The document summarizes recent economic data and sentiment regarding China. It notes that while exports are slowing due to global economic weakness, domestic consumption continues to grow and infrastructure investment may help offset declines in other areas. Recent data shows Chinese GDP growth slowing but not yet at dangerous levels. The outlook expects further slowing but growth still around 8% for 2012, which would not be disastrous. Risks remain from further weakness in Europe or the US hurting Chinese exports.

1. 1 November 2011
Wandering through the woods
Martin Becker
Introduction
Sentiment towards China recently has been erratic, swinging between those predicting that
growth will stay stronger for longer and those predicting a slowdown or hard landing. With
Europe and the US causing much anxiety for investors over recent weeks, the ‘hard landing
camp’ has won out, impacting both Asian and resource markets negatively.
Over the last few days, news from Europe has been positive, or at least less negative.
European policy markets have moved to write off more Greek debt, recapitalise the banks
and boost the size of the bailout fund to provide more support for the likes of Spain and
Italy. Recent data from the US has been positive too, showing continued - albeit slow -
growth (GDP growth for 3Q11 was +2.5% annualized, with private sector GDP +3.1% in the
quarter). This is likely to provide the markets with positive momentum until year end.
Despite this, sentiment toward China has deteriorated.
The current view on China
The deteriorating sentiment toward China can be summarised as follows:
• Exports are slowing as a result of slower global growth;
• Overinvestment in infrastructure projects and property with the view that supply is
now grossly in excess of demand;
• Higher levels of public debt as a result of infrastructure investment, with fear of a
sharp rise in bad loans for the banking sector;
Moore Stephens Sydney
Wealth Management Pty Ltd • Monetary tightening has resulted in a credit crunch, impacting the property market;
Level 7, 20 Hunter Street and
Sydney NSW 2000
Australia
• The fear of errors in government policy in dealing with higher levels of public debt
Telephone: +61 2 8236 7700 and inflation.
Facsimile: +61 2 9233 4636
sydney@moorestephens.com.au
www.moorestephens.com.au The bigger picture
A member of the Moore
Taking a broader perspective, the following facts should be kept in mind:
Stephens International Limited
Group of Independent Firms.
• Income per capita in China is less than 10% of US and Australian levels. This does
Moore Stephens Sydney
Financial Advisors are
suggest there is a reservoir of untapped demand; one could conclude then that
Authorised Representatives of
Moore Stephens Sydney
Wealth Management Pty Ltd,
AFSL Licence #336950.

2. over time the demand for infrastructure investments and capital projects will catch
up with supply as income levels continue to rise through industrialisation;
• Household debt is low, with around 90% of homes being owner occupied. The
average deposit for residential property is about 40% of purchase price, and some
20% of buyers pay in cash;
• China’s gross public debt is around 50% of GDP (US, EU and Japan c100%); the
budget deficit is around 2% of GDP. Government revenue is growing at c20% pa,
suggesting the deficit is easily serviceable. In addition, China does not rely on
foreign funding of its government debt;
• Central government will underwrite a large portion of bank loans to local
government spending on infrastructure projects, suggesting that the potential bad
debt ratio for banks is likely to remain well below 10%.
Current economic data
The most recent released economic data for September (Q3) suggests slowing growth -
with further slowing expected for Q4 - but no sign yet of a hard landing. See below
summary table of key economic indicators of internal drivers of growth and consumption in
real terms:
Key indicators
yoy % change
2009 2010 2011
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
Real
GDP 11.4 12.0 10.3 9.6 9.8 9.7 9.5 9.1
Fixed asset investment 25.8 23.3 20.5 18.3 16.8 17.4 18.0 15.5
Retail sales 16.5 15.5 15.2 14.8 13.9 11.6 11.5 10.7
Industrial production 17.9 19.6 15.9 13.5 13.3 14.4 14.0 13.8
Electricity consumption 23.3 22.6 17.2 10.7 5.5 12.7 13.3 11.6
Prices and money
CPI inflation 0.7 2.2 2.9 3.5 4.7 5.0 5.7 6.3
Raw materials inflation -8.4 9.9 11.7 7.7 9.1 10.2 10.4 10.5
M2 (money supply) 27.7 22.5 18.5 19.0 19.7 16.6 15.9 13.0
The outlook
In summing this up, the biggest risk to China would be a renewed economic downturn in
Europe and the US, especially considering that c20% of China’s exports are to Europe.
However, construction of social housing projects, continued growth in consumer spending
and further infrastructure investment is likely to offset lower exports (weaker global growth)
and a reduction in residential property construction. Netting this out, GDP growth is
expected to be around 8% in 2012.
Chinese authorities seem to be well aware that the threat to growth has increased, and it’s
hard to see policy makers in China not responding if it becomes apparent that growth is

3. slowing further. We should bear in mind that 4 trillion Renminbi was provided into the
economy in 2008/09 due to the perceived threat of the GFC on the Chinese economy.
Selective policy action has already started aimed at helping small business.
Conclusion
As a result of investor anxiety about Europe and the US (as well as China), commodity
prices have fallen over the last few months. Volatility in investment markets (including
currency and commodity prices) is likely to remain high in the short term given the fractured
state of the global economy.
China’s growth momentum held up pretty well through September, but signs of a more
substantial slowdown in the months to come are apparent. Further deceleration in the twin
growth engines of exports and investment appear likely for Q4 which is likely to reduce
GDP growth to 8 – 8.5%.
This would hardly be a disastrous outcome for China – but it will still be challenging for a
government long accustomed to easy double digit growth.
Despite positive developments in Europe and the US recently, the chance of another
recession in most advanced economies remains high.
Are we wandering deeper into the woods?

4. For more information please do not hesitate to contact one of the following members of our Wealth
Management team:
Charlie Viola +61 2 8236 7798
Director
Martin Fowler +61 2 8236 7776
Director
Martin Becker +61 2 8215 7920
Associate Director
Haris Argeetes +61 2 8236 7851
Manager
Disclaimer
The information provided is not personal advice. It does not take into account the investment
objectives, financial situations or needs of any particular investor and should not be relied upon as
advice. While the information is provided in good faith and believed to be accurate and reliable at
the date of preparation, we will not be held liable for any losses arising from reliance thereon. We
recommend investors consult their personal financial adviser to discuss suitability and application
to their individual circumstances. Articles represent the opinion of the author, Martin Becker, and
may not necessarily be representative of the views of Moore Stephens generally.
4