_Economy and Finance

Economics Research | Asia Ex-Japan 21 March 2013 First Insights: China: HSBC flash manufacturing PMI rebounds in March The HSBC China flash manufacturing PMI rebounded to 51.7 in March from 50.4 in February, much stronger than expected (Consensus: 50.8; Nomura: 51.0). The 1.3 percentage point (pp) jump in March cannot be explained by seasonal factors alone. Since the HSBC PMI data started in 2005, there have been four years when the lunar new year holiday fell in February; in these years, the PMI rose by an average of 0.6pp in March.

Asia Special Report: China: Rising risks of financial crisis · China is displaying the same three symptoms that Japan, the US and parts of Europe all showed before suffering financial crises: a rapid build-up of leverage, elevated property prices and a decline in potential growth.

Economics Research | Asia Ex-Japan 01 March 2013 First Insights: China: Another round of policy tightening in the property sector The government announced today a set of new tightening policies in the property market, including: (1) imposing a 20% capital gain tax on property transactions; (2) the PBoC to raise the down payment requirement and mortgage rate in cities, where property prices have risen quickly; and (3) extending the "local resident" requirement to cities, where property prices have increased swiftly and (4) for cities with "local resident" requirements, such policies shall be implemented in a more restrictive way.

Economics Research | Asia Ex-Japan 25 February 2013 First Insights: China: HSBC flash PMI drops surprisingly The HSBC flash PMI dropped surprisingly to 50.4 in February from 52.3 in January (Consensus: 52.2; Nomura: 53.3). The new orders subcomponent fell to 50.9 from 53.1 in January and new export orders to 49.8 from 53.7. The output subcomponent fell to 50.9 from 53.1, while that for the stock of finished goods rose slightly to 49.8 from 49.6.

Economics Research | Asia Ex-Japan | Nomura 25 February 2013 First Insights: China: Fuel price hikes add to inflationary pressures China last night announced a hike in gasoline and diesel retail prices, effective today. Increases of 3.5% and 3.8% have been applied, respectively, adding RMB300 and RMB290 to the prices per ton. This is the second major price hike announced in five days – on 20 February we saw the largest hike in the rail freight tariff rate since 2003, which was unusual in terms of timing as tariff hikes in Q1 are not common.

Economics Research | Asia Ex-Japan 22 February 2013 Asia Chart Alert: China: Property prices rose faster in January This should further pressure the government to tighten monetary and property market policies. Fig. 1: Property price growth and M2 growth

Fixed Income | Asia Ex-Japan 21 February 2013 Asia Insights: Reasons not to be too bullish on China · We reiterate our view that the consensus forecast for China’s economic growth is too optimistic. We expect GDP growth to slow in H2 to 7.3% y-o-y while the consensus expects it to be 8.1%. · We list five recent developments that support our cautious view, including local governments lowering their 2013 GDP growth targets by 0.5 percentage points (pp), and the severe air pollution problems that could spur Beijing to rethink its growth model. · The strength of coincident macro data may continue in Q1, but we believe leading policy indicators such as total social financing and M2 growth will soon moderate from currently high levels.

20 February 2013 Asia Chart Alert: China: The largest hike in the rail freight tariff since 2003 It reinforces our view that CPI inflation will rise above 3.5% in H2 and lead to two interest rate hikes. Fig. 1: Rail freight tariff and its growth

First Insights: China: Government announces reform plan to improve income distribution The Chinese government announced its plan to reform income distribution today. This is an important reform plan which has been debated by the government for many years. Our comments:

First Insights: China: First annual capital account deficit since 1998 China’s capital account recorded a deficit of US$117bn in 2012, the first capital account deficit since 1998. Net FDI inflows rose slightly to US$180bn in 2012 from US$179bn in 2011, but were offset by net portfolio and other financial outflows.

Economics Research | Asia Ex-Japan 01 February 2013 First Insights: China: Surprise fall in official PMI China’s official PMI dropped surprisingly to 50.4 in January from 50.6 in December (Consensus 51.0, Nomura 50.9), which casts some doubt on the strength and sustainability of the growth recovery. Sub-indexes show mixed signals. Output was down to 51.3 from 52.0, but new orders rose to 51.6 from 51.2 and while inventories of finished goods fell to 47.4 from 49.4, which suggests that the PMI may improve next month. The improvement of new orders was mostly driven by domestic demand as export orders fell. Input prices rose sharply to 57.2 from 53.3, reinforcing our view that inflation may surprise on the upside in 2013. Economists Zhiwei Zhang

Economics Research | Asia Ex-Japan 28 January 2013 Asia Chart Alert: China: Industrial profit improves; destocking continues Data further support our view that GDP growth is likely to rebound to 8.2% y-o-y in Q1 2013. Fig. 1: Industrial profit and inventory

Economics Research | Asia Ex-Japan 24 January 2013 Asia Chart Alert: China: Labour market tightens further in Q4 It reinforces our view that inflation will rise to over 4% y-o-y in H2. Fig. 1: China’s labour demand/supply ratio and CPI inflation

Asia Chart Alert: China: Working-age population falls in 2012; sooner than expected Potential growth has likely slowed to 7.0-7.5%, while we expect inflation to exceed consensus levels in 2013.

Fixed Income | Asia Ex-Japan 21 December 2012 Asia Insights: China: Mixed signals from leading indicators · Nomura's China leading indicator fell in November, but we expect it to pickup in December (Bloomberg ticker: NMEICLI). · Our heatmap continues to improve, with 67% of indicators positive in November, up from a revised 65% in October. · We expect growth momentum to continue to build, and maintain our above-consensus GDP forecasts for 4Q and Q1 2013.

Fixed Income | Asia Ex-Japan 10 December 2012 Asia Insights: China: Exports slowed but domestic demand remains strong ·China’s export growth slowed more than expected in November to 2.9% y-o-y from 11.6% in October. ·Import growth slowed to 0.0% y-o-y from 2.4%, but import growth for domestic consumption picked up. ·We expect the growth recovery to remain on track, as it is mainly driven by domestic demand.

First Insights: China: Trade slows but the growth recovery remains on track Export growth slowed to 2.9% y-o-y in November from 11.6% in October (Consensus 9%, Nomura 7%), while import growth slowed to 0% from 2.4% (Consensus 2.0%, Nomura 0%).

Fixed Income | Asia Ex-Japan NOMURA 02 December 2012 Asia Insights: China: The PMI continued to improve in November ·China’s official PMI rose further to 50.6 in November from 50.2 in October, lower than the consensus forecast of 50.8. ·Both the new orders and the production sub-indices continued to improve. ·This lends further support to our view of a strong economic rebound in Q4.