.38 6.34 6.30 6.26 6.22 6.18 6.14 500 400 300 200 100 0 -100 -200 -300 Oct 12 Nov 12 Dec 12 Jan 13 Feb 13 USD/CNY Mar 13 Apr 13 USD/CNH May 13

May 12 Spot

Jul 12

Sep 12

Nov 12

Jan 13

Mar 13 Fixing

May 13

6.10 Sep 12

Trading band

Spread (pips, RHS)

USD/CNY Spot and NDF

6.5 3 2 6.4 1 6.3 0 -1 6.2 -2 6.1 May Jun 12 12 -3 Jul 12 Aug Sep Oct Nov Dec Jan Feb Mar Apr May 12 12 12 12 12 13 13 13 13 13
USD/C NY 1y NDF

USD/CNY Spot and DF

6.5 3 2 6.4 1 6.3 0 -1 6.2 -2 6.1 May Jun 12 12 -3 Jul 12 Aug Sep Oct Nov Dec Jan 12 12 12 12 12 13 Feb Mar Apr May 13 13 13 13
1y DF

NDF Implied Appreciation, % (RHS)

DF Implied Appreciation, % (RHS)

USD/C NY

800 700 600 500 400 300 200 100 0 -100 -200 Mar 09

China - Monthly Change of Financial Institutions FX Position (RMB bn)

135 130 125 120 115 110 105 100 95 90

CNY Exchange Rate (Index: 1 Jan 2012 = 100)

CNY Appreciation

Jul 09

Nov Mar Jul 09 10 10

Nov Mar 10 11

Jul 11

Nov Mar 11 12

Jul 12

Nov Mar 12 13

Jan 12

Mar 12

May 12

Jul 12

Sep 12

Nov 12
C NY/AUD

Jan 13

Mar 13
C NY/USD

May 13

C NY/EUR

C NY/JPY

Sources: Bloomberg, CEIC, ANZ

ANZ Greater China Economics Weekly Insight / 14 May 2013 / 9 of 23

CHINA
PROPERTY MARKET: PRICES PICK UP FURTHER IN MARCH The ANZ property price index rose 4.2% y/y in March, up from 2.2% the previous month, indicating a fast acceleration in price momentum. New residential property prices rose in 68 of 70 cities m/m in March, compared with 66 in February. On a y/y basis, prices increased in 67 cities. Notably, housing prices surged in first tier cities, with Beijing, Shanghai, Guangzhou and Shenzhen up 8.6% y/y, 6.4%, 11.1% and 8.9% respectively. Property transactions in major cities slowed down significantly in April, after a strong performance in March, as more curbing policies gets rolled out.
China - Property Price Index (y/y)

18 16 14 12 10 8 6 4 2 0 -2 -4 2005 2006

12 10 8 6 4 2 0 -2 -4

China - First Tier City New Residential Property Prices (y/y)

2007

2008

2009

2010

2011

2012

2013

Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar 11 11 11 11 11 11 12 12 12 12 12 12 13 13
Beijing Shanghai Guangzhou Shenzhen

Official Property Price Index

ANZ Property Price Index

China - 70 City New Residential Property Price (number of cities m/m change)
70 60
Number of Cities

China - 70 City New Residential Property Price (number of cities y/y change)
70 60 50
Number of Cities

50 40 30 20 10 0 Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar 11 11 11 11 11 12 12 12 12 12 12 13 13
Decrease No C hange Increase

40 30 20 10 0 Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar 11 11 11 11 11 12 12 12 12 12 12 13 13
Decrease No C hange Increase

3,000 2,500 2,000 1,500

China - First Tier City Property Transactions (thousand sq m, 30-day moving sum)

700 600 500 400 300

60 50 40 30 20 10 0 -10 -20 -30 -40 Sep 10 Dec 10

China - Floor Space Started and Sold (y/y)

1,000 500 0 Sep 11

200 100 0 Dec 11 Mar 12

Shanghai

Jun 12

Sep 12
Guangzhou

Dec 12

Mar 13
Shenzhen (RHS)

Mar 11

Jun 11

Sep 11

Dec 11

Mar 12

Jun 12

Sep 12

Dec 12

Mar 13

Beijing

Floor Space Started

Floor Space Sold

Sources: Bloomberg, CEIC, ANZ

ANZ Greater China Economics Weekly Insight / 14 May 2013 / 10 of 23

CHINA
STEEL INDUSTRY: IRON ORE PRICES SOFTENED Imported iron ore prices at the Tianjin port fell further in April to below USD130 per ton, the lowest level since December, reflecting weak demand. Meanwhile, iron ore inventory levels were flat over the month, and still much lower than the average levels over the past five years. Both steel product inventory and prices declined over the past month. Baoshan Iron & Steel, the largest listed steelmaker in China, has cut its steel product prices for June bookings, the first cut in 9 months.
China - Import Iron Ore Price 62% Fe (USD/ton)

China - Iron Ore Inventory at Ports (mn tons) 105 100 95 90 85 80 75 70 65 60 55 50 Nov Feb May Aug Nov Feb May Aug Nov Feb May Aug Nov Feb May 09 10 10 10 10 11 11 11 11 12 12 12 12 13 13
Iron Ore Inventory 5 year average

170 160 150 140 130 120 110 100 90 80 Nov 11 Jan 12

Mar 12

May 12

Jul 12

Sep 12

Nov 12

Jan 13

Mar 13

May 13

C FR Tianjin Port

China - Steel Inventory and Rebar Price

10 9 8 7 6 5 4 5,500 5,000 4,500 4,000 3,500 3,000 2,500

6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 Jan 10 May 10 Sep 10

China - Steel Product Prices (th RMB/ton)

2,000 3 May Sep Jan May Sep Jan May Sep Jan May Sep Jan May 09 09 10 10 10 11 11 11 12 12 12 13 13
Steel inventories held by traders in major cities, m ton Domestic rebar price, RMB/ton (RHS)

Jan 11

May 11

Sep 11

Jan 12

May 12

Sep 12

Jan 13

May 13

Rebar

Hot Rolled Sheet

Steel Plate

C old Rolled Sheet

25 20 15 10 5 0

China - Industrial Production Growth vs Ferrous Metal Smelting & Pressing (y/y)

90 80 70 60 50 40 30 20 10 0

China - Domestic Demand of Imported Ore (m tons)

Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr 10 11 11 11 11 11 11 12 12 12 12 12 12 13 13
Headline Industrial Production Smelting & Pressing of Ferrous Metals

Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr 09 10 10 10 10 11 11 11 11 12 12 12 12 13 13
*Defined as monthly imports less monthly change of inventories

Sources: Bloomberg, CEIC, ANZ

ANZ Greater China Economics Weekly Insight / 14 May 2013 / 11 of 23

TAIWAN
REAL ACTIVITY: Q1 GDP DRAGGED BY POOR GLOBAL DEMAND Q1 GDP (advance estimate) slowed to 1.54% y/y, from 3.72% in Q4, much lower than market expectations of 3.1%. Sequentially, the economy contracted 0.81% saqr or 3.21% saar. Global economic recovery failed to gain traction and weak external demand dragged on the economy, reflecting the slowdown in Mainland China and the EU. We believe momentum will pick up mildly in Q2 and accelerate through the rest of the year, in conjunction with the pick up in China and the US. Domestically, investment should continue to be the main driver, as investment from electronic producers remains upbeat. Industrial production declined 3.28% y/y in March, from an 11.61% contraction in February. Meanwhile commercial sales fell 0.65% y/y, from -6.00% previously, but still below market expectations. Global and regional economic conditions have weighed on the domestic economy.
Taiwan - Real GDP Growth
25 20 15 10 5 0 -5 -10 Mar 09 Jul 09 Nov Mar 09 10 Jul 10 Nov Mar 10 11
y/y

14 12 10 8 6 4 2 0 -2 -4 -6 Jun 10
Jul 11 Nov Mar 11 12 Jul 12 Nov Mar 12 13

Taiwan - Contributions to GDP Growth (ppt)

Sep 10

Dec Mar 10 11

Jun 11

Sep Dec Mar 11 11 12

Jun 12

Sep 12

Dec Mar 12 13

Private C onsumption Investment Net Exports

Government C onsumption C hange in Stocks y/y

q/q, saar

25 20 15 10 5 0 -5 -10 -15 -20 -25 May 11 Jul 11 Sep 11

Taiwan - Economic Activities (y/y)

25 20 15 10 5 0 -5 -10

Taiwan - Commercial Sales (y/y)

Nov 11

Jan 12

Mar May 12 12

Jul 12

Sep 12

Nov 12

Jan 13

Mar 13

-15 Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12 Dec 12 Mar 13

C ommercial sales Exports Export orders

Industrial production Imports of Machineries

C ommercial Sales

Wholesale Trade

Retail Trade

Taiwan - Industrial Production Index

25 20 15 10 5 0 -5 -10 -15 -20 Sep 10 Dec 10 Mar 11 Jun 11 Sep 11
y/y

160 140 120 100 80 60 40 Dec 11 Mar 12 Jun 12 Sep 12 Dec 12 Mar 13

50 40 30 20 10 0 -10 -20 -30 Sep 10 Dec 10 Mar 11

Taiwan - Industrial Production of Major Sectors (y/y)

Jun 11

Sep 11

Dec 11

Mar 12

Jun 12

Sep 12

Dec 12

Mar 13

Electronic Parts C hemical Materials

Basic Metal Tech Products

Index (RHS)

Sources: CEIC, ANZ

ANZ Greater China Economics Weekly Insight / 14 May 2013 / 12 of 23

TAIWAN
EXTERNAL TRADE: EXPORTS CONTRACTED IN APRIL Exports contracted by 1.9% y/y in April, from a 3.3% gain in March, reflecting a general softening of global demand. Electronic exports, however, remained resilient and gained 3.4% y/y. Imports contracted 9.2% y/y in April, from a 0.2% increase in March. The sharp decline of imports was largely due to a 21% y/y reduction in oil imports. The trade surplus narrowed to USD2.27bn, from USD3.20bn. Exports to the Mainland and Hong Kong edged up 0.2% y/y. Exports to US, Japan and ASEAN6 gained 4.9%, 1.9% and 0.6% respectively. However, shipments to Europe declined sharply by 19.3% y/y. JPY weakness appeared to affect Taiwans exports and export orders differently. As shipments to Japan rose 9% y/y in the first four months while sales order from Japanese buyers declined in Q1, suggesting that the weak yen has affected Taiwans manufacturers at the regional level instead of domestic producers. Export orders fell 6.6% y/y in March, following a 14.5% contraction in February and much lower than the market expectation of a 1.9% increase. Notably, orders from Japan dropped 15.6% y/y, suggesting the weakening JPY is starting to have an impact on export orders on a weaker JPY/USD valuation.
Taiwan - Trade Developments
50 40 30 20 10 0 -10 -20 Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr 11 11 11 11 11 12 12 12 12 12 12 13 13
Trade Balance, $bn (RHS) Exports, y/y Imports, y/y

5 4 3 2 1 0 -1 -2

30 25 20 15 10 5 0 -5 -10 -15 -20

Taiwan - Exports Comparison with South Korea (y/y)

Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr 11 11 11 11 11 12 12 12 12 12 12 13 13
Taiwan South Korea

Taiwan - Exports by Destination (y/y)

50 40 30 20 10 0 -10 -20 -30 -40 Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr 11 11 11 11 11 12 12 12 12 12 12 13 13
Asia ex Mainland & HK HK Mainland Europe US

60 50 40 30 20 10 0 -10 -20 -30 -40

Taiwan - Imports by Origin (y/y)

180 150 120 90 60 30 0 -30 -60 -90

Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr 11 11 11 11 11 12 12 12 12 12 12 13 13
Asia ex Mainland & HK Mainland Europe US HK (RHS)

Taiwan - Export Orders

50 40 30 20 10 0 -10 -20 Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar 10 10 10 10 11 11 11 11 12 12 12 12 13
y/y Export Orders in USD (RHS) Export Orders 12mma

44,000 41,000 38,000 35,000 32,000 29,000 26,000 23,000 20,000

40 30 20 10 0 -10 -20 -30 May 11 Jul 11

Taiwan - Export Orders by Market (y/y)

Sep 11

Nov 11

Jan 12

Mar May 12 12

Jul 12

Sep 12

Nov 12

Jan 13

Mar 13
US

C hina/HK

Europe

Japan

ASEAN6

Sources: CEIC, ANZ

ANZ Greater China Economics Weekly Insight / 14 May 2013 / 13 of 23

TAIWAN
PRICES: INFLATION REMAINED BENIGN IN APRIL Headline inflation rose 1.04% y/y in April, down from 1.37%. Core CPI excluding vegetables and energy climbed only 0.86% y/y. Food price rose 2.36% y/y, underpinned by the sharp increase in weather affected vegetable prices which surged 8.23%. Medical and health expenses increased 1.35% y/y due partly to rising prices for Chinese herbs. Housing costs increased by 1.23% y/y, due to the low base of comparison after gas prices were allowed to rise by 6.35% last June. Headline producer prices continue to drop further by 3.69% y/y. For the first 4 months of 2013, WPI dropped 3.23% y/y. Prices of metal, chemical and petroleum products dropped. The decline should have been wider as there was a lower base prior to the electricity rate rise in June 2012. Inflation is not likely to be a concern for Taiwans economy. The weak yen and subsided commodity prices should continue to lower imported inflation in the coming months. As the upward adjustment of electricity fees was made last June, the base effect will begin in June this year.
Taiwan - CPI Momentum & Output Gap
6 4 2 0 -2 -4 -6 -8 -10 2006 2007 2008 2009 2010 2011
C PI

Taiwan - Contribution to CPI Inflation

4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 Jun 12
Food

Aug 12

Oct 12

Dec 12
Rental

Feb 13

Apr 13

2012

Housing ex. Rental Education & Entertainment C PI, y/y

Transportation Other

GDP Actual-Potential Gap, %

Taiwan - Headline and Core CPI

4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 Oct 10 Jan 11 Apr 11
C PI C PI ex Food & Energy C PI ex Fruits, Vegetables, Fish, Shellfish & Energy

Taiwan - CPI and Real Interest Rate

3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13

Jul 11

Oct 11

Jan 12

Apr 12

Jul 12

Oct 12

Jan 13

Apr 13

Real interest rate: 1-year Term Deposits minus C PI Inflation 3mma C PI y/y 3mma

Taiwan - WPI
10 8 6 4 2 0 -2 -4 -6 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12
y/y

5 4 3 2 1 0 -1 -2 -3 Oct 12 Jan 13 Apr 13

25 20 15 10 5 0 -5 -10 Oct 10 Jan 11 Apr 11

Taiwan - Import Price Index (y/y)

Jul 11

Oct 11

Jan 12

Apr 12

Jul 12

Oct 12

Jan 13

Apr 13

m/m sa (RHS)

ImPI in TWD

ImPI in USD

Sources: CEIC, ANZ

ANZ Greater China Economics Weekly Insight / 14 May 2013 / 14 of 23

TAIWAN
MONETARY AND RATE POLICIES: CBC TO HOLD IN JUNE We believe the CBC will not cut rates in response to sluggish growth given generally relaxed liquidity conditions. With a stable CPI, the central bank will be inclined to hold the policy rate at its June meeting. We believe the increasingly volatile currency market will prompt the CBC to watch for a stable exchange rate regime. We maintain our forecast that the first policy rate hike will occur in Q4 2013 at the earliest. On the exchange rate front, the CBC has recently issued a report which suggests that it is not worried about losing export competitiveness in view of the yen weakening as the KRW appears to appreciate against the JPY more than that for the TWD. We believe the central bank will continue to ensure an orderly function of the foreign exchange market and will emphasize stability in response to global currency volatility.
Taiwan - Money Supply (y/y) Taiwan - Money Market Interest Rates (bps)
200 180 160 140 120 100 80 60 40 20 0 Aug 10

14 12 10 8 6 4 2 0 Sep 10 Dec 10 Mar 11

Jun 11

Sep 11

Dec 11
M1b

Mar 12
M2

Jun 12

Sep 12

Dec 12

Mar 13

Nov 10

Feb 11

May Aug 11 11

Nov 11

Feb 12

May Aug 12 12

Nov 12

Feb 13

May 13

90-day C ommercial Paper Rediscount Rate

Interbank Overnight Rate 10 yr Gov't Bond Yield

Taiwan - TWD Exchange Rates

107 105 103 101 99 97 95 Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr 11 11 11 11 11 11 12 12 12 12 12 12 13 13
BIS NEER BIS REER TWD/USD Spot (RHS, inverted)

28 28 29 29 30 30 31

106 104 102 100 98 96 94 92 May Jun 12 12 Jul 12

Taiwan - USDTWD vs USDKRW (One year rolling index)

Aug Sep Oct Nov Dec Jan 12 12 12 12 12 13 USDTWD USDKRW

Feb Mar Apr May 13 13 13 13

60,000 50,000 40,000 30,000 20,000 10,000 0 Aug 11 Oct 11

Taiwan - RMB Deposits (RMB mn)

Taiwan - Real Estate Loans

80 70 60 50 40 30 20 10 0 -10 -20 -30 Oct 12 Dec 12 Feb 13 Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12 Dec 12 Mar 13 44.0 43.8 43.6 43.4 43.2 43.0 42.8 42.6 42.4 42.2 42.0

Dec 11

Feb 12

Apr 12

Jun 12

Aug 12

Real Estate Loan, TWD bn RE Loan as % of Banks' Loan Book (RHS)

Sources: CEIC, ANZ

ANZ Greater China Economics Weekly Insight / 14 May 2013 / 15 of 23

HONG KONG

REAL ACTIVITY: THE ECONOMY FLATTENED IN Q1 GDP grew 2.8% y/y in the first quarter. Sequentially, the economy barely expanded with a 0.2% q/q sa gain. This is in line with the downside surprise we saw for China and Taiwan. Private consumption rose 7.0% y/y, while investment contracted 2.2%. Goods exports and services exports rose 8.8% and 4.9% respectively, while imports of goods and services grew by 9.6% and 1.2% respectively. Retail sales growth moderated to 9.8% y/y in March, compared with 22.7% in February. In Q1 retail sales increased 13.9% y/y, from 7.6% in Q4, reflecting better domestic consumption and inbound tourist spending. The unemployment rate edged up 0.1ppt to 3.5% (sa) in March. Non-seasonally adjusted construction unemployment rate rose further, consistent with past seasonal factors.
Hong Kong - Contributions to GDP Growth (ppt) Hong Kong - GDP

15 10 5 0 -5 -10 Sep 10 Dec 10

12 10 8 6 4 2 0 -2

Mar 11

Jun 11

Sep 11

Dec 11

Mar 12

Jun 12

Sep 12

Dec 12

Mar 13

-4 Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar 10 10 10 10 11 11 11 11 12 12 12 12 13
y/y q/q, saar

Private Consumption Investment Net Exports

Government Consumption Changes in Inventories Total, y/y

35 30 25 20 15 10 5 0 Sep 10 Dec 10 Mar 11

Hong Kong - Retail Sales (y/y)

70 60 50 40 30 20 10 0 -10 -20 Dec 10 Mar 11

Hong Kong - Retail Sales Components (y/y)

Jun 11

Sep 11

Dec 11

Mar 12

Jun 12

Sep 12

Dec 12

Mar 13

Jun 11

Sep 11

Dec 11

Mar 12

Jun 12

Sep 12

Dec 12

Mar 13

C lothing & Footwear Jewellery, Watches & C locks

Motor Vehicles

Value

Volume

Hong Kong - Unemployment Rate

14 12 10 8 6 4 2 0 Mar 09 Jul 09 Nov Mar 09 10 Jul 10 Nov Mar 10 11 Jul 11 Nov Mar 11 12 Jul 12 Nov Mar 12 13 25 20 15 10 5 0 -5 -10 -15 -20 May 11 Jul 11

Hong Kong - Logistics Activities (y/y)

Sep 11

Nov 11

Jan 12

Mar May 12 12

Jul 12

Sep 12

Nov 12

Jan 13

Mar 13

C onstruction

Overall economy

Finance & Bus. Services

C ontainer Throughput (Sea) Air C argo Throughput

Passenger Movement (Air)

Sources: CEIC, ANZ

ANZ Greater China Economics Weekly Insight / 14 May 2013 / 16 of 23

HONG KONG
EXTERNAL SECTOR: EXPORTS REBOUNDED IN MARCH ON CROSS-BORDER TRADE Export growth rebounded to 11.2% y/y in March, from a 16.9% contraction February, driven by exports to China. CNY effects subsided in March as exports to Mainland China rebounded strongly by 16.5% y/y, following a 23.1% drop in February. Exports to the US registered a modest growth of 0.4% y/y, from a 4.6% decline. However shipments to Japan declined 0.6%, compared with -19.2 previously. Imports increased 11.3% y/y, compared with -18.3% in the previous month. The trade deficit widened to HKD49.1bn, from HKD34bn. Our recent study (ANZ Greater China Insight 7, May 2013) found that the cross-border trade between Hong Kong and the Mainland might reflect the problem of over-invoicing and was motivated by financial gains. As the Chinese authorities start to tighten regulations against non-genuine trades, these type of flows are likely to decline going forward.
Hong Kong - Trade Developments
40 30 20 10 0 -10 -20 -30 -40 -50 Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12 Dec 12 Mar 13 50 40 30 20 10 0 -10 -20 -30 Sep 10 Dec 10 Mar 11
US

Hong Kong - Exports by Destination (y/y)

Jun 11
EU

Sep 11

Dec 11
NIE

Mar 12

Jun 12

Sep 12

Dec 12

Mar 13

Trade Balance, HKD bn

Exports, y/y

Imports, y/y

ASEAN

C hina

20 15 10 5 0 -5 -10 -15 -20 Mar 12

Hong Kong - Regional Contributions to Export Growth (ppt)

30 25 20 15 10 5 0 -5 -10 -15 -20 -25

Hong Kong - Regional Contributions to Import Growth (ppt)

May 12

Jul 12
EU NIEs

Sep 12
US

Nov 12

Jan 13
C hina Total, y/y

Mar 13

Apr May Jun 12 12 12

ASEAN Japan

Jul 12
EU

Aug Sep 12 12

Oct Nov Dec Jan 12 12 12 13

US Other C hina

Feb Mar 13 13

ASEAN Japan

Other

NIEs

Total, y/y

20 15 10 5 0 -5 -10 -15 -20

Hong Kong - Product Contributions to Export Growth (ppt)

30 25 20 15 10 5 0 -5 -10 -15 -20 -25

Hong Kong - Product Contributions to Import Growth (ppt)

Apr May Jun 12 12 12

C hemicals

Jul 12

Aug Sep 12 12

Oct Nov Dec Jan 12 12 12 13

Misc Manufactures Total, y/y

Feb Mar 13 13

Apr May Jun 12 12 12

C hemicals

Jul 12

Aug Sep 12 12

Oct Nov Dec Jan 12 12 12 13

Misc Manufactures Total, y/y

Feb Mar 13 13

Manufactures by Materials

Manufactures by Materials

Machinery, Transport Equip Other

Machinery, Transport Equip Other

Sources: CEIC, ANZ

ANZ Greater China Economics Weekly Insight / 14 May 2013 / 17 of 23

HONG KONG
PRICES: PRICES DECLINE AFTER CHINESE NEW YEAR Headline inflation eased to 3.6% y/y in March, from 4.4% in February, as prices retreated after the Chinese New Year. Food prices eased 1.3ppts to 3.7%, reflecting prices declines after the festivals. Housing costs increased 5.2%, remaining the primary driver of inflation. Looking ahead, inflationary pressures will remain as the labour market continues to be tight and residential and commercial rents are still high. Hong Kong is unlikely to see its CPI dropping below 3.0% in 2013. CPI inflation may rise in the second half due to a relatively lower base last year.
Hong Kong - CPI Inflation
9 8 7 6 5 4 3 2 1 0 Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12 Dec 12 Mar 13 6 5 4 3 2 1 0 -1 -2 May 12 Jun 12
Food Electricity, Gas & Water Misc services Headline, y/y Excl. Gov't Relief, y/y y/y

Hong Kong - Contribution to Inflation

Jul 12

Aug 12

Sep 12

Oct 12

Nov 12

Dec 12

Jan 13

Feb 13

Mar 13

Housing Transport Others

20 15 10 5 0 -5 -10 Sep 10 Dec 10 Mar 11

Hong Kong - Inflation (y/y)

Hong Kong - CPI and CNY

30 20 10 0 -10 -20 -30 -40 9 8 7 6 5 4 3 2 1 0 Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12 Dec 12 Mar 13 1.26 1.24 1.22 1.20 1.18 1.16 1.14 1.12

Jun 11

Sep 11

Dec 11

Mar 12

Jun 12

Sep 12

Dec 12

Mar 13

C PI, y/y Food Housing Transport Elect., Gas & Water (RHS)

HKD/C NY (RHS)

Hong Kong - CPI and Liquidity

18 16 14 12 10 8 6 4 2 16 12 8 4 0 -4 9 8 7 6 5 4 3 2 1 0 Sep 10 Dec 10

Hong Kong - CPI and Unemployment Rate

4.4 4.2 4.0 3.8 3.6 3.4 3.2 3.0 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12 Dec 12 Mar 13

-8 0 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013
3m HIBOR C PI, y/y (RHS)

C PI, y/y

Unemployment Rate, sa (RHS)

Sources: CEIC, ANZ

ANZ Greater China Economics Weekly Insight / 14 May 2013 / 18 of 23

HONG KONG
MONEY AND BANKING: RMB DEPOSITS CONTINUED TO GROW ON A STRONG RMB M2 money supply growth edged down to 9.5% y/y in March, from 9.7% in February. On a m/m basis, M2 contracted for the second straight month, by 0.6%. RMB business continues to be a growth engine for the financial services. Hong Kongs RMB deposits increased 2.2% to RMB668.1bn. RMB cross-border trade settlement rose to RMB340.8bn, from RMB221.7bn. Short term CNH interbank interest rates came off, following a jump on 8 May. The overnight interbank rates quoted by Hong Kongs banks on the TMAs platform jumped to around 4.5% on 8 May, as liquidity conditions tightened. However, the surge was short-lived as interbank rates quickly came down over the following days.
Hong Kong - Money Supply
20 15 10 5 0 -5 Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12 Dec 12 Mar 13 350 300 250 200 150 100 50 0 May 2009 Nov 2009 May 2010 Nov 2010 May 2011 Nov 2011 May 2012 Nov 2012

Hong Kong - HKMA Aggregate Balance (HKD bn)

30 25 20 15 10 5 0 May 2013

M2, y/y

M2, m/m

Daily C hange (RHS)

HKMA Aggregate Balance

24,000 23,000 22,000 21,000 20,000 19,000 18,000 May 12

Hong Kong - Hang Seng Index and HKD

7.745 7.750 7.755 7.760 7.765 7.770 7.775

8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Apr May Jun 12 12 12

Offshore CNH O/N HIBOR (Fixing of individual banks)

Jul 12

Sep 12

Nov 12

Jan 13

Mar 13

May 13

Hangseng Index

USDHKD (RHS)

Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May 12 12 12 12 12 12 13 13 13 13 13

Hong Kong - RMB Trade Settlement

400 350 300 250 200 150 100 50 0 Sep Nov Jan MarMay Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar 10 10 11 11 11 11 11 11 12 12 12 12 12 12 13 13
Ratio to HK-C hina Trade (RHS) Ratio to Total HK Trade (RHS) Ratio to C hina Total Trade (RHS) Trade settlement amount (3mma), RMBbn

140 120 100 80 60 40 20 0

800 700 600 500 400 300 200 100 0

Hong Kong - RMB Deposits and Cross-Border Trade Settlement

12 10 8 6 4 2 0

Mar Jul Nov Mar Jul Nov Mar Jul Nov Mar Jul Nov Mar 09 09 09 10 10 10 11 11 11 12 12 12 13
Deposit, RMBbn Trade settlement amount, RMBbn RMB as % of Total Deposits (RHS)

Sources: CEIC, ANZ

ANZ Greater China Economics Weekly Insight / 14 May 2013 / 19 of 23

HONG KONG
REAL ESTATE: PROPERTY PRICES DECLINED FROM THE PEAK Government tightening measures have started to bite. Property price have begun to pull back as banks started to raise mortgage interest rates. Centa-City Leading Index declined from its peak on 17 March at 123.66, to 118.51 on 5 May. A gradual reduction in property price should help lower the risk of a real estate collapse as property prices should soon return to fair value. In our view, stable residential prices are a pillar supporting private consumption as property constitutes a substantial portion of household wealth. Even though rising household debt has become an increasing concern, the government needs to proceed with its property tightening policy in an orderly and flexible manner in order to avoid a sharp contraction of household wealth.
Hong Kong - Centa City Leading Index
140 120 100 80 60 40 20 0 1997

Hong Kong - Residential Property Transactions

80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Apr 10 Aug 10 Dec 10 Apr 11 Aug 11 Dec 11 Apr 12 Aug 12 Dec 12 Apr 13 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0

1999

2001

2003

2005

2007

2009

2011

2013

Number of Transactions (RHS)

Value, HKD mn

Hong Kong - Housing Market

260 240 220 200 180 160 140 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 50 48 46 44 42 40 38 36 34 32 30

Hong Kong - Property Price and Unemployment 300 250 200 150 100 50 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Property Price Index (1990=100) Unemployment Rate (Reverse Scale) (RHS)

0 1 2 3 4 5 6 7 8 9

Property Price Index (1999=100) C entaline Affordability Ratio, All Households (RHS)

120 110 100 90 80 70 60 50 40 30 20 1994

Hong Kong - Real Property Price Index Actual vs. Fair Values (Jul 97 = 100, CPI adjusted)

15 10 5 0 -5

Hong Kong - Consumption and Property Price (y/y)

60 50 40 30 20 10 0 -10 -20 -30 -40 -50

1997

2000

2003

2006 Fair Value

2009

2012

-10 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Private Consumption Residential Property Price (RHS)

Actual

Sources: CEIC, ANZ

ANZ Greater China Economics Weekly Insight / 14 May 2013 / 20 of 23

CHINA LIQUIDITY REPORT

China - PBoC Open Market Operations Gross Liquidity Injection (RMB bn)
250 200 150 100 50 0 01 Mar 15 Mar 29 Mar 12 Apr 26 Apr 10 May24 May 07 Jun 21 Jun
C B Bill Matured Repo Matured Reverse Repo

1,000 800 600 400 200 0 -200 -400 -600 -800 -1,000 10 Dec

China - PBoC Weekly Open Market Operations (RMB bn)

Liquidity Injection

Liquidity Withdrawal

24 Dec

07 Jan

21 Jan

04 Feb

18 Feb

04 18 Mar Mar

01 Apr

15 Apr

29 Apr

C B Bill Matured C B Bill Net

Repo Matured Repo

Reverse Repo Rev. Repo Matured

China - 7-day Repo Rate

5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 Sep 12
6 5 4 3 2 1 0 Jul 12 Aug 12

China - Shanghai Interbank Offered Rate

Oct 12

Nov 12

Dec 12

Jan 13

Feb 13

Mar 13

Apr 13

May 13

Sep 12 O/N

Oct 12

Nov 12

Dec 12

Jan 13

Feb 13

Mar 13

Apr 13

May 13

One Week

Two Week

One Month

Sources: CEIC, Bloomberg, ANZ

PBoC Resumed 3-month bill issuance last week The PBoC resumed the issuance of the 3-month bills for the first time since December 2011, to offset the capital inflows as the overseas investors pump money into the country to take advantage of the yuans rise. For the whole week, the central bank injected RMB84bn into the open market. Overall market liquidity conditions remain plentiful.

April monetary data stronger than expected China released April monetary data last Friday: New yuan loans were RMB792.9bn, lower than Marchs RMB1.06trn, but higher than the market expected. The country's social financing, a measure of funds raised by entities in the real economy, amounted to RMB1.75trn in April, an increase of RMB783.3bn y/y. By the end of April, the broad measure of money supply (M2), which covers cash in circulation and all deposits, increased 16.1% y/y to RMB103.3trn, compared with Marchs 15.8%. Chinas monetary data suggests that credit expansion remains strong, supported by relaxed market liquidity conditions. The Chinese authorities are likely to continue the accommodative monetary policy in the foreseeable future. Li-Gang Liu, Hao Zhou

ANZ Greater China Economics Weekly Insight / 14 May 2013 / 21 of 23

FORECASTS

y/y, unless otherwise noted Sep-11 Real GDP China Taiwan Hong Kong 9.2 3.53 4.4 Sep-12 Consumer Price Index China Taiwan Hong Kong Producer Price Index China Unemployment Rate, % Taiwan Hong Kong Exports China Taiwan Hong Kong Imports China Taiwan Hong Kong Trade Balance China, USD bn Taiwan, USD bn Hong Kong, HKD bn PMI and Export Orders China Manufacturing PMI Taiwan Export Orders Industrial Production China Taiwan Electricity Production China Retail Sales China Taiwan (Commercial Sales) Hong Kong M1 Growth China Taiwan (M1 B) Hong Kong M2 Growth China Taiwan Hong Kong 1.9 2.96 3.8 -3.6 4.28 3.3 10.0 10.3 15.2 2.3 1.2 14.9 27.7 4.09 -45.2 49.8 1.91 9.2 2.97 1.5 14.2 -1.50 9.5 7.3 3.35 10.3 14.8 3.96 11.0 Dec-11 8.9 1.21 3.0 Oct-12 1.7 2.34 3.8 -2.8 4.28 3.4 11.6 -1.9 -2.8 2.4 -1.8 3.3 32.0 3.3 -42.7 50.2 3.16 9.6 4.83 6.4 14.5 -0.68 3.9 6.1 3.6 13.1 14.1 3.3 10.0 2007 Current Account, % of GDP China Taiwan Hong Kong Foreign Reserves, USD bn China Taiwan Hong Kong Government Fiscal Surplus/Deficit, % of GDP China Taiwan Hong Kong (FY ending in March) 10.1 8.9 13.0 1,528 270 153 0.2 0.9 3.8 Mar-12 8.1 0.59 0.7 Nov-12 2.0 1.59 3.8 -2.2 4.24 3.4 2.9 0.8 10.5 0.0 0.1 9.0 19.6 3.4 -44.1 50.6 11.12 10.1 5.71 7.9 14.9 1.66 9.5 5.5 3.7 15.3 13.9 3.3 11.0 2008 9.3 6.9 15.0 1,946 292 183 -0.8 0.9 7.3 Jun-12 7.6 -0.12 1.1 Dec-12 2.5 1.60 3.8 -1.9 4.21 3.3 14.8 8.9 14.4 6.0 1.6 11.9 31.6 4.1 -48.0 50.6 8.51 10.3 2.05 7.6 15.2 1.49 9.1 6.5 4.9 15.9 13.8 3.7 12.1 2009 4.9 11.4 9.5 2,399 348 256 -2.8 -2.2 0.1 Sep-12 7.4 0.73 1.4 Jan-13 2.0 1.13 3.0 -1.6 4.20 3.4 25.2 21.6 17.6 28.8 22.2 23.9 29.1 0.5 -27.5 50.4 17.95 19.05 7.80 10.5 15.3 4.0 20.2 15.9 3.0 14.1 2010 4.0 9.3 6.6 2,847 382 269 -2.5 -1.2 1.5 Dec-12 7.9 3.72 2.5 Feb-13 3.2 2.96 4.4 -1.6 4.16 3.4 21.8 -15.8 -16.9 -15.2 -8.5 -18.3 15.2 0.9 -34.0 50.1 -14.47 9.9 -11.61 3.4 12.3 -6.00 22.7 9.5 5.7 13.6 15.2 3.5 8.5 2011 1.9 8.9 4.8 3,181 386 285 -1.8 -1.1 4.1 Mar-13 7.7 1.54 2.8 Mar-13 2.1 1.37 3.6 -1.9 4.18 3.5 10.0 3.3 11.2 14.1 0.2 11.3 -0.8 3.2 -49.1 50.9 -6.60 8.9 -3.28 2.1 12.6 -0.65 9.8 11.9 6.0 17.6 15.7 3.8 9.2 2012 2.3 10.5 1.3 3,312 403 317 -1.5 -2.6 3.8

Forecasts 2013 7.8 3.60 2.5 Apr-13 2.4* 1.37* 3.6* -2.6* 4.19 3.5 14.7* -1.9* 10.6 16.8* -8.2* 8.2 18.2* 2.3* -40.1 50.6* -4.72 9.0 5.70 12.8 3.20 14.5 11.9 16.1 2013 2.6* 10.8 2.8 3,443* 405* 304* 2.0 -

13 May-13 Foreign Exchange Rate USD/CNY USD/TWD USD/HKD Policy Interest Rate China PBOC 1-year Lending Rate Taiwan CBC Discount Rate Hong Kong Base Rate Shaded cells and column refer to forecast; *Indicates actual released data or YTD Sources: CEIC, Bloomberg, ANZ 6.146 29.819 7.761 6.00 1.875 0.50

Jun-13 6.20 6.00 1.875 0.50

Forecasts Sep-13 Dec-13 6.17 6.00 1.875 0.50 6.15 6.00 2.000 0.50

Mar-14 6.13 6.25 2.125 0.50

ANZ Greater China Economics Weekly Insight / 14 May 2013 / 22 of 23

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