l Global Research l

The Morning Call | 22:00 GMT 16 August 2011

17 Aug 11 The Ministry of CNY

Key events and data
EU We expect July CPI to have been flat at 2.5% UK Bank of England meeting minutes in focus, markets to scrutinise for QE clues US We expect a modest rise in Julys PPI Malaysia GDP growth moderated to 3.1% in Q2, with weaker trade performance Singapore Trade likely rebounded in July led by pharmaceuticals production
Dim sum bond issuance since 2008 2011 YTD: CNY 97.7bn (ex-2011 CGB auction) 140 120 100 80 60 40 20 0 2011 CGB auction

Market focus Chinas CNY 20bn debt issue shows clear support for CNY internationalisation Beijing wants trade and assets re-denominated into CNY We reiterate our Sell recommendation on USD-CNY 1Y NDF and USD-CNH 1Y DF
Delphine Arrighi, +852 3983 8568, Delphine.Arrighi@sc.com Stephen Green, +852 3983 8556, Stephen.Green@sc.com

Total issuance (CNY bn) 2008 2009 2010 2011 YTD

Sources: Bloomberg, Standard Chartered Research

Chinas Ministry of Finance auctions CNH 15bn of government bonds Wednesday, its biggest overseas issuance (a CNY 5bn retail tranche will be sold later). Vice Premier Li Keqiang will be the guest of honour at the ceremony in Hong Kong, a signal that Chinese yuan (CNY) internationalisation has the support of the senior leadership. With the recent turmoil in global markets, the case for CNH bonds has become even more compelling. They offer a significant yield pick-up above US Treasuries, which are near their 2008 lows. We believe that continuing inflation concerns onshore and the prospect of a third round of quantitative easing (QE3) in the US have led Beijing to allow faster CNY appreciation in recent days. Some of this may be a precursor to Vice President Bidens China visit starting on 17 August, but we view the CNY fixings to be a more strategic shift. An op-ed on the front page of the China Securities Journal on 16 August argued that it was time for USD-CNY band widening. We called for such a move in June and still expect it sooner rather than later. We suspect that reports suggesting this as a possibility are aimed at preparing the local corporate base for just such a move. In our view, the rationale for China wanting to issue international debt is two-fold. The funding is attractive and investors are keen to get their hands on CNH paper, but these reasons are secondary. The main reason, in our view, is that Beijing wants to create an alternative to the US dollar (USD) as a trade-settlement currency and as a denominator of global debt. Already, Chinas trade is being actively re-denominated and not just imports. In Q2, some 25% of all CNY settlement was for exports. In order to facilitate the holding of CNY offshore, a key plank to lay for CNY trade settlement to grow, there need to be investible instruments. Issuing CNH bonds creates and develops a yield curve off of which corporate debt can be priced. China probably hopes that over time, non-China firms will issue CNY equity and debt. This issue is another step along that road. FX strategy We initiated a short USD-CNY 1Y NDF outright position in the FX Trading Portfolio as of 27 May (see below) and reiterate our Sell recommendation on both USD-CNY 1Y NDF and USD-CNH 1Y DF. Rates strategy We recommend receiving CNY 5Y NDIRS at 3.75%, targeting 3.45% with a stop-loss at 3.90%. We do not expect the Peoples Bank of China (PBoC) to hike policy rates again this year as growth and inflation look set to moderate in H2.

Key data releases/events

SC EU CPI, % Jul US PPI, % July Malaysia GDP, % Q2 Singapore Non-oil dom. Exports, % 5.6 4.6 3.1 3.7 0.1 0.1 2.5 2.5 Cons

Risk Appetite Measure (SCRAM)

Risk seeking

Risk aversion

Aug-09

Feb-10

Aug-10

Feb-11

Aug-11

Market pricing
1y history Last 10Y UST ID 10Y KR 5Y ZA 10Y BR Jan12 JACI /$ $/ $/BRL $/KRW $/IDR $/INR $/CNY S&P500 EMFree 2.22 6.95 3.69 7.92 12.29 321 1d (8bp) 3bp 1bp (13bp) 1bp (5bp) Min 2.11 6.84 3.45 7.76 11.15 215 Max 3.74 9.20 4.51 8.90 12.62 326 1.483 85.86 1.771 1199 9073 47.08 6.811 1364 1206

1.441 (0.2%) 1.263 76.76 (0.1%) 76.71 1.591 0.1% 1.539

1070 (0.2%) 1050 8531 (0.2%) 8464 45.39 6.383 0.1% 44.08

(0.1%) 6.383

1193 (1.0%) 1047 1013 2.4% 963

Source:, Standard Chartered Research Important disclosures can be found in the Disclosures Appendix All rights reserved. Standard Chartered Bank 2011

research.standardchartered.com

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Table 1: Standard Chartered Research trading portfolios FX (live positions)

Trade Short USD-CNY Short USD-TWD Long THB vs. USD/EUR Short USD-INR Instrument 1Y NDF outright 3M NDF outright 3M forward outright 3M NDF outright Current 6.3005 28.68 30.10/43.24 45.30 Entry 6.3720 28.56 30.01/43.06 45.54 Entry date 27 May 26 July 10 Aug 16 Aug Target 6.20 O/R 28.10 28.50/41.00 43.50 Stop 6.44 O/R 29.15 30.30/44.00 46.00 Analyst Minikin Minikin Harr Harr

Source: Standard Chartered Research

Table 2: Standard Chartered Research trading portfolios Rates (paper portfolio)

Trade Long 20Y IDR bond Long 20Y PHP bond Long 5Y ZMK bond Long 5Y NGN bond Current 7.93% 7.70% 15.00% 11.08% Entry 8.65% 8.00% 16.00% 12.11% Entry date 9 June 19 July 9 June 14 July Target 7.55% 7.50% 13.00% 10.50% Stop 8.45% 8.50% 17.00% 12.70% Analyst Suwanapruti/ Kusuma Suwanapruti Arrighi Arrighi

Source: Standard Chartered Research

Asia
China More flattening ahead
Delphine Arrighi, +852 3983 8568
Delphine.Arrighi@sc.com

The Peoples Bank of China (PBoC) 5Y NDIRS to edge downwards on lower surprised the market on 16 August by growth and inflation raising the 1Y PBoC bill yield by 8.6bps to 16 GDP, q/q 14 3.5840%, casting some doubt on whether 12 the tightening cycle is over. While the PBoC 10 seems to have adopted a more neutral stance lately in its open-market operations, allowing the 7-day repo to stabilise around 3.25%, it is likely to maintain a firm grip on liquidity in the months to come, but through different instruments than policy rate hikes.
8 6 4 2 0 -2 -4 5Y NDIRS CPI, y/y

Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Source: Standard Chartered Research

Indeed, with CPI inflation likely to have peaked in July at 6.5% y/y and domestic growth showing signs of a moderate slowdown, we see little room for further rate hikes. Moreover, the PBoC is also likely to adopt a more cautious approach given heightened concerns surrounding the European debt crisis and global growth. However, with potential QE3 adding to the risk of further capital inflows, the central bank seems ready to rely more heavily on other instruments to dampen monetary pressures, allowing more currency appreciation and reinforcing its open-market operations. With moderately tight liquidity likely to keep short-term rates anchored at current levels, we see room for both the bond and swap curves to continue to flatten. The 2x5 NDIRS spread is currently at 9bps, and we see room for further tightening and a potential curve inversion as in late 2008 (when the 2x5 spread briefly reached +9bps). However, in view of the global uncertainties and our expectations of no further rate hikes, we prefer to express our view through an outright receiving position on the 5Y NDIRS, with the recent uptick providing better entry levels at 3.75%. (target 3.50%, stop-loss 3.90%).

GR11MY | 17 August 2011

The Morning Call

Japan Exports continue to recover despite JPY strength

Betty Rui Wang, +852 3983 8564
Betty-Rui.Wang@sc.com

Exports contracted by less than we Exports, imports and trade balance expected in June (-1.6%) and we expect % y/y, JPY bn another limited albeit slightly larger 50 2,500 Exports 40 2,000 decline for July, of 3% y/y. The Japanese 30 1,500 yen (JPY) appreciated by 5% against the 20 1,000 US dollar (USD) in July, which is likely to Imports 10 500 have dampened exporters profits. 0 0 Meanwhile, importers should have benefited Trade balance -10 -500 (RHS) from the exchange rate, and reconstruction- -20 -1,000 related demand and that for mineral fuels Jan-10 Jul-10 Jan-11 should have remained strong. Both are likely Sources: CEIC, Standard Chartered Research to have contributed to the expected 11% y/y rise in imports in July. In general, we expect the trade balance to have remained positive, albeit at a slightly lower pace.

Africa
Nigeria Upcoming bond auction should be well received
Delphine Arrighi, +852 3983 8568
Delphine.Arrighi@sc.com

Despite global market turmoil, domestic Bond supply is edging down market sentiment remains bullish ahead of Quarterly bond auction size, NGN bn the upcoming bond auction (due on 350 300 Wednesday 17 August).
250

The Debt Management Office will auction NGN 30bn of the 3Y bond, NGN 15bn of the 5Y bond and NGN 25bn of the 7Y bond. Given another record disbursement of the Federal Account Allocation Committee of NGN 616bn over the weekend, interbank liquidity is likely to ease, boosting demand for the upcoming bond auction.

200 150 100 50 0 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2009 2009 2010 2010 2010 2010 2011 2011 2011 Source: Standard Chartered Research

Although the currency has recently been under pressure, mirroring moves across all high-beta currencies, news from Nigeria has been relatively supportive lately, notably in terms of the fiscal outlook, with Finance Minister Ngozi Okonjo-Iweala joining at a time when gross revenues rose to NGN 907bn in July from NGN 883bn in June due to higher oil output. This, along with the central banks pre-emptive move to maintain confidence in the banking sector (through the nationalisation of three ailing banks ahead of the lifting of the guarantee on interbank placements), continues to provide a positive environment for local bonds. With supply of the 5Y bond having been significantly reduced (from NGN 30bn at previous auctions), we maintain our recommendation to be long the 5Y FGN bond (entered at 12.11% on 9 June, target 10.5%, stop-loss 12.70%, currently at 11.21%).

GR11MY | 17 August 2011

The Morning Call

Europe
Euro area The golden rule becomes the euro-area golden standard
Thomas Costerg, +44 20 7885 8615
Thomas.Costerg@sc.com

Attention will focus on the July CPI inflation Euro-area growth is losing steam report, out at 08:00 GMT. The headline CPI GDP growth, y/y % reading will likely confirm the deceleration to 4 2.5% y/y, from 2.7% in June, still well above 2 the European Central Banks (ECBs) target 0 ceiling (2%).
-2

The core CPI inflation data will take centre -4 stage. We expect core inflation to have -6 accelerated to 1.7% (consensus: 1.6%), Mar-04 Aug-05 Jan-07 Jun-08 Nov-09 Apr-11 from 1.6%, as the recent increases in Sources: Datastream, Standard Chartered Research headline inflation continue to pass through the core prices, helped by strong activity in Q1. An acceleration in core prices will likely keep pressure elevated on the ECB to continue to tighten policy, although the recent deceleration in growth (Q2 GDP grew 0.2% q/q, down from 0.8% in Q1) suggests otherwise. The market will also continue to digest the 16 August meeting between French president Sarkozy and German Chancellor Merkel. As expected, leaders rejected the idea of Euro-bonds (a common European debt agency), and refused to increase the EFSF (bailout fund) beyond the EUR 440bn agreed in July, subject to parliamentary approval in September/October. Merkel and Sarkozy stressed again the need for increased fiscal austerity in the euro area and convergence to the German model including for France. In particular, leaders will suggest the adoption of the golden rule, a framework to be enshrined in national constitutions ensuring a return to balanced budgets in the medium term. Germany adopted a debt brake mechanism in 2009 effective from 2016. Italy announced last week that it would adopt the golden rule. France also wants its corporate tax rate to converge towards Germanys a relatively modest step as Germanys rate (c.29.4%) is already close to the French rate of 33.3%. In addition, leaders suggested further integration within the euro area and hence mutual surveillance by creating an economic government of Heads of State, meeting twice a year and electing a president for 2.5 years to steer the discussions. However, they remained vague on a possible sanction mechanism for countries failing to abide by the rules. Leaders also backed the idea of a financial-transaction tax an idea that has gained momentum in Brussels over the past few months, in particular with members of the European parliament (MEPs). MEPs voted 360-299 in March 2011 in favour of the idea, which could yield EUR 200bn a year (with a tax rate of between 0.01% and 0.05% at the EU level).

GR11MY | 17 August 2011

The Morning Call

Switzerland Cabinet meeting to decide the CHFs fate

Thomas Costerg, +44 20 7885 8615
Thomas.Costerg@sc.com

Measures to deal with the persistent High CHF Swiss exporters suffocate strength of the Swiss franc (CHF) will be PMI survey backlog of orders 75 discussed at the 17 August cabinet meeting.
65

The recent Swiss National Bank (SNB) 55 decision to flood the banking system with 45 liquidity with a targeted increase in sight 35 deposits to CHF 120bn, from CHF 30bn initially having shown mixed success, the 25 SNB has recently left the door open for Jul-06 Mar-08 Nov-09 Jul-11 further action; i.e., pegging the CHF to the Sources: Datastream, Standard Chartered Research euro (EUR). This means that the SNB may have to re-start currency intervention, abandoned in June 2010 after 15 months. Although the SNB did not mention a target level for the peg, the press speculated on a lower limit of EUR-CHF 1.10. See also: FX Alert, 15 August 2011 Swiss franc, CHF lowered to Neutral from Overweight.

UK BoE minutes likely stayed downbeat

Sarah Hewin, +44 20 7885 6251
Sarah.Hewin@sc.com

Following last weeks downbeat assessment Investors are adjusting their expectations of the UK economy in the quarterly Inflation for UK inflation UK 10Y break-even infl. rate 3.3 Report, the minutes to the Bank of Englands (BoE) 4 August meeting will be 3.1 scrutinised for any discussion of further quantitative easing (QE). BoE Governor 2.9 Mervyn King said that the monetary policy 2.7 committee (MPC) viewed the weakness in underlying activity as likely to be somewhat 2.5 more persistent than previously expected Feb-10 Jun-10 Oct-10 Feb-11 Jun-11 and said, if we need to, we can carry out Sources: Bloomberg, Standard Chartered Research more asset purchases. Back in June, the minutes reported that some MPC members thought that more QE might be necessary, though there was no direct reference to QE in the July minutes. But the tone of the discussion on 4 August is likely to have stayed subdued. While in the near term inflation looks set to spike above 5%, the MPC is likely to have reiterated that inflation will fall in 2012 as temporary factors boosting prices fade. We expect the voting pattern to have remained unchanged, at 7-2 in favour of keeping rates on hold as opposed to raising rates, with Julys higher headline and core inflation supporting the views of the two policy makers (Spencer Dale and Martin Weale) who have previously backed higher rates. UK labour-market data are expected to show another rise in the claimant count we expect an increase of 26,000 in July, though changes to benefits make this measure of labour-market inactivity difficult to interpret. We also expect the ILO unemployment rate to have risen in June, to 7.8% from 7.7% in May. Recent survey data have pointed to slower hiring as the governments fiscal cuts take hold and the manufacturing sector comes under pressure.

GR11MY | 17 August 2011

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United States
Producers are still failing to pass on price increases
David Semmens, +1 212 667 0452
David.Semmens@sc.com

We expect that Julys headline producer Producers, not consumers, absorb price index (PPI) remained at 7.0% y/y, price rises rising 0.1% m/m following the -0.4% m/m 10 8 CPI (%, y/y) decline in June. While the core PPI is likely 6 4 to show a far more sedate 2.3% rise, with 2 expectations of a 0.2% m/m rise slightly 0 -2 lower than the 0.3% seen previously. While -4 crude oil prices rose 1.2% m/m in July, this -6 PPI (%, y/y) -8 follows the steepest decline in energy prices -10 (-2.8% m/m) since February 2010. We Jan-95 Jan-98 Jan-01 Jan-04 Jan-07 Jan-10 expect some moderation of the gains in car Sources: Bloomberg, Standard Chartered Research (+2.8% YTD) and truck prices (1.6%m/m in June), as Japanese industrial production continued to rebound strongly.

Commodities
Singapore bunker sales fell m/m in July, but fundamentals remain tight
Priya Narain Balchandani, +65 6596 8254
Priya.Balchandani@sc.com

The latest data from the Singapore Maritime Estimated surplus/deficit in East Asia Port Authority showed that bunker sales fell Mbd; we remain bullish in the medium term 8.6% m/m in July to 117.5 thousand tonnes 0.10 per day (ktd), but were still up 2.2% y/y for 0.05 0.00 the month and 5.3% y/y for the January-July period. This is a bearish indicator in a -0.05 market with otherwise tight fundamentals. -0.10 -0.15 Arbitrage volumes of fuel oil into East Asia -0.20 for delivery in September, at 0.53 million -0.25 barrels per day (mbd), are well below the Jan-10 May-10 Sep-10 Jan-11 May-11 2010 average of 0.72mbd and 35% below Sources: MPA, Reuters, Standard Chartered last year's levels. Furthermore, Singapores Research residual fuel oil stocks fell 4.6% y/y in the first two weeks of August to 19.6mn barrels, keeping us bullish for the medium term.

GR11MY | 17 August 2011

The Morning Call

Standard Chartered Research publications for 16 August 2011

FX Alert, Standard Chartered FX Trading Portfolio Sell USD-INR
Callum Henderson | Thomas Harr https://research.standardchartered.com/ResearchDocuments/Pages/ResearchArticle.aspx?R=78773 We have a short-term Overweight FX rating on the INR, and forecast USD-INR at 43.50 by year-end Slower growth appears to be largely priced in and inflation expectations may peak soon High yields are expected to add to the appreciation pressure

On the Ground, Global Interest rates to stay low in US, HK and Singapore
David Mann | David Semmens | Edward Lee Wee Kok | Kelvin Lau https://research.standardchartered.com/ResearchDocuments/Pages/ResearchArticle.aspx?R=78779 Interbank rates in the US, HK and Singapore to stay low until early 2013, led by loose US monetary policy Ample liquidity environment implies that HKD interbank rates could rise more slowly than USD rates Singapore and HK authorities need to maintain macro-prudential measures to pre-empt inflation risk

FX Alert, Standard Chartered FX Real Money Portfolio Re-entering the Real Money Portfolio
Callum Henderson | Eddie Cheung | Mike Moran | Ned Rumpeltin | Priyanka Kishore | Robert Minikin | Thomas Harr https://research.standardchartered.com/ResearchDocuments/Pages/ResearchArticle.aspx?R=78761 We are re-entering the Standard Chartered FX Real Money Portfolio In the majors we are short EUR against the USD, flat on JPY We are significantly long KRW, IDR, INR and BRL, reflecting our bullish view on EM

FX Alert, Peruvian sol A defensive Latam currency position

Bret Rosen | Mike Moran https://research.standardchartered.com/ResearchDocuments/Pages/ResearchArticle.aspx?R=78764 Central bank has ample reserves to offset any PEN volatility With the Fed maintaining a zerointerest-rate policy, risk-adjusted carry in the PEN is improving Substantial FDI into the mining sector supports the PEN; the appreciation trend should continue

On the Ground, China What to do as the world falls apart, again

Stephen Green https://research.standardchartered.com/ResearchDocuments/Pages/ResearchArticle.aspx?R=78790 China faces either slow global growth or another G2 financial crisis not a happy outlook The domestic economy has its vulnerabilities, but Beijing has the means to respond if needed We outline how monetary, fiscal and FX policy can best respond to these challenges

GR11MY | 17 August 2011

The Morning Call

Disclosures Appendix
Regulatory Disclosure:
SCB and/or its affiliates have received compensation for the provision of investment banking or financial advisory services within the past one year: MINISTRY OF FINANCE CHINA

Analyst Certification Disclosure:

The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed and attributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or other subject matter as appropriate; and, (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of analysts.

Global Disclaimer:
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Copyright: Standard Chartered Bank 2011. Copyright in all materials, text, articles and information contained herein is the property of, and may only be reproduced with permission of an authorised signatory of, Standard Chartered Bank. Copyright in materials created by third parties and the rights under copyright of such parties are hereby acknowledged. Copyright in all other materials not belonging to third parties and copyright in these materials as a compilation vests and shall remain at all times copyright of Standard Chartered Bank and should not be reproduced or used except for business purposes on behalf of Standard Chartered Bank or save with the express prior written consent of an authorised signatory of Standard Chartered Bank. All rights reserved. Standard Chartered Bank 2011.

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GR11MY | 17 August 2011

22:00 GMT 16 August 2011

22:00 GMT 16 August 2011