Investment Research — General Market Conditions

11 June 2009

Flash Comment
China: Domestic demand roaring ahead
 Today’s fixed asset investment data for May were much stronger than expected. Together
with soaring home and car sales, they suggest that domestic demand in China is currently
very strong. Fixed Asset Investment, May (% )
 While this is obviously very positive for the global economy and not least the rest of Asia, May Con April
there will soon be a need to rebalance economic policy in China to prevent another asset YTD, % y/y 32.9 31.0 22.6
bubble developing.
% y/y*, 38.7 - na 34.7
% m/m*, sa 6.0 na 0.6
Details
Several data releases in recent days suggest that domestic demand in China has gained Source: Reuters Ecowin, Bloomberg and *own
considerable strength. Importantly this does not appear to be just a temporary impact from the calculations
government’s massive fiscal easing. It increasingly looks like the private household sector is
starting to respond to easier financial conditions in China.

According to data released earlier today, Fixed Asset Investment (FAI) accelerated further in Credit easing has boosted fixed
May in the wake of the extraordinarily strong credit growth since the government abolished investments substantially
credit controls last autumn. Data released yesterday showed very strong increases in planned 40 % y/y % y/y 70

investments and newly started projects in May were up close to 75% y/y (see chart on the <<Fixed asset investment 60
30 50
next page). Hence, the investment side of the Chinese economy looks very strong at the
40
moment. 20 30
20
Data released yesterday suggest that the housing market has finally turned the corner. Home Credit>>
10 10
sales have increased sharply in recent months and seasonally adjusted sales have doubled since 0
late last year. While house prices are still down 1% y/y, they are now increasing sequentially 0 -10
98 99 00 01 02 03 04 05 06 07 08
month on month. Passenger car sales accelerated further in May, supported by lower auto
taxes and subsidies for environmentally friendly cars and are now up about 30% y/y (see chart Source: Reuters EcoWin and own calculations
on next page).

Finally today’s May foreign trade data showed continued strong gains in import volumes
supporting the picture of a strong domestic economy in China, see Flash Comment - China:
Just what the doctor ordered. Chinese housing market is recovering

Assessment & Outlook % y/y mio. sqm

15.0 100000
It is increasingly clear that China has been very successful in boosting domestic demand. At House sales

10.0 80000
the moment we think there is increasing upside risk to our forecast for 7.9% GDP growth in
2009. This is obviously very positive for the global economy and not least the rest of Asia. 5.0 60000
However, some of the movements in e.g. house and passenger car sales are starting to look
0.0 40000
quite extraordinary and at some stage the Chinese leadership will have to start to ask itself << House prices
whether it is just building the foundations for the next asset bubble and possible new wave of -5.0 20000
05 06 07 08 09
bad loans in the banking sector.

While the Chinese leadership (with some justification) can claim mission accomplished Source: Reuters EcoWin and own seasonal
adjustment
regarding being able to manage a soft landing, we believe there will soon be a need to
rebalance this policy. For that reason we expect the People’s Bank of China to start tightening
monetary policy in H2 09. In addition we believe that a combination of robust domestic
demand and only a modest output gap is a strong appreciation case for CNY.

Senior Analyst
Flemming J. Nielsen
+45 45128535
flemm@danskebank.dk

www.danskeresearch.com
 Flash Comment

Passenger car sales booming in China Investment activity is starting to have an impact

Dec. 2007 = 100 350 Jan. 07=100 350

140 140 Jan. 07=100
China
300 300
7 = 100 Planned investment
120 120
India 250 250
100 100
Korea 200 200
80 Japan 80 150 150

60 USA 60 100 100

Newly started projects
40 40 50 50
07 08 09 07 08 09

Source: Reuters EcoWin and own calculations Source: Reuters EcoWin and Markit

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Flash Comment

Disclosure
This report has been prepared by Danske Research, which is part of Danske Markets, a division of Danske Bank.
Danske Bank is under supervision by the Danish Financial Supervisory Authority. The author of this report is
Flemming J. Nielsen, Senior Analyst.

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Financial models and/or methodology used in this report

Calculations and presentations in this report are based on standard econometric tools and methodology.
Documentation can be obtained from the above named authors upon request.

Risk warning
Major risks connected with recommendations or opinions in this report, including a sensitivity analysis of
relevant assumptions, are stated throughout the text.

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