PP 7767/09/2011(028730)

Economic Highlights
Global
•MARKET DATELINE

7 October 2010

1 China Hardened Its Opposition Over A Rapid Appreciation

Of The Renminbi

2 IMF Cut Global Growth Projection For 2011 Slightly To

+4.2%

3 Euroland Banks May Get Addicted To ECB Cash

Tracking The World Economy...

Today’s Highlight

China Hardened Its Opposition Over A Rapid Appreciation Of The Renminbi

China has hardened its opposition to a rapid appreciation of the renminbi, telling off European Union leaders to tone down
their attacks on its currency and setting the stage for a confrontation over exchange rates at this week’s international
monetary meetings in Washington. China said that if the renminbi is to allow to appreciate by 20-40% against the US
dollar as some people are calling for, many of its factories will shut down and society will be in turmoil. As a result,
China said that it will stick to its policy of gradually increasing the currency’s flexibility. China has capped the renminbi’s
rise at 2% since adopting a more flexible exchange rate system. This prompted US House of Representatives to pass
a measure on 29 September that would let US companies seeking import duties to prevent Chinese manufacturers from
using an artificially weak renminbi as a competitive tool. The measure will not go to the Senate until after US
congressional elections in November.

Meanwhile, investors are increasingly selling the US dollar in expectation that the Fed will announce its own big plan to
buy government debt after its 3 November meeting. As a result, the euro moved above US$1.39/euro on 6 October
for the first time since February. Indeed, talks of the ECB exiting its unconventional measures have pushed up the euro.
The euro has risen 16% against the US dollar, 14% against the renminbi, 6% against the Japanese yen and 6% against
the British pound in the past four months.

Separately, Japan’s move on 5 October to cool down the yen’s sharp appreciation appears futile. The yen rose to a 15-
year high of ¥82.77/US$ on 6 October, before easing a bit to ¥82.93/US$ but still lower than ¥83.18/US$ on 5 October.
The yen last hit a 15-year high on 15 September, just before the Bank of Japan intervened in the foreign exchange market
to weaken the yen.

As a whole, traders are wary of a rising global currency tension, in which countries try to weaken their currencies to
boost exports. Japan did so this week with plans for a massive stimulus package and interest rate cut. Brazil also moved
to weaken the real, while South Korea increased its surveillance of the fund inflows that have pushed up the won to a
five-month high against the US dollar. As a result, the Institute of International Finance has called on the US, China, Japan
and the Euroland to find a way to resolve rising currency market tensions and to rethink of the way the foreign exchange
works.

Peck Boon Soon

(603) 9280 2163
Please read important disclosures at the end of this report.
bspeck@rhb.com.my

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 7 October 2010

IMF Cut Global Growth Projection For 2011 Slightly To +4.2%

◆ The International Monetary Fund (IMF) cuts its projection for the global economy to 4.2% in 2011, from
+4.3% forecast previously. For 2010, the IMF, however, raised its estimate to 4.8%, from +4.6% estimated
previously. The reduction in 2011’s global real GDP forecast was on account of a cut in developed nation’s real
GDP forecast. In particular, the IMF lowered its forecast for US real GDP for 2010 and 2011 to 2.6% and 2.3%
respectively, from the earlier forecast of 3.3% and 2.9% respectively, citing a lack of consumer spending. Consumer
spending, which accounts for about 70% of the US economy, will be hampered by high unemployment, a desire
to save more, tight credit and the deterioration in household wealth following the plunge in home prices. This,
however, will likely be mitigated by a pick-up in fixed investment as inventory accumulation slows. Indeed, business
spending on equipment and software has rebounded strongly in the 2Q.

◆ In the same vein, the IMF cut Japan UK’s economic projection to 1.5% and 2.0% respectively for 2011, from +1.8%
and +2.1% projected previously. The IMF, however, raised its real GDP forecast for the Euroland to 1.5% in 2011,
from +1.3% projected previously, mainly on account of a stronger growth in the Germany economy. The IMF,
however, kept China and India’s projections unchanged for 2011.

The Euroland Economy

Euroland Banks May Get Addicted To ECB Cash

◆ The European Central Bank (ECB) went all out to help banks with cheap cash during the financial crisis. However,
the extra yield that investors demand to hold Irish and Portuguese debt over Germany’s papers widened further
last week to 454 basis points and 441 basis points respectively, while Spain’s spread hit a two-month high. Rising
sovereign borrowing costs of these countries are having a knock-on effect on their banks’ ability to roll their short-
term financing at interest rates that make economic sense. This will likely make it harder for the ECB to wean
commercial banks off the lifeline it introduced two years. The ECB has phased out its 12- and 6-month loans
to banks but it still lends unlimited amounts in its weekly, monthly and three-month tenders. In May, it was forced
to reintroduce the unlimited three-month loans and start buying government bonds as Europe’s deepening debt
crisis started to threaten the survival of the euro. The risk for the ECB is that it may be pulled deeper into helping
the banking systems of the most indebted nations in the Euroland. Policymakers, on the other hand, are talking
about phasing out the non-conventional monetary measures introduced during the crisis and are concerned that
some banks’ reliance on the funds may prevent the ECB from exiting these measures when it sees fit. Meanwhile,
talks of the ECB exiting the non-conventional monetary measures have pushed up the euro.

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 7 October 2010

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