1. Asia
15 June 2010
Macro
Asia Economics Monthly Economics
Table of Contents
June Asia economic and financial forecasts ............... Page 2
Overview ............................................................ Page 3
Global Markets Research
China................................................................... Page 8
Hong Kong........................................................ Page 14
India .................................................................. Page 16
Indonesia .......................................................... Page 22
Malaysia............................................................ Page 24
Philippines ........................................................ Page 26
Singapore ......................................................... Page 28
South Korea ...................................................... Page 30
Sri Lanka ........................................................... Page 34
OVERVIEW: After another very strong quarter of export-led growth Taiwan .............................................................. Page 38
(investment-led in India) we think growth has probably peaked. We expect a Thailand ............................................................ Page 40
Interest rate and inflation charts....................... Page 42
steady decline in growth over the next few quarters with the possibility of a Asian economic indicators ............................... Page 46
rebound later in 2011. Direct contagion from peripheral Europe seems limited,
but heightened risk aversion leading to lower asset prices carries a real cost. Research Team
Michael Spencer, Ph.D
CHINA: May economic data point to slightly lower CPI peak rate but growing Chief Economist, Asia
risk of property oversupply. Labour actions and wage inflation may exacerbate (+852) 2203 8305
michael.spencer@db.com
investors’ concern on social stability and margin squeeze in the short term.
Jun Ma, Ph.D
HONG KONG: Consumption is under pressure from equity price declines, Chief Economist, Greater China
which we think will reverse. Exports continue to grow robustly, but the (+852) 2203 8308
jun.ma@db.com
outlook is for a slowing of QoQ(sa) GDP growth from exceptionally high rates
in recent quarters towards long-run trend growth rates later this year. Taimur Baig, Ph.D
Chief Economist, India
INDIA: Given the strong GDP outturn of Jan-Mar’10, we now expect real GDP (+65) 6423 8681
taimur.baig@db.com
growth to rise to 8% in FY10/11, versus our earlier estimate of 7.7%.
INDONESIA: Q2 is off to a strong start as indicated by April indicators; Juliana Lee
Senior Economist
inflation outlook appears to remain manageable. (+852) 2203 8312
juliana.lee@db.com
MALAYSIA: The governments’ 2011-15 Plan proposes to reinvigorate private
investment, but not to reduce the importance of exports as a driver of growth. Kaushik Das
Economist
We remain positive on the near-term prospects for growth, but cautious on (+91) 22 6658-4909
the long-run outlook. kaushik.das@db.com
PHILIPPINES: Growth picks up sharply in Q1, improving the outlook for the
rest of the year. Trade could be affected if Euro area economies slow,
creating some constraint to continued exports growth.
SINGAPORE: Exports continue to power the economy, supported by
residential investment, as other construction weakens and consumption
falters. Weakening exports in H2 will likely bring GDP growth down sharply.
SOUTH KOREA: Southern Europe and regulatory concerns leave the KRW
significantly weaker in May, despite positive trade reports.
SRI LANKA: The economy is enjoying a growth spurt after the end of many
years of conflict.
TAIWAN: Growth rises strongly in Q1 and risks to growth tilted to the upside
in Q2, amid strong growth in exports and tame inflation.
THAILAND: GDP growth rises strongly to 12%yoy in Q1, supported by
inventory restocking. The growth outlook for coming quarters is clouded by
political tension and adverse weather conditions.
Economics
Deutsche Bank AG/Hong Kong
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APPENDIX 1. MICA(P) 007/05/2010

2. 15 June 2010 Asia Economics Monthly
Asian Economics and Financial Forecasts
I. Macroeconomic Indicators
Real GDP Growth Inflation Current Account Fiscal Balance
(YoY%) (YoY%) (% of GDP) (% of GDP)
2008 2009 2010F 2011F 2008 2009 2010F 2011F 2008 2009 2010F 2011F 2008 2009 2010F 2011F
China 9.6 8.7 9.8 9.3 5.9 -0.7 3.4 2.5 7.2 5.8 4.3 2.9 -0.4 -2.9 -2.5 -2.0
Hong Kong 2.2 -2.8 6.5 5.5 4.3 0.5 2.0 3.0 13.6 8.7 6.4 8.7 0.1 1.6 0.4 0.1
India 6.4 5.7 9.0 8.0 9.1 2.2 9.3 6.9 -2.5 -2.6 -2.7 -2.7 -5.9 -6.7 -5.8 -5.6
Indonesia 6.0 4.5 5.5 6.5 9.8 4.9 4.5 6.5 0.0 1.4 1.5 1.8 -0.1 -1.5 -1.7 -1.8
Malaysia 4.6 -1.7 6.7 4.5 5.4 0.6 1.5 2.0 17.6 16.7 13.3 10.3 -4.8 -7.0 -4.5 -3.0
Philippines 3.5 1.1 4.5 5.0 9.3 3.3 4.5 5.5 2.2 5.3 6.5 6.5 -0.9 -3.8 -3.5 -2.6
Singapore 1.8 -1.3 9.0 5.0 6.6 0.6 2.1 2.4 18.6 17.8 19.7 22.5 9.0 -1.7 1.5 1.8
South Korea 2.2 0.3 5.5 3.9 4.7 2.8 2.9 3.9 -0.7 5.1 1.0 0.5 1.2 -1.7 -0.1 -0.2
Sri Lanka 6.0 3.5 6.0 6.5 22.7 3.5 6.5 10.0 -9.5 -0.5 -3.0 -4.0 -7.0 -9.8 -8.5 -7.5
Taiwan 0.7 -2.0 6.5 4.2 3.5 -0.9 1.1 1.9 6.5 11.2 8.5 6.3 -0.9 -3.9 -3.7 -3.3
Thailand 2.5 -2.2 5.5 4.1 5.5 -0.8 3.9 4.1 0.6 7.7 4.1 3.0 -1.1 -4.3 -4.8 -3.9
Vietnam 6.2 5.3 6.9 6.4 23.2 6.8 10.7 10.9 -10.2 -8.3 -9.7 -7.0 -4.7 -10.2 -7.5 -6.0
Emerging Asia* 6.9 5.5 8.4 7.6 6.9 0.9 4.6 4.0 4.7 5.0 3.5 2.6 -1.1 -3.5 -3.0 -3.0
EM Asia ex China&India* 3.2 0.3 6.0 4.8 7.1 2.1 3.4 4.4 4.1 6.9 4.9 4.5 -1.1 -7.7 -2.6 -2.1
II. Exchange Rates (vs. USD) Forecasts vs Forward Rates
Spot 3-Month 6-Month 12-Month
15-Jun DB Forward DB Forward DB Forward
China CNY 6.83 6.80 6.81 6.77 6.79 6.65 6.76
Hong Kong HKD 7.80 7.80 7.78 7.80 7.78 7.80 7.76
India INR 47.0 44.6 47.1 44.0 47.4 42.7 47.9
Indonesia IDR 9200 9050 9334 8925 9445 8850 9686
Malaysia MYR 3.31 3.23 3.29 3.20 3.30 3.15 3.32
Philippines PHP 46.5 45.6 46.9 45.0 47.2 44.2 47.9
Singapore SGD 1.41 1.39 1.40 1.38 1.40 1.36 1.40
South Korea KRW 1248 1280 1236 1180 1,236 1170 1,237
Taiwan NTD 32.4 32.5 32.0 31.5 31.8 30.5 31.4
Thailand THB 32.6 32.5 33.5 32.5 32.0 33.5 32.5 31.5 33.6 #
Vietnam VND 18975 19200 19399 19300 19935 19400 20999
III. Interest Rates (3-Month Interbank Rate)** Forecasts vs Implied Offshore Rates
3-Month 6-Month 12-Month
15-Jun DB Implied DB Implied DB Implied
China 2.25 2.52 2.13 2.52 2.22 2.52 2.60
Hong Kong 0.34 0.50 0.69 0.90 1.01 1.80 0.94
India 5.05 4.80 5.18 5.25 5.18 5.50 5.99
Indonesia 6.50 6.50 7.38 7.25 7.05 8.00 8.00
Malaysia 2.70 2.90 2.78 3.10 2.90 3.10 3.02
Philippines 4.15 4.30 4.36 4.80 4.17 5.20 4.63
Singapore 0.60 0.80 0.87 1.00 1.29 1.35 1.23
South Korea 2.45 2.85 2.84 3.20 3.22 3.70 3.67
Taiwan 0.51 0.60 0.72 0.70 0.70 1.30 1.03
Thailand 1.35 1.65 1.15 1.90 1.57 2.50 2.05
Vietnam 8.00 9.00 n/a 10.00 n/a 10.00 n/a
Source: Bloomberg, Reuters, DB Global Markets Research
Note: * GDP (PPP) weighted. ** Except for China, 1-yr deposit rate; India and Philippines, 3-mth T-bill yield; Indonesia, 1-mth BI rate; Pakistan, 12-mth T-bill yield; South Korea, 3-mth CD
rate; Taiwan, 3-mth CP rate; Thailand, 3-mth on-shore THB/THB swap rate.
Page 2 Deutsche Bank AG/Hong Kong

3. 15 June 2010 Asia Economics Monthly
Overview
Review of Q1 and a look ahead to Q2 The rebound in export volume growth, starting in the third
quarter of last year, allowed the government to scale back
its counter-cyclical stimulus. Credit growth slowed
With all economies now having reported first quarter
quickly from Q3 last year – by the beginning of this year
GDP, we begin with a review of this past quarter. It was
(and through May) credit growth on a 3m/3m(saar) basis
another quarter of above-potential GDP growth as the
has been 17% or lower, consistent with our
stronger-than-expected recovery from last year’s
understanding of the central bank’s target for credit
recession continued. Indeed, with few exceptions GDP
growth in 2010 – and with it fixed assets investment
growth exceeded our forecasts and we have often been
growth slowed.
forced to revise up what were already above-consensus
growth forecasts for 2010.
Encouragingly, inflation-adjusted retail sales growth has
been essentially stable over the past year. While
Another quarter of surprising growth starting in China
consumption does not appear to be getting more
The quarter started with positive news out of China: Q1
important as a driver of growth in the economy -- we
GDP rose 11.9%yoy, slightly higher than our forecast.
estimate the consumption/GDP ratio was essentially
We estimate that this resulted from a 2.4%QoQ(sa)
unchanged in 2009, which is itself an achievement – the
expansion, unchanged from 2009Q4 and slightly higher
resilience of consumption in the face of the external shock
than our estimate of the economy’s long-run potential
to exports is exceptional.
growth rate. While the government does not publish
quarterly expenditure-side national income accounts, we
fashion monthly real growth rates in retail sales, fixed Real GDP growth in India
assets investments and exports using their respective %yoy GDP Priv cons'n %yoy
price indices as indicators of the sources of demand 20 Fixed inv't Exports (rhs) 40
during the quarter. Quite clearly, China (like the rest of
Asia) has seen an impressive recovery in exports. The 15
30
government’s export quantum index rose on average
34.8%yoy in Q1, up from 7.8% in 2009Q4 and -18.4% a 20
10
year ago. April saw 31.6% growth in export volumes,
10
reportedly, and while the May value for the index has not
5
yet been published, the 48.4%yoy growth in export values 0
last month, given nearly unchanged export unit values
0
over the previous two months, suggests that export -10
growth might be higher in Q2 than in Q1.
-5 -20
2005 2006 2007 2008 2009
China: monthly indicators of real demand growth
Sources: CEIC and Deutsche Bank. GDP growth as reported by the production accounts.
%yoy FAI %yoy
45 Retail 60
Credit India too, but consumption was soft Indian GDP
40 Exp (rhs) 50 growth also surprised slightly to the upside, rising to
35 40 8.6%yoy in Q1 from 6.5% the previous quarter. We
30 30 estimate this implied QoQ(sa) growth of 3.7% after a
25 20 slight contraction of 0.6%QoQ(sa) in the previous quarter,
20 10 the first decline in more than five years. As elsewhere,
15 0 export growth rose sharply last quarter, but exports are
10 -10
much less important as a source of growth in India than in
other economies, even China. The more important recent
5 -20
development has been an increase in fixed investment,
0 -30
which rose 17.7%yoy last quarter. Last year’s election
2006 2007 2008 2009 2010
seems to have reinvigorated investment in India after two
Sources: CEIC and Deutsche Bank. Official export quantum growth rate; FAI growth deflated by the FAI
price index (available only through March); retail sales growth deflated by the retail price index; credit
years of weakness. The government’s own infrastructure
growth deflated by the CPI. spending and, more importantly in our mind, a
commitment to private-public partnerships and
Deutsche Bank AG/Hong Kong Page 3

4. 15 June 2010 Asia Economics Monthly
disinvestment has been instrumental in reviving real GDP to illustrate both how important exports are to
investment demand. the business cycle in Asia’s “high beta” economies and
how strong the recovery in the last year has been. On
Conversely, consumption growth was disappointingly average, exports have grown 22%QoQ(saar) in this
weak last quarter – at 2.6%yoy, by a narrow margin the recovery, more than double the long-run average of 10%.
weakest growth in eight years. We think high food prices Not surprisingly, GDP growth has averaged 10%saar over
have played a significant role in this declining the past year in these seven economies, likewise double
consumption growth. the long-run average.
Sources of demand in Asia excl China and India QoQ annualized growth in exports and GDP
%yoy Exports %yoy 60 %QoQ(saar) %QoQ(saar) 15
25 Fixed inv't 10
Priv cons'n (rhs) 40 10
20
8
15
20 5
10 6
5 0 0
4
0
-5 2 -20 -5
-10 Exports (lhs)
0 -40 -10
-15 GDP (rhs)
-20 -2
-60 -15
00 01 02 03 04 05 06 07 08 09 10
00 01 02 03 04 05 06 07 08 09 10
Sources: CEIC and Deutsche Bank. PPP-weighted exports, private consumption and fixed investment Sources: CEIC and Deutsche Bank. PPP-weighted real exports of goods and services and GDP for Hong
growth in Hong Kong, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Taiwan and Thailand. Kong, Malaysia, the Philippines, Singapore, South Korea, Taiwan and Thailand
Same pattern in Asia-8: strong exports, slightly weak So where to from here? Given the importance of
consumption The other eight economies for which we exports to the recovery in most economies, that should
have quarterly expenditure accounts data showed a be our primary focus in trying to plot the immediate future
broadly consistent pattern of soaring export growth and for Asia. When we consider where Asian exports are
rising “domestic demand” growth. We have long argued going, we are confronted with what appears to be a
that the linkages between investment and consumption resurgence of intra-regional trade. The conclusion that
on the one hand and exports on the other hand in small many investors drew in late 2007 – that a rising share of
open economies make the distinction between “external” intra-regional exports implied greater insulation from a US
and “domestic” demand artificial – the former drives the recession – was wrong. Intra-regional trade fell more
latter. So while we weren’t surprised to see fixed rapidly than exports to the US. So a relatively higher
investment growth rising strongly as export growth growth rate for intra-regional trade a year later is to be
soared, we found consumption growth overall surprised a expected.
little to the downside.
Exports by destination from Asia excl China and India
Only in Hong Kong and South Korea did Q1 GDP in this
100 %yoy,3mma Asia ex CH, HK
group not surprise significantly to the upside. Indeed, so
China
powerful has been the growth impulse of late that not 80 US&EU
only did Singapore’s advance estimate of Q1 GDP come
60
in much higher than consensus expectations, but the
second reading – after only one more month’s data – was 40
more than 2ppts higher.
20
Singapore is exceptional, as a very small, very open 0
economy, but this group of eight economies has seen a
very strong impulse to growth from the recovery in global -20
demand. Since Indonesia is a much less export-sensitive -40
economy than the others – it avoided even one quarter of
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
QoQ GDP decline – in the chart below we exclude it from
Sources: CEIC and Deutsche Bank. PPP-weighted, seasonally adjusted real GDP.
our estimate of QoQ(sa) growth in export volumes and
Page 4 Deutsche Bank AG/Hong Kong

5. 15 June 2010 Asia Economics Monthly
But exports to China have nearly doubled over the past A persistent loss of output, or growth? Longer term,
year, whereas other intra-regional exports (excluding the reliance on exports to drive growth in most Asian
Japan, although it matters little whether Japan is included economies could be a liability if the major export markets
or not) have risen only about 40%. Is this evidence of a in the US and Europe are not able to regain their pre-crisis
surge of Chinese demand for Asian exports? Or is it a vitality.
repeat of the outsourcing boom of 2002-03 when China’s
entry into the WTO combined with the post-recessionary Our index of GDP in the seven economies in Asia other
impulse to lower production costs saw regional than China, India and Indonesia shows that after a 5.9%
production networks extended to include China at the final drop in seasonally adjusted GDP, GDP has risen 10.4% to
stages? If the nascent decline in the growth of exports to a level well above the pre-crisis level. Importantly, output
China continues then our inclination is to infer the latter. is growing faster than the pre-crisis pace and the gap to
the pre-crisis trend is closing.
That would imply, though, that demand in the US and EU
remains uppermost as the primary driver of regional Real GDP index, Asia excl China and India
export growth. Our US GDP growth forecast is slightly
170 2000Q1=100
higher than the consensus at 3.5% this year, but much
165
higher than consensus at 3.6% next year. Our Euroland
160
forecasts for both years are slightly below consensus.
155
The combination, we think, means that export growth,
measured YoY, will likely decline – at times precipitously – 150
over the balance of this year. And while we think growth 145
could pick up again in mid-2011, we don’t expect to see 140
growth rates anything like as strong – on a QoQ(sa) or YoY 135
basis – as we have seen over the past few months. 130
125
Our GDP forecasts, therefore, have the same profile. We 120
expect YoY growth in exports and GDP to peak in the first 2005 2006 2007 2008 2009 2010
half of this year – in most economies Q1 was the peak –
Sources: CEIC and Deutsche Bank. PPP-weighted, seasonally adjusted real GDP.
and we currently forecast a rapid decline in growth over
the next two quarters. India is a notable exception, where In the aftermath of the 1997-98 crisis in Asia, these
we see growth dipping a little in Q2 but ending the year economies recovered much more slowly. Whereas pre-
stronger. Asian crisis growth in these economies was about 8%,
since 1999 it has averaged closer to 6%. The crisis
Our Macroeconomic Momentum Indicator – a monthly caused a permanent loss of output. Even though Asia
GDP growth proxy – suggests this is indeed what is wasn’t at the center of this crisis, it is likely that there will
happening. But with complete data only for April there is be a permanent loss of output in the US and Europe and
as yet only the barest hint of a slowdown in growth. perhaps as well a permanently lower growth rate.
Asian macroeconomic momentum indicator Real GDP index, Asia excl China and India
2.0 160 2000Q1=100
1.5 150
1.0 140
0.5 130
0.0 120
-0.5 110
-1.0 100
-1.5 90
-2.0 80
-2.5 70
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 60
93 94 95 96 97 98 99 00 01 02
Sources: CEIC and Deutsche Bank.
Sources: CEIC and Deutsche Bank. PPP-weighted, seasonally adjusted real GDP
Deutsche Bank AG/Hong Kong Page 5

6. 15 June 2010 Asia Economics Monthly
Unless these Asian economies can stimulate domestic international markets by European banks. Lending by
demand to a greater extent, or can tap Chinese demand banks in peripheral Euroland to Asian economies is
for their exports, this persistent weakness in the US and insignificant – amounting to about 0.1% of Asian GDP.
Europe will likely translate into a persistently weaker Lending by all Euroland banks together is still only about
growth rate in Asia. 3% of Asian GDP. Indeed, even borrowing from the UK
and Switzerland (together almost 4% of Asian GDP worth
Direct contagion from peripheral Europe is limited of credit) and the US (3.2%) is generally small. Only
The more immediate concern for markets, though, is the Malaysia and South Korea have significant exposures, but
potential spillover from the problems in peripheral Europe compared with Eastern Europe or Latin America these are
to Asia. In our view, the direct channels of contagion are small levels of external indebtedness to banks in Europe.
weak. Greece, Ireland, Italy, Portugal and Spain account
for only about 3.5% of Asian exports. Euroland accounts Of greater concern is the impact on Asia of heightened
for 12.2% of exports versus the US’ 14% share but as international investor risk appetite arising from worries
we’ve seen in recent weeks, EUR depreciation has been about their own losses in peripheral Europe. Asian equity
almost matched by depreciations in Asia. In our view, the markets have sold off in tandem with global markets, and
direct channel for contagion through falling peripheral credit spreads have widened, and these carry real
European demand or a weaker euro are not worrisome. economic consequences. The negative wealth effect
from falling asset prices is likely reducing consumption
Exports to Europe and the US as % of total exports growth and reducing banks’ willingness to lend.
45 % GIIPS Oth EUR Oth EU US Michael Spencer, Hong Kong, (852) 2203 8305
40
35
30
25
20
15
10
5
0
CH HK IN ID MY PH SG SK TW TH VN Asia
Sources: CEIC and Deutsche Bank. “GIIPS” is Greece, Ireland, Italy, Portugal and Spain; coverage of
“other EUR” and “other EU” may not be comprehensive due to data limitations.
European and US bank lending to Asia
35 % of GDP US
30 Oth.EU
25 EUR
20
15
10
5
0
CH IN ID MY PH SK TW TH VN Asia
Sources: BIS and Deutsche Bank. “Other EU” includes only the UK, Sweden and Switzerland.
Similarly, the direct financial channel is weak. As a region
of mostly surplus economies – many of whom are net
creditors to the rest of the world –Asian economies are
not especially exposed to possible retrenchment from
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7. 15 June 2010 Asia Economics Monthly
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8. 15 June 2010 Asia Economics Monthly
China A1(Pos)/A+/A+
Moody’s/S&P/Fitch
May economic data point to slightly lower CPI peak and real estate investment growth still accelerated to 44%
rate but growing risk of property oversupply. in May. Incidentally, real estate floor space sold dropped
3%yoy in May (indeed, Soufun’s weekly data has shown a
Labour actions and wage inflation may exacerbate
70% drop in transaction volume since mid-April), down
investors’ concern on social stability and margin
from the 27%yoy increase in April. The combination of
squeeze in the short term.
rising completions and falling sales indicates a growing
In the next three years we expect wage inflation to risk of over-supply in the property market in the coming
reach 14-17% per year, way above nominal GDP months.
growth. Over this medium-term, the wage inflation
trend will have a profound positive implication for the Labour actions and wage inflation may exacerbate
structural shift towards a consumption-driven investors’ concern on social stability and margin
economy. Our model shows that the long-term squeeze in the short term. The spread of labour strikes
beneficiaries include instant noodle, dairy, tobacco, over the past ten days and the minimum wage increases
and wine. announced by Beijing and Shenzhen in recent days
suggest that wage inflation is becoming a material risk to
Infrastructure and real estate FAI growth will likely
inflation and corporate margins. Foxconn announced
slow further, and thus sentiment on commodities will
wage increases of 30-100%, and this increase will no
likely remain weak in coming months.
doubt spill-over to other companies very quickly. The
We expect a slower pace of monetary (including rates threat of the contagious effect of labour strikes will also
and RMB) tightening in coming months. likely pressure many more local governments to raise
minimum wages.
May economic data point to slightly lower CPI peak
rate but growing risk of property over-supply. We see
We expect labour-intensive sectors (such as electronics
the following specific implications from a number of May
components, auto parts, apparel, retailing, construction,
data points:
etc) to see an average of additional 10% wage inflation
over the previous market expectation. For monopoly
First, Q2 GDP growth will likely slow to 10.2%yoy. IP
sectors and/or sectors that are dominated by large SOEs
growth dropped by 1.3ppts to 16.5%yoy in May, lower
(such as oil, power, telco, and financials), wage pressure
than consensus expectation. We expect IP growth to
will be much less as their average pay is 1-2 times higher
continue to slow to around 15.3% in June, which – based
than the average manufacturing salary, and the
on the correlation between IP and GDP -- implies that Q2
government is trying to limit wage growth in these
GDP growth will decelerate to about 10.2% from 11.9%
sectors as part of the effort to limit income disparity. For
in Q1.
the economy as a whole, we expect 4-5% extra average
wage increase this year, compared with our baseline
Second, the peak of officially reported CPI inflation may
projection of about 12%.
be somewhat lower (between 4.0-4.2%) than our previous
expectation of 4.5%. May CPI inflation rose to 3.1%yoy
Our simulation with a 135 sector computable general
vs 2.8% in April. On a mom basis, inflation dropped 0.1%
equilibrium (CGE) model shows that a 10% wage inflation
largely on the decline in vegetable prices. Going forward,
in 13 labour-intensive sector (assuming other sectors see
we expect some further increase in yoy CPI inflation to
no changes in wages) will result in the following macro
around 3.4%yoy in June. For Q3, we now think the peak
consequences, compared with the baseline case:
of CPI inflation will more likely to be between 4-4.2%yoy
(assuming only modest recovery in food prices in coming
1. Push up CPI by 0.4%;
months) in August or September, vs our previous
expectation of 4.5%. This is because the upward
2. Reduce real GDP growth by 0.12%;
pressures from manufacturing goods inflation (partly
reflecting the newly added wage inflation) and rental hikes
3. Reduce employment by 0.7 million jobs;
are partially offset by the recent drop in food prices.
4. Reduce real exports by 0.6%;
Third, the real estate sector will likely suffer from more
serious over-supply in the coming months. Real estate
5. Boost real consumption by 0.2%;
project completions rose by a massive 102% yoy in May,
Page 8 Deutsche Bank AG/Hong Kong

9. 15 June 2010 Asia Economics Monthly
In the short term, the negative macro implication is that it is likely to be overstated due to the lack of statistical
would exacerbate some investors’ fear of “stagflation”, coverage of private firms). Also worrying is that
as it may boost inflation and reduces GDP growth in a government revenue grew (at 21% per annum)
period (Q2 and Q3 this year) when yoy CPI inflation is significantly faster than workers’ income over the same
already poised to rise and yoy GDP growth is set to period.
decelerate. At the firm level, it reduces profit margins for
many low-end manufacturing companies (see our June 8 Annual average growth of govt revenue,
note on “who is vulnerable to wage inflation”). Along manufacturing profits, and labour income
with the possibility of further spread of labour actions to
other companies and regions, this wage-driven margin
squeeze will likely remain as headwinds against the Industrial profits
market for a while.
Over the next three years, we expect labour income Govt revenue
growth to reach 14-17% per annum, significantly
higher than nominal GDP growth of 11-12%. Over this
medium term, this wage trend will have a profound Manufacturing wage
positive implication for the structural shift towards a
consumption-driven economy. The government now
0% 5% 10% 15% 20% 25% 30%
feels – more strongly than ever – that income inequality
can become a material threat to social and political
Source: CEIC
stability. According to our calculation based on studies of
Prof. Cai Fang of the Social Science Academy, between
One of the root causes of income disparity is that the
2000 and 2007 migrant workers’ (mostly in labour
monopoly nature of the many large SOEs has allowed
intensive sectors) wage increase was only 5-6% per
them to enjoy excessive (and excessive growth) of profits,
annum. During the same period, annual average nominal
and these profits are not redistributed properly to the
GDP growth was 15%, and SOE wage inflation was 16%
labour force via the budgetary system. There are also
per annum. It is obvious that to address the income
complaints about excessive taxation on personal incomes.
distribution issue, low-income labour force will need to
Therefore, some fundamental – and politically very difficult
see a faster wage increase than average especially those
– reforms will need to be implemented to reverse the
in the SOEs.
perilous trend of rapid widening of income gap. In addition
to the increases in minimum wages, we think two major
Annual average wage increase of migrant workers, reforms will need to be pushed through: (1) drastically
SOE employees, and nominal GDP: 2000-2007 increase the dividend payout ratio of major SOEs (from
the current 7.5% to 30-40% in the next 3-4 years), and
use the proceeds to pay for social spending and to cut the
Wage of SOEs
personal income tax; (2) transfer a large part of liquid SOE
assets (shares of listed companies) owned by the national
and provincial SASACs to the social security funds. These
Nominal GDP
transfers should be used to increase the pension
standards of the retirees and to fill the “empty pension
accounts” of the individual pension plans.
Wage of migrant workers
While the specific policy actions remain to be worked out,
0% 2% 4% 6% 8% 10% 12% 14% 16% we are confident that there will be much stronger
determination for the government to engineer a rapid
Source: CEIC wage growth for the labour force (especially the low-
income labour force), partly due to the labour actions in
Another aspect of the growing income disparity that recent weeks. Government officials are now talking
needs to be addressed is that between the corporates seriously about doubling workers’ wages in the next five
and the labour force. From 2000-2008, the industrial years, which implies a 15% annual average wage increase
profits rose 6.2 fold, but industrial workers’ average wage in the next five years. With a rapid rise in minimum
has increased only 1.8 fold. In other words, the annual wages (e.g., at about 15-20% in most places this year)
average corporate profit growth was 28% vs and the possible structural reforms discussed above, we
manufacturing wage growth of only 14% (even this figure think it is even possible to see labour income growth
Deutsche Bank AG/Hong Kong Page 9

10. 15 June 2010 Asia Economics Monthly
exceeding 15% per annum in coming years. We project Long-term winners and losers of wage inflation: %
that over the next three years, the disposable income change in production from baseline
growth (after taxes and including various transfer receipts)
will likely reach 14-17%, significantly higher than nominal
GDP growth of 11-12%.
Assuming that annual average wage inflation will be 4ppts
higher than the baseline for the next five years (i.e.,a
cumulative 20% additional wage rise), our CGE model
shows that the structure of the economy will see the
following changes:
Consumption as % of GDP will rise by 1.9ppts;
Investment (capital formation) as % of GDP will Source: DB CGE model
increase by 2.0ppts.
Infrastructure and real estate FAI growth will slow
Net exports as % of GDP will fall by 3.9ppts. further, and sentiment on commodities will thus likely
remain weak in coming months. Government
The obvious results are that consumption will play a more
sponsored investments (in infrastructure, health,
important role in GDP, and the importance of exports will
education, and water treatment, etc) have already
diminish. The more interesting, but counterintuitive, result
decelerated sharply from the peak of 64%yoy in May
is that investment as % of GDP will also rise as a result of
2009 to 23%yoy in April 2010. We think these sectors
wage inflation. The logic is that due to higher wage
will likely see further deceleration in yoy FAI growth in the
inflation, companies will find it more attractive to
coming few months, and the growth rate will likely hit or
automate many production processes by investing in
fall below zero in June. The main reasons include the
machinery. The increase in capital intensity will thus
decline in new lending to local financing platforms starting
require an increase in the proportion of investment in
from early this year, the cut in government budget for
GDP.
infrastructure spending, and an increasingly less
favourable base effect (note that the yoy growth of
Change of GDP composition due to wage inflation infrastructure FAI was as high as 77% in June last year, vs
the 20% average growth in the previous few years). The
rapid decline in the yoy growth in new project starts in last
few months also bode negative for actual FAI growth in
the coming months.
Real estate FAI will likely pose the next short-term
downside risk to market sentiment. The following chart
shows that property transaction volume has come off by
70% already since mid April. 2-3 months later, this should
lead to a significant deceleration in developers’
construction activities. We expect from the current yoy
Source: DB CGE model rate of 30%, real estate FAI growth will also slow to zero
around September. Thus, between June and September,
These changes are in line with the broader objective of sentiment on China demand for commodities will likely to
the government in developing a consumption-driven remain weak.
economy. At the sector level, our model shows that the
beneficiaries in the consumer sector include instant
noodle, dairy, tobacco, and wine. The following chart
shows the estimated % increase in production due to
additional wage inflation over the next five years.
Page 10 Deutsche Bank AG/Hong Kong

11. 15 June 2010 Asia Economics Monthly
Property transaction volume index (weekly), yoy % its Treasury review of China’s currency regime (likely in
300
July), and one should expect more anti-dumping cases
against China. As a compromise, we think the best and
250
likely scenario is for China to move towards a basket
200 based system (which will introduce two-way volatility to
the CNY/USD rate) within the next two months without a
150
one-off appreciation. We now think that the RMB
100 appreciation vs the USD will likely be less than 1% before
50 the end of the year vs our previous expectation of about
3%.
0
100301-100307
100322-100328
081124-081130
081215-081221
090105-090111
090126-090201
090216-090222
090309-090315
090330-090405
090420-090426
090511-090517
090601-090607
090622-090628
090713-090719
090803-090809
090824-090830
090814-090920
091005-091012
091026-091101
091116-091122
091207-091213
091228-100103
100118-100124
100208-100214
100301-100307
100322-100328
100412-100418
100503-100509
100524-100530
Jun Ma, Hong Kong, (852) 2203 8308
Source: Sofun.com; DB calculation
We expect a slower pace of monetary (including rates
and RMB) tightening in coming months. Several macro
developments in recent weeks have led to concerns by
the many officials and policy advisors on the potential of a
second dip of the global economy and potential over-
tightening of economic policies. The arguments against
rate hikes and RMB appreciation are gaining popularity.
These arguments include: (1) the sovereign debt crisis in
Europe may be as destructive as the Lehman-led crisis in
terms of impact on the global economy and thus on
Chinese exports (this is a point that we disagree -- we
continue to expect Chinese export growth to surprise to
the upside at least in coming few months); (2) the anti-
property speculation policies promulgated in mid-April are
already strong enough and could potentially lead to a hard
landing of investment and GDP (again we think this
concern is over played; we think yoy GDP growth will
slow in Q2 and Q3 but will stabilize at 8.5%-9% in Q4); (3)
the RMB has appreciated by 15% vs the EUR over the
past two months and exports will lose a great deal of
competitiveness (our estimate is that the impact is
manageable); (4) the A share market has corrected
significantly in recent months (indeed it’s been the worst
performing compared with other major markets); (5)
inflation risks have receded somewhat in the past few
weeks due to the decline in food prices and some
commodities prices.
As a result, the likelihood of significant rate hikes has
diminished. We still think one rate hike in Q3 is possible,
but would not be surprised if the PBOC is on hold
throughout this year. On RMB, some of the above
arguments have also reduced the probability of an
immediate reform, but we still think that a reform in the
coming two months is possible and desirable. Otherwise,
pressure from the US will likely rise quickly: the Senate
may resume the legislative process of the Schumer and
Graham bill, the US administration will likely play tough in
Deutsche Bank AG/Hong Kong Page 11

12. 15 June 2010 Asia Economics Monthly
China: Deutsche Bank forecasts
2008 2009F 2010F 2011F
National Income
Nominal GDP (USD bn) 4526 4862 5663 6630
Population (mn) 1353 1364 1374 1375
GDP per capita (USD) 3345 3564 4122 4822
Real GDP (YoY%)1 9.6 8.7 9.8 9.3
Private consumption 10.0 9.0 8.8 9.0
Government consumption 9.9 10.0 9.0 8.5
Gross fixed investment 11.2 18.8 9.5 10.6
Exports 12.0 -10.2 20.0 12.0
Imports 15.9 -0.5 19.5 13.5
Prices, Money and Banking
CPI (YoY%) 5.9 -0.7 3.4 2.5
Broad money (M2) 17.8 29.0 17.0 16.5
Bank credit (YoY%) 18.8 31.0 17.0 16.0
Fiscal Accounts (% of GDP)
Budget surplus -0.4 -2.9 -2.5 -2.0
Government revenue 20.5 19.0 19.3 19.7
Government expenditure 20.9 21.2 21.8 21.7
Primary surplus 0.3 -1.5 -1.3 -0.9
External Accounts (USD bn)
Merchandise exports 1428.5 1201.7 1562.2 1780.9
Merchandise imports 1133.1 1005.6 1367.6 1641.1
Trade balance 295.4 196.1 194.6 139.8
% of GDP 6.4 4.0 3.4 2.1
Current account balance 426.1 284.0 244.6 189.8
% of GDP 7.2 5.8 4.3 2.9
FDI (net) 163.0 70.0 90.0 100.0
FX reserves (USD bn) 1946.0 2399.1 2700.0 3000.0
FX rate (eop) CNY/USD 6.84 6.83 6.77 6.53
Debt Indicators (% of GDP)
Government debt2 20.0 21.0 20.3 19.6
Domestic 19.1 20.2 19.6 18.9
External 0.8 0.8 0.7 0.7
Total external debt 8.3 7.4 6.1 5.1
in USD bn 375.0 360.0 340.0 330.0
Short-term (% of total) 65.0 60.0 50.0 50.0
General (YoY%)
Fixed asset inv’t (nominal) 25.6 30.1 19.0 21.0
Retail sales (nominal) 21.6 15.5 18.0 15.0
Industrial production (real) 12.9 12.0 14.0 13.0
Merch exports (USD nominal) 17.2 -16.0 30.0 13.0
Merch imports (USD nominal) 18.5 -18.0 36.0 16.0
Financial Markets Current 3M 6M 12M
1-year deposit rate 2.25 2.52 2.52 2.52
10-year yield (%) 3.25 3.35 3.45 3.65
CNY/USD 6.83 6.80 6.77 6.65
Source: CEIC, DB Global Markets Research, National Sources
Note: (1) Growth rates of GDP components may not match overall GDP growth rates due to
inconsistency between historical data calculated from expenditure and product method. (2) Including
bank recapitalization and AMC bonds issued.
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13. 15 June 2010 Asia Economics Monthly
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Deutsche Bank AG/Hong Kong Page 13

14. 15 June 2010 Asia Economics Monthly
Hong Kong Aa2(Pos)/AA+/AA
Moody’s/S&P/Fitch
Consumption is under pressure from equity price consumption is possibly much weaker than we have been
declines, which we think will reverse. Exports expecting.
continue to grow robustly, but the outlook is for a
But not only was consumption weaker than we’d
slowing of QoQ(sa) GDP growth from exceptionally
expected in Q1, the early indication for Q2 is also
high rates in recent quarters towards long-run trend
disappointing. Seasonally adjusted, retail sales volumes
growth rates later this year.
have declined for three consecutive months through April,
Asset price declines are depressing consumption and by a cumulative 5.3%. With equity prices still falling, and
reflect deteriorating investor sentiment more than the if property price inflation continues to moderate, it seems
fundamentals. that the weight of bearish investor sentiment may further
depress consumption in Hong Kong.
Consumption under pressure from weak sentiment…
As we remarked last month, we were surprised at the Seasonally adjusted retail sales volumes
weakness in private consumption as reported in the Q1
150 index
GDP figures. Seasonally adjusted, consumption was
unchanged in Q1 from Q4. We’ve subsequently received 140
data that help us to understand what happened. The
130
decline in consumer confidence in recent months has
evidently been much worse than we’d expected. Both 120
the housing market and the equity market ended the
110
quarter much weaker than they began, and this appears to
have dragged down spending. In our simple consumption 100
model the equity market is particularly important – more
90
so than property prices.
80
Consumption and real asset prices
00 01 02 03 04 05 06 07 08 09 10
60 %yoy %yoy 14
Sources: CEIC and Deutsche Bank
12
40 10
…largely stemming for European growth concerns
8
20 The decline in sentiment recently has little to do with
6
Hong Kong – specific factors, in our view, and more to do
4
0 with concerns about global growth. But on that front, we
2
think fears are exaggerated. The peripheral European
-20 0
economies – Greece, Ireland, Italy, Portugal and Spain –
-2
Real HSI (-1) will likely experience another year of recession as they
-40 Real prop'y price -4
tighten fiscal policy dramatically. But they account for
Cons'n (rhs) -6
-60 -8
only 2% of Hong Kong’s exports. And while economic
sentiment indicators and purchasing managers’ indexes
03 04 05 06 07 08 09 10
have pulled back a little in the last month, they continue to
Sources: CEIC and Deutsche Bank. “Cons’n” is real private consumption expenditure; “real HSI” is the
CPI-adjusted change in the Hang Seng Index; “real prop’y price” is the CPI –adjusted change in the point to strong month-on-month growth.
property price index.
Indeed, while there was a small 0.5%mom(sa) decline in
The quarterly average changes in real property and export volumes in March, this followed a 8.3%mom(sa)
(lagged) equity prices in Q1 pointed to much stronger increase in February. We estimate that exports rose 3.5%
consumption growth than in Q4. Our consumption - 4.0%mom(sa) in April and we forecast a further (smaller)
model, combining exports (the key driver of income increase in May. While the outlook for growth in Europe
growth in Hong Kong), real asset prices and interest rates) is weaker than it was a few weeks ago, the Euroland
indicated consumption growth would be about 8.4%yoy. growth forecast hasn’t been cut by more than 0.2% given
In fact, it was estimated at 6.5%. Based on April real still reasonably strong growth in the core countries.
property prices inflation and the first quarter’s still
In fact, when we look at the recent export data, growth in
elevated equity prices, we would expect Q2 consumption
exports to Europe is still holding up well. The recovery in
growth to be little changed from Q1. But the decline in
that market lags somewhat the recovery in exports to the
equity prices in Q2 suggest that the growth outlook for
US, but this reflects the slower pace of recovery in Europe
Page 14 Deutsche Bank AG/Hong Kong

15. 15 June 2010 Asia Economics Monthly
compared to the US. Bu certainly through April there was Hong Kong: Deutsche Bank Forecasts
no sign of renewed weakness in Europe as an export 2008 2009F 2010F 2011F
market. National Income
Nominal GDP (USD bn) 215.3 210.6 223.2 239.0
Hong Kong exports to the US and EU Population (mn) 7.0 7.1 7.1 7.2
40 Total EU US GDP per capita (USD) 30663 29762 31296 33234
%yoy,3mma
30
Real GDP (YoY %) 2.2 -2.8 6.5 5.5
20 Private consumption 2.4 -0.4 7.8 5.0
Government consumption 1.8 2.4 3.5 4.0
10 Gross fixed investment 0.8 -1.8 10.2 13.5
Exports 2.5 -10.1 17.0 8.0
0
Imports 2.3 -8.8 18.0 8.4
-10
Prices, Money and Banking
-20
CPI (YoY %) 4.3 0.5 2.0 3.0
-30 Broad money (HKD M3) 7.1 7.1 4.4 1.9
HKD Bank credit (YoY %) 8.8 0.3 10.5 5.7
00 01 02 03 04 05 06 07 08 09 10
Sources: CEIC and Deutsche Bank
Fiscal Accounts (% of GDP)1
Budget surplus 0.1 1.6 0.4 0.1
Michael Spencer, Hong Kong, (852) 2203 8305
Government revenue 19.2 19.1 18.5 18.0
Government expenditure 19.1 17.5 18.1 17.9
Primary surplus 0.1 1.6 0.5 0.1
External Accounts (USD bn)
Merchandise exports 365.4 321.9 374.7 412.1
Merchandise imports 388.6 348.7 411.6 448.7
Trade balance -23.1 -26.9 -36.9 -36.5
% of GDP -10.7 -12.8 -16.5 -15.3
Current account balance 29.3 18.4 14.3 20.8
% of GDP 13.6 8.7 6.4 8.7
FDI (net) 9.1 -3.8 2.5 3.5
FX reserves (USD bn) 182.5 255.8 243.1 234.5
FX rate (eop) HKD/USD 7.75 7.75 7.80 7.80
Debt Indicators (% of GDP)
Government debt 1.0 1.4 2.3 3.7
Domestic 0.2 0.7 1.6 3.7
External 0.8 0.7 0.7 0.0
Total external debt 308.2 319.5 291.2 261.5
in USD bn 663.4 673.0 650.0 625.0
Short-term (% of total) 73.8 75.0 73.1 75.0
General
Unemployment (ann avg %) 3.4 5.2 4.6 4.0
Financial Markets Current 3M 6M 12M
Discount base rate 0.50 0.50 1.00 2.00
3-month interbank rate 0.34 0.50 0.90 1.80
10-year yield (%) 2.32 3.00 3.20 3.60
HKD/USD 7.80 7.80 7.80 7.80
Source: CEIC, DB Global Markets Research, National Sources
Note: (1) Fiscal year data.
Deutsche Bank AG/Hong Kong Page 15

16. 15 June 2010 Asia Economics Monthly
India Baa2/BBB-(Neg)/BBB-
Moody’s/S&P/Fitch
Given the strong GDP outturn of Jan-Mar’10, we now Expenditure side GDP, contribution to growth
expect real GDP growth to rise to 8% in FY10/11,
versus our earlier estimate of 7.7%. % Private consumption Public consumption
Investment Net exports
High domestic inflation and fragile global financial 5.0
market considerations likely to complicate RBI’s
3.0
monetary policy decision.
1.0
Growth on a firm footing -1.0
-3.0
The economy stepped into 2010 with a strong growth
-5.0
outturn, with real GDP rising by 8.6%yoy in the Jan-March
quarter. Earlier data revisions were also released; the Oct- -7.0
December growth rate was revised up to 6.5%, and as a Mar-08 Sep-08 Mar-09 Sep-09 Mar-10
result, annual average real GDP growth rate for FY09/10
Source: CEIC, Deutsche Bank
was 7.4% (6.7% in the previous year). This marks a
remarkably resilient growth performance for India given Latest high-frequency economic indicators such as
the global economic turmoil during the timeframe. The manufacturing and services PMI indicate continued
quarterly outturn was about ½% higher than what we had buoyancy in non-farm sector growth momentum. The
expected, owing primarily to a strong showing in the manufacturing PMI reading for May was 59.0 (57.2 in
trade/hotel/transportation/communication sector. April), the strongest since Feb’08. On a 3mma basis, the
May PMI now stands at 58.0, same as the Jan-Mar’10
Production side GDP average, indicating strong industrial sector GDP growth
%yoy Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 prospect for Apr-June’10 quarter. The May services sector
Agriculture, Forestry 3.3 1.9 0.9 -1.8 0.7 PMI at 58.2, on the other hand, remained comfortably
and Fishing
above the threshold expansion mark of 50, indicating
Mining and Quarrying -0.3 8.2 10.1 9.6 14.0 buoyant services sector growth prospect as well.
Manufacturing 0.6 3.8 9.1 13.8 16.3
Electricity, Gas and 4.1 6.6 7.7 4.7 7.1 PMI readings firmly above 50
Water Supply
Construction 5.7 4.6 4.7 8.1 8.7 3mma Manufacturing PMI Services PMI
Trade, Hotels, 5.7 5.5 8.5 10.2 12.4 65
Transport and
Communication 60
Financing, Insurance, 12.3 11.8 11.5 7.9 7.9 55
Real Estate & Business
Services 50
Community, Social and 8.8 7.6 14.0 0.8 1.6
Personal Services 45
Source: CEIC, Deutsche Bank
40
Other than agriculture (+0.7%yoy), there was across the 2006 2007 2008 2009 2010
broad strength among the components of GDP, with the
manufacturing sector as the growth leader (+16.3%yoy). Source: Bloomberg, Deutsche Bank
Agriculture growth (+0.7%yoy) perhaps bottomed in the
Jan-March quarter, and ought to become a bigger With the recent developments, we are upgrading our
contributor to growth with rains expected to return to growth forecast to 8% for FY10/11. There is some upside
normal this year. India's expenditure side GDP data gets to the outlook if there is a bumper harvest, and
little attention, given serious problems with methodology investment picks up at a faster rate. There are some
and coverage. Nevertheless, note that the data from the downsides from external demand, especially if the Euro
spending side showed real GDP rising by an astonishing area debt and financial market turmoil deepens further in
11.2%yoy, one of the strongest growth rates on record. the months ahead.
Strong investment and net exports were the key drivers,
contributing 5.8% and 4% to growth, respectively.
Page 16 Deutsche Bank AG/Hong Kong