China, P.R.

: Mainland

SEB MERCHANT BANKI NG – COUNTRY RI SK ANALYSI S February 5, 2009

important your attention is drawn to the statement on the back cover of this report which affects your rights.
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China’s development continuous to confound most analysts and the recent surprise is this time 
on the downside. Although the picture is still unclear, recent numbers may point to an outright 
recession in early 2009. The big question is if it will be a V‐shaped or a L‐shaped downturn. 
`çìåíêó=ìéÇ~íÉ==
qÜÉ=ëäçïÇçïå=~ÅÅÉäÉê~íÉëK=Tle soflness in demand llal appeared slorlIy afler lle
Beijing Summer OIympics in Augusl 2008, inlensified during lle Iale parl of lle
year. Tle drop in louse prices acceIeraled afler laving peaIed in O1 and car saIes
foIIoved suil dropping more llan 14° in November compared vill lle same monll
2007. Tlal probabIy mucl refIecled lle ligllening of credil condilions vlicl lle
aullorilies lad adminislered in lle earIy spring lo slem lle lide of soaring consumer
prices al llal lime, bul lle conlinued slocI marIel roul since Iale 2007 vas IiIeIy aIso
a cuIpril. In lurn llese faclors affecled producer confidence as seen in lle sleep drop
of lle IMI (Iurclasing Managers Index) since Marcl, and lle “Iixed Assel
Inveslmenl¨ indicalor
veaIened from 29° in
Seplember lo 24° in
November for urban areas.
Lxporls, by conlrasl, seemed
nol as a major concern unliI
lle Ialesl monlls of lle year,
bul lle numbers for
November and December
slouId lave slol dovn lle
Iasl advocalors of lle
decoupIing myll. As a resuIl,
grovll in O4 vas dovn lo 4°
(yoy) in nominaI doIIar lerms,
from 23° in O3, probabIy indicaling cIose lo a slandsliII in reaI lerms. Tlere are
reporls of llousands smaII and medium sized exporl companies foIding in recenl
monlls parlicuIarIy in Clina's exporl lub in lle IearI River deIla-area. Hovever,
as imporls lave faIIen in landem, lle lrade baIance las been IillIe affecled. Tle
slarp drop in oiI prices las pIayed ils parl in lle reduclion of lle lolaI imporl biII,
bul so las lle sleep faII in deIiveries of inlermediale producls mainIy for lle
processing induslry vlicl maIes up laIf of lolaI exporls. Tlal may poinl lo
conlinued exporl reduclion some monlls furller dovn lle road.
China, Consumer Surveys
Consumer confidence index
Consumer expectation index
Consumer satisfaction index
Source: Reuters EcoWin
2005 2006 2007 2008
P
e
r
c
e
n
t
90
93
95
98
100
Why so pessimistic?
After the successes
in the Olympics
China's consumers
have turned
increasingly gloomy
fë=`Üáå~=áå=íÉÅÜåáÅ~ä=êÉÅÉëëáçå\ Lven renovned pessimisls, incIuding Irofessor
Roubini of NYU, lave so far Iimiled lleir dovnside prediclions lo “grovll
recession¨-lerms. Hovever, as lle O4 reaI GDI grovll licIed in al onIy 6,8°
SEB Merchant Banking Country Risk Analysis February 5, 2009
grovll, lle queslion arose if Clina slalislicaIIy speaIing aIready is in a leclnicaI
recession, normaIIy defined as lvo subsequenl quarlers of negalive grovll quarler-
on- quarler (qoq). Tle pubIisled 6,8° resuIl is in year-on-year (yoy) lerms. As lle
aullorilies do nol pubIisl more delaiIs, independenl economisls lave caIcuIaled lle
qoq number on lleir ovn. ApparenlIy, llis comes cIose lo zero. AIllougl some
indicalors in Ianuary 2009 began lo poinl upvard, incIuding lle IMI survey, lle
IiIeIilood is for GDI grovll nol lo improve mucl in lle nexl fev monlls,
suggesling llal O1 vouId be raller fIal compared vill lle previous quarler and llal
a leclnicaI recession couId be in lle maIing.
cáëÅ~ä=~åÇ=ãçåÉí~êó=ëíáãìäìë=éä~å. As lle consumer price infIalion peaIed in lle
summer and inlernalionaI price lrends seemed lo leraId a nev area of defIalion
raller llan infIalion, lle
aullorilies vere quicI in
reversing lle monelary
ligllening imposed some
monlls earIier. Credil ceiIings
vere Iifled, inleresl rales
reduced and reserve
requiremenls eased. AIso, lle
process of IegaIizing lle
apparenlIy Iarge grey marIel for
credils vas speeded up in many
provinces. Tlal marIel is
imporlanl for Iabor inlensive
SMLs, vlicl so far lave been lle lardesl lil by lle probIems in Clina's exporl
seclor. IinaIIy in November, lle aullorilies aIso Iauncled a major fiscaI slimuIus
pacIage for 2009-2010 vill a lolaI price lag of CNY 4 lriIIion (aboul $600 biII. or
(13°/GDI). Tlis program aims al acceIeraling infraslruclure projecls, improving
sclooIs and medicaI leaIll care parlicuIarIy in lle counlry side, and speeding up lle
lransfer of income lo ruraI dislricls. Tle Ialler is in Iine vill a Iong-slanding aim of
lle governmenl lo dislribule lle fruils of economic grovll more evenIy across lle
counlry bul vouId probabIy aIso be effeclive in boosling consumer demand as lle
more veaIlly urban dveIIers are IiIeIy lo lave a ligler marginaI savings propensily
llan lleir poorer cousins from lle counlry. Hovever, lle effeclive size of lle
slimuIus las been queslioned by independenl observers, as lle pacIage seems lo
incIude many projecls llal anyvay vere a parl of previousIy approved five-year
pIans, and llal lle reaI addilionaI spending couId be no more llan a llird of lle
leadIine number. NeverlleIess, lle pacIage las been greeled as a veIcome slep lo
rebaIance lle economy lovard reIying more on domeslic demand, in parlicuIar
consumer demand, llan exporls and exlernaI demand.
Credits and GDP
Bank Loans
GDP Current prices
Source: Reuters EcoWin
2003 2004 2005 2006 2007 2008
P
e
r
c
e
n
t
6
9
11
14
16
19
21
24
Could this kick
start the
economy soon?
eçéÉë=Ñçê=~=sJëÜ~éÉÇ=êÉÅçîÉêó\==Clina's economy las on previous occasions
reacled posiliveIy lo slimuIus pacIages Iauncled by lle cenlraI governmenl and il is
nol excIuded llal lle governmenl viII be abIe lo once again adminisler sucl a fix. Ils
vasl reserves insliII confidence llal il las lle resources lo do so. Hovever, lle
claIIenges may llis lime be grealer llan on previous occasions. Tle vorId economy
may be in for a Iong recession meaning lle exlernaI demand may nol come bacI lo
assisl lle recovery anylime soon. As sucl, Clina may need lo rellinI ils
deveIopmenl modeI based on exporl Ied grovll. Tlal modeI las so far served lle
counlry exlremeIy veII, and il may nol be a simpIe lasI lo dilcl an oId successfuI
slralegy over-nigll. In lle mean lime il can prop up domeslic demand by
governmenl spending, bul risIs in lle process inadverlenlIy reversing many of lle
reforms of recenl decades. Hovever, according lo some anaIysls lle governmenl is
2

SEB Merchant Banking Country Risk Analysis February 5, 2009
very mucl focused on lle sociaI baIance and vouId nol risI a sleep rise in lle
numbers of unempIoyed. As a consequence, il viII be liglIy molivaled lo do ils
ullermosl lo IicI-slarl lle economy lo avoid a I-slaped Iong recession.
`çìäÇ=`Üáå~=ÄÉ=ãÉí=ïáíÜ=éêçíÉÅíáçåáëã=Ñêçã=çíÜÉê=ÅçìåíêáÉë\==Since lle summer
of 2008, Clina disconlinued lle apprecialion of lle reminbi vis-à-vis lle doIIar, bul
las conlinued lo appreciale in effeclive lerms as lle doIIar slrengllened vis-à-vis lle
euro and mosl oller currencies excepl lle yen. Hovever, lle nev “peg¨ againsl lle
doIIar las nol been received veII by US poIilicians, and lle risI is llal lle nev
adminislralion in Waslinglon couId in lle nexl fev monlls name Clina a “currency
manipuIalor¨. Tlal vouId lrigger a process in Congress llal couId end vill
imposing proleclionisl measures againsl imporls from Clina. LU and oller counlries
couId laIe llal as green Iigll lo foIIov suil. On lle oller land, cosl consideralions
lave become an increasingIy pressing issue for many Clinese exporlers, and lle
governmenl las been caugll belveen a rocI and a lard pIace. Tlis las been a
Iooming danger for some lime, bul may lave come lo a lead earIier llan expecled.
-´-
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ëáíì~íáçåK=^=äçåÖ=ëìÅÅÉëëJëíçêó=ã~ó=ÄÉ=~Äçìí=íç=ÅçãÉ=íç=~å=ÉåÇ=~åÇ=íç=ëÉÅìêÉ=
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ÅçìåíêáÉë=Ü~îÉ=ÄÉÉå=áå=íÜÉ=ë~ãÉ=ëáíì~íáçå=~åÇ=ìëì~ääó=ã~å~ÖÉÇ=íÜÉ=éêçÅÉëë=áå=~=
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Ä~Åâ=çå=êÉÑçêãëK==eçïÉîÉêI=íÜÉ=~ìíÜçêáíáÉë=ÅçìäÇ=çîÉê=íÜÉ=åÉñí=ÑÉï=óÉ~êë=ãÉÉí=~=íÉëí=
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ï~êåáåÖë=çå=`Üáå~I=Äìí=~éé~êÉåíäó=Ü~äíÉÇ=íÜÉ=éêçÅÉëë=çÑ=ìéÖê~ÇáåÖK==
=
Key ratios 2009
GDP/capita ($) 3414
GDP (%chg.) 5,6%
Inflation 0,9%
Trade balance/GDP 8,8%
Reserves/imports (months) 24
Budget balance/GDP -1%
Government debt/GDP 8%
0
5
10
15
Resilience
Liquidity
Information
Absence of
event risk
Macro balance
China
Average EM
Saudi Arabia
Graph: China scores above average on macro balance and
liquidity much like Saudi Arabia, but is weaker than the
average on reliable information. Resilience is about the
average of emerging markets but event risk is weaker like
Saudi Arabia.

bñíÉêå~ä=ê~íáåÖëW=
Iilcl: A+
S&I: A
mÉÉêëW
Korea
Saudi Arabia
CliIe
3

SEB Merchant Banking Country Risk Analysis February 5, 2009

Key data: 2004 2005 2006 2007 2008 2009 2010 2011
GDP (mill.US$) 1 931 660 2 247 790 2 649 280 3 290 920 4 128 040 4 587 940 5 345 190 6 014 140
GDP/capita (US$) 1481 1712 2006 2478 3090 3414 3955 4426
GDP (%chg.) 10,1% 10,4% 11,6% 11,9% 8,8% 5,6% 8,8% 7,7%
Investments/GDP 42% 43% 44% 44% 44% 44% 43% 43%
Budget balance/GDP -1% -1% -1% 1% 1% -1% -1% -1%
Govt debt/GDP 16% 15% 14% 12% 9% 8% 8% 8%
CPI inflation (%chg.) 3,8% 1,8% 1,8% 4,8% 5,8% 0,9% 1,7% 0,9%
Money demand (%chg.) 11,4% 10,1% 12,8% 14,0% 10,4% 10,6% 9,7% 7,7%
Stock prices (%chg.) -1% -21% 59% 144% -42%
Interest rates 5,4% 5,6% 5,9% 6,9% 6,9% 4,5% 4,4% 3,9%
Exch. Rate ($) 8,28 8,19 7,97 7,61 6,95 6,67 6,38 6,22
Trade/GDP (%) 58% 62% 65% 65% 61% 55% 49% 47%
Oil price (Brent) $38 $54 $65 $73 $97 $44 $60 $74
Millions US $
Export of goods 593 393 762 484 969 682 1 220 000 1 423 880 1 444 160 1 509 000 1 596 260
Imports of goods 534 410 628 295 751 936 904 618 1 096 900 1 081 420 1 128 180 1 209 240
Other: 9 676 26 629 32 120 56 451 55 609 42 957 29 034 21 915
Current account ($ mill) 68 659 160 818 249 866 371 833 382 589 405 697 409 854 408 935
(% of GDP) 3,6% 7,2% 9,4% 11,3% 9,3% 8,8% 7,7% 6,8%
FDI 53 132 67 821 56 935 121 418 231 669 65 463 64 450 45 790
Loan repayments -16 289 -20 848 -18 122 -23 829 -29 613 -33 469 -36 898 -39 774
Net other capital flows 40 441 21 929 -61 612 -63 340 -112 495 -77 441 -85 656 -68 300
Balance of payments 145 943 229 720 227 067 406 083 472 150 360 250 351 750 346 650
Reserves 513 260 742 980 970 047 1 376 130 1 848 280 2 208 530 2 560 280 2 906 930
Total debt 232 983 268 896 307 383 335 000 347 156 356 848 365 494 371 962
o/w short term debt 105 391 136 081 163 961 181 753 189 733 196 726 202 807 207 938
Source: OEF (Oxford Economic Forecasting) and SEB estimates.
Rating history

Fitch (eoy) A- A- A- A A
Moody's (eoy) A3 A2 A2 A2 A1
S&P (eoy) BBB BBB+ A- A A
Type of government: Communism rule (experiments with free elections at local levels)
Next elections N/A
Other:
Latest PC deal None
Recent IMF programs None
Spot and forward rates, USD/CNY
Spot Rates, USD/CNY., Close Forward Rates, USD/CNY 12 Month Outright, Bid
Source: Reuters EcoWin
05 06 07 08 09
6,25
6,50
6,75
7,00
7,25
7,50
7,75
8,00
8,25
8,50
Spot
NDF
Shanghai Stock Exchange
Source: Reuters EcoWin
96 97 98 99 00 01 02 03 04 05 06 07 08
0
1000
2000
3000
4000
5000
6000
7000
Foreign reserves
Source: Reuters EcoWin
2000 2002 2004 2006 2008
U
S
D

T
r
i
l
l
i
o
n
s

(
t
h
o
u
s
a
n
d

b
i
l
l
i
o
n
s
)
0,00
0,25
0,50
0,75
1,00
1,25
1,50
1,75
2,00
Investments/GDP
0
10
20
30
40
50
60
70
2002 2004 2006 2008
percent
Source: OEF


4

SEB Merchant Banking Country Risk Analysis February 5, 2009
aáëÅä~áãÉê=

`çåÑáÇÉåíá~äáíó=kçíáÅÉ=

Tle informalion in llis documenl las been compiIed by SLB Merclanl BanIing, a
division villin SIandinavisIa LnsIiIda BanIen AB (pubI) (“SLB¨).

Opinions conlained in llis reporl represenl lle banI's presenl opinion onIy and are
subjecl lo clange villoul nolice. AII informalion conlained in llis reporl las been
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represenlalion or varranly, expressed or impIied, is made vill respecl lo lle
compIeleness or accuracy of ils conlenls and lle informalion is nol lo be reIied upon
as aullorilalive. Anyone considering laIing aclions based upon lle conlenl of llis
documenl is urged lo base lis or ler inveslmenl decisions upon sucl invesligalions
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and no specific aclions are being soIiciled as a resuIl of il: lo lle exlenl permilled by
Iav, no IiabiIily vlalsoever is accepled for any direcl or consequenliaI Ioss arising
from use of llis documenl or ils conlenls.

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5