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PP 7767/09/2010(025354)

Economic Highlights

16 July 2010

1 China’s Real GDP Growth Moderated In The 2Q And Will

Likely Soften Further In 2H 2010

2 US Industrial Production And Manufacturing Activities In

Philadelphia Region Slowed Down

3 China’s Key Economic Indicators Heading South

4 Japan kept Its Key Policy Rate Unchanged And Predicts

Growth To Slow In 2011

Tracking The World Economy...

Today’s Highlight

China’s Real GDP Growth Moderated In The 2Q And Will Likely Soften Further In 2H 2010

China’s real GDP growth moderated to 11.1% yoy in 1H 2010, from +11.9% recorded in the 1Q, indicating that the
government’s measures have succeeded in slowing down the country’s economic growth. The moderation was reflected
in a slower increase in secondary industry (comprising of mining & quarrying, manufacturing, construction and utility
sectors), which slackened to 13.2% yoy in the 1H, from +14.5% in the 1Q, in tandem with a slight ease in domestic
demand. Similarly, tertiary industry (mainly services) slowed down to 9.6% yoy in the 1H, from +10.2% in the 1Q. In
the same vein, growth of primary industry weakened to 3.6% yoy in the 1H, from +3.8% in the 1Q. The moderation
in 1H’s real GDP growth implies that China’s economic growth had eased to 10.3% yoy in the 2Q, from +11.9% in the

Despite the moderation, growth remains commendable. This could ease concerns that the series of tightening measures
undertaken by China would lead to a sharp slowdown in its economic growth. This is especially the case as a sharp
slowdown in the country’s economic growth would compound risks for the world economic recovery that is already clouded
by European budget cuts and limited American job gains. One reason for the resilient growth experienced by China,
perhaps, is that although infrastructure projects started under the stimulus programme will expire this year, it will take
three to five years to complete. Going forward, the key economic indicators suggest that China’s economic growth will
slow further in 2H 2010. This will provide room for the authorities to scale back restrictions on bank lending in the coming

The US Economy

Industrial Production Moderated In June

◆ US industrial production moderated to 0.1% mom in June, from +1.3% in May. This was the slowest
increase in four months, indicating that industrial activities are moderating in the country, on account of a drop
in manufacturing production and a slowdown in utilities output. Manufacturing production fell by 0.4% mom in June,
compared with +1.0% in May. This was the first decline in four months, mainly due to a drop in the production
of motor vehicle & parts and a slowdown in the production of machinery and computers & electronic products.
Similarly, utilities output eased to 2.7% mom in June, from +5.6% in May. These were, however, mitigated by
a rebound in mining output during the month. Meanwhile, industrial capacity utilisation rate held stable at 74.1%

Peck Boon Soon

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16 July 2010

in June, the same level as in May and compared with 68.2% a year ago. The capacity utilisation rate in the
manufacturing sector, however, eased to 71.4% in June, from 71.7% in May and compared with 65.4% a year
ago. As a whole, despite a moderation in June’s industrial activities, it held up relatively well, suggesting that the
US economy will likely continue expanding in the 2Q.

Manufacturing Activities In Philadelphia Region Slowed Down In July

◆ The Philadelphia Business Outlook Survey’s diffusion index of current general activity fell to 5.1 in
July, from 8.0 in June and after reaching a recent high of 21.4 in May. The Philadelphia Fed region, which
comprises eastern Pennsylvania, southern New Jersey and Delaware, is more exposed to the auto sector and less
influenced by financial services and trade than the New York region. This was the second straight month of easing,
suggesting that factory activities expanded at a slower pace during the month, due to a drop in new orders, unfilled
orders and delivery time as well as a slowdown in shipments. Manufacturers, however, continued to recruit workers
and average workweek picked up during the month, while inventory remained relatively stable. Input costs inched
up but selling prices fell by a larger magnitude, pointing to a squeeze in margin during the month. Over the next
six months, the future general activity index also eased to 25.0 in July, from 40.2 in June and the peak
of 52.0 in March. This suggests that manufacturing activities are likely to continue expanding, albeit at a more
moderate pace, in the months ahead. The slowdown was due to a slowdown in new orders and shipments as well
as declines in unfilled orders, delivery time and inventory. As a result, firms indicated that they will likely slow
down labour recruitment but will probably increase capital spending in the months ahead. Meanwhile, firms expect
input costs and selling prices to ease in the near term.

Asian Economies

China’s Key Economic Indicators Heading South

◆ China’s industrial production slowed down to 13.7% yoy in June, from +16.5% in May, pointing to easing
domestic demand as exports were held up relatively well. This was on account of slower increases in the
production of pig iron, steel products and cement. Similarly, the production of motor vehicles and electricity also
weakened during the month. These were, however, mitigated by a pick-up in the production of crude oil.

◆ Similarly, retail sales moderated to 18.3% yoy in June, the slowest pace of increase in three months and
from +18.7% in May, suggesting that consumer spending has turned weaker. This was reflected in a
slowdown in sales of daily-use items, household electronics, communication appliances, automobiles and petroleum

◆ In the same vein, urban fixed-asset investment eased to 25.5% yoy in 1H 2010, from +25.9% in the first
five months of 2010 and +33.6% in the corresponding period of last year when a RMB4 trn fiscal stimulus
programme was kicking in. This was reflected in slower increases in investment in secondary and tertiary
industries, which were mitigated by a pick-up in investment in the primary industry. The weaker growth was due
to a moderation in investment in non-metal minerals, ferrous metals & non-ferrous metals, real estate and utilities.
These were, however, mitigated by a pick-up in investment in railway transportation and oil & gas mining, indicating
that China’s investment will still likely be resilient.

◆ Separately, China’s inflation moderated to 2.9% yoy in June, from the fastest pace of +3.1% in 19 months
in May, indicating that price pressure remains manageable. This was due to a slowdown in food prices,
which eased to 5.7% yoy in June, from +6.1% in May and the high of +6.2% in February. A drop in the costs
of transport & communications also helped. This was, however, offset partially by a pick-up in the costs of
recreation & education, while the costs of housing and healthcare remained stable during the month. Meanwhile,
the costs of non-food items held stable at 1.6% yoy in June, the same rate of increase as in May and compared
with +1.3% in April. Mom, inflation fell by a larger magnitude of 0.6% in June, compared with -0.1% in May.

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16 July 2010

Japan kept Its Key Policy Rate Unchanged And Predicts Growth To Slow In 2011

◆ The Bank of Japan (BOJ) kept its key policy rate unchanged at 0.1% and predicted economic growth to slow
down in 2011, as fiscal stimulus worldwide fizzles out and overseas demand loses steam. Nevertheless, the BOJ
raised its real GDP forecast for the year ending March 2011 to 2.6%, from 1.8% estimated in April. For 2011,
it cut the forecast to 1.9%, from +2.0% estimated previously. Prime Minister Naoto Kan, whose government lost
its upper-house majority this week, may put pressure on the central bank, as he seeks support from smaller
parties wanting to end deflation. The International Monetary Fund said that the BOJ could support the recovery and
ease the decline in prices, including through purchasing a wider range of assets and expanding fund-supplying


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