ANZ RESEARCH GREATER CHINA ECONOMICS WEEKLY INSIGHT

16 JULY 2013 GREATER CHINA ECONOMICS CHARTBOOK China: Q2 GDP growth slowed further to 7.5% y/y, down from Q1s 7.7%, putting at risk the 7.5% growth target. The slowing growth was mainly dragged by declining industrial production and worsening export conditions. We believe monetary policy inaction, and even policy mistakes in handling the surging interbank rates, have also contributed to cooling economic growth. Looking forward, unemployment pressures, high money market rates and deleveraging by commercial banks, and problems faced by local government financing platforms could pose further downside risks to the economy. To head off such risks, the government will need to take prompt policy action such as an interest rate cut. A reserve requirement ratio cut should not be excluded if capital flight were to occur. Fiscal policy is still effective as China still has plenty of room to invest in urban infrastructure, technology upgrading, and human capital. Finally, reforms and opening up of the financial sector will also help instil confidence in Chinas future growth prospects. We believe these policy reactions should allow China to grow at around 7.6% this year and 7.2% next year. Taiwan: Exports grew by a surprisingly large margin in June on the back of strong demand from ASEAN and Mainland China. The electronics sector stayed resilient although household consumption remained weak. GDP is forecasted to have grown modestly by 1.89% y/y in Q2. Our recent client visits also suggest that the electronic sector remains upbeat. Taiwans external demand will likely recover in the second half. Hong Kong: As China has tightened over-invoicing and round tripping in trade, goods flow in Hong Kong has started to decline. Fortunately, domestic consumption holds up well as high property prices continue to preserve household wealth. HKD HIBOR barely rose despite the US tapering concern. CHINA MARKET LIQUIDITY REPORT Generally speaking, market interest rates should be relatively stable, with overnight and 7-day trading at 3.0-3.3% and 3.5-3.8% respectively, reflecting that overall tightness will persist for a while. CHART OF THE WEEK Chinas H1 GDP growth led by investment, consumption contributed less
China - Contribution to GDP Growth
20 15 10 5 0 -5 02 03 04 05 06 07 08 09 10 11 12 13H1 GDP, y/y

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

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

RESEARCH@ANZ.COM

Consumption

Investment

Net Exports

Sources: CEIC, ANZ

ANZ Greater China Economics Weekly Insight / 16 July 2013 / 2 of 23

DATA PREVIEW & REVIEW

GREATER CHINA ECONOMIC DATA CALENDAR
DATE 17 July 18 July 18 July 22 July 22 July 22 July 23 July 23 July COUNTRY China Hong Kong China Taiwan Taiwan Hong Kong Taiwan Taiwan DATA/EVENT Actual FDI (y/y) Composite Interest Rate Unemployment Rate sa Unemployment Rate - sa Export Orders (y/y) CPI - Composite Index (y/y) Industrial Production (y/y) Commercial Sales (y/y) PERIOD Jun Jun Jun Jun Jun Jun Jun Jun CONSENSUS 0.7% -3.4% -----LAST -0.26% 3.4% 4.19% -0.4% 3.9% -0.07% -1.85% 16:30 8:30 16:00 16:30 16:00 16:00 TIME (HK/SG)

Source: Bloomberg

WEEK IN REVIEW
DATE 9 July 9 July 10 July 10 July 10 July 12 July 12 July 12 July 12 July 12 July 12 July 15 July 15 July 15 July 15 July 15 July 15 July 15 July 15 July 15 July 15 July COUNTRY China China China China China China China China China China China China China China China China China China China China China DATA/EVENT CPI (y/y) Producer Price Index (y/y) Trade Balance (USD) Exports (y/y) Imports (y/y) Foreign Reserves New Yuan Loans Money Supply - M0 (y/y) Money Supply - M1 (y/y) Money Supply - M2 (y/y) Aggregate Financing Real GDP YTD (y/y) GDP (y/y) GDP (q/q) Industrial Production YTD (y/y) Industrial Production (y/y) Fixed Assets Investment YTD (y/y) Retail Sales YTD (y/y) Retail Sales (y/y) Business Climate Index Entrepreneur Confidence Index PERIOD Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Q2 Q2 Q2 Jun Jun Jun Jun Jun Q2 Q2 CONSENSUS 2.5% -2.6% $27.80bn 3.7% 6.0% $3470.0bn 800.0bn 10.5% 10.7% 15.2% 1275.0bn 7.7% 7.5% 1.8% 9.3% 9.1% 20.2% 12.7% 12.9% ----ACTUAL 2.7% -2.7% $27.12bn -3.1% -0.7% $3500.0bn 860.5bn 9.9% 9.1% 14.0% 1040.0bn 7.6% 7.5% 1.7% 9.3% 8.9% 20.1% 12.7% 13.3% 120.6 117.0 LAST 2.10% -2.90% $20.42bn 1.0% -0.3% $3442.6bn 667.4bn 10.8% 11.3% 15.8% 1185.6bn 7.7% 7.7% 1.6% 9.4% 9.2% 20.4% 12.6% 12.9% 125.6 122.4

Source: Bloomberg

ANZ Greater China Economics Weekly Insight / 16 July 2013 / 3 of 23

GREATER CHINA CHARTBOOK

OVERVIEW: CHINAS GDP SLOWED FURTHER IN Q2 China: Chinas Q2 GDP growth slowed further to 7.5% y/y, down from Q1s 7.7%, putting at risk the 7.5% growth target set this year. The slowing growth was mainly dragged by declining industrial production (8.9% y/y in June vs 9.2% in May) and worsening export conditions (-3.1% y/y in June vs +1.0% in May). We believe monetary policy inaction and even policy mistakes in handling the surging interbank rates, have also contributed to cooling economic growth. Looking forward, some downside risks remain: First, the unemployment pressure will rise significantly because of lost trade competitiveness and a record number of new graduates entering the job market this year. Second, high money market rates and deleveraging by commercial banks will spill over to the real sector. The small and medium enterprises will feel most of the brunt, further increasing the volatility of this sector. Third, local government financing platforms could quickly become a lot more fragile. To head off such risks, the government will need to take prompt policy actions. Monetary policy must change to reflect the rapidly changing domestic and external conditions. An interest rate cut is long overdue, and a reserve requirement ratio cut should not be excluded if capital flight were to occur. Chinas fiscal policy is still effective as the country still has plenty of room to invest: urban infrastructure, technology upgrading, and human capital. Finally, reforms and opening up of the financial sector will also help instil confidence on Chinas future growth prospects. We believe these policy reactions should allow China to grow at around 7.6% this year with CPI inflation falling to a range of 2.5 to 3.0%. These policies will have major implications for domestic rates and the RMB exchange rate. Market rates should see a general downward trend and the RMB should continue to weaken in the second half, not only against the USD but also its Asian crosses. Taiwan: Exports grew by a surprisingly large margin in June on the back of strong demand from ASEAN and Mainland China. The electronics sector stayed resilient although household consumption remained weak. GDP is forecasted to have grown modestly by 1.89% y/y in Q2. Our recent client visits also suggest that the electronic sector remains upbeat. Taiwans external demand will likely recover in the second half. Hong Kong: As China has tightened over-invoicing and round tripping in trade, goods flow in Hong Kong has started to decline. Fortunately, domestic consumption holds up well as high property prices continue to preserve household wealth. HKD HIBOR barely rose despite the US tapering concern.
China - GDP Growth
20 18 16 14 12 10 8 6 4 2 0 2005 -5 2006 2007 2008 2009 2010 q/q, saar 2011 2012 2013 02 03 04 05 06 07 08 09 10 11 12 13H1 GDP, y/y 0 5 10 15 20

China - Contribution to GDP Growth

y/y

Consumption

Investment

Net Exports

Taiwan - Trade Developments

50 40 30 20 10 0 -10 -20 Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun 11 11 11 11 12 12 12 12 12 12 13 13 13 Trade Balance, $bn (RHS) Exports, y/y Imports, y/y 5 4 3 2 1 0 -1 -2 0.32 0.30 0.28 0.26 0.24 0.22 0.20 Mar 12

Hong Kong - 1-month HKD HIBOR

May 12

Jul 12

Sep 12

Nov 12

Jan 13

Mar 13

May 13

Jul 13

1m HKD HIBOR

Sources: Bloomberg, CEIC, ANZ

ANZ Greater China Economics Weekly Insight / 16 July 2013 / 4 of 23

CHINA
REAL ACTIVITY: GDP SLOWED TO 7.5%, BARELY MEETING THE GOVERNMENTS ANNUAL TARGET Q2 GDP slowed to 7.5% y/y, down from Q1s 7.7%, in line with market expectations. In the first half of the year, GDP grew 7.6% y/y. The primary, secondary and tertiary industries grew by 3.0%, 7.6% and 8.3% respectively in H1. By expenditure, consumption and investment contributed 3.4ppts and 4.1ppts respectively to overall growth in H1, while net exports contributed 0.1ppt. On a q/q basis, the economy rose 1.7%, 0.1ppt higher than in Q1. Industrial production growth slowed to 8.9% y/y in June, compared with 9.2% in May. However, electricity production growth rebounded to 6.0%, from 4.1% in the previous month. In H1, industrial production grew 9.3% y/y while electricity production increased 4.4%. Fixed asset investment eased slightly to 20.1% y/y in H1, compared with 20.4% in January-May. Retail sales grew 13.3% y/y in June, from 12.9% in May. For H1, retail sales increased 12.7%.
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 13H1 GDP, y/y

q/q, saar

Consumption

Investment

Net Exports

25 20 15 10 5 0 -5

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

23 21 19 17 15 13 11 9 7 5

40 35 30 25 20 15 10 5 0 Dec 10 Mar 11

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

Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun 10 10 10 11 11 11 11 12 12 12 12 13 13
Electricity Production Industrial Production (RHS)

Jun 11

Sep 11

Dec 11

Mar 12

Jun 12

Sep 12

Dec 12

Mar 13

Jun 13

Total FAI

SOE

Private

20

China - Retail Sales (y/y)

60 50 40

China - Housing and Auto Sales Volume (y/y)

15

30 20 10 0 -10 -20 -30

10

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

-40 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12 Dec 12 Mar 13 Jun 13

Nominal

Real

Auto Sales

Housing Sales

Sources: NBS, CEIC, ANZ

ANZ Greater China Economics Weekly Insight / 16 July 2013 / 5 of 23

CHINA

EXTERNAL TRADE: TRADE FIGURES REFLECT REALITY After the crackdown on over-invoicing and round tripping trade figures since May, the Chinese trade figures are beginning to reflect reality. June trade figures continued to trend down, reflecting that Chinas external demand remains weak. Export contracted by 3.1% y/y and imports extended the negative growth at -0.7% y/y in June, compared with Mays 1.0% and -0.3%, respectively. The trade surplus widened to USD27.1bn. By destination, exports to the US fell 5.4% y/y in June, from a 1.6% decline in May. Exports to the EU contracted 8.3%, from -9.7% in the previous month. Exports to Japan declined 5.1%, from -5.7%. Exports to Hong Kong fell sharply to -7.0%, from a 7.7% increase in the previous month. Exports to ASEAN rose 10.2%, while shipments to Taiwan fell 2.2%.
China - Trade Developments
50 40 30 20 10 0 -10 -20 -30 -40 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12 Dec 12 Mar 13 Jun 13 50 40 30 20 10 0 -10 -20 -30 -40 50 40 30 20 10 0 -10 -20 -30 Dec 10 Mar 11 Jun 11 China Sep 11 Dec 11 Mar 12 Jun 12 Sep 12 Dec 12 Mar 13 Jun 13

China's exports vs regional exports (y/y)

Trade Balance, $bn (RHS)

Exports, y/y

Imports, y/y

Hong Kong

Korea

Taiwan

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

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

50 40 30 20 10 0 -10

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

Jun 11

Sep 11
US

Dec 11
EU

Mar 12

Jun 12
NIE

Sep 12

Dec 12

Mar 13

Jun 13

Dec 10

Mar 11

Jun 11

Sep 11
US

Dec 11
EU

Mar 12

Jun 12
NIE

Sep 12

Dec 12

Mar 13

Jun 13

ASEAN

ASEAN

240 220 200 180 160 140 120 100 Dec 10 Mar 11 Jun 11

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

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

50 0 -50 -100 -150 -200 Dec 10 Mar 11 Jun 11

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

Sep 11
EU

Dec 11

Mar 12
US

Jun 12

Sep 12

Dec 12

Mar 13

Jun 13

Sep 11

Dec 11

Mar 12

Jun 12

Sep 12

Dec 12

Mar 13

Jun 13

Japan (RHS)

ASEAN-5

AU+NZ

NIE ex HK

Sources: Bloomberg, CEIC, ANZ

ANZ Greater China Economics Weekly Insight / 16 July 2013 / 6 of 23

CHINA
PRICES: REBOUNDING INFLATION DUE TO A LOW BASE COMPARISON Chinas CPI inflation rebounded to 2.7% in June, from Mays 2.1%, largely due to a low base last year. Food and rental costs rose 4.9% and 3.1% respectively in June, from 3.2% and 3.0% in the prior month. Meanwhile, on a m/m basis, CPI remained unchanged in June, compared with a 0.6% decline the prior month. On a sequential basis, CPI inflation in June remained unchanged from May. PPI inflation remained negative for 16 consecutive months, indicating firms have little power to raise prices due to the lack of demand. As there is a pass-through effect from PPI inflation to CPI inflation, a weak PPI inflation result also suggests that the CPI is unlikely to pick up in the next 1-2 quarters. We maintain our forecast that average CPI inflation will be around 2.5% for the whole of 2013, much lower than the government target of 3.5%.
China - Inflation (y/y)

10 8 6 4 2 0 -2 -4 -6 Dec 10 Mar 11 Jun 11 Sep 11

7 6 5 4 3 2 1 0

China - Contribution to Inflation (y/y)

Dec 11

Mar 12
C PI

Jun 12
PPI

Sep 12

Dec 12

Mar 13

Jun 13

-1 Dec 10 Mar 11 Jun 11

Food

Sep 11

Dec 11

Mar 12

Jun 12

Sep 12

Dec 12

Mar 13
C PI

Jun 13

Housing

Medical

Other

China - CPI Inflation

8 6 4 2 0 -2 -4 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12
y/y

China - PPI Inflation

2

10 8 5

3 0 0

-3 -5 -8 -1

-1 Dec 12 Mar 13 Jun 13

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

y/y

-2 Dec 12 Mar 13 Jun 13

m/m (RHS)

m/m (RHS)

China - Real Interest Rate

8 6 4 2 0 -2 -4 Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun 10 10 10 11 11 11 11 12 12 12 12 13 13
C PI, y/y Deposit Rate Real Interest Rate

China Food Price Index

230 220 210 200 190 180 170 160 150 140 Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun 09 09 10 10 10 10 11 11 11 11 12 12 12 12 13 13

Sources: CEIC, ANZ

ANZ Greater China Economics Weekly Insight / 16 July 2013 / 7 of 23

CHINA
MONETARY POLICY: POLICY CHANGES ARE URGENTLY NEEDED TO INSTIL CONFIDENCE New yuan loans came in at RMB860.5bn in June, slightly above market consensus. However, total social financing eased to RMB1.04trn, from RMB1.19bn in the previous month. M2 growth moderated to 14.0% y/y in June, from 15.8% in May, reflecting slower deposit growth. While liquidity conditions have eased significantly in the past few weeks, the 7-day repo rate, the most important gauge of the liquidity environment, continued to trade above 3.5%, much higher than the normal level of 3%. This suggests that the PBoC is maintaining an overall tight liquidity condition in Chinas onshore market despite soft growth and inflation outlooks, which has increased the uncertainties of the policy outlook in the next 1-2 quarters. We reiterate our view that the monetary authority should anchor its monetary policy based on forwardlooking inflation, growth and employment dynamics. This requires the PBoC to first cut interest rates to lower both interbank rates and cost of funding in the real economy. If China were to experience large capital outflows with the expectation of QE tapering in the US, the PBoC could act accordingly by cutting the reserve requirement ratio.
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 12,000 10,000 20 8,000 6,000 4,000 15 2,000 0
Total Social Financing

China - Total Social Financing (RMB bn)

Trust Loan

RMB Loan

Entrusted Loan

Banker's Acceptance Draft

10 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11

M2, y/y

Mar 12

Jun 12

Sep 12

Dec 12

Mar 13

Jun 13

Foreign Currency Loan

Credit, y/y

H1 2012

H1 2013

1,200 1,000 800 600 400 200 0

China - New Yuan Loans (RMB bn)

250 200 150 100 50 0 -50 -100 -150 -200

China - PBoC Weekly Open Market Operations (RMB bn)

Liquidity Injection

Liquidity Withdrawal

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

25 Mar

C B Bill Matured C B Bill Net

08 Apr

22 Apr

06 May

Repo Matured Repo

20 May

03 Jun

17 Jun

Reverse Repo Rev. Repo Matured

Sources: Bloomberg, CEIC, PBoC, ANZ

Net Corp Bond

01 Jul

NonFinancial Equity

ANZ Greater China Economics Weekly Insight / 16 July 2013 / 8 of 23

CHINA
EXCHANGE RATE: RMB SHOULD START TO DEPRECIATE IN THE SECOND HALF The strong yuan is a major culprit behind the loss of export competitiveness. We believe that the Chinese authorities should re-visit their exchange rate policy amid the weakness of the Asian peers. In fact, the RMB strengthening since last June is largely driven by Mainland-Hong Kong cross border trade masking capital inflows induced by the onshore and offshore interest rate differentials, rather than real trade. As a weaker RMB is in Chinas interest to help the export sector and regain Chinas trade competitiveness, we believe the RMB should depreciate in the second half of the year, and year-end rates should be around 6.20 or even weaker. Slower capital inflows or even capital outflows due to expectations of US QE tapering will help alleviate the pressures on the RMB as well. Given a strong yuan relative to other Asian currencies, export competitiveness will continue to erode. With this in mind, we see a downside risk for the RMB exchange rate. In the long term, we believe the new political leadership should roll out a clear strategy to re-position Chinas products within the global supply chain.
USD/CNY
6.45 6.40 6.35 6.30 6.25 6.20 6.15 6.10 6.05 Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul 12 12 12 12 12 12 12 13 13 13 13 13 13 13 Spot Trading band Fixing

China - CNY and CNH Spot

6.26 500 400 6.22 300 200 6.18 100 0 6.14 -100 -200 6.10 Jan 13 -300 Feb 13 Mar 13 Apr 13 May 13 USD/CNY Jun 13 Jul 13

Spread (pips, RHS)

USD/CNH

USD/CNY Spot and NDF

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

USD/CNY Spot and DF

6.5 3 2 6.4 1 0 -1 -2 -3 6.1 Jul 12 Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun 12 12 12 12 12 13 13 13 13 13 13
DF Implied Appreciation, % (RHS) USD/C NY

6.3

6.3

6.2

6.2

-4 Jul 13

-4 Jul 13
1y DF

NDF Implied Appreciation, % (RHS)

1y NDF

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

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

140 135 130 125 120 115 110 105 100 95 90

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

CNY Appreciation

Jan May Sep Jan May Sep Jan May Sep Jan May Sep Jan May 09 09 09 10 10 10 11 11 11 12 12 12 13 13

Jan 12

Mar 12

May 12

Jul 12

Sep 12 CNY/JPY

Nov 12

Jan 13

Mar 13

May 13 CNY/USD

Jul 13

CNY/EUR

CNY/AUD

Sources: Bloomberg, CEIC, ANZ

ANZ Greater China Economics Weekly Insight / 16 July 2013 / 9 of 23

CHINA
PROPERTY MARKET: PRICES SURGED IN FIRST TIER CITIES Property prices continued to heat up in May. Our calculation showed that property prices picked up to 6.5% y/y in May, compared with 5.3% in April. Notably, the average prices in first tier cities surged 14.2% in May, compared with an average 5.1% in the rest of the 70 cities. Housing prices in Beijing, Shanghai, Guangzhou and Shenzhen increased 15.2%, 12.2%, 15.5% and 14.0% respectively. By number of cities, the prices rose in 65 of 70 cities m/m in May, down from 67 in April. On a y/y basis, prices increased in 69 cities, Wenzhou was the only city that saw prices decline. Meanwhile, transactions in major cities continued to slow down in May.
China - Property Price Index (y/y)

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

18 16 14 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

May Jul 11 11

Sep Nov Jan Mar May Jul 11 11 12 12 12 12

Shanghai

Sep Nov Jan 12 12 13

Mar May 13 13

Official Property Price Index

ANZ Property Price Index

Beijing

Guangzhou

Shenzhen

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 May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May 11 11 11 11 12 12 12 12 12 12 13 13 13 Decrease No Change Increase

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

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

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

700 600 500 400 300 200 100 0

60 50 40 30 20 10 0 -10 -20 -30 -40 Nov 10 Feb 11

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

0 Sep Nov Jan Mar May 11 11 12 12 12

Beijing Shanghai

Jul 12

Sep Nov Jan Mar May 12 12 13 13 13

Guangzhou

Jul 13

May 11

Aug 11

Nov 11

Feb 12

May 12

Aug 12

Nov 12

Feb 13

May 13

Shenzhen (RHS)

Floor Space Started

Floor Space Sold

Sources: Bloomberg, CEIC, ANZ

ANZ Greater China Economics Weekly Insight / 16 July 2013 / 10 of 23

CHINA
STEEL INDUSTRY: IRON ORE PRICES REBOUNDED SLIGHTLY The Tianjin Port imported iron ore prices rebounded to above USD125 per ton at mid-July. Iron ore inventory also started to climb slowly, but remained well below the average level of the past 5 years. Steel prices, however, continued to decline. Steel inventories held by traders also continued the downward trend, consistent with past seasonality paterns.
China - Import Iron Ore Price 62% Fe (USD/ton)

170 160 150 140 130 120 110 100 90 80 Dec 11 Feb 12

105 100 95 90 85 80 75 70 65

China - Iron Ore Inventory at Ports (mn tons)

Apr 12

Jun 12

Aug 12

Oct 12

Dec 12

Feb 13

Apr 13

Jun 13

60 55 50 Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun 09 10 10 10 10 11 11 11 11 12 12 12 12 13 13
Iron Ore Inventory 5 year average

C FR Tianjin Port

China - Steel Inventory and Rebar Price

10 9 8 7 6 5 4 3 Jun Oct Feb Jun Oct Feb Jun Oct Feb Jun Oct Feb Jun 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)

5,500 5,000 4,500 4,000 3,500 3,000 2,500 2,000

6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 Dec 10 Mar 11 Jun 11

China - Steel Product Prices (th RMB/ton)

Sep 11

Dec 11

Mar 12

Jun 12

Sep 12

Dec 12

Mar 13

Jun 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)

Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May 11 11 11 11 11 11 12 12 12 12 12 12 13 13 13
Headline Industrial Production Smelting & Pressing of Ferrous Metals

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
*Defined as monthly imports less monthly change of inventories

Sources: Bloomberg, CEIC, ANZ

ANZ Greater China Economics Weekly Insight / 16 July 2013 / 11 of 23

TAIWAN
REAL ACTIVITY: INDUSTRIAL PRODUCTION IMPROVED DUE TO ELECTRONICS Industrial production inched down 0.07% y/y in May, compared with -0.80% in the previous month. Sequentially, industrial production gained 0.98% m/m after seasonal adjustments. The improvement was driven by the robust semiconductors sector as electronics manufacturing expanded 3.47% y/y in May. The base metal industry contracted 7.37% while chemicals declined 3.66%, suggesting that the economic conditions for conventional industries remain challenging. Domestic demand performed poorly. Commercial sales contracted 1.85% y/y in May, from a 1.01% gain in April, mainly due to a 2.63% decline in wholesale sales. Meanwhile, retail sales increased marginally by 0.11%. Given continued sluggish domestic demand and stable exports, Taiwans GDP is forecast to have grown by 1.89% y/y in Q2. Going forward, the improving US economy likely helped lift the pace of recovery in H2, given that the global electronics industry remains upbeat.
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 Aug 11 Oct 11 Dec 11

Taiwan - Economic Activities (y/y)

25 20 15 10 5 0 -5 -10

Taiwan - Commercial Sales (y/y)

Feb 12

Apr 12

Jun 12

Aug 12

Oct 12

Dec 12

Feb 13

Apr 13

Jun 13

-15 Nov 10 Feb 11 May 11 Aug 11 Nov 11 Feb 12 May 12 Aug 12 Nov 12 Feb 13 May 13

Commercial sales Exports Export orders

Industrial production Imports of Machineries

Commercial Sales

Wholesale Trade

Retail Trade

Taiwan - Industrial Production Index

25 20 15 10 5 0 -5 -10 -15 -20 Nov 10 Feb 11 May 11 Aug 11 Nov 11 y/y Feb 12 May Aug 12 12 Nov 12 Feb 13 May 13 120 110 100 90 80 70 60 50 40 80 60 40 20 0 -20 -40 Nov 10 Feb 11

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

Index (RHS)

May Aug Nov Feb 11 11 11 12 Electronic Parts Chemical Materials

May Aug Nov 12 12 12 Basic Metal Tech Products

Feb 13

May 13

Sources: CEIC, ANZ

ANZ Greater China Economics Weekly Insight / 16 July 2013 / 12 of 23

TAIWAN
EXTERNAL TRADE: EXPORTS SURPRISED ON THE UPSIDE IN JUNE Taiwans exports surprised on the upside with a 8.6% y/y gain in June, mainly driven by strong shipments to ASEAN (+20.3%) and Mainland China (8.6%). By product, electronics continued to buffer Taiwans trade performance, growing 10.9% y/y. Meanwhile, mineral exports, which include oil fuels, surged 39.4%. On a sequential basis, exports rose by 0.5% m/m. Imports increased 6.1%, from -8.0% in May, also beating market consensus. Notably, imports of capital equipment increased 7.5%, reflecting a robust investment demand. The trade surplus narrowed to USD3.25bn in June, from a record high of USD4.46bn in May. On the other hand, export orders declined 0.4% y/y in May, from a 1.1% contraction in April, slightly better than market expectations. The declining demand from China, ASEAN and the US appears to have stabilized with some markets starting to restock. Excluding the change of export orders from Japan, which has suffered from a currency valuation effect, the headline growth should have been 1.3% y/y.
Taiwan - Trade Developments
50 40 30 20 10 0 -10 -20 Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun 11 11 11 11 12 12 12 12 12 12 13 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)

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

Taiwan - Exports by Destination (y/y)

50 40 30 20 10 0 -10 -20 -30 -40 Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun 11 11 11 11 12 12 12 12 12 12 13 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

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

Taiwan - Export Orders

40 30 20 10 0 -10 -20 44,000 41,000 38,000 35,000 32,000 29,000 26,000 23,000 20,000 May Aug Nov Feb May Aug Nov Feb May Aug Nov Feb May 10 10 10 11 11 11 11 12 12 12 12 13 13 y/y Export Orders in USD (RHS) Export Orders 12mma

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

Taiwan - Export Orders by Market (y/y)

Nov 11

Jan 12

Mar May 12 12 Europe

Jul 12

Sep Nov 12 12

Jan 13

Mar May 13 13 US

China/HK

Japan

ASEAN6

Sources: CEIC, ANZ

ANZ Greater China Economics Weekly Insight / 16 July 2013 / 13 of 23

TAIWAN
PRICES: INFLATIONARY PRESSURES CONTINUED TO EASE IN JUNE Headline CPI inflation eased further to 0.60% y/y in June, compared with 0.74% in May, largely due to lower food inflation, which has eased to 0.48% y/y. Core inflation, which excludes food and energy, rose to 0.33% in June, from 0.28%. WPI fell 1.90% y/y in June, compared with -3.33% in the previous month and the market consensus of a 2.35% decline. Overall, WPI continued to be negative as prices of base metals, electronic components and other minerals remained depressed. However, sequentially, WPI gained 0.75% m/m sa. Going forward, the strength of TWD against USD and JPY will contine to help fend off imported inflation. Inflation is unlikely to be a major risk factor for the rest of the year.
Taiwan - CPI Momentum & Output Gap
6 4 2 0 -2 -4 -6 -8 -10 2006 2007 2008 2009 2010 2011 CPI 2012 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 Aug 12 Sep 12 Oct 12 Nov 12 Dec 12 Jan 13 Feb 13 Mar 13 Apr 13 May 13 Jun 13

Taiwan - Contribution to CPI Inflation

GDP Actual-Potential Gap, %

Food Housing ex. Rental Education & Entertainment CPI, y/y

Rental Transportation Other

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 Dec 10 Mar Jun Sep Dec Mar Jun Sep Dec Mar 11 11 11 11 12 12 12 12 13 CPI CPI ex Food & Energy CPI ex Fruits, Vegetables, Fish, Shellfish & Energy Jun 13 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 Dec 10 Mar 11

Taiwan - CPI and Real Interest Rate

Jun 11

Sep 11

Dec 11

Mar 12

Jun 12

Sep 12

Dec 12

Mar 13

Jun 13

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

Taiwan - WPI
10 8 6 4 2 0 -2 -4 -6 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12 y/y Dec 12 Mar 13 Jun 13 5 4 3 2 1 0 -1 -2 -3 25 20 15 10 5 0 -5 -10 Dec 10 Mar 11 Jun 11

Taiwan - Import Price Index (y/y)

Sep 11

Dec 11

Mar 12

Jun 12

Sep 12

Dec 12

Mar 13

Jun 13

m/m sa (RHS)

ImPI in TWD

ImPI in USD

Sources: CEIC, ANZ

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

TAIWAN
MONETARY AND RATE POLICIES: CBC HELD INTEREST RATE AT 1.875% AS EXPECTED Taiwans central bank (CBC) held the policy rate at 1.875% in June, in line with market expectations. Low inflation and sluggish growth continue to prompt the CBC to remain accommodative as the current interest rate level has been considered appropriate. Furthermore, the central bank is also watching closely the highly uncertain financial markets. The changing monetary policy stance of other major central banks is also on the radar. Against this global backdrop, we believe the CBC will continue to act prudentially and maintain a stable monetary policy stance. Taiwans bond yield has risen sharply on the back of rising US Treasury yields. Thus, given the tapering bias of US monetary policy going forward, Taiwans interest rates will also be subject to an upward bias. On the exchange rate front, the CBC will continue to strive for a balance between export competitiveness and the risk of imported inflation when formulating its view on TWD exchange rates. RMB deposits rose 7.4% m/m to RMB71.2bn in June.
Taiwan - Money Supply (y/y) Taiwan - Money Market Interest Rates (bps)
200 180 160 140 120 100 80 60 40 20 0 Nov 12 Feb 13 May 13 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13

10 9 8 7 6 5 4 3 2 1 0 Nov 10 Feb 11 May 11

Aug 11

Nov 11

Feb 12 M1b

May 12 M2

Aug 12

90-day Commercial Paper Rediscount Rate

Interbank Overnight Rate 10 yr Gov't Bond Yield

Taiwan - TWD Exchange Rates

107 105 103 101 99 97 95 Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun 11 11 11 11 11 12 12 12 12 12 12 13 13 13 BIS NEER BIS REER TWD/USD Spot (RHS, inverted) 28 28 29 29 30 30 31 102 100 98 96 94 92 90 Jul 12

Taiwan - USDTWD vs USDKRW (One year rolling index)

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

Feb Mar Apr May Jun 13 13 13 13 13 USDKRW

Jul 13

80,000 70,000 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
Dec Feb 12 13 Apr 13 Jun 13

44.5 44.0 43.5 43.0 42.5 42.0 Nov 10 Feb 11 May Aug 11 11 Nov 11 Feb 12 May 12 Aug 12 Nov 12 Feb 13 May 13

Dec Feb 11 12

Apr 12

Jun Aug Oct 12 12 12

OBU DBU

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

Sources: CEIC, ANZ

ANZ Greater China Economics Weekly Insight / 16 July 2013 / 15 of 23

HONG KONG

REAL ACTIVITY: GROWTH MOMENTUM OF DOMESTIC ACTIVITY REMAINED MODEST Retail sales grew 12.8% y/y in May, compared with 20.7% in April and market expectations of 19.4%. Sales of jewellery, watches and valuable gifts grew 34.5%, much slower than the 68.5% gain in April, as the first wave of gold-buying occurred in April after gold prices slumped. In addition, consumer durable goods also declined 9.5% y/y, from a 0.8% gain the previous month, driven by slow sales of motor vehicles. Seaborne cargo remained depressed, despite the resumption of port workers after a long strike. Container throughput by seas contracted 10.5% y/y in May, from the previous contraction of 12.2% in April. Meanwhile, air cargo throughput rose 10.7% y/y in June, from 12.4% the previous month.
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 Nov 10 Feb 11 May 11

Hong Kong - Retail Sales (y/y)

80 60 40 20 0 -20 -40

Hong Kong - Retail Sales Components (y/y)

Aug 11

Nov 11
Value

Feb 12

May 12
Volume

Aug 12

Nov 12

Feb 13

May 13

May Jul 11 11

C lothing & Footwear

Sep Nov Jan Mar May Jul 11 11 12 12 12 12

Motor Vehicles

Sep Nov Jan Mar May 12 12 13 13 13

Jewellery, Watches & C locks

Hong Kong - Unemployment Rate

14 12 10 8 6 4 2 0 May Sep 09 09 Jan May Sep 10 10 10 Jan May Sep 11 11 11 Jan May Sep 12 12 12 Jan May 13 13 25 20 15 10 5 0 -5 -10 -15 -20 Aug 11 Oct 11

Hong Kong - Logistics Activities (y/y)

Dec 11

Feb 12

Apr 12

Jun 12

Aug 12

Oct 12

Dec 12

Feb 13

Apr 13

Jun 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 / 16 July 2013 / 16 of 23

HONG KONG
EXTERNAL SECTOR: TRADE SLOWED SIGNIFICANTLY AS CHINA CLAMPS DOWN ON FALSE TRADE Exports dropped by 1.0% y/y in May, compared with a 9.0% gain in April, consistent with the declining pattern of Chinas trade. The large drop in exports growth was primarily due to exports to Mainland, which declined significantly due to the Mainlands cracking down of over-invoicing. Exports to China grew a mere 0.7%, compared with 15.7% in April. Additionally, exports to the US and EU also declined by 7.9% and 7.0% respectively, from -3.6% and -0.6%. Imports increased by 1.7% y/y in May, from 7.7% in April, and also lower than market expectations. As the cross-border financially-driven trades started to slow, imports from China also declined. The trade deficit widened by HKD1.6bn to HKD44.3bn in May.
Hong Kong - Trade Developments
40 30 20 10 0 -10 -20 -30 -40 -50 Nov 10 Feb 11 May 11 Aug 11 Nov 11 Feb 12 May 12 Aug 12 Nov 12 Feb 13 May 13 40 30 20 10 0 -10 -20 -30 May Jul 11 11 Sep Nov Jan Mar May Jul 11 11 12 12 12 12
US EU NIE

Hong Kong - Exports by Destination (y/y)

Sep Nov Jan Mar May 12 12 13 13 13

ASEAN C hina

Trade Balance, HKD bn

Exports, y/y

Imports, y/y

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

Hong Kong - Regional Contributions to Export Growth (ppt)

30 25 20 15 10 5 0 -5 -10 -15 -20 -25 Jun 12

Hong Kong - Regional Contributions to Import Growth (ppt)

May Jun 12 12

Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May 12 12 12 12 12 12 13 13 13 13 13
EU NIEs US Other C hina Total, y/y

Jul 12

Aug Sep 12 12
EU NIEs

Oct Nov Dec Jan 12 12 12 13

US Other

Feb Mar Apr May 13 13 13 13

C hina Total, y/y

ASEAN Japan

ASEAN Japan

20 15 10 5 0 -5 -10 -15 -20 Jun 12

Hong Kong - Product Contributions to Export Growth (ppt)

30 25 20 15 10 5 0 -5 -10 -15 -20 -25 Jun 12

Hong Kong - Product Contributions to Import Growth (ppt)

Jul 12

Aug Sep 12 12

Oct Nov Dec Jan 12 12 12 13

Feb Mar Apr May 13 13 13 13

Jul 12

Aug Sep 12 12

Oct Nov Dec Jan 12 12 12 13

Feb Mar Apr May 13 13 13 13

C hemicals Machinery, Transport Equip Other

Manufactures by Materials Misc Manufactures Total, y/y

C hemicals Machinery, Transport Equip Other

Manufactures by Materials Misc Manufactures Total, y/y

Sources: CEIC, ANZ

ANZ Greater China Economics Weekly Insight / 16 July 2013 / 17 of 23

HONG KONG
PRICES: CPI INFLATION EASED SLIGHTLY IN MAY Headline CPI eased to 3.9% y/y in May, slightly below the previous reading of 4.0%. Food inflation eased to 4.0% in May, from 5.2% in April as vegetable prices rose slower. On the other hand, housing prices accelerated to 6.2% from 5.9% on the back of rising private rentals. Going forward, Hong Kongs inflation still has upward pressure. With public services including MTR (Hong Kongs subway) raising its fares and the government inclined to pledge the relief measures no more than the previous, Hong Kong will likely run an inflation scenario unless there is a substantial reduction in economic activities triggered by a crisis-like event.
Hong Kong - CPI Inflation
9 8 7 6 5 4 3 2 1 0 Nov 10 Feb 11 May 11 Aug 11 Nov 11 Feb 12 May 12 Aug 12 Nov 12 Feb 13 May 13 5 4 3 2 1 0 -1 -2 Jul 12 Aug 12 Sep 12 Oct 12 Nov 12 Dec 12 Jan 13 Feb 13 Mar 13 Apr 13 May 13

Hong Kong - Contribution to Inflation

Headline, y/y

Excl. Gov't Relief, y/y

Food Electricity, Gas & Water Misc services y/y

Housing Transport Others

20 15 10 5 0 -5 -10 Nov 10 Feb 11 May 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 Nov 10 Feb 11 May 11 Aug 11 Nov 11 Feb 12 May 12 Aug 12 Nov 12 Feb 13 May 13 1.28 1.26 1.24 1.22 1.20 1.18 1.16 1.14 1.12

Aug 11

Nov 11

Feb 12

May Aug 12 12

Nov 12

Feb 13

May 13

C PI, y/y

HKD/C NY (RHS)

Food

Housing

Transport

Elect., Gas & Water (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 Nov 10 Feb 11

Hong Kong - CPI and Unemployment Rate

4.2 4.0 3.8 3.6 3.4 3.2 3.0 May 11 Aug 11 Nov 11 Feb 12 May 12 Aug 12 Nov 12 Feb 13 May 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 / 16 July 2013 / 18 of 23

HONG KONG
MONEY AND BANKING: CNH HIBOR AFFECTED BY THE ONSHORE LIQUIDITY SQUEEZE Broad money M2 growth accelerated to 13.4% y/y in May, from 10.3% in April, driven by the strong growth of foreign currency deposits that reported a 14.8% gain (April: 9.8%). Sequentially, M2 increased by 1.2% m/m. Hong Kongs RMB deposit increased by 3.1% y/y in May, reaching RMB698.5bn at the end of the month. Cross border trade settlement also rose to RMB318.1bn in May, from RMB275.4bn in April, partly reflecting the strong cross border trade that took place in previous months. The onshore liquidity crunch that started in June has had a large impact on Hong Kongs CNH interest rates. In late June, the CNH HIBOR fixing curve, released by the TMA in June, became inverted as short term interest rates surged on the back of tightening liquidity conditions onshore, which caused onshore market interest rates to surge. As onshore rates declined in July, the offshore CNH HIBOR also declined and the curve is no longer inverted. This shows that despite capital controls, the onshore CNY market still heavily influences the offshore CNH market. (See ANZ CNH Market Monitor 3 July 2013)
Hong Kong - Money Supply
20 15 10 5 0 -5 Nov 10 Feb 11 May 11 Aug 11 Nov 11 Feb 12 May 12 Aug 12 Nov 12 Feb 13 May 13 350 300 250 200 15 150 100 50 0 2007 10 5 0 2008 2009 2010 2011 2012 2013

Hong Kong - HKMA Aggregate Balance (HKD bn)

30 25 20

M2, y/y

M2, m/m

Daily C hange (RHS)

HKMA Aggregate Balance

Hong Kong - HKD Loan and Deposits

88 86 84 82 80 78 76 74 May Jul 11 11 Sep Nov Jan Mar May Jul 11 11 12 12 12 12
Loan-to-deposit Ratio 5 0 15 10 25 20

Hong Kong - CNH HIBOR Fixing Curve

8 7 6 5 4 3 2 1 0 ON 1W 2W 1M 2M 3M 6M 1Y

Sep Nov Jan Mar May 12 12 13 13 13

Loans, y/y (RHS)

24/06/2013

15/07/2013

Hong Kong - RMB Trade Settlement

400 350 300 250 200 150 100 50 0 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 140 120 100 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

Ratio to HK-China Trade (RHS) Ratio to Total HK Trade (RHS) Ratio to China Total Trade (RHS) Trade settlement amount (3mma), RMBbn

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
Deposit, RMBbn Trade settlement amount, RMBbn RMB as % of Total Deposits (RHS)

Sources: CEIC, ANZ

ANZ Greater China Economics Weekly Insight / 16 July 2013 / 19 of 23

HONG KONG
REAL ESTATE: HKMA WARNS BANKS OF POTENTIAL MORTGAGE RISK Hong Kongs property prices held up well, despite a large decline in transaction volumes. The Centa City Leading Index was little changed from a month ago on 7 July 2013, and property prices held firm after a modest correction that started in Q2. Meanwhile, residential property transactions remained depressed, declining by 22.2% m/m in June in value terms. It has been reported by the local media that banks in Hong Kong have recently started to offer lower HIBOR-linked mortgage rates and packages to attract new loans. However, the Hong Kong Monetary Authority (HKMA) has warned banks of mortgage risks and reportedly provided window guidance. The upside risk of the US interest rate will continue to cloud Hong Kongs property outlook while government measures to curb transactions may start to prevent the price adjustment process. Policymakers are advised to act pre-emptively and flexibly in view of changing market conditions.
Hong Kong - Centa City Leading Index
130 120 110 100 90 80 70 60 50 Jan May Sep Jan May Sep Jan May Sep Jan May Sep Jan May 09 09 09 10 10 10 11 11 11 12 12 12 13 13

Hong Kong - Residential Property Transactions

80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Jun 10 Oct 10 Feb 11 Jun 11 Oct 11 Feb 12 Jun 12 Oct 12 Feb 13 Jun 13 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0

Number of Transactions (RHS)

Value, HKD mn

Hong Kong - Housing Market

260 240 220 200 180 160 140 Nov 10 Feb 11 May 11 Aug 11 Nov 11 Feb 12 May 12 Aug 12 Nov 12 Feb 13 May 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 2004 2005 0 1 2 3 4 5 6 7 2006 2007 2008 2009 2010 2011 2012 8 2013

Property Price Index (1999=100)

Property Price Index (1990=100) Unemployment Rate (Reverse Scale) (RHS)

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 C onsumption Residential Property Price (RHS)

Actual

Sources: CEIC, ANZ

ANZ Greater China Economics Weekly Insight / 16 July 2013 / 20 of 23

CHINA LIQUIDITY REPORT

China - PBoC Weekly Open Market Operations (RMB bn)
Liquidity Injection

250 200 150 100 50 0 -50 -100 -150 -200 25 Mar

China - Weekly Maturing Repo and CB Bills (RMB bn)

180 160 140 120 100 80 60 40

Liquidity Withdrawal

C B Bill Matured C B Bill Net

08 Apr

22 Apr

06 May

Repo Matured Repo

20 May

03 Jun

17 Jun

Reverse Repo Rev. Repo Matured

01 Jul

20 0 15 Jul 22 Jul 29 5 12 19 26 2 9 16 23 30 7 14 Jul Aug Aug Aug Aug Sep Sep Sep Sep Sep Oct Oct
C B Bill Matured Repo Matured

China - 7-day Repo Rate

12 10 8 6 4 2 0 Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun 11 11 11 11 12 12 12 12 12 12 13 13 13

China - SHIBOR Fixing

12 10 8 6 4 2 0 Jul 11 Sep Nov Jan Mar May 11 11 12 12 12 1-month Jul 12 Sep Nov Jan Mar May 12 12 13 13 13 6-month Jul 13

3-month

Sources: CEIC, Bloomberg, ANZ

Overall tightness will persist for a while There were no matured funds in the open market last week, PBOC did not conduct any open market operations (OMOs) as well. In the meantime, RMB50bn fiscal deposit was auctioned off last Thursday. Generally speaking, the market interest rates should be relatively stable, with overnight and 7-day trading at 3.0-3.3% and 3.5-3.8% respectively, reflecting that overall tightness will persist for a while. Chinas M2 growth and new loans slowed in June China's new yuan-denominated lending in June stood at RMB860.5bn, up from RMB667.4bn in May. The June figure was down RMB59.3bn from the same period last year. The country's social financing, a measure of funds raised by entities through bank credit and other ways, amounted to RMB1.04 trn in June, down RMB742.7bn from last year. M2, a broad measure of money supply that covers cash in circulation and all deposits, increased 14% y/y, from 15.8% in May. The growth rate was down 1.8ppt from the level in May but remained 0.2ppt higher than that seen at the end of 2012.

A slower M2 growth suggests that the PBoCs liquidity tightness since mid-May has started to crack down on shadow banking activities. As the central bank has set a 13% M2 growth target for this year, the liquidity conditions are unlikely to improve significantly in the second half of the year. Li-Gang Liu, Hao Zhou

ANZ Greater China Economics Weekly Insight / 16 July 2013 / 21 of 23

FORECASTS

y/y, unless otherwise noted Dec-11 Real GDP China Taiwan Hong Kong 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 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) 8.9 1.21 3.0 Dec-12 2.5 1.61 3.8 -1.9 4.21 3.3 14.8 8.9 14.4 6.0 1.6 11.9 31.6 4.11 -48.0 50.6 8.51 10.3 5.96 7.6 15.2 1.49 9.1 6.5 4.91 15.9 13.8 3.67 12.1 Mar-12 8.1 0.59 0.7 Jan-13 2.0 1.12 3.0 -1.6 4.20 3.4 25.2 21.6 17.6 28.8 22.2 23.9 29.1 0.51 -27.5 50.4 17.95 2.10 7.80 10.5 15.3 3.97 20.2 15.9 2.99 14.1 2007 10.1 8.9 13.0 1,528 270 153 0.2 0.9 3.8 Jun-12 7.6 -0.12 0.9 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 0.92 -34.0 50.1 -14.47 19.30 3.4 -6.00 22.7 9.5 5.66 13.6 15.2 3.53 8.5 2008 9.3 6.9 15.0 1,946 292 183 -0.8 0.9 7.3 Sep-12 7.4 0.73 1.5 Mar-13 2.1 1.36 3.6 -1.9 4.18 3.5 10.0 3.2 11.2 14.1 0.2 11.3 -0.8 3.19 -49.1 50.9 -6.60 8.9 -11.70 2.1 12.6 -1.00 9.8 11.8 6.03 17.6 15.7 3.78 9.2 2009 4.9 11.4 9.5 2,399 348 256 -2.8 -2.2 0.1 16 Jul-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. Sources: CEIC, Bloomberg, ANZ 6.137 29.885 7.758 6.00 1.875 0.50 Dec-12 7.9 3.97 2.8 Apr-13 2.4 1.05 4.1 -2.6 4.19 3.5 14.7 -1.9 9.0 16.8 -8.2 7.7 18.2 2.27 -42.7 50.6 -1.11 9.3 -3.00 3.1 12.8 1.01 20.7 11.9 5.72 15.5 16.1 3.71 9.3 2010 4.0 9.3 6.6 2,847 382 269 -2.5 -1.2 1.5 Forecast Sep-13 6.17 5.75 1.875 0.50 Mar-13 7.7 1.67 2.8 May-13 2.1 0.74 3.9 -2.9 4.19 3.4 1.0 0.9 -1.0 -0.3 -8.0 1.7 20.4 4.46 -44.3 50.8 -0.40 9.2 -0.80 4.1 12.9 -1.85 12.9 11.3 7.04 18.9 15.8 4.32 11.1 2011 1.9 8.9 4.8 3,181 386 285 -1.8 -1.1 4.1 Dec-13 6.20 5.75 2.000 0.50

Forecasts Jun-13 2013 7.5* 1.89 2.0 Jun-13 2.7* 0.60* 4.4 -2.7* 4.18 3.6 4.8 8.6* -4.8 9.6 6.8* -5.2 27.1* 3.25* -41.3 50.1* 0.47 8.9* 2.62 5.1* 13.3* -1.63 7.8 9.1* 14.0* 2012 2.3 10.5 1.3 3,312 403 317 -1.5 3.8 Mar-14 6.23 5.75 2.125 0.50 7.6 2.36 2.5 Jul-13 2.7 0.26 3.4 4.17 3.7 12.4 4.0 -2.2 8.4 3.0 -1.7 34.3 3.30 -40.9 50.5 1.76 9.2 -0.66 13.2 -3.19 5.4 15.4 2013 3500* 407* 304* 2.0 Jun-14 6.25

5.75 2.250 0.50

ANZ Greater China Economics Weekly Insight / 16 July 2013 / 22 of 23

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