PP 7767/09/2010(025354)

Economic Highlights
Global
ïMARKET DATELINE

29 June 2010

1 Surging Local Government Debt May Weaken China’s

Economic Growth

2 US Consumer Spending Bounced Back In May

3 Euroland’s Money Supply Remained Stable But Was

Weak

4 Japan’s Retail Sales Slowed Down In May

Tracking The World Economy...

Today’s Highlight

Surging Local Government Debt May Weaken China’s Growth

China’s efforts to contain the risks from a surge in local-government debt may affect the country’s economic growth. A
report by the nation’s chief auditor last week to a standing committee of the National People’s Congress indicated that
some local governments’ debt burdens are excessive. The chief auditor cited cases of debts amounting to more than
100% of local governments’ available fiscal resources in an audit of 18 provinces, 16 cities and 36 counties. In one case,
the level is as high as 365%. This suggests that China’s economic activities, to some extent, were fueled by the
accumulation of debt by local governments and relatively forceful measures, including strictly controlling new borrowing,
are probably needed to contain it. Such a move will likely slow down China’s economic growth going forward, particularly
when the stimulus spending fizzles out. The China Banking Regulatory Commission (CBRC) estimates that outstanding
loans to funding vehicles set up by local governments rose 70% to RMB7.38 trn at the end of 2009 from a year ago.
In 1Q 2010, about 40% of new loans went to such entities, according to the CBRC. The vehicles are used by local
governments to raise fund, as they cannot borrow directly.

Chinese policymakers are grappling with the risks posed by the credit boom that has fueled the nation’s real GDP growth,
which expanded at a faster pace of 11.9% yoy in the 1Q, after hitting a low of +6.1% in the corresponding quarter of
2009. Indeed, Chinese banks may face a wave of bad loans from lending to local-government financing vehicles under
the stimulus programme that begun in November 2008. However, with proactive measures being undertaken to address
it, the problem will likely be manageable.

The US Economy

Consumer Spending Bounced Back In May

◆ US personal consumption expenditure (PCE) rebounded to increase by 0.2% mom in May, after remaining
unchanged in April and compared with +0.6% in March. This suggests that consumers continued to spend, albeit
cautiously, as austerity drive in Europe and policy normalisation as well as tightening in emerging economies will likely
slow down the global economy. In real terms, PCE grew by 0.3% mom in May, after remaining unchanged in April
and compared with +0.4% in March. On an annualised basis, the PCE, however, held stable at 3.4% in May, the
same rate of increase as in April but higher than +3.0% in March, suggesting that consumer spending will
contribute positively to the US economic growth in the 2Q. The US uses this figure to compute its consumer
spending in real GDP. Meanwhile, income moderated somewhat to 0.4% mom in May, from +0.5% in April. This
was the third straight month of increase, on the back of a sustained increase in wages. Consequently, the personal
savings rate rose to 4.0% of disposable income in May, from 3.8% in April and a low of 3.3% in March.
Peck Boon Soon

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

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 29 June 2010

◆ Separately, the headline PCE price index stagnated for the second consecutive month in April-May, after rising by
0.1% mom in March. Yoy, the headline PCE price index moderated to 1.9% in May, from +2.0% in April and a high
of +2.1% in March. The core PCE price index, on the other hand, inched up to +0.2% mom in May, after remaining
stable at 0.1% in the previous two months. Yoy, the core PCE price index edged up to 1.3% in May, from +1.2%
in April and a high of +1.6% in December 2009. This suggests that price pressures remained tame and it would
provide more room for the US Fed to hold its key policy rate unchanged at between 0-0.25% in the near term. The
Fed, however, will likely use other instruments to absorb excess liquidity from the system.

The Euroland Economy

Euroland’s Money Supply Remained Stable

◆ Euroland’s seasonally adjusted money supply, M3, remained stable at -0.2% yoy in May, the same rate of
decline as in April and compared with -0.1% in March. Loan growth, on the other hand, inched up to +0.2% yoy
in May, from +0.1% in April. As a whole, the money supply and loan growth remained lacklustre, indicating that
the underlying economic activities in the Euroland will likely remain weak in the 2Q, after rising modestly by 0.2%
qoq in the 1Q.

Asian Economies

Japan’s Retail Sales Slowed Down In May

◆ Japan’s retail sales fell by 3.1% mom in May, compared with +6.1% in April. Cars and machinery led the decline.
Automobiles sales fell by 5.9% mom in May, while household machinery, which includes appliances such as flat-screen
TVs, tumbled 7.9%. Yoy, the retail sales slowed down to 2.8% in May, from +4.9% in April. This was the
slowest pace of increase in four months, a sign that the impact from government incentives to purchase cars and
household appliances is fading. Consumers have had some relief in recent months, with wages climbing in March
and April and job prospects picking up, as export-led recovery is beginning to filter down. Nonetheless, a recovery
in consumer spending will likely be slow in the country.

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