ANZ RESEARCH

GREATER CHINA ECONOMICS WEEKLY INSIGHT

7 JANUARY 2014

FEATURE NOTE WHY THE PBOC HAS NOT BEEN ABLE TO SMOOTH MONEY MARKET RATES First, the seasonality factor still matters. Looking into the historical pattern, we find that Chinas money market rates tend to increase significantly at quarter-end and year-end, as Chinese commercial banks need to meet a number of regulatory requirements. Second, the attempt to curb and regulate banks financial institutions (FI) business has also tightened the liquidity condition, making large banks unwilling to lend to money markets. Third, the prime dealer system may not be working effectively. This means that the PBoC may need to consider opening up the system to any bank that wishes to borrow. Finally, the PBoC will also need to consider the negative consequences of interest rate liberalisation. While interest rate liberalisation will lead to better allocation of financial resources, it will also lead to higher interest rate levels according to international experiences. DATA PREVIEW China: We expect the economy to have grown 7.6% y/y in Q4, down from Q3s 7.8%, as fiscal spending slowed in the last quarter. CHINA MARKET LIQUIDITY REPORT China's cabinet has issued new rules to strengthen regulation of the shadowbanking lending. The rules are known as Document no. 107. We view this as another initiative taken by the Chinese authorities to curb the rise of shadow banking activity. This also indicates that the onshore liquidity tightness could persist longer than anticipated. CHART OF THE WEEK RMB spot exchange rate closed at 6.05, strengthened by 3.0% by the end of 2013, making 1-year risk-free return on RMB deposits relative to the USD at 6%.
USD/CNY
6.45 6.40 6.35 6.30 6.25 6.20 6.15 6.10 6.05 6.00 Aug 12 Oct 12 Dec 12 Spot Feb 13 Apr 13 Jun 13 Aug 13 Oct 13 Dec 13

INSIDE Feature Note Data Preview Week in Review China Liquidity Report Momentum Barometer Forecasts Important Notice 2 5 7 9 11 13 14

CONTRIBUTORS
Li-Gang Liu Chief Economist, Greater China LiGang.Liu@anz.com Raymond Yeung Senior Economist Raymond.Yeung@anz.com Hao Zhou Economist, China Economics Hao.Zhou2@anz.com Louis Lam Economist, Greater China Louis.Lam@anz.com Unias Li Analyst, Greater China Unias.Li@anz.com

RESEARCH@ANZ.COM

Trading band

Fixing

Sources: Bloomberg, ANZ

anonymous@anonymous.com FIRST LAST 01/07/14 02:49:34 PM Hong Kong Highpower

Greater China Weekly Insight / 7 Jan 2014 / 2 of 15

FEATURE NOTE
WHY THE PBOC HAS NOT BEEN ABLE TO SMOOTH MONEY MARKET RATES Chinas money market interest rates surged again in December after Junes cash crunch in 2013, raising concerns about PBoCs policy effectiveness and the central banks ability to manage money market rates in an environment of financial innovation and interest rate liberalisation. From Chinas monetary statistics, there is little evidence of tight credit conditions. In fact, Chinas money supply continued to outpace the nominal growth of the economy by a large margin, suggesting that liquidity conditions should be quite relaxed. To some extent, Chinas fast M2 growth in 2013 was driven by large capital inflows on attractive interest rate differentials and the RMBs steady appreciation. However, the aggregate monetary indicator has belied what has been happening in money markets. The onshore interest rates have kept rising in the past few quarters. For example, the 7-day repo rate, a credible onshore short-term rate to measure liquidity conditions, picked up to 4.4% on average since Junes cash crunch, compared with an average level of 3.2% from January to early June. In the meantime, market volatility has also increased significantly, giving rise to risks in banks balance sheet management.
China - 7-day Repo 12 10 8 6 4 2
Avg: 3.2% Avg: 6.6%

Avg: 4.4%

0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 13 13 13 13 13 13 13 13 13 13 13 13 14
Sources: Bloomberg, ANZ

In our view, the following reasons could help contribute to the dichotomy of fast growing M2 and rising money market rates: First, the seasonality factor still matters. Looking into historical patterns, we find that Chinas money market rates tend to increase significantly at quarter-end and year-end, as Chinese commercial banks need to meet a number of regulatory requirements. That said, competition for deposits among commercial banks has become much more intense in the past few years than before, especially with the emergence of wealth management products (WMPs) as banks in China can offer high yield WMPs to evade the control of deposit rate ceiling set by the PBoC.

anonymous@anonymous.com FIRST LAST 01/07/14 02:49:34 PM Hong Kong Highpower

Greater China Weekly Insight / 7 Jan 2014 / 3 of 15

FEATURE NOTE
China - Overnight Repo 12 10 8 6 4 2 0 2010
End of Year

2011

2012

2013

2014

Sources: Bloomberg, ANZ

Second, the attempt to curb and regulate banks financial institution s (FI) business has also tightened the liquidity condition, making large banks unwilling to lend to money markets. The FI business among large Chinese banks has developed rapidly in the past few years, as this new business requires much lower capital requirement and is not subject to the loan-to-deposit ratio. It is estimated that the FI business has amounted to one-quarter of Chinese commercial banks balance sheet, and banks normally conduct borrow in short tenor and lend in long tenor to finance their FI business. In this case, banks maturity mismatch problem has emerged. To contain the rising maturity-mismatch risk, it is reported that the Chinese banking regulator is drafting a regulation, called Document No. 9, to limit the size and growth of the FI business, which has caused large banks to become more cautious in lending their surplus cash to counterparties.
China - Net Borrowing from Financial Institutions (RMB trn)

5 4 3 2 1

0 -1
-2

2010

2011

2012

2013
Large Banks

Medium and Small Banks

Sources: WIND, ANZ Note: Large banks include those with total assets of over RMB2trn at end of 2008, including ICBC, CCB, ABC, BOC, CDB, BOCOM and PSBC. Medium and small banks include those with total assets of less than RMB2trn at the end of 2008 and operating across provinces.

Third, the prime dealer system may not be working effectively. The PBoCs open market operations (OMOs) are conducted only with the prime dealers. Currently, the prime dealers consist of only 48 banks and securities companies. The newly introduced short-term liquidity operations (SLOs) are only open to 12 big banks. We believe that the prime dealer system may have two problems: First, under the very high reserve requirement ratio at 20% applied to large commercial banks, they have little incentive to lend in the interbank market when liquidity is tight. Second, some big banks may prefer to see such rates rise further as they can make more money from the inter-bank market. After all, big commercial banks are net lenders in the interbank market. This means that the PBoC may need to consider opening up the SLO system to any bank.

anonymous@anonymous.com FIRST LAST 01/07/14 02:49:34 PM Hong Kong Highpower

Greater China Weekly Insight / 7 Jan 2014 / 4 of 15

FEATURE NOTE
The chart above illustrates that Chinas small and medium-sized banks rely heavily on the funds provided by the big banks in the interbank market. By the end of October 2013, the big state banks (CCB, ICBC, BOC, CDB, BOCOM and PSBC) offered around RMB2.1trn to other financial institutions via inter-bank market. If the 7-day repo rate climbs about 200bps, the big banks can make an additional RMB42bn for one year. On the other hand, the big banks hold about RMB9.8trn as required reserves, which only get return of 1.62% from the central bank. Assuming that the average cost of the deposits is about 2.5% for the big banks, the big banks actually suffer a loss of at least RMB86bn every year. This indicates that a surge in short-term funding costs will somewhat help the big banks to offset the potential loss from the required reserves. This then raises another issue, whether the reserve requirement ratio (RRR), a quantitative indicator, has become more binding under the environment of partial interest rate liberalisation. As Chinas lending rates have been fully liberalized, and the deposit rate ceiling has become less binding because of wealth management products, it is likely the quantity-based monetary policy instrument has become more binding. While Chinas large commercial banks need to lock in 20% of their deposits as the required reserves in the central bank and the economy continues to slow, the shareholders expectation of banks profits remains elevated. Against this backdrop, commercial banks are forced to find ways to maximize their profits. Perhaps it is time to consider whether the RRR should be adjusted downward in order to prevent rising interbank rates from passing through to lending rates in the environment of an economic slowdown. In addition, a lower RRR is equivalent to a liquidity injection, which will help lower interbank rates, reduce speculative capital inflows, and take pressure off from the continued RMB appreciation. We believe that financial innovation and shadow banking activity have caused Chinas money supply to surge while the real economy continues to slow. Data show that the M2/GDP ratio has picked up significantly since 2009-2010 when China conducted the RMB4trn fiscal stimulus package. In the meantime, the soaring money supply appears to have followed the introduction of QE in the US as well, led by large capital inflows on widening interest rate differentials. (Please see Chinas Monetary Policy Review and Outlook: Time to Resolve Distortions and Return to Policy Consistency, ANZ Greater China Weekly Insight, 19 November, 2013) Finally, the PBoC will also need to consider the negative consequences of interest liberalisation. While interest rate liberalisation will lead to better allocation of financial resources, it will also lead to higher interest rate levels according to international experiences. In particular, rising funding costs such as deposit rates or interbank rates will lower interest rate margins. As a result, the overall franchise value of the banking system will decline as banks become more aggressive by taking more risks. To avoid such risks, a proper risk pricing model will be needed. We believe the Chinese banking regulator should require banks to maintain a minimum interest rate margin to ensure profitability and appropriately calculate the risks associated with counterparties, including both corporates and financial institutions. A deep and broad bond market will help to enhance the pricing model as well. This is an important component that will facilitate a truly successful interest rate liberalisation.

Li-Gang Liu, Hao Zhou

anonymous@anonymous.com FIRST LAST 01/07/14 02:49:34 PM Hong Kong Highpower

Greater China Weekly Insight / 7 Jan 2014 / 5 of 15

DATA PREVIEW

y/y GDP (Q4, y/y) GDP (2013, y/y) CPI (%) PPI (%) New Yuan Loans (CNY bn) M2 Industrial Production (%) Fixed Asset Investment (%,YTD) Retail Sales (%) Exports (%) Imports (%) Trade Surplus ($ bn)

Market Impact High High High Med Med Med Med Med Med High High Med

Last 7.8 7.7 3.0 -1.4 624.6 14.2 10.0 19.9 13.7 12.7 5.3 33.8

Consensus (Median) 7.6 7.6 2.7 -1.3 585.0 13.9 9.8 19.9 13.6 5.0 5.0 32.2

ANZ Forecast 7.6 7.6 2.5 -1.3 520.0 14.2 9.8 19.8 13.8 6.1 6.4 33.1

CHINAS Q4 AND DECEMBER DATA DUMP WILL BE RELEASED IN MIDDLE-JANUARY. We expect the economy will grow 7.6% y/y in Q4, down from Q3s 7.8%, as the fiscal spending slowed in the last quarter. The Ministry of Finance held record highs of over RMB4trn in its account as of endNovember, suggesting that the pace of fiscal expenditure was slower than anticipated. In the meantime, there is low restocking activity in the past few months, pointing to a cautious economic outlook. The economy could have grown by 7.6% for the whole year of 2013. Inflation pressures remain mild. We expect the CPI to rise 2.5% y/y in December, compared with Novembers 3.0%, due to falling food prices and a high base recorded in the same period of last year. The PPI is expected to decline by 1.3% in December, unchanged from last month. While the exports could have slowed to 6.1% y/y in December from Novembers 12.7%, the port throughput volume remained elevated during the month. Therefore, the slowdown in headline growth is largely due to base comparisons. The import growth is likely to pick up to 6.4%, from Novembers 5.3%. As a result, the trade surplus should remain high at $33.1bn. The industrial production should have moderated to 9.8% y/y in December, down from Novembers 10.0%, as suggested by manufacturing PMI. The fixed asset investment will likely slow to 19.8% for the whole year of 2013. In addition, retail sales could continue its strong momentum since mid2013, gaining 13.8% in December, compared with last reading of 13.7%.

anonymous@anonymous.com FIRST LAST 01/07/14 02:49:34 PM Hong Kong Highpower

Greater China Weekly Insight / 7 Jan 2014 / 6 of 15

DATA PREVIEW

GREATER CHINA ECONOMIC DATA CALENDAR

DATE COUNTRY DATA/EVENT PERIOD CONSENSUS LAST TIME (HK/SG)

7-Jan 7-Jan 7-Jan 7-Jan 8-14 Jan 8-14 Jan 8-14 Jan 9-12 Jan 9-12 Jan 10-15 Jan 10-15 Jan 10-15 Jan 10-15 Jan 10-15 Jan 10-15 Jan 14-17 Jan 14-17 Jan 14-17 Jan 14-17 Jan 14-17 Jan 14-17 Jan 14-17 Jan 14-17 Jan 14-18 Jan 14-18 Jan 14-18 Jan 17-Jan 17-22 Jan Source: Bloomberg

Taiwan Taiwan Taiwan Hong Kong China China China China China China China China China China China China China China China China China China China China China China Hong Kong China

Trade Balance Exports y/y Imports y/y Foreign Reserves Trade Balance Exports y/y Imports y/y CPI y/y PPI y/y Aggregate Financing RMB Foreign Reserves New Yuan Loans Money Supply M0 y/y Money Supply M1 y/y Money Supply M2 y/y GDP YTD y/y GDP y/y GDP SA q/q Industrial Production YTD y/y Industrial Production y/y Fixed Assets Ex Rural YTD y/y Retail Sales YTD y/y Retail Sales y/y Business Climate Index Entrepreneur Confidence Index Foreign Direct Investment y/y Composite Interest Rate China Property Prices

Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec 4Q 4Q 4Q Dec Dec Dec Dec Dec 4Q 4Q Dec Dec Dec

$3.55B 0.50% 2.20% -$32.90B 5.20% 5.00% 2.70% -1.30% 1125.0B -585.0B 8.50% 9.00% 13.90% 7.60% 7.60% 1.90% 9.70% 9.80% 19.90% 13.20% 13.60% ------

$3.51B 0.00% -0.50% $308.6B $33.80B 12.70% 5.30% 3.00% -1.40% 1227.8B $3662.7B 624.6B 7.70% 9.40% 14.20% 7.70% 7.80% 2.20% 9.70% 10.00% 19.90% 13.00% 13.70% 121.5 119.5 2.40% 0.34% --

16:00 16:00 16:00 ---------------------------------------------------

anonymous@anonymous.com FIRST LAST 01/07/14 02:49:34 PM Hong Kong Highpower

Greater China Weekly Insight / 7 Jan 2014 / 7 of 15

WEEK IN REVIEW
WEEK IN REVIEW TAIWANS CBC STAYS PUT IN DECEMBER The central banks decision to keep the rediscount rate at 1.875% was not surprising. CBC has kept the interest rate at this level since July 2011 as it regards the current interest rate as being consistent with the macroeconomic conditions of low growth and inflation. The CBC set the M2 target for 2014 at 2.5%-6.5%. As the range is similar to that of 2013, this signals that the CBC will continue to stick to the accommodative monetary policy stance and maintain interbank liquidity conditions at the existing level. The CBC sees global oil prices falling next year. This may suggest that the central bank sees little risk of imported inflation despite a potential depreciation of the local currency. While the CBC continues to see the changing US Fed policy as an uncertainty, market activity since the US announcement of tapering have been calm. Interest rate levels appear to be stable. The currency exchange rate has softened which may, in fact, be a welcome direction by the policymakers in view of export competitiveness. As the low inflationary regime will extend into next year, the central bank will continue to maintain their wait-and-see attitude. The CBC will likely link its interest rate policy to the forthcoming movement of the USD floating rate which is expected to stay low for most of 2014. As such, we think Taiwan will only lift the base rate in December 2014.

CHINAS FIRST RELEASE OF TOTAL GOVERNMENT DEBT LEVELS Chinas National Audit Office (NAO) announced that Chinas total government debt (including both central and local governments) amounted to RMB20.7trn as of June 2013, equivalent to 40% of Chinas GDP. However, including contingent liabilities, Chinas total government debt would exceed RMB30trn, or equivalent to 50-55% of Chinas GDP. It is worth noting that this is the first time China is releasing total government debt figures. NAO said that the debt (including contingent liabilities) at central government level was RMB12.4trn as of this June, compared with RMB11.9trn as of end of last year. In the meantime, the local government debt (including contingent liabilities) was RMB17.9trn and RMB15.9trn at end-June 2013 and end-2012 respectively, which tops market expectations. According to the NAO report, about 57% of the local debt was borrowed from commercial banks. Also, 22% of the local debt matured before the end of this year, and about 40% will mature in the next two years. China announced in its last local debt audit results that total local government debt was RMB10.7trn as of end-2010. It is still not clear whether the two sets of figures are statistically comparable.

CHINAS PMI EASED DUE TO LIQUIDITY TIGHTNESS AND SLOW FISCAL EXPENDITURE Chinas official PMI moderated to 51.0 in December, down from 51.4 in the prior month and lower than the market expected, suggesting that real activity could have slowed in the month due to continued liquidity tightness. The sub-indices of the PMI also indicate that Chinese corporates remained reluctant to hoard raw materials before the new production season, reflecting a cautious outlook over the economy. The raw material index dropped to 47.6 from Novembers 47.8. New orders and export orders slid by 0.3pts and 0.8pts respectively in the month, suggesting that demand has not yet recovered. In the meantime, the pace of fiscal spending to date has been slower than the past few years, as the Ministry of Finance held record highs of over RMB4trn treasury funds by end-November. While slow fiscal spending could drag down economic growth, this indicates that Chinas 2013 fiscal deficit could be well below the budgeted figures of RMB1.2trn (about 2% of GDP).

anonymous@anonymous.com FIRST LAST 01/07/14 02:49:34 PM Hong Kong Highpower

Greater China Weekly Insight / 7 Jan 2014 / 8 of 15

WEEK IN REVIEW
Combining these factors, we maintain our forecast that Chinas economy could slow to 7.57.6% in Q4, from Q3s 7.8%, and the GDP growth would be 7.6% for the whole year.

DATE

COUNTRY

DATA/EVENT

PERIOD

CONSENSUS

ACTUAL

LAST

31-Dec 31-Dec 31-Dec 31-Dec 1-Jan 2-Jan 2-Jan 2-Jan 2-Jan 3-Jan 6-Jan 6-Jan 6-Jan 6-Jan 6-Jan

Hong Kong Hong Kong Hong Kong Hong Kong China China Taiwan Hong Kong Hong Kong China Taiwan Taiwan China Hong Kong Taiwan

Budget Balance HKD Money Supply M1 HKD y/y Money Supply M2 HKD y/y Money Supply M3 HKD y/y Manufacturing PMI HSBC/Markit Manufacturing PMI HSBC/Markit Manufacturing PMI Retail Sales Value y/y Retail Sales Volume y/y Non-manufacturing PMI CPI y/y WPI y/y HSBC/Markit Services PMI HSBC/Markit PMI Foreign Reserves

Nov Nov Nov Nov Dec Dec Dec Nov Nov Dec Dec Dec Dec Dec Dec

----51.2 50.5 -5.50% 4.00% -0.80% -----

15.6B 12.60% 7.40% 7.40% 51 50.5 55.2 8.50% 9.00% 54.6 0.33% 0.02% 50.9 51.2 $416.81B

20.8B 13.40% 8.00% 8.00% 51.4 50.8 53.4 6.30% 5.90% 56 0.67% -0.94% 52.5 52.1 $415.56B

Source: Bloomberg

anonymous@anonymous.com FIRST LAST 01/07/14 02:49:34 PM Hong Kong Highpower

Greater China Weekly Insight / 7 Jan 2014 / 9 of 15

CHINA ONSHORE MARKET LIQUIDITY REPORT

150 100 50 0 -50

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

China - SHIBOR
16 14 12 10 8 6 4 2 4/1/2014 0 Apr 12 Jul 12 O/N Oct 12 Jan 13 Apr 13 Jul 13 Oct 13 Jan 14

Liquidity Withdrawal -100 16/9/2013 8/10/2013 30/10/2013 21/11/2013 13/12/2013

CB Bill Matured CB Bill Net

Repo Matured Repo

Reverse Repo Rev. Repo Matured

One Week

Two Week

One Month

12 10 8 6 4

China - 7-day Repo Rate

5.0 4.5 4.0 3.5 3.0 2.5

China - Government Bond Yields

2 0 Jan Mar May Jul 12 12 12 12 Sep Nov Jan Mar May Jul 12 12 13 13 13 13 Sep Nov Jan 13 13 14

2.0 Jan 11 May 11 Sep 11 Jan 12 3-year May 12 Sep 12 Jan 13 May 13 Sep 13 10-year Jan 14

1-year

5-year

7-year

CHINA FURTHER TIGHTENS THE SHADOW BANKING It was reported that China's cabinet has issued new rules to strengthen regulation of the shadow-bank lending that has helped fuel an explosion in debt levels since 2008. The rules, which were issued by the State Council, or cabinet, and are known as Document no. 107: The document said that shadow banking is a "beneficial" and "inevitable" consequence of financial development and provides an official definition of the term. The regulations contain new restrictions on banks' cooperation with trust companies, securities brokerages and other intermediaries with whom banks have worked with in order to carry out offbalance sheet business. Authorities also attempted to address the problem of banks' exploiting regulatory loopholes by clarifying the responsibilities of various regulators, the People's Bank of China, the China Banking Regulatory Commission, and the China Securities Regulatory Commission.

Separately, in the 2014 National Regulatory Work Conference, China Banking Regulatory Commission also provided some principles to mitigate four key shadow banking risks: Wealth management - Banks should separate funds belonging to wealth management business from their own funds. They cannot use the wealth management funds to finance their loan book. Trust business - Trust companies should focus on trust business. Their credit creation activities will be controlled with net capital requirements. Small credit companies - They will be supervised by the CBRC along with other relevant government departments. Relevant regulations will be launched. Guaranteed financing companies - It needs to define clearly how to measure the contingent liability and the maximum net asset level (i.e. to cap their level of leverage).

anonymous@anonymous.com FIRST LAST 01/07/14 02:49:34 PM Hong Kong Highpower

Greater China Weekly Insight / 7 Jan 2014 / 10 of 15

CHINA ONSHORE MARKET LIQUIDITY REPORT

ANZ Assessment We view this as another initiative taken by Chinese authorities to curb the rise of shadow banking activity. The Chinese banking regulator will likely draft detailed policies to adopt such policy initiative, which could result in de-leveraging activity by Chinas financial institutions. This also indicates that the onshore liquidity tightness could persist longer than anticipated. In China, shadow banking activity in different forms are not only a part of financial innovation but also driven by rigid banking regulations. Since these activities could result in systemic risk, there is a need to come up with a regulatory framework to safeguard China's financial stability. We welcome the issuance of such a comprehensive and holistic regulatory framework, although it will take time for the relevant authorities at the local government level to execute the regulatory framework. In our view, shadow banking may also be a derivative of inconsistencies between monetary policy and banking regulation. While the PBOC deems the overall M2 growth of 13-14% an "appropriate" level matching the economy, private and small-micro enterprises still have a difficult time getting access to credit, or they turn to the shadow banking system for funding. We believe that an alternative way to curb shadow banking is for the formal banking sector or the capital markets to meet the credit demand from the real sector. For instance, if local governments can issue bonds, they will not need to seek funds from the Local Government Financing Vehicle. Once local governments and their affiliated enterprises are off the loan market, this will release the loan supply for private sector enterprises and SMEs.

Li-Gang Liu, Raymond Yeung, Hao Zhou

anonymous@anonymous.com FIRST LAST 01/07/14 02:49:34 PM Hong Kong Highpower

Greater China Weekly Insight / 7 Jan 2014 / 11 of 15

MOMENTUM BAROMETER

WEEKLY MOMENTUM Real activity in Greater China was mixed in December. Chinas Ningbo port throughput grew further to 12.9% y/y, but low PMI reading suggested that foreign trade could have slowed in the month. Meanwhile, Macaus gambling revenue growth moderated in December, despite hitting a record high in 2013. Hong Kongs secondary private residential property prices grew moderately, as the Centa-City leading index increased to 119.07 in the week of 23-29 December. Chinas money market rates eased as liquidity tensions alleviated after the PBoC injected liquidity into the financial market. Separately, the Taiwanese dollar weakened slightly during the week and stayed steady at 29.9, which was affected by the U.S. tapering and higher yields in Treasury securities. REAL ACTIVITY MOMENTUM Chinas Ningbo port throughput picked up further in December. Ningbo port throughput grew 12.9% y/y to 1.42m twenty-foot equivalent units (TEUs) in December, from a 9.6% increase in previous month. However, higher port throughput growth was mainly due to a low base in the same period of last year. On the contrary, a low official PMI reading of 51.0 in December suggested that foreign trade could slow in the coming month, where export orders, the subindex of the PMI, slid by 0.8pts to 49.8 in the month.
China - Ningbo Port Container Throughput (y/y)

25 20 15 10 5 0 -5 Apr 12

Jun 12

Aug 12

Oct 12

Dec 12

Feb 13

Apr 13

Jun 13

Aug 13

Oct 13

Dec 13

Macaus gambling revenue moderated to 18.5% y/y in December, despite hitting a record high in 2013. Macaus gambling revenue moderated to 18.5% y/y, from 21.3% in November. However, total gambling revenue for the year of 2013 hit a record high and amounted to MOP360.8bn, up 18.6% from 2012. The total gambling revenue was about seven times as much as the Las Vegas Strip, which was attributed to increasing numbers of wealthy visitors from China.

90 80 70 60 50 40 30 20 10 0

Macau - Gaming Revenue (% y/y)

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

Hong Kongs secondary private residential property prices rose 0.1% during the week of 23-29 December. Hong Kongs secondary private residential property prices rose 0.1% as of 23-29 Dec from a week earlier. The Centa-City Leading Index, an indicator of existing housing prices in Hong Kong, increased to 119.07 from 118.95 in previous week.

Hong Kong - Centa City Leading Index

140 120 100 80 60 40 20 0 1997

1999

2001

2003

2005

2007

2009

2011

2013

Sources: CEIC, ANZ

anonymous@anonymous.com FIRST LAST 01/07/14 02:49:34 PM Hong Kong Highpower

Greater China Weekly Insight / 7 Jan 2014 / 12 of 15

MOMENTUM BAROMETER
MARKET MOMENTUM CNY strengthened significantly during the week, supported by optimism that the Chinese government will push forward capital account liberalization. CNY strengthened significantly by 0.2% to 6.0517 during the week, as PBoC Deputy Governor Yi Gang vowed to expand the opening up of foreign exchange market and stepped up efforts to boost currency convertibility.
USD/CNY
6.45 6.40 6.35 6.30 6.25 6.20 6.15 6.10 6.05 6.00 Aug 12 Oct 12 Dec 12 Spot Feb 13 Apr 13 Jun 13 Aug 13 Oct 13 Dec 13

Trading band

Fixing

Chinas 1-yr interest rate swap dropped 15.5bps after hitting a record high of 5.38% during the week. Chinas 1-yr interest rate swap dropped 15.5bps after hitting a record of 5.38% during the week, implying market expectations priced into the financial market for an easing of money market rates. Meanwhile, the 7-day repo rate, a gauge of short term liquidity in the banking system, has eased slightly to 5.0% from 5.4% as liquidity tension was alleviated after the PBoC injected liquidity into the financial market. We believe that liquidity will continue to be tight for a period of time as the Chinese New Year nears.

China - IRS One Year

6 5 5 4 4 3 May 2013

Jun 2013

Jul 2013

Aug 2013

Sep 2013

Oct 2013

Nov 2013

Dec 2013

Jan 2014

Taiwanese dollar (TWD) weakened in the year ending. The TWD weakened extending the weakness that commenced in the year ending. The currency broke 30.0, the level we had seen before Q3. As a currency commonly used for comparison, KRW has also softened since the new year starts although it has not bounced back to its weakest point in June. Taiwan's export data has failed to impress recently. This currency direction should be welcome by some local exporters especially for those who hold a view that JPY depreciation will hurt their competitiveness.
30.2 30.0 29.8 29.6 29.4 29.2 Mar 13

Taiwan - Exchange rate

Apr 13

May 13

Jun 13

Jul 13

Aug 13

Sep Oct 13 13

Nov 13

Dec 13

Jan 14

Sources: CEIC, Bloomberg, ANZ

anonymous@anonymous.com FIRST LAST 01/07/14 02:49:34 PM Hong Kong Highpower

Greater China Weekly Insight / 7 Jan 2014 / 13 of 15

FORECAST

y/y, unless otherwise noted Sep-12 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) 7.4 1.35 1.5 Jun-13 2.7 0.60 4.10 -2.7 4.17 3.3 -3.1 8.7 -0.2 -0.7 6.8 1.4 27.1 3.26 -49.7 50.1 -3.54 8.9 -0.40 6.0 13.3 -0.27 14.6 9.0 7.89 18.1 14.0 4.82 9.6 Dec-12 7.9 3.85 2.8 Jul-13 2.7 0.06 6.90 -2.3 4.18 3.3 5.1 1.6 10.6 10.9 -7.7 8.3 17.8 3.22 -37.2 50.3 0.50 9.7 2.06 8.1 13.2 -0.28 9.3 9.7 8.63 16.2 14.5 5.42 9.0 2007 10.1 8.9 13.0 1,528 270 153 0.2 0.9 3.8 Mar-13 7.7 1.44 2.9 Aug-13 2.6 -0.79 4.50 -1.6 4.19 3.3 7.2 3.6 -1.3 7.0 -1.2 -0.2 28.5 4.58 -39.6 51.0 0.46 10.4 -0.58 13.4 13.4 -0.60 8.1 9.9 8.31 14.7 14.7 5.41 8.1 2008 9.3 6.9 15.0 1,946 292 183 -0.8 0.9 7.3 Jun-13 7.5 2.69 3.2 Sep-13 3.1 0.84 4.60 -1.3 4.18 3.3 -0.3 -7.0 1.5 7.4 -0.7 0.4 15.2 2.34 -42.0 51.1 2.01 10.2 0.59 8.2 13.3 1.34 5.0 8.9 8.05 14.5 14.2 5.54 9.6 2009 4.9 11.4 9.9 2,399 348 256 -2.8 -2.2 0.1 7 Jan-14 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 6.051 30.076 7.755 6.00 1.875 0.50 Sep-13 7.8 1.66 2.9 Oct-13 3.2 0.6 4.30 -1.5 4.17 3.3 5.8 -1.5 8.8 7.6 -2.8 6.3 31.1 3.52 -38.1 51.4 3.16 10.3 0.61 8.4 13.3 1.79 6.3 8.9 8.58 13.4 14.3 5.99 8.0 2010 4.0 9.3 7.0 2,847 382 269 -2.5 -1.2 1.5 Forecast Mar-14 6.05 6.00 1.875 0.50 Dec-13 7.6 2.36 2.9 Nov-13 3.0 0.67 4.30 -1.4 4.15 3.3 12.7 0.0 5.8 5.3 -0.5 5.2 33.8 3.51 -44.6 51.4 0.78 10.0 -0.12 6.8 13.7 0.23 8.4 9.4 8.85 12.6 14.2 6.05 7.4 2011 1.9 9.0 5.6 3,181 386 285 -1.8 -0.5 4.1 Jun-14 6.03 6.00 1.875 0.50

Forecasts 2013 7.6 2.04 2.9 Dec-13 2.5 0.33 3.70 -1.3 4.13 3.3 6.1 -1.7 6.1 6.4 2.4 3.8 33.1 3.15 -42.6 51.0* -2.26 9.8 1.24 13.8 2.28 10.1 14.2 2012 2.3 10.7 1.7 3,312 403 317 -1.5 -1.4 3.8 Sep-14 6.00 6.00 1.875 0.50

2014 7.2 3.62 3.5 Jan-14 3.0 0.32 3.50 -1.0 4.10 3.3 -2.8 -1.0 5.0 -0.9 -12.00 8.6 25.6 3.37 -40.9 51.2 0.98 9.8 0.14 13.8 3.23 8.5 2013 2.8 11.0 3.6 3497* 409* 300* 2.0 Dec-14 5.98 6.00 2.000 0.50

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