ANZ RESEARCH

GREATER CHINA ECONOMICS WEEKLY INSIGHT

2 JULY 2013

FEATURE NOTE HOW BIG IS THE SECOND ROUND IMPACT OF CHINAS INTER-BANK CREDIT SQUEEZE?
2 6 7 8 10 12 13

INSIDE Feature Note Data Preview Week in Review China Liquidity Report Momentum Barometer Forecasts Important Notice

If Chinas central bank continues to tighten market liquidity without accommodating the rapidly deteriorating internal and external environments, we believe financial institutions will start to de-leverage which will last for 1-2 quarters. The real economy will suffer. The high inter-bank interest rate will pass-through to the bond markets and bank lending to corporates. It will also hurt local governments financing ability. Chinas local government debt outstanding remains above RMB10trn, which means that even 10bps rise of the funding cost will bring about RMB10bn in additional interest payments. We believe that medium-small banks will suffer the most from an inverted yield curve as they are price sensitive. The second round impact of the liquidity crunch will hurt small and medium-sized enterprises as it will result in a double whammy with high interest rate and strong RMB exchange rate.

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

DATA PREVIEW China: We expect Chinas CPI inflation to rebound to 2.6% y/y in June, from 2.1% in May, mostly due to base effects. Meanwhile, the PPI inflation is likely to remain soft, at -2.4%. WEEK IN REVIEW Taiwans central bank held the policy rate at 1.875% in June as expected. CHINA MARKET LIQUIDITY REPORT The liquidity tightness has started to ease after PBoC fine-tuned its tone last week. However, the overnight and 7-day repo rates stayed high, suggesting that funding costs are unlikely to return to normal levels very soon. CHART OF THE WEEK Chinas medium and small banks borrowed intensively from the inter-bank market
China - Net Borrowing from Financial Institutions (RMB trn)

RESEARCH@ANZ.COM

4 3 2 1 0 -1 -2 2010

2011

2012 Big-four Banks

2013 Joint-stock Banks

Medium and Small Banks

Sources: CEIC, ANZ

Greater China Weekly Insight / 2 Jul 2013 / 2 of 14

FEATURE NOTE
HOW BIG IS THE SECOND ROUND IMPACT OF CHINAS INTER-BANK CREDIT SQUEEZE? The continuous and severe liquidity squeeze in Chinas inter-bank markets has concerned many that the country is likely to experience a fast de-leveraging process in its financial system. As a result, the real economy will continue to suffer. PBoC Governor Zhou acknowledged over the weekend that the market has basically understood the PBoCs handling of liquidity. He said banks had great interest to extend loans in early-June but this was not in line with Chinas monetary policy, and banks need to adjust. This is the first time that Chinas central bank has admitted that the aim of the liquidity tightness is to slow the expansion of the commercial banks balance sheets, indicating that a de-leveraging could be inevitable. In our view, if the central bank continues to maintain the relatively tight liquidity conditions without any signal of a policy easing to reflect the rapidly deteriorating internal and external environment, the de-leveraging process in the financial institutions will mean that credit extended to the real economy will fall in the next 1-2 quarters, which will further weaken the already sluggish economy. In this note, we investigate the second-round impact of Chinas inter-bank credit squeeze and its implications for the overall economy and some sectors that are likely affected the most in the aftermath of the inter-bank turmoil. IMPACT ON THE BOND MARKET We start from the financial markets first. Most Chinese banks now hold large amount of bonds as a part of their liquid asset holding. Chinas bond outstanding reached RMB26trn at the end of 2012, equivalent to 25% of Chinas banking assets. Nearly 90% of Chinas bond transactions take place in the inter-bank market. In the past few years, Chinas bond market transaction picked up steadily, rising by 17.5% from 2010 to 2012. More importantly, inter-bank bond repurchase surged by more than 60% from 2010 and 2012, suggesting that bonds are used as an important liquidity management instrument.
China - Interbank Transactions (RMB bn)
61.8%

160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0

17.5% 67.4%

Interbank Repo

Interbank Lending 2010 2011 2012

Interbank Bonds

Sources: PBoC, ANZ

This means that a surge in Chinas inter-bank rates will quickly transit in the bond markets. If under the pressure of a liquidity squeeze, those banks facing a cash crunch will have to reduce their bond holdings. Furthermore, because bond trading is also financed by short-tenor inter-bank repo (overnight and 7-day repos), a surge in repo rates will result in a negative carry, and thereby drive up bond yields as well. Indeed, we believe a fast rising government bond yield over the past few months is a reflection of the inter-bank credit squeeze, leading the yield curve to be inverted.

Greater China Weekly Insight / 2 Jul 2013 / 3 of 14

FEATURE NOTE

China - Government Bond Yields 4.5 4.0 3.5 3.0 2.5 2.0 Sep 11

Jan 12 1-year

May 12 3-year

Sep 12 5-year

Jan 13 7-year

May 13 10-year

Sources: PBoC, ANZ

If the liquidity tightness continues, we will likely see the following sequential developments in Chinas bond and credit markets. We believe financial institutions will likely sell government bonds as they are the most liquid asset, followed by the sale of credit bonds such as corporate bonds and chengtou bonds if the overall liquidity environment stabilizes somewhat. This means that government bond yields will rise and the appetite for corporate and chengtou bonds will dry up. Indeed corporates, and particularly local governments, will face more difficulty in issuing bonds. If there is a freeze in the chengtou bond markets, some local governments will likely face difficulty in paying back their loans to the banking system, issued during the GFC period. This could lead to rising non-performing loans in the banking system. Meanwhile, commercial banks will find it difficult to sell lowrated bonds, but have to increase provisions to cover the mark-to-market losses and prepare for possible default. While the above described sequential events that may not be realized, we believe policymakers will need to be aware of these spillover effects. In the past few weeks, at least 15 bond issuances have been cancelled, which is likely to dampen market confidence. IMPACT ON THE BANK LENDING It is reported that some Chinese commercial banks have suspended new loans extension amid the liquidity crunch. There does not seem to be a clear pass-through effect from the inter-bank borrowing rates to the loan rates, largely owing to Chinas interest rate controls. However, past experience suggests that the actual lending rates tend to be higher while the inter-bank offered rates saw increased volatilities, and vice versa. This suggests that this round of liquidity tightness will not help increase loans to the real economy, and we will likely see higher lending rates for corporates, as overall credit conditions become tighter.
China - Inter-bank Borrowing Rates vs Loan Lending Rates

8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0 2009

14 12 10 8 6 4 2 0

2009

2010 2010 2011 2011 2012 2012 2013 Banks' Lending Rates (Weighted Average) Inter-bank Overnight Repo Rates (RHS)

Sources: PBoC, ANZ

In our view, the lending activities and behavior are different between big banks and the small and medium ones. For the big banks, as they have strong branch networks and hold large deposits, they may still want to offer

Greater China Weekly Insight / 2 Jul 2013 / 4 of 14

FEATURE NOTE
loans to corporates, albeit at a higher price. For the small and medium banks, especially those adopting a FTP (fund transfer pricing) system, they may have to stop lending to avoid incurring losses. In most cases, the FTP is priced according to market interest rates, normally SHIBOR and bond yields. As the yield curve has been inverted, the commercial banks will not be able to make money in long-tenor loan extension. We believe most foreign banks will become more cautious in lending if the inverted yield curve does not disappear soon. Commercial banks profit margin will be squeezed as a result, as overall funding costs are likely to be higher. For the big banks, the margin squeezing could be offset by higher lending rates. However, for the medium and small banks, the profits will likely decline significantly due to an inverted yield curve. IMPACT ON THE INTER-BANK BUSINESS It is widely believed that this round of liquidity tightness is conducted by the PBoC with the aim to curb the inter-bank business which has flourished in the past few years. In fact, the inter-bank business has developed rapidly as these businesses require less capital and face relative looser regulations. As Chinese banks need to comply with strict loan-to-deposit ratios and are under capital tightness pressure, many banks turn to interbank business (not need to comply with loan-to-deposit ratio) to improve the profitability. At present, interbank business refers to inter-bank borrowing/lending, bonds, bankers acceptance draft (BAD), letters of credit (LC), etc. While banks are taking on inter-bank credit exposure in conducting the inter-bank business, we believe that corporates and local governments (via chengtou bonds) are actually the end users of the funding. The chart below shows that Chinas medium and small banks have borrowed intensively from the inter-bank market in the past few quarters, suggesting that they will have to reduce such business in the coming quarters. As these businesses need to be financed by inter-bank borrowing and are very price sensitive, a liquidity crunch will sharply cut the scale of such business.
China - Net Borrowing from Financial Institutions (RMB trn)

4 3 2 1 0 -1 -2 2010

2011

2012 Big-four Banks

2013 Joint-stock Banks

Medium and Small Banks

Sources: WIND, ANZ

In our view, the de-leveraging will take about 1-2 quarters, as the inter-bank businesses are normally conducted with one year tenor. Meanwhile, in order to finance the existing business, some commercial banks will have to issue high-yielding wealth management products (WMPs) to diversify the funding structure. IMPLICATIONS FOR THE REAL ECONOMY The tight inter-bank credit conditions will start to affect the real sectors of the economy in the coming months: First, we expect funding costs for the property developers and local government financing vehicles (LGFV) to rise further as they will find it difficult to roll over funds. Official data suggest that Chinas local government debt outstanding remains above RMB10trn, which means that even 10bps rise of the funding cost will bring about RMB10bn in additional interest payments. Second, small and medium-sized enterprises (SMEs) will likely suffer amid the liquidity crunch. Past experience suggests that the banks normally reduce the exposure to SMEs when the credit appetite eases. Given many of them are in the export sector, these sectors will experience double whammy effect from both rising credit costs and the strong RMB. Third, the issuance of the WMPs will still be sizable in the foreseeable future as banks have to compete for funds amid the liquidity tightness. However, if the WMPs scale back as the commercial banks lower the leverage ratio,

Greater China Weekly Insight / 2 Jul 2013 / 5 of 14

FEATURE NOTE
the medium and small banks lending capacity will also be constrained. As the medium and small banks mainly serve the SME sector, the SMEs will be further affected. The challenge for the PBoC is to walk the tightrope between market discipline and over-tightening. If liquidity is too tightly rationed, banks may need to deleverage and will be unwilling to offer funds into inter-bank markets, exacerbating already sparse liquidity conditions. In this case, while the central bank emphasized that it will definitely prevent the systemic crisis from taking place via a series of instruments, this risk would remain if the PBoC cannot strike the correct balance between disciplining the banks and maintaining market stability.

Li-Gang Liu, Hao Zhou

Greater China Weekly Insight / 2 Jul 2013 / 6 of 14

DATA PREVIEW
CHINA DATA PREVIEW We expect Chinas CPI inflation to rebound to 2.6% y/y in June, from 2.1% in May, mostly due to base effects. Meanwhile, the PPI inflation is likely to remain soft, at -2.4%, reflecting weakness in the corporate sector. Overall, Chinas inflationary pressures remain tepid.

GREATER CHINA ECONOMIC DATA CALENDAR

DATE 02 Jul 02 Jul 03 Jul 03 Jul 04 Jul 05 Jul 05 Jul 05 Jul 05 Jul 08 Jul 08 Jul 08 Jul 09 Jul 09 Jul COUNTRY Hong Kong Hong Kong China China Hong Kong Taiwan Taiwan Taiwan Hong Kong Taiwan Taiwan Taiwan China China DATA/EVENT Retail Sales - Value (y/y) Retail Sales - Volume (y/y) Non-manufacturing PMI HSBC Services PMI PMI CPI (y/y) WPI (y/y) Foreign Reserves (USD) Foreign Reserves (USD) Trade Balance (USD) Exports (y/y) Imports (y/y) CPI (y/y) Producer Price Index (y/y) PERIOD May May Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun MARKET 21.2% 15.6% ---0.60% --------LAST 20.7% 19.4% 54.3 51.2 49.8 0.74% -3.28% 406.62bn 305.7bn 4.46bn 0.9% -8.0% 2.1% -2.9% TIME (HK/SG) 16:30 16:30 9:00 9:45 10:30 8:30 8:30 16:20 16:20 16:00 16:00 16:00 9:30 9:30

Source: Bloomberg

Greater China Weekly Insight / 2 Jul 2013 / 7 of 14

WEEK IN REVIEW
TAIWAN HOLDS INTEREST RATE AS EXPECTED Taiwans central bank (CBC) held the policy rate at 1.875% in June as widely expected. Low inflation and sluggish growth continue to prompt the CBC to remain accommodative as the current interest rate level has been considered appropriate. Furthermore, the central bank is also watching closely the highly uncertain financial markets. The changing monetary policy stance of major economies is also on the radar. Against this global backdrop, we believe the CBC will continue to act prudentially and maintain a stable monetary policy stance. It is noteworthy that Taiwans bond yield has risen sharply on the back of rising US Treasury yields. Given the tapering bias of US monetary policy going forward, Taiwans interest rates will also be subject to an upward bias. As the Bank of Koreas Governor CS Kim noted, emerging markets may be forced to tighten monetary policy to fight against capital outflows and associated exchange market pressure stemming from the rise in the global interest rate. Our forecast has been for Taiwan to lift interest rates at the December 2013 board meeting at the earliest. On the exchange rate front, we believe that the CBC may share the concern regarding capital outflows but to a lesser extent than Korea as it could naturally help devalue the currency strength in view of its export competitiveness. The Taiwan market has seen capital outflows in recent trading days. On the other hand, the recent revision (reduction) of securities gains tax law will motivate foreign investors to look at Taiwans equity market, limiting the chance of massive capital outflows. Given this market condition, we believe the central bank will continue its policy towards the currency market, aiming to maintain an orderly movement of the TWD exchange rate. Raymond Yeung

WEEK IN REVIEW
DATE 25 Jun 25 Jun 25 Jun 27 Jun 27 Jun 27 Jun 27 Jun 28 Jun 28 Jun 28 Jun 28 Jun 28 Jun 28-30 Jun 01 Jul 01 Jul 01 Jul COUNTRY Hong Kong Hong Kong Hong Kong China Taiwan Taiwan Taiwan Taiwan Hong Kong Hong Kong Hong Kong Hong Kong China China China Taiwan DATA/EVENT Exports (y/y) Imports (y/y) Trade Balance (HKD) Industrial Profits YTD (y/y) Coincident Index (m/m) Leading Index (m/m) Benchmark Interest Rate Bounced Check Ratio Govt Mthly Budget Surp/Def (HKD) Money Supply M1 - in HKD (y/y) Money Supply M2 - in HKD (y/y) Money Supply M3 - in HKD (y/y) Leading Index Manufacturing PMI HSBC Manufacturing PMI HSBC Manufacturing PMI PERIOD May May May May May May 27-Jun May May May May May May Jun Jun Jun MARKET 3.4% 3.5% -38.0bn ---1.88% ------50.1 48.3 -ACTUAL -1.0% 1.7% -44.3bn 12.3% 0.20% 0.70% 1.88% 0.18% -7.8bn 18.90% 11.10% 11.20% 99.6 50.1 48.2 49.5 LAST 9.0% 7.7% -42.7bn 11.4% -0.20% 0.40% 1.88% 0.18% 13.4bn 15.50% 9.30% 9.40% 99.8 50.8 49.2 47.1

Source: Bloomberg

Greater China Weekly Insight / 2 Jul 2013 / 8 of 14

CHINA ONSHORE MARKET LIQUIDITY REPORT

250 200 150 100 50 0 -50 -100 -150 -200 25 Feb
Liquidity Withdrawal

China - PBoC Weekly Open Market Operations (RMB bn)

Liquidity Injection

China - Weekly Maturing Repo and CB Bills (RMB bn)

180 160 140 120 100 80 60 40 20 0 1 Jul 8 Jul 15 Jul 22 Jul 29 5 12 19 26 2 9 16 23 30 Jul Aug Aug Aug Aug Sep Sep Sep Sep Sep
Repo Matured

11 Mar

25 Mar

08 Apr

22 Apr

06 May

20 May

03 Jun

17 Jun

C B Bill Matured C B Bill Net

Repo Matured Repo

Reverse Repo Rev. Repo Matured

C B Bill Matured

China - 7-day Repo Rate

12 10 8 6 4 2 0 Jun Aug 11 11 Oct Dec Feb Apr Jun Aug Oct 11 11 12 12 12 12 12 Dec Feb Apr Jun 12 13 13 13 12 10 8 6 4 2 0

China - SHIBOR Fixing

Jun Aug Oct Dec Feb Apr Jun Aug Oct 11 11 11 11 12 12 12 12 12 1-month 3-month

Dec Feb Apr Jun 12 13 13 13 6-month

Sources: Bloomberg, CEIC, ANZ

FUNDING COSTS ARE UNLIKELY TO RETURN TO NORMAL LEVELS VERY SOON The PBoC didnt conduct any open market operations last week, while the matured funds were RMB25bn for the week. Meanwhile, the liquidity tightness has started to ease after PBoCs statement and designated liquidity injection over the past few trading days, while the overnight and 7-day repo rates stayed high. These suggest that the market is still functioning, but that funding costs are unlikely to return to normal levels very soon. PBOC FINE-TUNES ITS TONE TO EASE LIQUIDITY CONDITIONS PBoC has fine-tuned its tone to ease liquidity conditions, and released a statement on its website last Tuesday evening talking about recent market liquidity tightness. The major points were as follows: The overall liquidity conditions are relaxed, and the commercial banks are holding RMB1.5trn excess reserves with the central bank as of 21 June, compared with normal level of RMB1.0trn; The PBoC admitted that it has already provided liquidity to some financial institutions over the past few days, indicating that the central bank could have already used the short-term liquidity operations (SLO) which was introduced in January, for the first time, to ease the market liquidity tightness; The PBoC will continue to use a few instruments including SLO to support financial institutions, and it expects that market liquidity conditions will gradually ease; Big banks should help stabilise the market and report any important and urgent issues to the central bank in a timely manner; The banks should reasonably arrange their assets and liabilities, and the central bank will give liquidity support if there is a temporary liquidity shortage; The SHIBOR price quotation contributors should honour their offering prices, and market makers must not mislead the market via fake deals.

Greater China Weekly Insight / 2 Jul 2013 / 9 of 14

CHINA ONSHORE MARKET LIQUIDITY REPORT

CHINAS LIQUIDITY TIGHTNESS PUSHED UP OFFSHORE RATES AS WELL Chinese banks raise offshore RMB (CNH) interest rates in Hong Kong to absorb cash amid the onshore liquidity squeeze. Some banks are raising the 1-month CNH deposit rates so that exporters will convert their FX assets into RMB, and then repatriate back onshore through Hong Kongs RMB clearing bank. The onshore and offshore interest rate differential can be as high as 4%, Sina News reported citing unidentified sources. Meanwhile, the yields on the Ministry of Finances (MoF) dim sum bonds in Hong Kong were sharply higher than last year due to the liquidity crunch onshore. The MoF sold RMB10bn worth of RMB-denominated bonds in Hong Kong last week, with yields ranging from 2.87% to 3.6%, all higher than last years levels. Li-Gang Liu, Hao Zhou

Greater China Weekly Insight / 2 Jul 2013 / 10 of 14

MOMENTUM BAROMETER
WEEKLY MOMENTUM Chinas industrial profits rose to 15.5% y/y in May, from 9.3 in April. However, this is mainly due to base effects. The manufacturing sector remains weak as indicated by the latest official PMI figure, which declined to 50.1 in June, from 50.8 in May. Meanwhile, in Hong Kong, trade growth slumped due to the crack down by Chinese authorises on false trade activities. In the onshore market, market interest rates eased significantly following the PBoCs statement on Tuesday, pledging to ease market liquidity tightness through its liquidity operations. In Taiwan, government bond yields continued to rise on the back of US tapering expectations. REAL ACTIVITY MOMENTUM Chinas official PMI fell significantly The official Purchasing Managers Index (PMI) fell significantly to 50.1, from 50.8 in May. While in line with market expectations, manufacturing activity remains lukewarm, bordering between contraction and expansion. In addition, the magnitude of the PMI drop has shown that Chinas overall economic activity has decelerated further. Notably, the new export order sub-index, which was omitted in the NBSs official release on 1 July but later released, came in at 47.7 in June, much weaker than the 49.4 in May. Chinas industrial profits rose on base effects Industrial profits rose 15.5% y/y in May, compared with 9.3% in April. However, the gain in profits was largely due to base effects instead of a real recovery in the industrial sector. In the first five months, industrial profits increase 12.3% y/y.
20 15 10 5 0 -5 -10 Jan 12 Mar 12 May 12 Jul 12 Sep 12 Nov 12 Jan 13 Mar 13 May 13

China - Official Manufacturing PMI

59 57 55 53 51 49 47 45 Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun 10 10 10 11 11 11 11 12 12 12 12 13 13 Headline New Orders New Export Orders

China - Industrial Profits (ytd, y/y)

Hong Kongs trade slumped in May due to a crack down of false trade activities Hong Kongs trade growth declined sharply as the Mainland Chinese government tightened regulations to curb cross-border over invoicing. Exports contracted by 1.0% y/y in May, down from a 9.0% gain in April, and below the market consensus of a 3.4% increase. Imports grew 1.7% y/y, from 7.7% previously, also below market expectations.

Hong Kong - Trade Developments

40 30 20 10 0 -10 -20 -30 -40 -50 Nov 10 Feb 11 May 11 Aug 11 Nov 11 Feb 12 May 12 Aug 12 Nov 12 Feb 13 May 13

Trade Balance, HKD bn

Exports, y/y

Imports, y/y

Sources: CEIC, ANZ

Greater China Weekly Insight / 2 Jul 2013 / 11 of 14

MOMENTUM BAROMETER
MARKET MOMENTUM RMB appreciation expectations have turned around The RMB non-deliverable forward (NDF) has returned to around 6.30, suggesting that markets are now increasingly expecting a RMB depreciation. The NDF reached 6.20 in May.
USD/CNY Spot and NDF
6.5 3 2 6.4 1 0 -1 -2 -3 6.1 Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun 12 12 12 12 12 12 12 13 13 13 13 13 13
NDF Implied Appreciation, % (RHS) USD/C NY 1y NDF

6.3

6.2

-4

Chinas inter-bank liquidity squeeze have eased somewhat Market interest rates in China eased significantly after the PBoCs statement on Tuesday evening. The PBoC admitted that it has already provided liquidity to some financial institutions, indicating that the central bank could have already used the short-term liquidity operations (SLO) to ease the market liquidity tightness, and will continue to use a few instruments including SLO to support financial institutions. The weighted average 7-day repo rate declined to below 6% as of Monday, compared with the peak of over 10% last week. Taiwans bond yields surged on the back of rising US treasury Taiwans bond yield has risen sharply on the back of rising US Treasury yields. The 10-year government bond yield reached 1.45% last week. Given the rising expectation of the US Feb tapering its quantitative easing, Taiwans interest rates will be subject to upward pressure.

China - 7-day Repo Rate

12 10 8 6 4 2 0 Jun Aug Oct Dec Feb Apr Jun Aug 11 11 11 11 12 12 12 12 Oct Dec Feb Apr 12 12 13 13 Jun 13

Taiwan - 10 Year Government Bond Yield

1.50 1.45 1.40 1.35 1.30 1.25 1.20 1.15 1.10 Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun 12 12 12 12 12 12 12 13 13 13 13 13 13

Sources: CEIC, Bloomberg, ANZ

Greater China Weekly Insight / 2 Jul 2013 / 12 of 14

FORECASTS
y/y, unless otherwise noted Dec-11 Real GDP China Taiwan Hong Kong 8.9 1.21 3.0 Dec-12 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 2.5 1.60 3.8 -1.9 4.21 3.3 14.8 8.9 14.4 6.0 1.6 11.9 31.6 4.11 -48.0 50.6 8.51 10.3 2.10 7.6 15.2 1.49 9.1 6.5 4.91 15.9 13.8 3.67 12.1 Mar-12 8.1 0.59 0.7 Jan-13 2.0 1.13 3.0 -1.6 4.20 3.4 25.2 21.6 17.6 28.8 22.2 23.9 29.1 0.5 -27.5 50.4 17.95 19.30 7.80 10.5 15.3 4.0 20.2 15.9 3.0 14.1 2007 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) 10.1 8.9 13.0 1,528 270 153 0.2 0.9 3.8 Jun-12 7.6 -0.12 1.1 Feb-13 3.2 2.96 4.4 -1.6 4.16 3.4 21.8 -15.8 -16.9 -15.2 -8.5 -18.3 15.2 0.9 -34.0 50.1 -14.47 9.9 -11.17 3.4 12.3 -6.00 22.7 9.5 5.7 13.6 15.2 3.5 8.5 2008 9.3 6.9 15.0 1,946 292 183 -0.8 0.9 7.3 Sep-12 7.4 0.73 1.4 Mar-13 2.1 1.37 3.6 -1.9 4.18 3.5 10.0 3.2 11.2 14.1 0.2 11.3 -0.8 3.2 -49.1 50.9 -6.60 8.9 -3.00 2.1 12.6 -1.00 9.8 11.8 6.0 17.6 15.7 3.8 9.2 2009 4.9 11.4 9.5 2,399 348 256 -2.8 -2.2 0.1 Dec-12 7.9 3.97 2.5 Apr-13 2.4 1.05 4.1 -2.6 4.19 3.5 14.7 -1.9 9.0 16.8 -8.2 7.7 18.2 2.3 -42.7 50.6 -1.11 9.3 -0.80 6.2 12.8 1.01 20.7 11.9 5.7 15.5 16.1 3.7 9.3 2010 4.0 9.3 6.6 2,847 382 269 -2.5 -1.2 1.5 Mar-13 7.7 1.67 2.8 May-13 2.1 2.05 3.9 -2.9 4.19 3.4 1.0 0.9 -1.0 -0.3 -8.0 1.7 20.4 4.5 -44.3 50.8 -0.40 9.2 0.20 4.1 12.9 -1.85 11.4(f) 11.3 7.0 18.9 15.8 4.3 11.1 2011 1.9 8.9 4.8 3,181 386 285 -1.8 -1.1 4.1 Forecasts Jun-13 2013 7.9 1.89 2.0 Jun-13 2.8 0.08 4.4 4.23 3.6 4.8 -1.7 -4.8 8.2 -3.8 -5.0 28.3 3.0 -41.8 50.2 -1.48 9.0 1.12 13.0 1.50 7.8 15.5 2012 2.3 10.5 1.3 3,312 403 317 -1.5 -2.6 3.8 7.6 2.36 2.5 Jul-13 2.7 -0.10 3.4 4.28 3.7 12.4 0.9 -2.2 8.4 -8.6 -1.5 34.3 3.3 -41.6 50.5 -0.26 9.2 -0.66 13.2 -0.11 5.4 15.4 2013 2.6* 10.8 2.8 3,443* 407* 306* 2.0 3.1*

2 Jul-13 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 or YTD Sources: CEIC, Bloomberg, ANZ 6.133 30.006 7.756 6.00 1.875 0.50

Sep-13 6.17 5.75 1.875 0.50

Forecasts Dec-13 Mar-14 6.20 5.75 2.000 0.50 6.23 5.75 2.125 0.50

Jun-14 6.25 5.75 2.250 0.50

IMPORTANT NOTICE
The distribution of this document or streaming of this video broadcast (as applicable, publication) may be restricted by law in certain jurisdictions. Persons who receive this publication must inform themselves about and observe all relevant restrictions. 1. Country/region specific information: Australia. This publication is distributed in Australia by Australia and New Zealand Banking Group Limited (ABN 11 005 357 522) (ANZ). ANZ holds an Australian Financial Services licence no. 234527. A copy of ANZ's Financial Services Guide is available at http://www.anz.com/documents/AU/aboutANZ/FinancialServicesGuide.pdf and is available upon request from your ANZ point of contact. If trading strategies or recommendations are included in this publication, they are solely for the information of wholesale clients (as defined in section 761G of the Corporations Act 2001 Cth). Persons who receive this publication must inform themselves about and observe all relevant restrictions. Brazil. This publication is distributed in Brazil by ANZ on a cross border basis and only following request by the recipient. No securities are being offered or sold in Brazil under this publication, and no securities have been and will not be registered with the Securities Commission - CVM. Brunei. Japan. Kuwait. Malaysia. Switzerland. Taipei. This publication is distributed in each of Brunei, Japan, Kuwait, Malaysia, Switzerland and Taipei by ANZ on a cross-border basis. European Economic Area (EEA): United Kingdom. ANZ is authorised and regulated in the United Kingdom by the Financial Services Authority (FSA). This publication is distributed in the United Kingdom by ANZ solely for the information of persons who would come within the FSA definition of eligible counterparty or professional client. It is not intended for and must not be distributed to any person who would come within the FSA definition of retail client. Nothing here excludes or restricts any duty or liability to a customer which ANZ may have under the UK Financial Services and Markets Act 2000 or under the regulatory system as defined in the Rules of the FSA. Germany. This publication is distributed in Germany by the Frankfurt Branch of ANZ solely for the information of its clients. Other EEA countries. This publication is distributed in the EEA by ANZ Bank (Europe) Limited (ANZBEL) which is authorised and regulated by the FSA in the United Kingdom, to persons who would come within the FSA definition of eligible counterparty or professional client in other countries in the EEA. This publication is distributed in those countries solely for the information of such persons upon their request. It is not intended for, and must not be distributed to, any person in those countries who would come within the FSA definition of retail client. Fiji. For Fiji regulatory purposes, this publication and any views and recommendations are not to be deemed as investment advice. Fiji investors must seek licensed professional advice should they wish to make any investment in relation to this publication. Hong Kong. This publication is distributed in Hong Kong by the Hong Kong branch of ANZ, which is registered by the Hong Kong Securities and Futures Commission to conduct Type 1 (dealing in securities), Type 4 (advising on securities) and Type 6 (advising on corporate finance) regulated activities. The contents of this publication have not been reviewed by any regulatory authority in Hong Kong. If in doubt about the contents of this publication, you should obtain independent professional advice. India. This publication is distributed in India by ANZ on a cross-border basis. If this publication is received in India, only you (the specified recipient) may print it provided that before doing so, you specify on it your name and place of printing. Further copying or duplication of this publication is strictly prohibited. Lao PDR. This publication is distributed in Lao PDR for information purposes only. This publication and any views and recommendations are not to be deemed as financial advice or investment advice. Lao investors who wish to make any investment in relation to this publication must seek licensed professional advice. New Zealand. This publication is intended to be of a general nature, does not take into account your financial situation or goals, and is not a personalised adviser service under the Financial Advisers Act 2008. Oman. This publication has been prepared by ANZ. ANZ neither has a registered business presence nor a representative office in Oman and does not undertake banking business or provide financial services in Oman. Consequently ANZ is not regulated by either the Central Bank of Oman or Omans Capital Market Authority. The information contained in this publication is for discussion purposes only and neither constitutes an offer of securities in Oman as contemplated by the Commercial Companies Law of Oman (Royal Decree 4/74) or the Capital Market Law of Oman (Royal Decree 80/98), nor does it constitute an offer to sell, or the solicitation of any offer to buy nonOmani securities in Oman as contemplated by Article 139 of the Executive Regulations to the Capital Market Law (issued vide CMA Decision 1/2009). ANZ does not solicit business in Oman and the only circumstances in which ANZ sends information or material describing financial products or financial services to recipients in Oman, is where such information or material has been requested from ANZ and by receiving this publication, the person or entity to whom it has been dispatched by ANZ understands, acknowledges and agrees that this publication has not been approved by the CBO, the CMA or any other regulatory body or authority in Oman. ANZ does not market, offer, sell or distribute any financial or investment products or services in Oman and no subscription to any securities, products or financial services may or will be consummated within Oman. Nothing contained in this publication is intended to constitute Omani investment, legal, tax, accounting or other professional advice. Peoples Republic of China. If and when the material accompanying this publication does not only relate to the products and/or services of Australia and New Zealand Bank (China) Company Limited (ANZ China), it is noted that: This publication is distributed by ANZ or an affiliate. No action has been taken by ANZ or any affiliate which would permit a public offering of any products or services of such an entity or distribution or re-distribution of this publication in the Peoples Republic of China (PRC). Accordingly, the products and services of such entities are not being offered or sold within the PRC by means of this publication or any other method. This publication may not be distributed, re-distributed or published in the PRC, except under circumstances that will result in compliance with any applicable laws and regulations. If and when the material accompanying this publication relates to the products and/or services of ANZ China only, it is noted that: This publication is distributed by ANZ China in the Mainland of the PRC. Qatar. This publication has not been, and will not be: lodged or registered with, or reviewed or approved by, the Qatar Central Bank ("QCB"), the Qatar Financial Centre ("QFC") Authority, QFC Regulatory Authority or any other authority in the State of Qatar ("Qatar"); or authorised or licensed for distribution in Qatar, and the information contained in this publication does not, and is not intended to, constitute a public offer or other invitation in respect of securities in Qatar or the QFC. The financial products or services described in this publication have not been, and will not be: registered with the QCB, QFC Authority, QFC Regulatory Authority or any other governmental authority in Qatar; or authorised or licensed for offering, marketing, issue or sale, directly or indirectly, in Qatar. Accordingly, the financial products or services described in this publication are not being, and will not be, offered, issued or sold in Qatar, and this publication is not being, and will not be, distributed in Qatar. The offering, marketing, issue and sale of the financial products or services described in this publication and distribution of this publication is being made in, and is subject to the laws, regulations and rules of, jurisdictions outside of Qatar and the QFC. Recipients of this publication must abide by this restriction and not distribute this publication in breach of this restriction. This publication is being sent/issued to a limited number of institutional and/or sophisticated investors (i) upon their request and confirmation that they understand the statements above; and (ii) on the condition that it will not be provided to any person other than the original recipient, and is not for general circulation and may not be reproduced or used for any other purpose.

IMPORTANT NOTICE
Singapore. This publication is distributed in Singapore by the Singapore branch of ANZ solely for the information of accredited investors, expert investors or (as the case may be) institutional investors (each term as defined in the Securities and Futures Act Cap. 289 of Singapore). ANZ is licensed in Singapore under the Banking Act Cap. 19 of Singapore and is exempted from holding a financial advisers licence under Section 23(1)(a) of the Financial Advisers Act Cap. 100 of Singapore. In respect of any matters arising from, or in connection with the distribution of this publication in Singapore, contact your ANZ point of contact. United Arab Emirates. This publication is distributed in the United Arab Emirates (UAE) or the Dubai International Financial Centre (as applicable) by ANZ. This publication: does not, and is not intended to constitute an offer of securities anywhere in the UAE; does not constitute, and is not intended to constitute the carrying on or engagement in banking, financial and/or investment consultation business in the UAE under the rules and regulations made by the Central Bank of the United Arab Emirates, the Emirates Securities and Commodities Authority or the United Arab Emirates Ministry of Economy; does not, and is not intended to constitute an offer of securities within the meaning of the Dubai International Financial Centre Markets Law No. 12 of 2004; and, does not constitute, and is not intended to constitute, a financial promotion, as defined under the Dubai International Financial Centre Regulatory Law No. 1 of 200. ANZ DIFC Branch is regulated by the Dubai Financial Services Authority (DFSA). The financial products or services described in this publication are only available to persons who qualify as Professional Clients or Market Counterparty in accordance with the provisions of the DFSA rules. In addition, ANZ has a representative office (ANZ Representative Office) in Abu Dhabi regulated by the Central Bank of the United Arab Emirates. ANZ Representative Office is not permitted by the Central Bank of the United Arab Emirates to provide any banking services to clients in the UAE. United States. If and when this publication is received by any person in the United States or a "U.S. person" (as defined in Regulation S under the US Securities Act of 1933, as amended) (US Person) or any person acting for the account or benefit of a US Person, it is noted that ANZ Securities, Inc. (ANZ S) is a member of FINRA (www.finra.org) and registered with the SEC. ANZ S address is 277 Park Avenue, 31st Floor, New York, NY 10172, USA (Tel: +1 212 801 9160 Fax: +1 212 801 9163). Except where this is a FX- related or commodity-related publication, this publication is distributed in the United States by ANZ S (a wholly owned subsidiary of ANZ), which accepts responsibility for its content. Information on any securities referred to in this publication may be obtained from ANZ S upon request. Any US Person receiving this publication and wishing to effect transactions in any securities referred to in this publication must contact ANZ S, not its affiliates. Where this is an FX- related or commodity-related publication, it is distributed in the United States by ANZ's New York Branch, which is also located at 277 Park Avenue, 31st Floor, New York, NY 10172, USA (Tel: +1 212 801 9160 Fax: +1 212 801 9163). Commodity-related products are not insured by any U.S. governmental agency, and are not guaranteed by ANZ or any of its affiliates. Transacting in these products may involve substantial risks and could result in a significant loss. You should carefully consider whether transacting in commodity-related products is suitable for you in light of your financial condition and investment objectives. ANZ S is authorised as a broker-dealer only for US Persons who are institutions, not for US Persons who are individuals. If you have registered to use this website or have otherwise received this publication and are a US Person who is an individual: to avoid loss, you should cease to use this website by unsubscribing or should notify the sender and you should not act on the contents of this publication in any way. 2. Disclaimer for all jurisdictions, where content is authored by ANZ Research: Except if otherwise specified in section 1 above, this publication is issued and distributed in your country/region by ANZ, on the basis that it is only for the information of the specified recipient or permitted user of the relevant website (collectively, recipient). This publication may not be reproduced, distributed or published by any recipient for any purpose. It is general information and has been prepared without taking into account the objectives, financial situation or needs of any person. Nothing in this publication is intended to be an offer to sell, or a solicitation of an offer to buy, any product, instrument or investment, to effect any transaction or to conclude any legal act of any kind. If, despite the foregoing, any services or products referred to in this publication are deemed to be offered in the jurisdiction in which this publication is received or accessed, no such service or product is intended for nor available to persons resident in that jurisdiction if it would be contradictory to local law or regulation. Such local laws, regulations and other limitations always apply with nonexclusive jurisdiction of local courts. Before making an investment decision, recipients should seek independent financial, legal, tax and other relevant advice having regard to their particular circumstances. The views and recommendations expressed in this publication are the authors. They are based on information known by the author and on sources which the author believes to be reliable, but may involve material elements of subjective judgement and analysis. Unless specifically stated otherwise: they are current on the date of this publication and are subject to change without notice; and, all price information is indicative only. Any of the views and recommendations which comprise estimates, forecasts or other projections, are subject to significant uncertainties and contingencies that cannot reasonably be anticipated. On this basis, such views and recommendations may not always be achieved or prove to be correct. Indications of past performance in this publication will not necessarily be repeated in the future. No representation is being made that any investment will or is likely to achieve profits or losses similar to those achieved in the past, or that significant losses will be avoided. Additionally, this publication may contain forward looking statements. Actual events or results or actual performance may differ materially from those reflected or contemplated in such forward looking statements. All investments entail a risk and may result in both profits and losses. Foreign currency rates of exchange may adversely affect the value, price or income of any products or services described in this publication. The products and services described in this publication are not suitable for all investors, and transacting in these products or services may be considered risky. ANZ and its related bodies corporate and affiliates, and the officers, employees, contractors and agents of each of them (including the author) (Affiliates), do not make any representation as to the accuracy, completeness or currency of the views or recommendations expressed in this publication. Neither ANZ nor its Affiliates accept any responsibility to inform you of any matter that subsequently comes to their notice, which may affect the accuracy, completeness or currency of the information in this publication. Except as required by law, and only to the extent so required: neither ANZ nor its Affiliates warrant or guarantee the performance of any of the products or services described in this publication or any return on any associated investment; and, ANZ and its Affiliates expressly disclaim any responsibility and shall not be liable for any loss, damage, claim, liability, proceedings, cost or expense (Liability) arising directly or indirectly and whether in tort (including negligence), contract, equity or otherwise out of or in connection with this publication. If this publication has been distributed by electronic transmission, such as e-mail, then such transmission cannot be guaranteed to be secure or error-free as information could be intercepted, corrupted, lost, destroyed, arrive late or incomplete, or contain viruses. ANZ and its Affiliates do not accept any Liability as a result of electronic transmission of this publication. ANZ and its Affiliates may have an interest in the subject matter of this publication as follows: They may receive fees from customers for dealing in the products or services described in this publication, and their staff and introducers of business may share in such fees or receive a bonus that may be influenced by total sales. They or their customers may have or have had interests or long or short positions in the products or services described in this publication, and may at any time make purchases and/or sales in them as principal or agent. They may act or have acted as market-maker in products described in this publication. ANZ and its Affiliates may rely on information barriers and other arrangements to control the flow of information contained in one or more business areas within ANZ or within its Affiliates into other business areas of ANZ or of its Affiliates. Please contact your ANZ point of contact with any questions about this publication including for further information on these disclosures of interest.