PP 7767/09/2010(025354)

Economic Highlights
Global
•
MARKET DATELINE

12 March 2010

1 China’s Economy Showing Early Signs Of Moderating But

Remains Strong In 1Q 2010

2 US Exports Fell M-o-m But Trade Deficit Narrowed In

January

Tracking The World Economy...

Today’s Highlight

China’s Economy Showing Early Signs Of Moderating But Remains Strong In 1Q 2010

China’s economy is beginning to show early signs of moderating, a signal that the government’s gradual withdrawal of
stimulus policies in recent months is starting to have an effect on the real economy. China usually uses incremental
tightening measures to slow the pace of economic growth to a more sustainable level without derailing it.

As it stands, China’s urban fixed-asset investment moderated to 26.6% yoy in January-February, from +30.5% in 2009
and compared with +26.5% in the corresponding period of last year. This could be due to shorter working days as a
result of festive season. Nevertheless, there were signs that China’s urban fixed-asset investment is easing. The
slowdown in the fixed–asset investment was reflected in slower increase in investment across the board from primary
to manufacturing and services industries. This was due to a moderation in investment in coal mining, non-metal minerals,
utilities and railway transportation. These were, however, mitigated by a pick-up in investment in real estate, ferrous
metals and non-ferrous metals.

Similarly, China’s money supply, M2, moderated to 25.5% yoy in February, from +26.0% in January and a peak of
+29.7% yoy in November. This was the third straight month of easing, in line with a moderation in loan demand, which
slowed down to 29.3% yoy in February, from +33.0% in January and a peak of +33.8% in December. In the same vein,
new lending slowed down to RMB700.1bn in February, compared with RMB1,390.0bn in January. New loans extended
average about RMB1.045trn a month in the first two months of 2010, more moderate compared with an average of
RMB1,228trn a month in the corresponding period of 2009, indicating that the tightening measures introduced by the
authorities to control the rapid expansion in new credit have yielded some results.

Meanwhile, industrial output grew by 20.7% yoy in the first two months of 2010, faster than an average of +17.9%
recorded in the 4Q of last year and +11.0% in the corresponding period of 2009. This suggests that industrial activities
remained strong due to a pick-up in the production of raw coal, cement and crude oil. These were, however, offset
partially by a slowdown in the production of pig iron, steel products and motor vehicles. Similarly, electricity output
weakened during the period. China’s industrial production, however, slowed down to 12.8% yoy in February, weaker than
+18.5% in December, due partly to the festive season. China did not provide the figure for January.

Similarly, China’s retail sales grew by 17.9% yoy in January-February, compared with an average of +16.5% in the 4Q
and +10.0% in the corresponding period of 2009, pointing to a pick-up in consumer spending. This will complement
stronger growth in exports to allow China to sustain strong economic activities in the 1Q, after recording a growth of
+10.7% in the 4Q of last year. In the same vein, retail sales grew at a faster pace of 22.1% yoy in February, compared
with +17.5% in December, in tandem with a festive celebration. China did not provide the figure for January.

Peck Boon Soon

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

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 12 March 2010

Also, China’s inflation rate accelerated to 2.7% yoy in February, from +1.5% in January. This was the fastest increase
in 16 months and the fourth consecutive month of picking up due partly to a lower base effect as well as a pick-up in
demand. The faster increase in inflation rate was due to a pick-up in food prices, which rose by 6.2% yoyo in February,
compared with +3.7% in January and +5.3% in December. This was made worse by a faster increase in the costs of
non-food items, which accelerated to 1.0% yoy in February, from +0.5% in January. This was the third straight month
of picking up mainly on account of a pick-up in the costs of transport & communication and recreation & education during
the month, a reversal from declines in the previous month. Faster increases in the costs of housing and healthcare as
well as a smaller decline in prices of household items worsened the situation. Mom, inflation grew by 1.2% in February,
compared with +0.6% in January.

We believe China will likely continue to tighten its policies at a measured pace. Indeed, China’s Ministry of Land and
Resources issued rules on 10 March that required developers purchasing land from local governments to put up a down
payment of at least 50%, up from 20-30% previously. Earlier, the authorities have also stepped up its efforts to control
local governments’ borrowings via investment vehicles.

The US Economy

Exports Fell M-o-m But Trade Deficit Narrowed In January

X The US exports fell by 0.3% mom in January, after rising by 3.4% in December. The decline is understandable
and may not signal a weakness in global demand given that exports have been rising for the last eight consecutive
months. The decline was due to a drop in the exports of capital goods, particularly civilian aircraft, and automotives
as well as a slowdown in the exports of computers & parts, industrial supplies and consumer goods. These were,
however, mitigated by a pick-up in the export of semiconductors and telecommunication equipment. Nevertheless,
the US exports strengthened to 15.1% yoy in January, from +7.7% in December and -2.2% in November, indicating
that exports are on a recovery path. Similarly, imports contracted by 1.7% mom in January, compared with
+4.9% in December, due to declines in the imports of capital goods such as civilian aircraft, computers & parts
and telecommunication equipment, and automobiles, industrial supply and consumer goods. Yoy, imports grew by
11.9% in January, after rising by 4.7% in December, pointing to a gradual improvement in domestic demand. The
faster m-o-m drop in imports than that of exports caused the US trade deficit to narrow to US$37.3bn in January,
from a deficit of US$39.9bn in December. The improvement in trade deficit will provide some cushion to
the US dollar amidst a sharp rise in the government’s budget deficit.

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