PP 7767/09/2010(025354)

Economic Highlights
Global
•
MARKET DATELINE

12 August 2010

1 China’s Key Economic Indicators Point To Slowing Growth

Ahead

2 US Exports Fell M-o-m And Trade Deficit Widened In

June

3 Japan’s Core Machinery Orders Bounced Back M-o-m

But Fell Y-o-y In June

Tracking The World Economy...

Today’s Highlight

China’s Key Economic Indicators Point To Slowing Growth Ahead

In tandem with a slowdown in global demand and the effect of a series of policy tightening undertaken by the Chinese
authorities, the key economic indicators suggest that the economy will likely soften further, after easing to +10.2% yoy
in the 2Q.

As it stands, China’s industrial production slowed down to 13.4% yoy in July, from +13.7% in June and a high of +18.1%
in March, in line with a slowdown in domestic demand and exports. This was the slowest growth in 11 months, after
excluding distortions caused by holidays at the start of each year, due to a decline in the production of pig iron and a
slowdown in the production of crude oil, steel products and motor vehicles. These were, however, mitigated by a pick-
up in the production of cement and electricity during the month. Meanwhile, China has ordered more than 2,000
companies in 18 industries including cement, coking, iron, paper and dyeing to shut outdated manufacturing capacity by
the end of September. Such adjustments would likely have a direct impact on industrial production and could compound
the slowdown even though it does not in any way indicate a deterioration in China’s economic fundamentals

Similarly, retail sales moderated to 17.9% yoy in July, from +18.3% in June and a high of +18.5% in April. This was
the slowest pace of increase in eight months (excluding January-February due to data distortion), suggesting that
consumer spending is softening as consumers turned cautious. The slowdown was reflected in a slowdown in sales of
food, drinks & tobacco; garments & textiles; office supplies; sports & recreation items; furniture; construction materials;
jewelry; communication appliances; automobiles; and petroleum products. These were, however, mitigated by a pick-
up in sales of daily-use items, household electronics and cosmetics.

In the same vein, urban fixed-asset investment slackened to 24.9% yoy in January-July, from +25.5% in 1H 2010 and
+32.9% in the corresponding period of last year. This was reflected in slower increases in investment in secondary and
tertiary industries, which were mitigated by a pick-up in investment in the primary industry. The weaker growth was due
to a moderation in investment in ferrous metals, real estate, utilities and railway transportation. These were, however,
mitigated by a pick-up in investment in oil & gas mining, non-metal minerals and non-ferrous metals, indicating that
China’s investment would remain resilient.

In line with a slowdown in economic activities, China’s money supply, M2, slowed down to 17.6% yoy in July, from +18.5%
in June and a peak of +29.7% yoy in November. Loan growth, however, rebounded to 18.4% yoy in July, from +18.2%
in June but off a high of +29.3% recorded in January. New lending, on the other hand, slowed down to RMB532.8bn
in July, from RMB603.4bn in June and a high of RMB1,390bn in January. Peck Boon Soon
(603) 9280 2163
Please read important disclosures at the end of this report.
bspeck@rhb.com.my

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China’s inflation, however, rebounded to +3.3% yoy in July, after moderating to 2.9% in June. This was the fastest pace
of increase in more than a year, indicating that price pressure is gradually building up but will likely be manageable. The
pick-up was due to a faster increase in food prices, which grew by 6.8% yoy in July, a rebound from +5.7% in June.
The costs of non-food items, however, held stable at +1.6% yoy for the third consecutive month in July and compared
with +1.3% in April. A sharper drop in the costs of transport & communications and a slowdown in the costs of housing
as well as prices of tobacco & alcohol were offset by a pick-up in the costs of healthcare and recreation & education as
well as a smaller decline in the prices of clothing. Mom, inflation inched up by 0.4% in July, a rebound from -0.6% in
June and -0.1% in May.

The US Economy

Exports Fell M-o-m And Trade Deficit Widened In June

◆ The US exports fell by 1.3% mom in June, after a rebound to +2.5% in May. The decline was due to a drop
in the exports of capital goods, mainly on account of a drop in the exports of semiconductors, computers & parts
and telecommunication equipment as well as a slowdown in the exports of civilian aircraft. This was made worse
by declines in the exports of industrial supplies and food & beverages as well as a slowdown in the exports of
consumer goods. These were, however, mitigated by a pick-up in the exports of automotives. Yoy, the US exports
moderated to 17.7% yoy in June, the first easing after three consecutive months of picking up and from +21.1%
in May, indicating that the US exports are beginning to turn softer. Imports, however, strengthened to 3.0%
mom in June, from +2.8% in May. This was on the back of a pick-up in the imports of consumer goods and
a smaller decline in the imports of crude oil, in tandem with a sustained increase in consumer spending. These
were, however, offset partially by a slowdown in the imports of automobiles and food & beverages. Similarly, the
imports of capital goods weakened, due to a decline in the imports of computers & parts, which was mitigated by
a pick-up in the imports of semiconductors, telecommunication equipment and civilian aircraft. Yoy, imports inched
up to 29.2% in June, from +29.0% in May and a low of +11.1% in January. Consequently, the US trade deficit
widened to US$49.9bn in June, from a deficit of US$42.0bn in May and US$35.1bn in January. In the first half
of 2010, the US trade deficit grew by 44.8% to US$247.5bn, from a deficit of US$170.9bn in the corresponding
period of 2009. The deterioration in trade deficit, coupled with a huge fiscal deficit, will likely hurt the US dollar
going forward.

Asian Economies

Japan’s Core Machinery Orders Bounced Back M-o-m But Fell Y-o-y In June

◆ Japan’s core machinery orders, excluding volatile orders for ships and orders placed by electric power
companies, rebounded to increase by 1.6% mom in June, from -9.1% in May. Despite the rebound,
businesses have turned cautious and will likely slow down their spending. This was in tandem with a slowdown
in exports for the fourth consecutive month in June, which would prompt investors to slow down investment in
plants and machinery. Indeed, Japan’s core machinery orders contracted by 2.2% yoy in June, the first in four
months and compared with +4.3% in May, suggesting that businesses have turned cautious in spending.

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