Asian Economics Quarterly-Will Asia crack?

Asian 

ECONOMICS 

Macro 

Asian Economics 

Fourth Quarter 2011 

Will Asia crack? 

Asia faces a double squeeze from tumbling demand in the West and rising global 

financial jitters 

Growth, as a result, is likely to slow further, with stress showing especially across the 

region’s periphery 

But, with China at its core, and financial systems awash with liquidity, Asia should 

withstand the pressure 

By Qu Hongbin and Frederic Neumann 

Disclosures and Disclaimer This report must be read with the disclosures and analyst 

certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

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Summary 

The world has become a fragile place. And Asia’s fate is still tied to the 

global trade cycle. No surprise, then, that investors are fearing a rerun 

of 2008, when Asian economies got squeezed to breaking point. 

The risks are certainly rising with every week that policy uncertainty 

persists in the West. But Asia also has certain strengths that should, 

at the margin, provide it with a little more resilience. China, above all, 

looks to be in more robust shape, with exports contributing now much 

less to growth. That also helps others that have become more reliant 

on shipments to mainland China than the West. Asia, in short, may 

just avoid cracking under pressure. 

Looking for a map 

A short, three years after the world economy tumbled off the cliff, it is finding itself again staring into the 

void. Sure, most indicators have held up well so far, with the exception of the occasional wobble 

especially in the more trade dependent economies, such as Taiwan and Korea. But this is taking comfort 

from the rear-view mirror. Look ahead and it appears that the road has suddenly disappeared. The West, 

once again, is on the skids. Certainly in Europe financial stress is already taking its toll on growth. In the 

United States, the economy remains decidedly lacklustre, even if it is not entirely clear yet whether it will 

trip into an outright recession. 

That’s of worry for Asia. The region’s economies have historically relied on exports to power growth. In 

addition, most financial systems are open and foreign capital plays a prominent role. As funds dry up, and 

Western shoppers grow tired, the economic consequences for Asia can be severe. In 2008, for example, in 

spite of all the hopes about decoupling, the financial and economic exposure of Asia to the West became 

once more painfully obvious. The decline in output, in fact, was much sharper in many Asian economies 

than in the US or the EU. Financial markets, too, even if structurally in much better shape, took a battering. 

Such memories are hard to erase, even if Asia lingered for a mere four months in recession before snapping 

back into action. Over the subsequent three years, regional output rose by over a third, only surpassed by 

exuberant asset prices themselves. Inflation, too, quickly resurfaced and still provides a headache for the 

region’s policy-makers. Growing tensions in the West, however, have now suddenly taken their toll again, 

perhaps most spectacularly in falling exchange rates. And there could be more: bond investments and bank 

lending into Asia by institutions in the West stand at an all-time record. 

The current jitters in Asia’s financial markets, in short, are entirely understandable. However, there are 

also reasons to remain a little more confident that the impact may be less severe this time around than in 

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2008. Take China. All the talk about a hard-landing notwithstanding, we remain of the view that growth 

will hold up. Exports no longer contribute as much to growth as three years ago and public investment will 

continue to provide plenty of stimulus. This, then, matters for other economies in Asia as well, notably 

Hong Kong and Singapore, but also Korea, Taiwan and Malaysia, all highly dependent on trade. China, 

after all, has become an important market in its own right. 

The second channel of contagion, finance, is harder to assess. Much depends on policy developments in 

Europe. Fundamentally, however, even if foreign capital continues to play an important role in Asia, the 

risk that its withdrawal could undermine the fundamental integrity of local financial systems appears to 

be relatively manageable, as in 2008. Liquidity remains ample, with excess savings providing a useful 

buffer. This is not to say that the short-term disruptions would not be severe. They almost certainly will 

be. But, just as in the earlier episode, local financial institutions would then stand ready to take up the slack 

and power continued growth in credit, upon which the regional economy has, for better or worse, become 

increasingly dependent in recent years. 

What markets, then, are worth keeping an eye on? As mentioned, the stability of China remains our key call. 

But, beyond this, we also favour ASEAN, which is increasingly finding its niche again, especially in export 

markets, vis-à-vis its big northern neighbour. In India, the news is a little more mixed. Inflation remains more 

stubborn here than elsewhere, which may necessitate more tightening. But, we still expect the economy to 

pick up steam again next year. Korea and Taiwan are especially exposed to the slowdown in global demand. 

In the latter, in particular, there is a risk that weak exports weigh on the economy through the middle of next 

year. The relatively low forecast for 2012, therefore, masks a sharp recovery over the second half. 

Japan, meanwhile, is likely to avoid a recession, with reconstruction spending providing crucial support. But 

there are signs that growth has already lost momentum as a strong yen, and weaker overseas demand, take their 

toll. The outlook for 2012, therefore, remains cloudy. Australia, by contrast, should see quite a bit stronger 

growth next year, partly reflecting ongoing demand from China and partly the local investment boom. 

HSBC GDP growth forecasts (October 2011 vs. previous, red denotes higher than consensus, grey lower than consensus) 

2010 2011f (old) 2011f (new) 2011f 

consensus 

2012f (old) 2012f (new) 2012f 

consensus 

2013f 

Australia 2.7 1.8 1.8 1.8 3.9 3.9 3.7 3.7 

New Zealand 1.7 1.7 2.0 2.1 4.3 3.8 3.7 3.7 

China 10.4 8.9 8.9 9.1 8.6 8.6 8.6 8.8 

Hong Kong 7.0 6.5 5.0 5.4 5.4 4.5 4.4 5.3 

India* 8.5 7.4 7.4 7.5 8.1 8.1 8.0 8.3 

Indonesia 6.1 6.5 6.4 6.4 6.8 6.7 6.4 6.5 

Japan 4.0 -0.6 -0.6 -0.5 2.4 1.9 2.4 0.9 

Korea 6.2 4.1 3.4 3.9 4.7 4.1 4.2 4.2 

Malaysia 7.2 5.7 4.8 4.6 5.8 5.0 4.7 5.2 

Philippines 7.6 4.3 4.3 4.5 4.8 4.8 4.9 4.6 

Singapore 14.5 6.2 5.0 5.3 6.3 5.1 4.7 5.6 

Sri Lanka 8.0 8.2 8.1 8.0 6.8 6.8 7.1 7.1 

Taiwan 10.9 5.6 4.0 4.7 4.9 1.7 4.2 6.6 

Thailand 7.8 4.4 3.9 3.9 5.4 5.0 4.6 4.9 

Vietnam 6.8 5.9 5.8 5.9 7.1 7.0 6.7 7.2 

Asia. Ex JP 9.3 7.5 7.3 7.5 7.5 7.3 7.3 7.6 

Asia. Ex. JP & CN 7.9 6.0 5.5 5.7 6.3 5.8 5.9 6.3 

Asia. Ex. JP CN & IN 7.7 5.3 4.6 4.9 5.5 4.7 4.9 5.4 

Source: CEIC, HSBC, Consensus Economics; *number for India are on FY basis; regional aggregates are nominal GDP weighted 

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Contents 

Key forecasts 4 

Monetary & fiscal policy 

assumptions 5 

Not so fast 6 

Data and principles 6 

Still exportin’ 7 

Domesticated 10 

Asia’s addiction 12 

Prices in the pipeline 13 

Still lots of it 14 

The mind game 15 

What it all means 16 

China to hold up well 18 

Inflation petering out 18 

Growth is cooling, but still strong 18 

Chinese growth has become much less export-driven 21 

There’s room to respond … 22 

… but it won’t be like 2008-09 22 

GDP 23 

Inflation 24 

Industrial production & 

unemployment 25 

Consumption & saving 26 

Investment 27 

Trade 28 

Exchange rates & interest rates 29 

Country profiles 31 

Australia 32 

China 36 

Hong Kong 40 

India 44 

Indonesia 48 

Japan 52 

Korea 56 

Malaysia 60 

New Zealand 64 

The Philippines 68 

Singapore 72 

Sri Lanka 76 

Taiwan 80 

Thailand 84 

Vietnam 88 

Disclosure appendix 95 

Disclaimer 96 

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Key forecasts 

(% y-o-y) Asia Average AU CH HK IN ID JP KR MA NZ PH SG SL TW TH VN 

Real GDP%* 

2010 7.5 2.7 10.4 7.0 8.5 6.1 4.0 6.2 7.2 1.7 7.6 14.5 8.0 10.9 7.8 6.8 

2011f 4.7 1.8 8.9 5.0 7.4 6.4 -0.6 3.4 4.8 2.0 4.3 5.0 8.1 4.0 3.9 5.8 

2012f 5.5 3.9 8.6 4.5 8.1 6.7 1.9 4.1 5.0 3.8 4.8 5.1 6.8 1.7 5.0 7.0 

2013f 5.4 3.7 8.8 5.3 8.3 6.5 0.9 4.2 5.2 3.7 4.6 5.6 7.6 6.6 4.9 7.2 

Private consumption 

2010 5.8 2.8 9.5 5.8 8.6 4.6 1.8 4.1 6.5 2.3 3.4 4.2 12.0 3.7 4.8 10.0 

2011f 4.9 3.1 9.4 7.7 7.9 4.7 -0.4 2.5 6.3 1.4 5.2 5.3 9.7 3.1 3.5 4.9 

2012f 5.2 2.5 9.3 5.0 8.1 5.3 0.5 3.7 6.2 1.7 5.1 4.8 7.3 1.9 3.7 5.2 

2013f 5.2 2.6 9.3 6.4 8.3 5.4 0.3 3.5 6.0 2.1 5.2 5.5 8.2 4.0 4.0 5.3 

Fixed investment 

2010 11.8 5.8 24.5 8.1 8.6 8.5 -0.2 7.0 9.8 3.4 19.1 5.1 26.5 23.4 9.4 10.9 

2011f 9.1 5.5 21.5 6.3 7.1 9.4 -0.5 0.1 4.5 4.9 4.8 2.9 14.3 0.4 5.9 3.9 

2012f 10.8 8.4 19.0 2.8 8.5 10.7 6.0 3.0 6.1 11.7 8.5 4.6 12.7 2.5 5.4 6.6 

2013f 9.6 7.6 19.0 3.4 8.8 9.3 2.0 3.8 6.3 11.0 4.9 5.0 14.5 6.8 4.4 6.8 

Current account balance** (% of GDP) 

2010 3.5 -2.7 4.2 5.6 -3.0 0.8 3.6 3.3 11.5 -4.1 4.2 22.2 -3.3 9.3 4.7 -8.3 

2011f 3.0 -2.5 3.7 6.2 -2.3 0.5 2.8 2.2 11.9 -2.5 4.3 19.2 -3.8 9.8 4.5 -7.6 

2012f 2.4 -2.9 2.6 9.8 -2.6 0.6 2.1 1.6 11.8 -1.6 3.9 22.4 -3.1 11.4 3.4 -6.7 

2013f 2.2 -3.2 2.0 9.6 -2.2 0.4 1.8 1.3 11.8 -1.0 4.0 25.4 -2.7 11.1 3.5 -7.4 

CPI (period average)* 

2010 2.6 2.8 3.3 2.3 10.4 5.1 -0.7 3.0 1.7 2.0 3.8 2.8 6.2 1.0 3.3 9.2 

2011f 3.3 3.4 4.8 5.0 8.0 5.6 -0.5 4.4 3.2 4.5 4.4 4.7 6.9 1.5 4.0 18.4 

2012f 2.6 3.1 2.9 5.3 7.7 6.2 -0.3 3.6 3.0 3.0 4.5 3.0 5.8 2.0 3.6 11.2 

2013f 2.4 3.4 2.6 4.8 6.5 6.0 -0.2 3.6 2.5 2.4 4.0 2.6 7.6 2.2 3.0 9.5 

Money market interest rate*** (%, year-end) 

2010 2.38 4.95 2.25 0.28 7.19 6.37 0.20 2.80 2.98 3.17 0.77 0.44 n/a 0.74 2.15 n/a 

2011f 3.18 5.05 3.10 0.30 7.70 6.80 0.20 4.05 3.00 3.05 4.49 0.40 n/a 1.12 3.80 n/a 

2012f 3.46 5.55 3.10 0.30 7.70 7.55 0.20 4.55 3.50 4.55 4.99 0.40 n/a 1.49 4.30 n/a 

2013f 3.98 5.80 7.00 0.30 7.70 7.55 0.20 5.05 3.50 4.55 5.24 0.90 n/a 1.99 4.30 n/a 

Exchange rate (vs. USD, year-end) 

2010 n/a 0.84 6.62 7.77 44.8 8,991 83.3 1,126 3.08 0.73 44.0 1.29 111.1 30.4 30.0 19,498 

2011f n/a 0.95 6.35 7.80 49.0 8,800 74.0 1,150 3.10 0.76 43.5 1.27 109.0 30.0 30.7 21,500 

2012f n/a 0.93 6.15 7.80 45.5 8,300 72.0 1,070 2.88 0.74 41.0 1.19 106.0 28.0 28.8 21,500 

2013f n/a 0.93 6.05 7.80 44.0 8,300 72.0 1,050 2.82 0.74 40.0 1.17 104.0 27.4 28.0 21,500 

* India GDP and CPI forecasts are fiscal year basis. ** Hong Kong: current account refers to visible and invisible trade balance only 

*** China: 3-month time deposit; Hong Kong: 3mth HIBOR; India: 3-month T-Bill; Indonesia: 3 month SBI; Korea-3 month CD yield; Malaysia: 3-month KLIBOR; Philippines: 3-month T-bill; Singapore: 3-month SIBOR; Taiwan: 91-day 

secondary CP; Thailand: 3 month BIBOR 

Source: HSBC, CEIC, NB: Asia aggregate data are based on 2010 nominal USD weights and does not include Australia and New Zealand 

GDP (% y-o-y) 

8 

8 

CPI (% y-o-y) 

10 

6 

6 

8 

Asia ex China, India & Japan av erage 

F'cast 

4 

4 

6 

2 

Asia ex C hina, India & Japan av erage F'cast -2 

Asia av erage 

2 

4 

0 

0 

2 

-2 

-2 

-4 

-4 

97 99 01 03 05 07 09 11f 13f 

0 

Asia av erage 

97 99 01 03 05 07 09 11f 13f 

Source: CEIC, HSBC 


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Monetary & fiscal policy 

assumptions 

Monetary policy 

Period end % Q3 2011 Q4 2011f Q1 2012f Q2 2012f Q3 2012f Q4 2012f Q1 2013f Q2 2013f 

Australia RBA cash target rate 4.75 4.75 5.00 5.00 5.25 5.25 5.50 5.50 

China 1 year base lending rate 6.56 6.56 6.56 6.56 6.56 6.56 6.56 6.56 

Hong Kong Discount Window Base Rate 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 

India Repo rate 8.25 8.50 8.50 8.50 8.50 8.25 8.00 8.00 

Indonesia BI Overnight rate 6.75 6.75 6.75 7.25 7.50 7.50 7.50 7.50 

Japan Overnight call rate 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 

Korea Base rate 3.25 3.25 3.50 3.75 3.75 3.75 3.75 4.00 

Malaysia Overnight rate 3.00 3.00 3.25 3.50 3.50 3.50 3.50 3.50 

New Zealand RBNZ cash rate 2.50 2.75 3.25 3.75 4.00 4.25 4.25 4.25 

Philippines Reverse repo rate 4.50 4.50 4.50 4.75 5.00 5.00 5.25 5.25 

Singapore 3 months rate 0.37 0.40 0.40 0.40 0.40 0.40 0.90 0.90 

Sri Lanka Reverse Repo rate 8.50 8.50 8.50 9.00 9.50 10.00 10.25 10.25 

Taiwan Discount rate 1.875 1.875 1.875 2.000 2.125 2.250 2.375 2.500 

Thailand 1-day repo rate 3.50 3.50 3.50 3.50 3.75 4.00 4.00 4.00 

Vietnam Refinancing Rate 14.00 14.00 14.00 14.00 14.00 14.00 14.00 13.00 

Source: HSBC, CEIC 

Fiscal policy assumptions for 2011 

Australia In the most recent budget, weaker-than-expected revenues due to the Queensland floods, 

lower-than-expected capital gains receipts and large tax deductions by mining companies, 

saw a larger budget deficit than expected for 2010/11, at 3.6% of GDP. However, the 

government still plans to return the budget to a small surplus position by 2012/13, with an 

implied fiscal contraction of 2.1% of GDP this year and 1.7% of GDP next year. Net debt is 

expected to peak at just 7.2% of GDP in 2012/13, before declining over the projection 

horizon. 

China 

Proactive fiscal policy will remain in place but Beijing plans to narrow its fiscal deficit from 

an actual 2.5% of GDP in 2010 to 2% this year, which is helpful for checking inflation. To 

ramp up spending on education, healthcare and other social welfare, spending on these 

areas will be accelerated to increase by over 14% y-o-y this year, outstripping the planned 

11.9% growth rate for 2011’s total fiscal spending. Though a step in the right direction, the 

scale of this shift in fiscal spend from construction to social welfare likely remains too 

modest for effective rebalancing of China’s growth engine to consumption in the near term. 

Hong Kong The government’s spending plan intends for its consolidated fiscal budget to drop sharply 

from 4.1% in 2010/11 to around zero in 2011/12, although rising global financial market 

turbulence will likely prompt the government to turn more cautious thereafter. One-off relief 

measures have been introduced to protect the welfare of the poor and buffer the near-term 

impact of higher housing/energy inflation, including a two-month public housing rental 

waiver and residential electricity subsidy. Public pressure swayed the government to 

expand its initial budget design to include income tax cuts and a one-off HKD6000 cash 

hand-out to residents as well. 

India The central government deficit is projected to reach around 5.2% of GDP in 2011/12, 

above the government’s deficit target of 4.6% of GDP. We do not believe the deficit target 

is achievable because it is predicated on overly optimistic growth assumptions (9%). This 

means tax collections could disappoint. The assumed privatization receipts will also be 

difficult to achieve. Moreover, fuel subsidies are likely to turn out higher than budgeted in 

light the unrealistic assumptions about oil prices. 

Indonesia In 2011, with growth staying strong and the government unable to kick the curious habit of 

under-spending, we expect the budget deficit to be 1.9% of GDP, broadly in line with the 

government projection of a deficit of 2.1% of GDP. The key risk fuel subsidies which can 

turn out higher if the policy stays unchanged. 

Japan 

The government has proposed a third supplemental budget of over JPY10trn, which is 

expected to be passed by late October. This would support construction activity well into 

2012. How exactly this will be funded is not clear yet, although partly funds could be made 

available for reconstruction from cuts elsewhere, which implies that the boost to growth is 

not as large as this headline number suggests. 

Korea 

The South Korean government has targeted to reduce its budget deficit sharply and 

achieve a fiscal balance by 2013. This is in response to increasing global pressure for fiscal 

prudency following the debt crisis in Europe. With global economic conditions looking 

gloomy and elections in 2012, we believe achieving such targets may prove difficult. 

Therefore we expect the budget deficit to fall to 0.5% of GDP in 2012 and 0.3% in 2013. 

Malaysia The government targets a reduction in the 2011 budget deficit to 5.4% of GDP from 

5.6% in 2010. However, we believe that the fiscal deficit could come out significantly 

lower (4.4% of GDP) due to better-than-budgeted tax collections hitherto and underexecution 

on the spending side. However, whether the government continues its 

prudent fiscal path in the run-up to 13th general elections will be something to watch 

out for in the forthcoming 2012 budget, which is set to be announced on 7 October. 

Fiscal policy assumptions for 2011 

New Zealand 

Philippines 

Singapore 

Sri Lanka 

Taiwan 

Thailand 

Vietnam 


In response to the Canterbury earthquake the budget position blew out substantially 

for 2010/11, with a deficit of 8.4% of GDP. Nonetheless, the government retained its 

plans to return to surplus over the forecast horizon, indeed pulling forward the first 

planned surplus year to 2014/15, in response to sovereign ratings concerns. Net 

debt is expected to peak at 29.6% of GDP in 2014/15, and to fall thereafter. 

The Aquino administration’s fiscal consolidation strategy is paying off. Fiscal 

position has improved significantly in the first eight months of the year; the deficit 

narrowed from PHP228bn to PHP34bn, an 84.9% improvement from last year. We 

expect the budget deficit to be 2.4% of GDP in 2011, a significant improvement from 

3.7% from the previous year. 

While the government delivered some “goodies” in reward for the strong growth 

performance, the fiscal stance in 2011 is estimated to be slightly contractionary, 

consistent with the government’s exit strategy and the need to tame inflation 

pressures in the economy, supplementing the monetary policy efforts in this regard. 

This is also predicated on the assumption that the government’s typically 

conservative budget assumptions imply that the actual outcome will be better than 

budgeted. 

The budget deficit for 2011 is expected to shrink (7.1%), but not by as much as 

budgeted by the government (6.8%). Tax broadening measures will help support 

revenue collections, but the hoped for growth (and, thereby, revenue) impact from 

budgeted tax rate cuts will prove difficult to achieve. 

We expect the government to continue efforts to narrow its budget deficit again in 

2011/12. The positive impact of the ongoing fiscal consolidation program was to an 

extent limited by the impact of last year’s tax cuts. However, the tax cuts in turn 

have already started to stimulate business and investment activities. With a general 

election due in early 2012, only if both the US and Euro zone economies were to 

plummet into recession would the government be willing to consider breaking away 

from its fiscal consolidation plans to embark upon major fiscal spending. 

As part of her election campaign, Prime Minister Yingluck Shinawatra promised a range 

of populist measures, e.g. minimum wage increases, higher guaranteed price for rice, 

tablet computers for students, tax cuts and increased infrastructure spending. Owing to 

such a populist stance, we expect the budget deficit to grow from 1.3% in 2010 to 2% in 

2012. This estimate, however, is an optimistic measure of government finances. The 

recently approved figure from the cabinet projects a deficit of THB350bn (around 3% of 

the GDP). Our optimistic stance relies on robust growth in government revenue, which 

is projected to hold up well even if exports slow more than expected. 

The government is implementing an expenditure reduction of 10% and limit state 

investment. Spending on subsidies may also shrink, with the authorities now allowing 

more frequent energy price hikes. The fiscal deficit target for 2011 is expected to be 

3.9%, a significant reduction from a deficit of 5.5% in 2010. 


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Not so fast 

Financial turbulence and sharply falling activity in the West raise 

the spectre of Asia again heading into another 2008-style bust 

But the region’s fundamentals remain sound and growth should 

prove less sensitive to swings in exports than in previous episodes 

China’s demand will support regional trade, while consumption and 

investment from India to ASEAN and beyond adds further resilience 

Data and principles 

Let’s dive right into it. Things aren’t looking pretty 

in much of the developed world. Europe continues 

to grapple with sovereign funding challenges and 

burgeoning risk aversion among its big lenders. In 

the US, various recession signals are flashing red 

even before the government has started to tighten 

fiscal policy. Japan, perhaps, looks a little steadier 

at the moment, with growth receiving a boost from 

reconstruction activity. But that’s hardly enough. 

For Asia, all this means two things. First, exports 

will almost certainly take a large hit. It may not be 

quite 2008, but the memory of that episode cuts 

deep and demand in the West still matters for the 

region. Second, financial jitters in the US and EU 

have started to infect Asia as well. As currencies and 

capital markets sell off, domestic demand, clearly 

the engine of growth over the past three years, will 

also throttle down. 

Sure, the data so far shows little evidence of this. 

Across the region, with the exception of a few minor 

bumps, such as industrial production in Taiwan, 

things still seem pretty solid. That’s not entirely 

surprising: the financial world has just recently 

spun itself into a tizzy, and economic data will only 

gradually come to reflect the damage this has caused 

in the real sector. 

Frederic Neumann 

Economist 

The Hongkong and Shanghai 

Banking Corporation Limited 

+852 2822 4556 

fredericneumann@hsbc.com.hk 

1. Asia ex Japan: export growth (% 3m/3m sa) 2. Asia ex Japan: PMI new export orders 

10 

5 

0 

-5 

-10 

-15 

-20 

Jan Mar May Jul Sep Nov 

2008 2011 

53 

51 

49 

47 

45 

43 

41 

39 

37 

35 

33 


2008 2011 


Source: Markit, CEIC, HSBC; NB: GDP weighted 

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3. Change in export to GDP ratio: latest minus 2Q 2008 

12 

10 

8 

6 

4 

2 

0 

-2 

-4 

-6 

-8 

-10 

CH HK IN ID JP KR MA PH SG SL TA TH VN 

Source: CEIC, HSBC; NB: 4 quarter moving averages 

That, if you remember, was the same story in 2008. 

Until the collapse of Lehman Brothers in September 

of that year, exports continued to power ahead. And, 

while soaring inflation had already taken its toll on 

sentiment and spending, domestic demand remained 

reasonably robust as well. That changed dramatically 

in the fourth quarter of 2008 with the global credit 

crunch: relatively calm economic seas in Asia were 

suddenly hit by an exceedingly violent storm. 

This, then, should give us pause before signalling the 

all clear. Recent economic data tells us only so much 

about the near-term trajectory of growth in the event 

that financial calamity strikes again. Still, there are 

broader principles that can be applied to assess 

Asia’s fundamental exposure to turbulence in the 

West. This, arguably, has declined in recent years 

and our still relatively optimistic outlook for the 

region rests primarily on the view that structurally 

the sensitivity of Asian growth to swings in demand 

in the West has fallen in recent years. 

Still exportin’ 

Exports, no doubt, still matter hugely for Asian 

economies. An extreme shock, like that in 2008, 

when shipments collapsed in some cases by 40% 

or more in a matter of months, will inevitably 

leave its mark on the region. But such outcome is 

extreme. The more relevant question, therefore, is 

whether a decline in shipments, which will likely 

occur, though perhaps not to the same extent as in 

the aftermath of the collapse of Lehman Brothers, 

would have proportionately the same effect as three 

years ago. In short, has the sensitivity of Asian 

growth to demand in the US and the EU declined 

over time? 

Statistically, there is no clear-cut way to answer 

this given that the post-crisis period is too short to 

be used for rigorous analysis. But consider a few 

other observations, which indeed suggest that Asia 

is now less dependent on the West than before. 

Chart 3 shows the change in the export to GDP ratio 

for Asian economies since the middle of 2008. In 

almost all cases, this measure has fallen, implying 

that external demand is generally less important for 

local growth. 

The only notable exceptions are Hong Kong and 

Korea. In the former, this is misleading since trade 

passes through the territory’s port without, at least 

for the most part, directly affecting local activity. 

In the latter, this reflects relatively lacklustre local 

demand in the face of gradual deleveraging. After 

years of heady credit growth before the Global 

Financial Crisis, Korea is the only major Asian 

economy that subsequently curtailed its lending 

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spree, rendering the economy more dependent on 

exports as a result. 

From a regional perspective, however, what matters 

most is the decline in China’s exports-to-GDP ratio. 

As Qu Hongbin, HSBC’s chief China economist, 

argues in the next chapter, exports played a crucial 

role in driving growth on the mainland right up to 

the collapse of Lehman Brothers. So far this year, 

however, the contribution of net exports to GDP 

growth has dwindled to zero. As a result, China’s 

economy should hold up much better than in 2008 

in the event that exports take another big hit. 

4. Korean exports by destination (USD bn, sa, 3mma) 

12 

10 

8 

6 

4 

2 

0 

Aug-00 Aug-02 Aug-04 Aug-06 Aug-08 Aug-10 

to China to EU and US 


Given the growing role of China’s own demand in 

driving the regional trade cycle, this in turn suggests 

that other economies should hold up better as well. 

Again, consider Korea where the importance of 

exports has risen over the past three years. Chart 4 

shows Korea’s exports to the West and to China. 

As late as 2003, shipments to the US and EU were 

about twice as large as exports to the mainland. 

Although the gap closed rapidly in subsequent years, 

it was only in mid-2009 that China surpassed the 

West as an export destination for Korea. 

Today, Korea exports about 20% more to China 

than it does to the US and the EU combined. In 

terms of growth, mainland demand has clearly 

been the driver in recent years: Korean exports to 

China are now over 30% above their pre-crisis 

peak, whereas shipments to the West have barely 

risen back to their mid-2008 level. Of course, one 

complication with this analysis is that some of the 

exports going from Korea to China ultimately feed 

through to the West. It is impossible to precisely 

estimate the share of such transhipments. Growing 

supply chain integration between the two countries 

may well account for a good chunk of their trade, 

possibly masking the ultimate importance of the US 

and the EU in driving these exports. 

Still, while there is some merit to this argument, it 

is not the whole story. For one, it’s unlikely that 

supply chain integration increases that rapidly (note 

the jump in exports from Korea to China in the last 

couple of years). Moreover, supply chain integration, 

though certainly prominent in the period before the 

Global Financial Crisis, may have slowed in recent 

years as China moves up the value added ladder and 

takes over the production of certain inputs instead 

of purchasing them abroad. 

5. Share of local exports heading to China (%) 

30 

25 

20 

15 

10 

5 

0 

IN ID JP SK MY PH SG TW TH VN 

pre-crisis Latest 


Admittedly, Korea’s exposure to China is relatively 

high compared to other economies in the region. 

Still, all countries have seen the share of their 

exports destined for the mainland rise in the last 

three years, with the exception of Taiwan, which 

already enjoys close trade ties. Also, official data 

understates the importance of Chinese demand for 

regional trade. For example, shipments are often 

routed via Hong Kong, and the share of the 

territory’s exports destined for China jumped from 

8

Macro 



abc 

6. Asia ex Japan: ratio of intra-Asian trade to exports to the West – “now almost twice as large” 

2.0 

1.9 

1.8 

1.7 

1.6 

1.5 

1.4 

1.3 

1.2 

1.1 

1.0 

Asian supply chain integration 

China joins WTO 

China's domestic demand take-off 

Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 


48.6% to 52.3% over the past three years (not shown 

in the chart). Moreover, in terms of contribution to 

overall export growth, Mainland demand has clearly 

been the dominant driver. 

The importance of China, however, extends beyond 

shipments sent directly to its shores. Intra-regional 

trade also receives an indirect boost through income 

effects that reverberate across the entire region. Take 

Indonesia. High coal prices have evidently helped 

to stabilize its economy and boosted consumption 

spending. This in turn pushes up import demand, 

whether for Japanese car parts or Taiwanese gadgets 

(for an extensive study on the rising importance of 

trade between emerging markets, see Stephen King’s 

The Southern Silk Road, 7 June 2011). 

As a result, intra-Asian trade has rapidly gained in 

importance relative to shipments from the region 

to the West. Again, this cannot be put entirely down 

to ongoing supply chain integration, a process that 

occurred largely over the first half of the last decade, 

the time leading up to, and immediately following, 

China’s accession to the WTO in December of 2001. 

More recently, the rise in the relative importance of 

regional trade reflects more and more both the direct 

and indirect effects of soaring mainland demand. 

7. Asia ex Japan: structural change in the drivers of growth – “from exports to domestic demand” (ppt) 

8 

7 

6 

5 

4 

3 

2 

1 

0 

-1 

-2 

net ex ports and domestic demand highly correlated 

net ex ports still important 

1Q-2000 1Q-2002 1Q-2004 1Q-2006 1Q-2008 1Q-2010 1Q-2012 

Net Exports 

Domestic Demand 

temporary decoupling 


9

Macro 



abc 

8. Emerging Asia: output rising more rapidly than export volume (index, 2000 = 100) 

340 

+ 34% 

290 

240 

190 

+15% 

140 

90 

40 

Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 

EM Asia ex port v olume 

EM Asia output 

Source: CBP, HSBC 

Domesticated 

This can be gleaned from Chart 7, which shows the 

contribution of domestic demand and net exports 

to GDP growth in emerging Asia. Note that over 

the first half of the last decade, internal and external 

demand were similar in their importance to growth. 

Something changed, however, around 2005, when 

consumption and investment started to take off and 

net exports faded in relevance. As we’ve noted 

before, the critical development at this time was 

that the deleveraging process, triggered by the 1997 

regional currency crisis, had largely run its course. 

No surprise, then, that intra-Asian trade also started 

to rise more rapidly again than shipments to the 

West, although this time not because of supply 

chain trading but due to the growing importance 

of local demand. 

This structural shift away from dependence on 

exports, especially those destined for the US and 

the EU, has also underpinned the recovery from 

the Global Financial Crisis in Asia. Take Chart 8. 

Here, we show the levels of output and export 

volume for emerging Asia. Note how the two series 

rose at roughly the same pace until about 2006, 

when industrial production growth began to exceed 

the rise in the volume of shipments. This process 

became even more pronounced after the Global 

Financial Crisis. Currently, output in emerging 

Asia is roughly 34% above its pre-crisis peak, 

while export volumes have risen only about 15%. 

So far, this is fairly straight-forward stuff. But two 

critically important questions remain. First, why is 

it that domestic demand collapsed in 2008 along 

with exports? Chart 7, after all, shows that after a 

period of “temporary decoupling”, things headed 

south quite rapidly on the local front as well. Second, 

what is driving Asia’s sudden domestic vigour in the 

first place? Is it sustainable? 

9. Asia ex Japan: headline inflation (% 3m/3m saar) 

10 

8 

6 

4 

2 

0 

Jan Mar M ay Jul Sep N ov 

200 8 201 1 


Let’s tackle both questions in turn. Admittedly, the 

slump in domestic demand rivalled the decline in 

exports in 2008. But that doesn’t necessarily mean 

the two are closely linked. In fact, to a large extent 

10

Macro 



abc 

10. Asia ex Japan: real retail sales (% 3m/3m saar) 11. Asia ex Japan: consumer confidence 

24 

20 

16 

12 

4 8 

-4 0 -8 

-12 

-16 

-20 


2008 2011 

100 

95 

90 

85 

80 

75 


2008 2011 



the rapid deceleration in Asian consumption and 

investment had a somewhat different cause, namely 

the sudden surge in inflation, primarily of food, that 

rattled consumers and squeezed their purchasing 

power over the course of 2008. 

As Chart 9 shows, the trajectory is far more 

benign this year. Despite concerns over rising 

inflation in places such as India, China and Korea, 

the move has not been nearly as sharp as in the 

run-up to the Global Financial Crisis. In essence, 

there has not been the same “sticker shock” this 

year that threatens to undermine household 

spending. Consequently, regional retail sales and 

consumer confidence are charting a different 

trajectory this year compared to 2008. 

The inflation spike of 2008 also had an impact on 

investment at the time by eliciting a strong response 

from the region’s central banks. As a result, in 

August of that year, policy rates were higher in all 

Asian economies than they are currently. True, the 

pace of rate hikes has been more rapid in 2011, but 

what matters is the level of interest rates, which by 

our estimates are still in accommodative territory 

for virtually all economies. 

Coupled with relatively stable exchange rates, at 

least in trade weighted terms, monetary conditions 

are therefore significantly looser today than three 

years ago. This, of course, matters for investment, 

which is expected to hold up better this time 

around. In principle, capital spending should also 

12. Policy rates are lower today than at the onset of the Global Financial Crisis (%) 

16 

14 

12 

10 

8 

6 

4 

2 

0 

AU NZ CH HK IN ID JP SK MY PH SG SL TW TH VN 

latest Aug-08 

Source: CEIC, HSBC; NB: money market benchmark rates for Hong Kong and Singapore 

11

Macro 



abc 

be less sensitive to swings in exports given that 

domestic demand has become a more prominent 

driver of growth. Companies may no longer shy 

away from investment simply because shipments 

to the West have slowed. 

13. Consumer bank credit (% of GDP) 

70 

60 

50 

40 

30 

20 

10 

0 

CH HK ID IN MY PH SG SK TH TW 

end 200 8 latest 


In addition, and this is often overlooked, monetary 

conditions are increasingly relevant for household 

spending given that consumer borrowing, which is 

mostly done at variable rates in Asia, has risen quite 

rapidly in recent years. In Korea, Malaysia and 

Taiwan, for example, household debt levels are well 

above the regional average, while consumer credit 

has also contributed materially to spending growth 

in Thailand, Indonesia, Singapore and Hong Kong, 

partly in the form of mortgages and partly for the 

purchase of consumer durables. In a number of 

economies, notably Malaysia, Korea and China, 

the data in Chart 13 may not even do justice to the 

overall level of household debt as it neglects the 

significant amount of non-bank borrowing that has 

occurred in these markets, but for which data is not 

readily available. 

Asia’s addiction 

Taken together, then, the sharp decline in domestic 

demand in 2008 was partly the result of soaring 

inflation and consequent monetary tightening. As 

such, it was – at least to an extent – coincidental to 

the slump in exports, rather than the result of it. 

The second question we need to tackle, then, is 

where Asia’s recent domestic vigour stems from. 

Factors often cited are the emergence of a middle 

class in places like China and India, demographics, 

urbanization and government policy that aims to 

rebalance economies away from exports via the 

development of rural areas and so forth. These 

explanations are certainly valid. But we doubt that 

they tell the entire story. Rather, Asia is undergoing 

a re-leveraging process that adds an extra kick to 

local demand beyond what can be explained by the 

structural factors cited above. Asia’s growth, in 

short, is credit driven. 

14. Leverage on the rise: bank credit to GDP ratio (%) 

100 

Asian Financial Crisis 

95 

leverage 

90 

85 

80 

75 

Global 

Financial 

Crisis 

Mar-91 Mar-93 Mar-95 Mar-97 Mar-99 Mar-01 Mar-03 Mar-05 Mar-07 Mar-09 Mar-11 

Credit to GDP ratio Asia ex J 

Asia ex JP ex CH 


12

Macro 



abc 

15. Headline inflation has rolled over (% 3m/3m sa) 16. Core inflation pressures still elevated (% 3m/3m sa) 

5 

4 

3 

2 

1 

0 

-1 

00 01 02 03 04 05 06 07 08 09 10 11 

Asia x JP ASEAN NIEs 

2.5 

2.0 

1.5 

1.0 

0.5 

0.0 

-0.5 

-1.0 

00 01 02 03 04 05 06 07 08 09 10 11 

Asia x JP ASEAN NIEs 

Source: CEIC, HSBC; NB: simple averages 

Source: CEIC, HSBC; NB: simple averages 

Chart 14 makes the point. Here, we show the bank 

credit-to-GDP ratio for emerging Asia. This tracks 

our general story quite well. Lending fuelled the 

boom in the early 1990s, which was eventually 

cut short by the Asian Financial Crisis of 1997. 

Subsequently a long period of deleveraging ensued, 

which weighed on domestic demand and raised 

the importance of net exports. Balance sheets were 

largely repaired, however, about a decade later. 

This, then, prompted a re-leveraging process that 

endures to this day, helping to boost local demand 

and giving Asia a degree of resilience in the face of 

volatile exports to the West. 

This process, of course, cannot continue indefinitely. 

The credit intensity of growth in Asia has to fall at 

some stage for the expansion to be sustainable. But 

this is likely to be a gradual process that will have 

to play itself out over the coming years. In the shortterm, 

with the West facing another potential bust, 

the main question facing Asia is whether such event 

will impair the near-term ability of the region’s 

financial systems to continue to extend credit at 

the required pace to maintain growth. 

In principle, a credit cycle can be brought to a halt 

in one of three ways. First, inflation could get out 

of control, necessitating a tightening response by 

officials that knocks the wind out of borrowers. 

Second, the cost of capital could climb for other 

reasons, such as the drying up of liquidity or the 

withdrawal of funds from the region by investors 

elsewhere. Third, and closely related, even if the 

monetary setting remains highly accommodative, 

financial conditions can rapidly change. After all, 

credit availability is primarily a function of risk 

appetite among lenders, which might evaporate 

for reasons other than a tightening of monetary 

policy or a withdrawal of funds from the region. 

Prices in the pipeline 

Let’s consider each in turn. Inflation has been of 

some concern this year. In particular, China and 

India have tightened monetary policy to address 

growing price pressures. In Korea, Hong Kong 

and Singapore, inflation has reared its head as 

well, but the policy response, for various reasons, 

has been more muted. Elsewhere in ASEAN, with 

the notable exception of Vietnam, price pressures 

have stayed relatively benign so far, largely 

thanks to stable rice prices. 

Headline inflation has now started to roll over in 

virtually all Asian economies. There is a risk, of 

course, that this could change in the near term. For 

example, rice prices may start to climb again in 

response to a change in policy by Thailand, the 

world’s number one exporter. As we discussed 

elsewhere, the higher reservation price offered to 

farmers in the country could have wider implications 

for regional headline inflation (see What’s cooking 

with rice?, 21 September 2011). Still, the global 

13

Macro 



abc 

downturn will likely take the sting out of commodity 

prices generally, helping especially to lower the 

cost of energy. A sharp spike in headline inflation 

that could force Asian central banks to hike rates 

into the downturn, therefore, appears unlikely. 

Still, this is not to say that price pressures are no 

longer a concern. For example, core inflation is 

proving rather persistent across the region. This 

could reflect either a lagging effect from strong 

growth over the past two years or, more worryingly, 

a deterioration in the growth-inflation trade-off 

that Asian economies face. If the latter is true, and 

there is growing evidence for this, it will make it 

more difficult for policy-makers to slash rates to 

support growth. 

In sum, inflation is unlikely to force central banks 

to hike rates further in the coming months and put at 

risk the re-leveraging process that is currently under 

way. At the same time, however, rate cuts appear 

difficult to deliver as well given persistent core 

price pressures. In fact, we maintain our call for 

the time being that no central bank in Asia will 

ease monetary policy in the near term – unless, of 

course, the global financial system goes into deep 

freeze again, as it did in late 2008 (see also Pretty 

Sticky, 20 September 2011). 

Still lots of it 

Even if policy-makers are unlikely to endanger the 

credit creation process any time soon by hiking 

interest rates further, could there be another trigger? 

As mentioned, a potential constraint includes the 

evaporation of liquidity, either because local 

leverage has reached prohibitive proportions or 

because it is withdrawn in overwhelming amounts 

by Western investors. On the first count, the risk 

appears minimal, on the second much larger. 

Asian financial systems are awash with so much 

liquidity that they will likely be able to sustain the 

credit creation process for quite some time. Take 

the loan-to-deposit ratio. This still remains low by 

historical standards. In fact, it is surprising that it 

has failed to rise much in recent years. Unlike in 

the early 1990s, when strong credit growth pushed 

up the loan-to-deposit ratio, this time liquidity has 

been barely affected. The reason, of course, is that 

most Asian central banks now intervene heavily in 

their foreign exchange markets, purchasing 

dollars and thus injecting local currency into 

domestic financial systems. This, too, is not 

sustainable over time, but for the near term at 

least it is unlikely that local financial systems will 

run into structural liquidity constraints. 

Still, liquidity – in the sense of demand for local 

assets – could be harmed by the withdrawal of 

foreign capital. And it is here that Asia may have 

become more vulnerable in recent years. For 

example, the share of ownership of local bond 

markets by foreigners has risen dramatically in a 

number of markets, with more than a third of 

17. Ample local liquidity: loan-to-deposit ratio (%) 18. Bank lending to Asia by Europe at record (USD bn) 

110.0 

100.0 

90.0 

80.0 

70.0 

Jan-90 Jan-94 Jan-98 Jan-02 Jan-06 Jan-10 

Asia ex Japan 


140 0 

120 0 

100 0 

80 0 

60 0 

40 0 

20 0 

0 

Mar-05 Ma r-07 Mar-0 9 Ma r-11 

J apan US Europe 

Source: BIS, HSBC 

14

Macro 



abc 

outstanding debt being held by non-residents in 

Korea, Indonesia and Malaysia. Thailand and the 

Philippines have seen a pick-up in inflows as well, 

if not to the same degree, while India and China 

remain protected by capital controls. 

A potentially even more worrying aspect is bank 

lending into Asia. The Asian Financial Crisis, in 

fact, was largely triggered by a refusal from big 

global lenders to roll over short-term loans. What’s 

remarkable is that European banks are now lending 

even more to Asia than in the run-up to the Global 

Financial Crisis. Since most of this is dollar based, 

and European banks are now themselves struggling 

to borrow the currency at a decent rate, credit lines 

could be cut. 

This is possibly already occurring, with a dollar 

shortage in Asia being partly responsible for the 

sharp depreciation of local currencies over the past 

month. The question, however, is whether this 

withdrawal of capital will endanger the integrity 

of local financial system, and thus fundamentally 

impair the local credit creation mechanism. Here, 

the answer is probably “no”. For one, the level of 

short-term debt in Asia is easily covered by the 

FX reserves held by central banks. In fact, this 

ratio has improved almost everywhere since the 

Global Financial Crisis. 

More fundamentally, Asian economies, for the 

most part, still save more than they invest. This 

implies that financial systems are not dependent 

on foreign capital. It is, in fact, rare for countries 

with current account surpluses, which imply the 

existence of excess savings, to experience outright 

financial collapse (Japan’s bust in the late 1980s 

comes to mind, but note that the economy never 

went into a technical recession until 1997 in part 

because excess savings allowed the public sector 

to borrow and thus sustain growth). 

None of this, however, is to say that there will not 

be a severe short-term impact on local growth if 

credit lines are cut and capital leaves the region. 

Even if there are sufficient savings to finance all 

investment plans, this process would prove highly 

disruptive: there will temporarily be more sellers 

than buyers in local capital markets, depressing 

prices, and credit lines have to be renegotiated 

with other lenders. The point, however, is that 

wider financial damage will likely be avoided and 

that the credit creation mechanism will not be 

fundamentally impaired. As in 2008, after a few, 

short months of upheaval, leverage should quickly 

begin to climb again. 

The mind game 

In principle, therefore, Asia’s financial systems 

should be able to withstand the direct blow of 

further calamity in the West. Still, there is one 

more factor to watch, much harder to quantify, but 

potentially more pernicious for it. A big shock 

19. Short-term debt to FX reserve ratios (%) 20. National savings-investment gaps (% of GDP) 

80 

60 

40 

20 

0 

CH IN ID SK MY PH SL TW TH VN 

2008 201 1F 

20 

15 

10 

5 

0 

-5 

-10 

-15 

CH HK IN ID SK MY PH SG SL TW TH VN 

2008 2011f 

Source: IMF, CEIC, HSBC 

Source: IMF, HSBC 

15

Macro 



abc 

from the West may still undercut local confidence 

to such an extent that risk aversion soars and banks 

aggressively wind back lending. Given that leverage 

has risen further in recent years, this risk has actually 

become more acute; the more debt there is in the 

system, the more vulnerable an economy becomes 

to rapid changes in risk appetite. 

Financial confidence is a tricky thing to predict, 

and contagion can often follow entirely irrational 

patterns. While we don’t think this is likely, a sudden 

cascade of risk aversion from the West deep into 

local financial systems in Asia cannot be ruled out. 

In 2008, any such impact proved short-lived and 

the experience of an ultimately swift recovery 

should in principle provide even greater resilience 

going forward. But what also helped at the time 

was a massive, policy response by Asian officials, 

which ranged from extra liquidity provision to 

deposit guarantees and massive government 

spending. Fortunately, in all these respects, the 

region retains the ability to roll out another such 

powerful response again to shore up confidence. 

21. Central government debt (% of GDP) 

80 

60 

40 

20 

0 

AU NZ C H HK ID IN MY PH SK TH TW VN 

20 08 20 11f 

Source: IMF, HSBC 

What it all means 

None of this is to say that Asia will remain entirely 

unaffected by the trouble brewing in the West. 

Even if the region has at the margin become less 

sensitive to swings in exports to the US and the 

EU, and possess sufficient financial resilience to 

avoid being dragged into prolonged calamity, it 

will still feel the pinch. In fact, if the West revisits 

the depth of 2008, Asia would be hard pressed to 

avoid a major slowdown in growth, with the 

smaller, more open economies, such as Taiwan, 

Malaysia, Korea, Singapore and Hong Kong almost 

certainly seeing output contract. Elsewhere, in 

Indonesia, Thailand the Philippines, India and 

China, the impact would be less severe thanks to 

the depth and vigour of local markets. 

22. Japan’s V starting to fade (red denotes firms’ forecast) 

120 IP index (2005=100) 

October 

110 

100 

90 

80 

70 

March 

60 

Sep-01 Sep-03 Sep-05 Sep-07 Sep-09 Sep-11 

Source: CEIC, Bloomberg, HSBC 

Japan, despite the size of its economy, would also 

be challenged to maintain growth, even if ongoing 

reconstruction activity will help to cushion the blow. 

In fact, there are already signs that the economy’s 

impressive bounce from the March lows is starting 

to fade. In part, this reflects the strength of the yen, 

which is starting to hurt exporters and investment. 

Weaker global demand, too, will take its toll on 

Japan where, unlike elsewhere in Asia, the export 

sector has become ever more important as a driver 

of growth in recent years. 

Australia, too, is not entirely immune to external 

headwinds. The recent sell-off in commodities for 

example and heightened fears over a hard landing 

in China – even if unjustified – have weighed on 

business and consumer confidence. Still, the bulging 

pipeline of investment in the natural resource sector 

should help to support growth, even if demand in 

China dips temporarily because of a larger-thananticipated 

blow to the country’s exports. As a 

16

Macro 



abc 

result, Paul Bloxham, HSBC’s chief Australia 

economist, still does not expect rate cuts by the 

Australia’s central bank, with the next move likely 

to be up, rather than down. 

This, in fact, is a key call for the entire region. If a 

major misfortune in the West, on the scale of 2008, 

can be avoided, it appears unlikely that Asian central 

banks will be quick to pull the trigger on rate cuts. 

Three reasons come to mind. First, even if headline 

inflation is better behaved this time around, core 

price pressures are more pressing. Price stability 

is also an increasingly contentious political issue 

across the region. Thus, central banks, mindful of 

their hard-earned credibility in fighting inflation, 

will be reluctant to slash rates all too hastily. 

Second, the experience of 2008 still looms large 

in a different, all too easily forgotten way. While 

the collapse in economic activity has certainly been 

unprecedented, so has the subsequent rebound, 

which instantly stoked inflation pressures and all 

too visible froth in asset markets. As such, officials 

will be more cautious in 2011 when weighing the 

need for accommodation. There is little appetite in 

the region to court another round of jumpy inflation 

prints and sky-bound asset prices. 

Third, and a little more subtly, the influx of capital 

into local bond markets, which has now reached 

unprecedented proportions, should change the 

calculus of central banks in economies where this 

development has been especially prominent. With 

exchange rates already coming under pressure, bond 

investors will seek reassurance that officials do not 

cut rates too hastily. Bond vigilantes are suddenly 

present in Asia as well. That, at least, is one thing 

that has changed since the financial crisis of 2008. 

23. HSBC policy rate forecasts (red denotes hike/rise, grey denotes cut/fall) 

Q3 11 Q4 11f Q1 12f Q2 12f Q3 12f Q4 12f Q1 13f Q2 13f Q3 13f Q4 13f 

Australia 4.75 4.75 5.00 5.00 5.25 5.25 5.50 5.50 5.50 5.50 

New Zealand 2.50 2.75 3.25 3.75 4.00 4.25 4.25 4.25 4.25 4.25 

China 6.56 6.56 6.56 6.56 6.56 6.56 6.56 6.56 6.56 6.56 

Hong Kong 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 

India 8.25 8.50 8.50 8.50 8.50 8.25 8.00 8.00 8.00 8.00 

Indonesia 6.75 6.75 6.75 7.25 7.50 7.50 7.50 7.50 7.50 7.50 

Japan 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 

Korea 3.25 3.25 3.50 3.75 3.75 3.75 3.75 4.00 4.00 4.25 

Malaysia 3.00 3.00 3.25 3.50 3.50 3.50 3.50 3.50 3.50 3.50 

Philippines 4.50 4.50 4.50 4.75 5.00 5.00 5.25 5.25 5.25 5.25 

Singapore 0.37 0.40 0.40 0.40 0.40 0.40 0.90 0.90 0.90 0.90 

Sri Lanka 8.50 8.50 8.50 9.00 9.50 10.00 10.25 10.25 10.25 10.25 

Taiwan 1.875 1.875 1.875 2.000 2.125 2.250 2.375 2.500 2.625 2.750 

Thailand 3.50 3.50 3.50 3.50 3.75 4.00 4.00 4.00 4.00 4.00 

Vietnam 14.00 14.00 14.00 14.00 14.00 14.00 14.00 13.00 13.00 13.00 

Source: CEIC, HSBC; NB: discount window base rate for Hong Kong, 3 months Sibor for Singapore 

17

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abc 

China to hold up well 

China is on track for a soft landing ... 

With growth now becoming less export-driven, the knock-on effect 

of a new global recession would be much smaller this time 

To offset this, all Beijing needs to do is to tweak fiscal policy rather 

than to replay the massive 2008-09 stimulus package 

Inflation petering out 

Headline CPI eased to 6.2% y-o-y in August from 

the cyclical high of 6.5% y-o-y in July, thanks to a 

lower carry-over effect (2.7ppts in August versus 

3.3ppts in July) and decelerating food inflation. 

Sequentially, prices moderated further to 0.3% 

growth m-o-m seasonally adjusted in August 

compared with 0.5% in July. High frequency 

indicators showed that food prices started to soften 

after the mid-Autumn festival, likely resulting in 

slower sequential growth in September than the 

1.2% m-o-m recorded in July. 

We believe that inflation is petering out for the 

following reasons: 

Excessive credit growth has already been 

removed. “Inflation is always and everywhere 

a monetary phenomenon”. This holds true for 

China. The root cause of the inflation was 

accelerating credit growth during the 

implementation of the stimulus package. 

Credit growth shot up to nearly 35% y-o-y in 

3Q09 and has normalised to about 16% y-o-y 

after sustained credit tightening. This ratio is 

in line with the historical average and should 

help contain inflationary pressure. 

Supply side measures are filtering through to 

China’s food market. Food prices are a major 

contributor to inflation. Besides monetary 

drivers, food prices are vulnerable to supply 

shocks. As such, Beijing policy makers have 

stepped up efforts to stimulate food 

production to stabilise food supply. 

Chart 1. Inflation has peaked 

25 

20 

15 

10 

5 

0 

-5 

(%yr) 

(%yr) 

98 99 00 01 02 03 04 05 06 07 08 09 10 11 


CPI Non-food CPI Food CPI 

Growth is cooling, but still 

strong 

Growth has already reacted to credit tightening 

measures and is on course for gradual moderation. 

GDP growth cooled to 9.5% y-o-y in 2Q from 

9.7% y-o-y in 1Q and 10.4% y-o-y last year – a 

desired, modest slowdown and essential to contain 

25 

20 

15 

10 

5 

0 

-5 

Qu Hongbin 

Economist 



+852 2822 2025 

hongbinqu@hsbc.com.hk 

18

Macro 



abc 

inflation. But this is still strong and better than 

market and policy makers initially expected. 

We expect a lagged impact from credit tightening 

and the global slowdown to slow growth in the 

coming quarters. But still resilient domestic 

demand should be sufficient to support around 

8.5% to 9% y-o-y growth in the coming quarters. 

Chart 2. GDP growth slows but still strong 

(%) 

20 

Forecast 

15 

10 

Chart 3. FAI growth has started to slow 

50 

( %yr, 3mma) 

40 

30 

20 

10 

05 06 07 08 09 10 11 

Nominal growth of FAI Real growth of FAI 


Chart 4. But investment in newly started projects picked up 

5 

0 

02 03 04 05 06 07 08 09 10 11 12 

GDP grow th y -o-y GDP grow th qoq saar 


35 

30 

25 

20 

(%yr) 

(%yr) 

100 

80 

60 

40 

20 

0 

-20 

-40 

Fixed asset investment (FAI) growth has been 

stronger than expected. Credit tightening started 

from early 2010 but investment still expanded 

25% y-o-y over the first eight months, compared 

with the average of 24.4% y-o-y in the previous 

decade. Yes, the single month growth rate for 

August decelerated to an eight-month low of 

22.7% y-o-y from 24.5% in July, but real growth 

of 15.4% y-o-y in fixed investment is still strong. 

Moreover, investment initiatives at local levels are 

more than enthusiastic, picking up to 28.1% y-o-y 

for the January to August period from 28.0% for 

the January to July period. This is in sharp 

contrast to a further contraction of investment at 

the central level. Growth in newly started 

investment projects accelerated to 23.1% y-o-y in 

the first eight months versus 19.3% in the first 

seven months. 

06 07 08 09 10 11 

FAI (Lhs) 

Inv estment in new ly started projects (Rhs) 


We believe credit tightening – though 

approaching to the end – will continue to curb 

investment growth. But this will be just a 

slowdown, not a meltdown (see China Inside Out: 

Investment growth: slowdown not meltdown, 

26 August 2011). The factors that support this 

analysis include: 

Continued investment into over 100,000 

ongoing infrastructure projects should provide 

a floor for the slowdown in FAI. Despite the 

credit tightening, infrastructure investment 

has continued to expand at around 10% y-o-y 

so far this year, and will likely continue to 

cushion the investment slowdown. 

Property investment is likely to slow but 

public housing can offset the slackness in real 

estate. Tightening measures are slowing 

19

Macro 



abc 

private property sales and reducing funding 

available for developers. That said, the plan to 

build 10m units of public housing, which is 

due to start by the end of November, should 

be treated seriously by local officials – this is 

a political as well as an economic task. More 

than 86% of the planned construction this 

year was started by the end of August, up 

from less than 30% in May. This shows that 

execution at the local level has been more 

efficient than many expected. 

Consumer related sectors, representing nearly 

40% of total investment, should remain 

resilient as consumer spending continues to 

hold up well. 

Consumer spending resilient 

Consumer spending should continue to hold up 

well. The job market remains tight, which allows 

rapid wage growth. Despite the softening in 

headline PMI readings, employment components 

remained above the 50-line, implying ongoing 

expansion in payrolls. The worries about Chinese 

exporters suffering from weakening external 

demand appear overplayed for the time being, not 

least because the job market is still holding up 

much better than during the 2008-09 slump. 

Chart 5. Employment keeps expanding 

60 

55 

50 

45 

40 

05 06 07 08 09 10 11 

HSBC China Manufacturing PMI-Employ ment 

HSBC China Serv ices PMI-Employ ment 

Source: Markit, HSBC 

With a tight labour market supported by economic 

growth, Chinese consumers have enjoyed strong 

wage growth over the past two years, increasing 

their spending power. Average wages have risen 

over 10% y-o-y in real terms this year, increasing 

disposable income growth for urban households 

by 7.6% y-o-y and cash income growth for rural 

households 13.7% for 1H, both in real terms. 

In addition, the government has taken a further 

step to boost household income by reducing 

income tax threshold and rates. The new personal 

income tax took effect in September, likely easing 

the tax burden by RMB53bn this year and over 

RMB160bn next year. These measures, plus the 

ongoing investment into the social security 

network, should help to support resilient 

consumer spending. 

Chart 6. Retail sales growth to remain resilient 

30 

25 

20 

15 

10 

5 

0 

-5 

-10 

(%yr) 

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 


Retail sales 

Total wage 

The credit squeeze is unlikely to have any 

meaningful negative impact on consumption due to 

the low level of leverage in the household sector. 

Consumer loans represent only around 16% of total 

bank loans, still low despite the 4ppt rise over the 

past three years. Nearly 90% of these loans are 

mortgages. This has two important implications: 

Even if there is sustained property tightening 

leading to a property market correction, this 

won’t have an adverse impact on household 

balance sheets. 

China’s households are big net savers, with 

net deposits (total deposits minus consumer 

20

Macro 



abc 

loans) of over RMB24trn. Each 25bp interest 

rate hike is equivalent to RMB60bn in extra 

household income. 

Chart 7. Chinese households have low leverage 

20 (%) 

15 

10 

Consumer loans as % of total loans 

5 

2005 2006 2007 2008 2009 2010 2011 


Chart 8. Chinese households – large net savers 

35 

(RMB trn) 

30 

25 

20 

15 

10 

5 

0 

2007 2008 2009 2010 1H11 

Household sav ings Household debt 


Net exports, which accounted for 8-9% of GDP 

before the 2008 crisis, shrunk to 2-3% in 2010-11. 

This, plus the combination of a weak global 

recovery and strong domestic growth, implies that 

net exports have been falling (compared with the 

pre-crisis level) or remaining flat (compared with 

2009) over the last three years, becoming a drag 

or at best making zero contribution to GDP 

growth. Indeed, out of the 9.6% GDP growth in 

1H11, the contribution of net exports was almost 

zero. This is in contrast to 2007-08, when net 

exports accounted for 3-4ppt out of the 11.9% 

GDP growth. 

During 2008-09, when the global economy 

slipped into a recession and net exports fell by 

40% y-o-y, this 3-4ppt contribution turned into a 

negative 2ppt contribution, cutting the GDP 

growth rate by 5ppt before the massive stimulus 

package picked up the slack. 

Chart 9. China is less dependent on net exports 

16 (ppts) 

12 

8 

4 

0 

Chinese growth has become 

much less export-driven 

-4 

2005 2006 2007 2008 2009 2010 1H 11 

Consumption Gross capital formation Net ex ports 

Chinese growth has become much less dependent 

on external demand in the post-crisis era. 

Domestic demand has contributed 110% of 

China’s GDP growth since 2009, much higher 

than the average of around 85% in the previous 

three years before the crisis. The fact that import 

growth has exceeded export growth in the postcrisis 

era also underscores the strength of 

domestic demand. 


This time, if the global economy falls into a 

recession again, net exports would at most cut 

China’s GDP growth by 1-2 ppts. Even taking in 

account a second-round effect, the impact of an 

external shock will likely be much smaller than in 

the previous crisis. 

21

Macro 



abc 

There’s room to respond … 

With inflation petering out, Beijing has some 

policy flexibility to respond to a global downturn. 

In other words, less inflationary pressure provides 

the leeway to shift the policy focus towards 

supporting growth. 

The most likely trigger would be if exports were 

to stop growing or start to fall. But export growth 

has been much better than expected so far this 

year, with the August reading posting an upside 

surprise at 24.5% y-o-y. Such a pace is unlikely to 

be sustainable and we expect export growth to 

slow to below 20% in the coming months. This is 

based on our global view that while world growth 

is cooling there will not be an immediate global 

recession (see The new global cooling: cutting our 

growth forecast, 6 September, 2011). 

Despite the gloomy outlook for developed 

countries, emerging markets should hold up 

reasonably well. China’s exports have become 

much more diversified, so emerging markets 

should provide some buffer to the downturn in the 

developed world. China’s exports are likely to be 

resilient in the coming months, so we think there is 

no need for Beijing to respond for the time being. 

… but it won’t be like 2008-09 

With growth less export-driven, the knock-on 

effect of a recession should be much smaller. 

Even taking into account the second-round effect 

via the labour market, the impact on GDP growth 

should be around 2ppt, compared to at least 5ppt 

in 2008. So the amount of additional domestic 

spending needed to maintain 8% GDP growth will 

be much smaller, probably less than a third of the 

previous package. 

We believe the recent pain caused by overstimulation 

also means Beijing policy makers will 

be more cautious when it comes to stimulus policy 

in order to avoid making the same mistakes. 

The most likely policy response will be targeted 

fiscal expansion in public housing and small- and 

medium-sized enterprises (SMEs) rather than an 

across-the-board easing of monetary policy. With 

fiscal revenue still growing at 30% y-o-y and 

likely topping RMB10trn (or nearly a quarter of 

GDP), there is no doubt that China has plenty of 

fiscal muscle to boost growth. 

Take public housing, for example. The 12th Five- 

Year Plan unveiled earlier this year called for the 

construction of 36m public housing units; work on 

10m units is due to start in November and the 

balance could be front-loaded. 

As a mini-stimulus, this would instantly generate 

tens of thousands of jobs to absorb possible layoffs 

from factories hit by a slump in external 

demand. The new housing would also have a 

second-round effect by spurring consumer 

spending on decoration and consumer durables. 

SMEs hold the key to a stable job market as they 

account for 75% of employment. Possible policies 

to help these companies include: targeted 

monetary easing; fiscal subsidies for SMEs that 

hire additional workers; and favourable SME 

fiscal policy. 

22

Macro 



abc 

GDP 

% y-o-y 2004 2005 2006 2007 2008 2009 2010 2011f 2012f 2013f 

China 10.1 10.2 11.6 14.2 9.6 9.2 10.4 8.9 8.6 8.8 

Hong Kong 8.5 7.1 7.0 6.4 2.3 -2.7 7.0 5.0 4.5 5.3 

Japan 2.7 1.9 2.0 2.4 -1.2 -6.3 4.0 -0.6 1.9 0.9 

Korea 4.6 4.0 5.2 5.1 2.3 0.3 6.2 3.4 4.1 4.2 

Taiwan 6.2 4.7 5.4 6.0 0.7 -1.9 10.9 4.0 1.7 6.6 

North Asia-ex Japan 8.3 8.1 9.4 11.4 7.6 7.0 9.8 7.8 7.5 8.0 

Australia 3.8 3.1 2.6 4.6 2.6 1.4 2.7 1.8 3.9 3.7 

India 7.4 9.5 9.6 9.3 6.8 8.0 8.5 7.4 8.1 8.3 

Indonesia 5.0 5.7 5.5 6.3 6.0 4.6 6.1 6.4 6.7 6.5 

Malaysia 7.3 5.3 5.8 6.5 4.8 -1.6 7.2 4.8 5.0 5.2 

New Zealand 4.5 3.3 1.0 2.8 -0.1 -2.0 1.7 2.0 3.8 3.7 

Philippines 6.4 5.0 5.3 7.1 3.5 1.1 7.6 4.3 4.8 4.6 

Singapore 9.2 7.4 8.7 8.8 1.5 -0.8 14.5 5.0 5.1 5.6 

Sri Lanka 5.5 6.2 7.7 6.8 6.0 3.5 8.0 8.1 6.8 7.6 

Thailand 6.4 4.7 5.1 5.0 2.5 -2.3 7.8 3.9 5.0 4.9 

Vietnam 7.8 8.4 8.2 8.5 6.3 5.3 6.8 5.8 7.0 7.2 

Asia-ex China, India & Japan 6.0 5.0 5.7 6.0 3.1 0.4 7.7 4.6 4.7 5.4 

Asia-ex China & Japan 6.3 6.2 6.7 6.9 4.2 2.7 7.9 5.5 5.8 6.3 

Asia-ex Japan 7.9 7.9 8.9 10.3 7.0 6.3 9.3 7.3 7.3 7.7 

Asia 5.3 5.2 6.0 7.4 4.1 1.8 7.5 4.7 5.5 5.4 

Source: HSBC, CEIC; NB: Australia and New Zealand are not included in Asia aggregate and data are based on IMF nominal USD weights for the respective year, for which 2011 ,2012 and 2013 use 2010 weights,*India data are FY 

GDP (% yr): China remains the regional growth leader 

GDP (% yr): growth expected to stabilize over the coming years 

15 

12 

9 

6 

3 

0 

JP AU NZ KR TH TW PH MA HK SG VN ID IN SL CH 

2011f 2012f 2013f 

16 

14 

12 

10 

8 

6 

4 

2 

0 

-2 

F'cast 

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11f 12f 13f 

Asia Asia-ex Japan Asia-ex China & Japan 



GDP 

(% y-o-y) _______________ 2011f ________________ _______________ 2012f ________________ ________________2013f _________________ 

1Q 2Q 3Qf 4Qf 1Qf 2Qf 3Qf 4Qf 1Qf 2Qf 3Qf 4Qf 

Australia 1.0 1.4 2.2 2.5 4.3 4.0 3.8 3.7 3.7 3.8 3.8 3.7 

China 9.7 9.5 8.7 8.6 8.4 8.5 8.6 8.7 8.7 8.7 8.8 8.9 

Hong Kong 7.5 5.1 4.4 3.2 2.3 2.5 5.3 7.5 5.9 6.3 5.7 3.4 

India 7.8 7.7 6.0 8.2 7.9 7.7 8.1 8.2 8.2 8.4 8.6 8.3 

Indonesia 6.5 6.5 6.4 6.2 6.3 6.7 6.9 6.8 6.3 6.4 6.4 7.1 

Japan -1.0 -1.1 -0.1 0.0 2.1 2.3 2.3 1.1 1.0 0.8 0.9 1.0 

Korea 4.2 3.4 2.4 3.5 2.8 3.4 5.5 4.7 3.9 4.5 4.5 4.0 

Malaysia 4.9 4.0 5.6 4.7 4.0 3.8 5.4 6.6 6.1 5.7 4.9 4.2 

New Zealand 1.4 1.7 2.4 2.6 2.8 3.8 4.2 4.5 4.3 3.7 3.5 3.4 

Philippines 4.6 3.4 4.0 5.3 3.6 4.7 5.2 5.6 4.6 4.0 4.5 5.2 

Singapore 9.3 0.9 5.4 4.6 0.6 4.6 7.2 8.0 6.8 5.9 4.7 5.0 

Sri Lanka 7.9 8.2 8.0 8.5 6.8 6.8 6.8 6.9 7.5 7.6 7.5 7.6 

Taiwan 6.2 5.0 3.3 2.0 -1.3 -0.2 3.0 5.0 6.8 6.4 6.1 7.1 

Thailand 3.2 2.6 4.9 4.9 3.5 5.3 5.5 5.5 5.4 5.0 4.7 4.5 

Vietnam 5.4 5.7 6.1 5.8 6.5 6.5 7.4 7.5 8.1 7.4 6.8 6.4 


23

Macro 



abc 

Inflation 

(% y-o-y) 2004 2005 2006 2007 2008 2009f 2010 2011f 2012f 2013f 

China 3.9 1.8 1.5 4.8 5.9 -0.7 3.3 4.8 2.9 2.6 

Hong Kong -0.4 0.9 2.0 2.0 4.3 0.6 2.3 5.0 5.3 4.8 

Japan 0.0 -0.3 0.2 0.1 1.4 -1.3 -0.7 -0.5 -0.3 -0.2 

Korea 3.6 2.8 2.2 2.5 4.7 2.8 3.0 4.4 3.6 3.6 

Taiwan 1.6 2.3 0.6 1.8 3.5 -0.9 1.0 1.5 2.0 2.2 

North Asia-ex Japan 3.4 2.0 1.6 4.0 5.5 -0.2 3.1 4.6 3.0 2.8 

Australia 2.3 2.6 3.5 2.4 4.3 2.0 2.8 3.4 3.1 3.4 

India* 3.9 4.2 6.8 6.2 9.1 12.4 10.4 8.0 7.7 6.5 

Indonesia 6.1 10.5 13.1 6.7 9.8 4.8 5.1 5.6 6.2 6.0 

Malaysia 1.4 3.0 3.6 2.0 5.4 0.6 1.7 3.2 3.0 2.5 

New Zealand 2.1 3.0 3.4 2.4 4.0 2.1 2.3 4.4 3.0 2.4 

Philippines 6.0 7.7 6.3 2.8 9.3 3.3 3.8 4.4 4.5 4.0 

Singapore 1.7 0.5 1.0 2.1 6.6 0.6 2.8 4.7 3.0 2.6 

Sri Lanka 9.0 11.0 10.0 15.8 22.6 3.5 6.2 6.9 5.8 7.6 

Thailand 2.8 4.5 4.6 2.2 5.5 -0.8 3.3 4.0 3.6 3.0 

Vietnam 7.7 8.3 7.4 8.3 23.1 7.0 9.2 18.4 11.2 9.5 





Source: HSBC, CEIC; NB: Australia and New Zealand are not included in Asia aggregate and data are based on IMF nominal USD weights for the respective year, for which 2011 ,2012 and 2013 use 2010 weights, *India data are FY 

CPI (% yr): inflation risks still highest in Vietnam and India 

CPI (% yr): headline inflation has likely peaked for now 

16 

13 

10 

7 

4 

1 

-2 

JP TW MA AU TH PH KR NZ SG CH HK ID SL IN VN 

2011f 2012f 2013f 

10 

8 

6 

4 

2 

0 

-2 

F'cast 

98 99 00 01 02 03 04 05 06 07 08 09 10 11f 12f 13f 

Asia-ex China & Japan Asia-ex Japan Asia 



CPI 

(% y-o-y) _______________ 2011f ________________ _______________ 2012f ________________ ________________2013f _________________ 

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 

Australia 3.0 3.5 3.6 3.6 3.3 2.7 3.0 3.5 3.6 3.6 3.3 2.9 

China 5.0 5.9 6.0 3.8 3.3 2.5 2.3 3.1 3.2 2.8 2.3 2.3 

Hong Kong 3.8 5.2 6.1 4.8 4.6 4.2 6.1 6.4 4.8 3.8 3.6 1.4 

India 9.0 8.9 8.5 8.0 6.7 7.5 7.9 7.8 7.5 6.5 6.5 6.5 

Indonesia 6.8 5.9 4.8 4.9 5.5 6.3 6.5 6.5 6.2 6.0 6.0 6.0 

Japan -0.5 -0.4 -0.2 -0.7 -0.6 -0.6 -0.1 0.0 -0.1 -0.3 -0.2 0.0 

Korea 4.5 4.2 4.6 4.5 3.7 3.6 3.5 3.4 3.6 3.6 3.6 3.6 

Malaysia 2.8 3.3 3.4 3.4 3.3 3.1 3.0 2.8 2.6 2.5 2.4 2.4 

New Zealand 4.2 5.3 4.8 3.0 3.1 3.0 3.0 2.9 2.6 2.4 2.4 2.3 

Philippines 4.1 4.5 4.8 4.4 4.0 4.3 4.9 4.7 4.5 4.1 3.8 3.7 

Singapore 5.2 4.7 4.8 4.3 2.9 3.0 2.9 3.2 3.1 2.8 2.4 2.1 

Sri Lanka 7.1 8.0 7.0 5.6 5.0 5.3 6.0 7.0 7.5 7.7 7.7 7.6 

Taiwan 1.3 1.6 1.4 1.7 1.7 1.9 2.3 2.0 1.9 1.9 2.2 2.7 

Thailand 3.0 4.1 4.3 4.4 4.1 3.6 3.4 3.2 3.0 3.0 3.0 3.0 

Vietnam 12.8 19.4 22.5 19.1 16.2 11.1 8.7 8.9 9.1 9.4 9.7 9.9 


24

Macro 



abc 

Industrial production & 

unemployment 

Industrial production 

(% y-o-y) 2004 2005 2006 2007 2008 2009 2010 2011f 2012f 2013f 

China (VAI) 16.3 15.9 16.2 16.0 12.9 12.9 15.7 13.2 12.5 13.5 

Hong Kong 2.9 2.5 2.2 -1.5 -6.7 -8.3 3.5 -0.6 8.1 3.8 

Japan 4.8 1.4 4.5 2.8 -3.3 -21.9 16.5 2.8 -4.0 9.6 

Korea 10.4 6.3 8.4 6.9 3.4 -0.1 16.2 5.8 8.5 8.0 

Taiwan 9.3 3.8 4.7 7.8 -1.8 -8.1 26.9 6.4 2.5 10.0 


Australia -0.1 1.7 1.2 4.3 2.8 -2.5 5.3 -0.4 4.5 4.8 

India 11.7 7.9 11.9 8.7 3.2 10.5 7.8 4.2 6.4 8.1 

Indonesia 6.4 4.6 4.6 4.7 3.7 2.2 4.5 5.8 5.0 5.0 

Malaysia 0.3 6.3 6.7 2.8 1.3 -9.0 11.7 4.7 5.0 6.3 

New Zealand 2.3 0.3 -5.0 5.4 -7.6 -1.4 -0.5 4.3 3.2 1.4 

Philippines 5.0 5.3 4.2 3.3 4.8 -4.8 11.2 6.8 8.5 8.5 

Singapore 13.9 9.5 11.9 5.9 -4.2 -4.2 29.7 5.3 4.0 6.6 

Sri Lanka 5.6 6.0 5.7 7.6 5.9 3.6 8.6 8.5 7.0 8.0 

Thailand 11.1 8.8 6.4 8.1 3.9 -7.2 14.4 1.6 5.6 3.1 

Vietnam 16.0 17.2 17.0 17.1 14.6 7.6 14.0 na na na 

Asia-ex China, India & Japan 8.6 6.0 6.8 6.0 1.9 -2.8 14.3 4.9 6.0 7.6 



Asia 8.5 6.3 8.7 8.0 3.8 -2.9 14.9 7.1 5.0 10.4 

Source: HSBC, CEIC; NB: Australia and New Zealand are not included in Asia aggregate and data are based on IMF nominal USD weights for the respective year, for which 2011 ,2012 and 2013 use 2010 weights 

Industrial production (% yr): China still the leader for the time being 

18 

12 

6 

0 

-6 

HK AU TH JP IN NZ MA SG ID KR TW PH SL CH 

2011f 2012f 2013f 


Unemployment rate (%): highest in Indonesia and the Philippines 

9 

8 

7 

6 

5 

4 

3 

2 

1 

0 

TH SG MA KR HK CH SL VN TW JN AU NZ ID PH 


2011f 2012f 2013f 

Unemployment rate (average) 

% 2004 2005 2006 2007 2008 2009 2010 2011f 2012f 2013f 

China 4.2 4.2 4.1 4.0 4.2 4.3 4.1 4.3 4.3 4.3 

Hong Kong 6.8 5.6 4.8 4.1 3.4 5.2 4.4 3.5 3.3 3.3 

Japan 4.7 4.4 4.1 3.8 4.0 5.1 5.1 4.7 5.0 5.0 

Korea 3.7 3.7 3.4 3.2 3.2 3.3 3.8 3.5 3.3 3.1 

Taiwan 4.4 4.1 3.9 3.9 4.1 5.8 5.2 4.6 4.8 4.2 


Australia 5.4 5.0 4.8 4.4 4.3 5.6 5.2 5.1 5.2 4.9 

Indonesia 9.7 10.6 10.8 9.7 8.8 8.1 7.5 6.9 6.5 6.4 

Malaysia 3.6 3.6 3.3 3.2 3.3 3.7 3.3 3.2 3.1 3.1 

New Zealand 4.1 3.8 3.8 3.7 4.2 6.2 6.5 6.4 6.0 5.7 

Philippines 12.0 8.0 7.9 7.2 7.5 7.4 7.4 7.1 7.0 7.0 

Singapore 3.4 3.1 2.7 2.1 2.3 3.0 2.2 2.1 2.1 2.1 

Sri Lanka 1.5 7.2 1.2 0.6 1.0 5.7 4.5 4.4 4.1 4.0 

Thailand 2.1 1.9 1.5 1.4 1.4 1.5 1.0 0.7 1.1 1.1 

Vietnam 5.6 5.3 4.8 4.6 4.7 4.6 4.3 4.5 4.5 4.4 





25

Macro 



abc 

Consumption & saving 

Consumer expenditure 

(% y-o-y) 2004 2005 2006 2007 2008 2009 2010 2011f 2012f 2013f 

China 7.2 8.5 8.7 9.0 8.9 8.0 9.5 9.4 9.3 9.3 

Hong Kong 7.0 3.0 5.9 8.5 2.4 0.6 5.8 7.7 5.0 6.4 

Japan 1.6 1.3 1.5 1.6 -0.7 -1.9 1.8 -0.4 0.5 0.3 

Korea 0.3 4.6 4.7 5.1 1.3 0.0 4.1 2.5 3.7 3.5 

Taiwan 5.2 2.9 1.5 2.1 -0.9 1.1 3.7 3.1 1.9 4.0 


Australia 5.7 3.2 3.4 5.5 1.9 1.0 2.8 3.1 2.5 2.6 

India 1.7 8.5 8.3 9.3 7.7 7.3 8.6 7.9 8.1 8.3 

Indonesia 5.0 4.0 3.2 5.0 5.3 4.9 4.6 4.7 5.3 5.4 

Malaysia 10.5 9.1 6.8 10.5 8.7 0.7 6.5 6.3 6.2 6.0 

New Zealand 5.4 4.6 2.2 4.1 -0.3 -0.8 2.3 1.4 1.7 2.1 

Philippines 5.9 4.8 5.5 5.8 6.4 2.3 3.4 5.2 5.1 5.2 

Singapore 6.1 3.6 3.5 6.4 3.2 0.2 4.2 5.3 4.8 5.5 

Sri Lanka 4.7 2.6 7.3 7.8 6.7 -2.5 12.0 9.7 7.3 8.2 

Thailand 6.1 4.9 3.2 1.8 2.9 -1.1 4.8 3.5 3.7 4.0 

Vietnam 7.1 7.3 8.3 10.8 9.3 3.1 10.0 4.9 5.2 5.3 





Source: HSBC, CEIC; NB: Australia and New Zealand are not included in Asia aggregate and data are based on IMF nominal USD weights for the respective year, for which for which 2011 ,2012 and 2013 use 2010 weights 

Consumer expenditure (% y-o-y): China, India and Malaysia to lead in 2012 

Savings as a % of GDP: China, Singapore and Malaysia the highest 

11 

9 

7 

5 

3 

1 

-1 

JP NZ KR AU TW TH ID VN PH SG MA HK IN CH 

2011f 2012f 2013f 

55 

45 

35 

25 

15 

5 

-5 

PH SL JP AU TW HK VN IN ID TH KR MA CH SG 

2011f 2012f 2013f 



Gross saving ratio 

% GDP 2004 2005 2006 2007 2008 2009 2010 2011f 2012f 2013f 

China 45.7 48.2 50.1 51.0 51.4 50.0 50.5 50.0 50.0 49.5 

Hong Kong 30.2 33.3 33.3 31.0 30.2 27.4 27.1 28.8 28.9 28.9 

Japan 26.8 27.2 27.7 28.5 26.7 22.9 23.8 24.0 24.7 25.2 

Korea 35.0 33.2 31.5 30.8 35.8 35.5 37.0 38.2 38.6 39.3 

Taiwan 27.4 27.1 28.8 30.1 27.3 26.3 29.8 27.8 26.4 27.6 


Australia 21.2 22.0 22.2 23.2 24.4 23.5 24.5 25.1 25.4 26.0 

India 32.7 33.6 34.8 35.6 32.3 32.3 33.7 34.5 35.1 35.2 

Indonesia 24.9 27.5 28.7 28.1 31.0 31.7 34.2 35.2 36.2 36.9 

Malaysia 44.0 43.5 43.4 46.3 49.2 44.0 46.9 48.0 48.0 48.0 

Philippines 18.6 16.6 19.1 20.3 17.5 20.5 20.1 18.7 18.6 18.4 

Singapore 47.0 49.4 51.2 53.6 49.5 49.2 52.2 51.0 53.1 54.5 

Sri Lanka 21.6 21.6 23.7 25.3 25.0 23.6 24.3 23.6 24.6 25.4 

Thailand 31.7 30.9 32.4 34.4 32.6 31.3 35.8 35.6 34.5 34.3 

Vietnam 32.0 34.6 36.5 33.3 29.0 30.1 29.8 30.3 31.5 30.7 






26

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abc 

Investment 

Total investment 

(% y-o-y) 2004 2005 2006 2007 2008 2009 2010 2011f 2012f 2013f 

China 27.6 27.2 24.5 25.8 26.1 30.5 24.5 21.5 19.0 19.0 

Hong Kong 2.5 4.1 7.1 3.4 1.0 -3.9 8.1 6.3 2.8 3.4 

Japan 1.4 3.1 0.5 -1.2 -3.6 -11.7 -0.2 -0.5 6.0 2.0 

Korea 2.1 1.9 3.4 4.2 -1.9 -1.0 7.0 0.1 3.0 3.8 

Taiwan 14.0 2.7 0.1 0.6 -12.4 -11.0 23.4 0.4 2.5 6.8 


Australia 7.1 8.7 4.5 10.1 7.9 -3.2 5.8 5.5 8.4 7.6 

India 20.7 16.2 13.8 16.2 1.5 7.3 8.6 7.1 8.5 8.8 

Indonesia 14.7 10.9 2.6 9.3 11.9 3.3 8.5 9.4 10.7 9.3 

Malaysia 3.1 5.0 7.5 9.4 1.1 -5.6 9.8 4.5 6.1 6.3 

New Zealand 12.8 5.5 -1.2 6.0 -3.0 -12.8 3.4 4.9 11.7 11.0 

Philippines 1.3 -6.6 3.9 10.9 2.8 -1.7 19.1 4.8 8.5 4.9 

Singapore 10.1 0.4 14.6 19.6 13.5 -2.9 5.1 2.9 4.6 5.0 

Sri Lanka 17.8 9.8 13.9 12.0 11.0 2.9 26.5 14.3 12.7 14.5 

Thailand 13.2 10.5 3.9 1.5 1.2 -9.2 9.4 5.9 5.4 4.4 

Vietnam 10.4 9.8 9.9 24.2 3.8 8.7 10.9 3.9 6.6 6.8 





Source: HSBC, CEIC; NB: Australia and New Zealand are not included in Asia aggregate and data are based on IMF nominal USD weights for the respective year for which 2011 ,2012 and 2013 use 2010 weights 

Investment growth (% yr): highest in China, and followed by Sri Lanka 

Investment to GDP ratio (%): high in China, with Vietnam and India next 

25 

20 

15 

10 

5 

0 

-5 

JP KR TW SG VN MA PH NZ AU TH HK IN ID SL CH 

2011f 2012f 2013f 

50 

40 

30 

20 

10 

0 

PH MA HK JP TW KR TH SL SG AU ID IN VN CH 

2011f 2012f 2013f 

Source: HSBC, HSBC 


Investment-to-GDP ratios 

% 2004 2005 2006 2007 2008 2009 2010 2011f 2012f 2013f 

China 43.2 42.7 42.6 42.2 43.5 45.0 46.0 46.6 46.6 46.5 

Hong Kong 21.3 20.9 21.9 20.1 19.9 19.9 21.5 20.6 20.0 19.7 

Japan 23.0 23.6 23.8 23.7 23.6 20.2 20.2 21.0 22.0 22.5 

Korea 30.4 30.1 29.8 29.4 25.7 24.9 24.8 23.4 22.8 22.3 

Taiwan 23.7 22.7 22.7 22.1 22.4 17.7 22.6 21.5 20.6 20.6 


Australia 24.5 25.8 26.3 27.7 29.1 27.8 28.6 29.7 30.9 32.1 

India 34.0 36.1 37.7 40.2 36.0 36.4 35.4 34.2 36.2 37.3 

Indonesia 24.1 25.1 25.4 24.9 27.8 31.0 32.5 33.7 34.8 35.6 

Malaysia 22.7 19.9 20.0 19.8 19.3 26.4 14.9 16.3 16.3 16.3 

Philippines 16.0 13.9 13.8 14.7 14.7 14.0 14.8 8.3 8.8 8.7 

Singapore 21.7 20.0 21.0 21.1 30.2 26.4 30.5 28.6 29.7 29.7 

Sri Lanka 22.1 25.0 28.7 29.9 29.9 23.7 25.9 27.4 27.8 28.1 

Thailand 26.8 31.4 28.3 26.4 29.1 21.2 24.6 25.8 25.6 25.8 

Vietnam 35.5 35.6 36.8 43.1 39.7 38.1 38.9 38.3 38.2 38.1 






27

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Trade 

Real exports 

(% y-o-y) 2004 2005 2006 2007 2008 2009 2010 2011f 2012f 2013f 

China 32.0 29.0 25.0 23.8 11.2 -17.9 29.4 16.0 10.0 10.0 

Hong Kong 15.4 10.6 9.4 8.3 2.6 -10.1 16.8 10.2 11.2 11.4 

Japan 13.9 7.0 9.7 8.4 1.6 -23.9 23.9 0.4 3.9 5.0 

Korea 19.7 7.8 11.4 12.6 6.6 -1.2 14.5 7.7 7.3 7.7 

Taiwan 15.4 7.8 11.4 9.6 0.9 -8.7 25.7 4.3 1.3 18.2 

North Asia-ex Japan 26.5 21.1 20.0 19.8 9.5 -14.9 26.8 14.1 9.2 10.2 

Australia* 4.0 2.9 2.2 2.4 4.7 2.6 5.7 -0.5 12.5 11.7 

India 19.0 25.8 20.0 5.9 14.4 -5.5 17.9 14.9 7.0 7.5 

Indonesia 13.5 16.6 9.4 8.5 9.5 -9.7 14.9 11.2 8.1 8.6 

Malaysia 2.3 8.3 6.6 4.1 1.7 -10.5 9.9 5.3 7.5 8.2 

New Zealand* 6.1 -0.5 1.7 3.9 -1.8 1.9 2.8 4.1 5.4 6.0 

Philippines 15.0 4.8 13.4 5.5 -5.3 -7.8 21.0 0.1 5.9 7.3 

Singapore 19.1 12.4 10.9 9.3 4.0 -8.1 19.2 3.2 8.3 8.8 

Sri Lanka 17.0 7.4 11.6 17.7 5.2 -5.9 16.1 32.2 23.9 28.3 

Thailand 9.6 4.2 9.1 7.8 5.1 -12.5 14.7 9.1 6.6 6.5 


Asia-ex China & Japan 16.2 13.2 12.8 8.5 7.4 -6.5 16.6 9.8 6.9 8.9 

Asia-ex Japan 22.8 19.9 18.1 15.6 9.4 -12.7 23.5 13.1 8.6 9.5 

Asia 18.4 13.9 14.6 12.9 6.6 -16.7 23.6 8.9 7.0 8.0 

* Real Exports for Goods and Services 


Real exports (% yr): moderation in 2012, before rebound the following year 

Current account (% GDP): still negative in a number of markets 

30 

25 

20 

15 

10 

5 

0 

AU PH JP SG NZ TW MA KR TH HK ID IN CH SL 

2011f 2012f 2013f 

25 

20 

15 

10 

5 

0 

-5 

-10 

VN SL AU NZ IN ID KR JP CH PH TH HK TW MA SG 

2011f 2012f 2013f 



Current account balance 

% GDP 2004 2005 2006 2007 2008 2009 2010 2011f 2012f 2013f 

China 3.6 7.1 9.3 10.6 9.4 5.7 4.2 3.7 2.6 2.0 

Hong Kong 8.9 12.4 11.4 10.8 10.3 7.5 5.6 6.2 9.8 9.6 

Japan 3.7 3.6 3.9 4.8 3.2 2.8 3.6 2.7 2.0 1.8 

Korea 2.2 4.1 2.1 1.5 2.3 0.4 3.3 2.1 1.5 1.3 

Taiwan 5.8 4.8 7.0 8.9 6.9 11.4 9.3 9.8 11.4 11.1 


Australia -6.1 -5.8 -5.4 -6.3 -4.6 -4.3 -2.7 -2.5 -2.9 -3.2 

India 0.1 -1.2 -1.0 -0.7 -2.5 -1.9 -3.0 -2.2 -2.3 -2.1 

Indonesia 0.6 0.1 3.0 2.4 0.0 2.0 0.8 0.5 0.6 0.4 

Malaysia 12.1 15.0 16.7 15.9 17.7 16.5 11.5 11.9 11.8 11.8 

New Zealand -5.7 -7.9 -8.2 -8.2 -8.8 -3.1 -4.1 -2.5 -1.6 -1.0 

Philippines 1.0 1.9 4.3 4.6 2.1 5.6 4.2 4.2 3.7 4.0 

Singapore 17.0 21.1 24.8 27.3 14.6 19.0 22.2 19.2 22.4 25.4 

Sri Lanka -3.2 -2.7 -5.0 -4.0 -9.3 -0.5 -3.3 -3.8 -3.1 -2.7 

Thailand 1.7 -4.3 1.1 6.6 0.8 8.3 4.7 4.5 3.4 3.5 

Vietnam -3.5 -1.1 -0.3 -9.8 -11.9 -8.0 -8.3 -7.6 -6.7 -7.4 






28

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Exchange rates & interest rates 

Exchange rates 

2008 2009 2010 ______________2011 _______________ ______________ 2012 _______________ 

(vs. USD, period end) 1Q 2Q 3Q 4Qf 1Qf 2Qf 3Qf 4Qf 

Australia (AUD) 0.96 0.80 0.84 0.97 1.02 0.97 0.95 0.94 0.94 0.93 0.93 

China (RMB) 6.82 6.83 6.6 6.62 6.57 6.38 6.35 6.30 6.25 6.20 6.15 

Hong Kong (HKD) 7.75 7.76 7.77 7.78 7.78 7.78 7.80 7.80 7.80 7.80 7.80 

India (INR) 48.5 46.7 44.8 44.6 44.7 49.0 49.0 48.2 47.4 46.6 45.5 

Indonesia (IDR) 10,950 9,400 8,991.0 8,709 8,597 8,950 8,800 8,700 8,550 8,400 8,300 

Japan (JPY) 91.3 90.0 83.3 82 80 77 74 73 73 72 72 

Korea (KRW) 1,260 1,166 1,126.0 1,097 1,098 1,178 1,150 1,130 1,110 1,090 1,070 

Malaysia (MYR) 3.45 3.42 3.1 3.03 3.02 3.18 3.10 3.05 3.00 2.95 2.88 

New Zealand (NZD) 0.67 0.72 0.73 0.77 0.76 0.76 0.76 0.76 0.75 0.74 0.74 

Philippines (PHP) 48.1 46.4 44.0 43.5 43.4 43.8 43.5 43.0 42.5 42.0 41.0 

Singapore (SGD) 1.44 1.40 1.3 1.26 1.23 1.31 1.27 1.25 1.23 1.21 1.19 

Sri Lanka (LKR) 113.3 114.4 111.1 110.5 109.6 110.2 109.0 108.3 107.5 106.8 106.0 

Taiwan (TWD) 32.9 32.0 30.4 29.4 28.8 30.5 30.0 29.5 29.0 28.5 28.0 

Thailand (THB) 34.7 33.3 30.0 30.2 30.7 31.2 30.7 30.2 29.7 29.2 28.8 

Vietnam (VND) 17,483 18,200 19,498 20,880 20,600 20,830 21,500 21,500 21,500 21,500 21,500 

Source: HSBC, CEIC, Bloomberg 

3-month interest rates 

2008 2009 2010 ______________2011 _______________ ______________ 2012 _______________ 

(% pa, period end) 1Q 2Q 3Q 4Qf 1Qf 2Qf 3Qf 4Qf 

Australia n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 

China 1.71 1.71 2.25 2.60 2.85 3.10 3.10 3.10 3.10 3.10 3.10 

Hong Kong 0.95 0.14 0.28 0.26 0.30 0.30 0.30 0.30 0.30 0.30 0.30 

India 4.71 3.68 7.19 7.31 8.19 7.50 7.70 7.70 7.70 7.70 7.70 

Indonesia 11.98 6.59 6.37 6.37 6.37 6.80 6.80 6.80 7.30 7.55 7.55 

Japan 0.55 0.28 0.20 0.20 0.20 0.20 0.20 0.20 0.20 0.20 0.20 

Korea 4.68 2.82 2.80 3.35 3.53 4.05 4.05 4.30 4.55 4.55 4.55 

Malaysia 3.37 2.17 2.98 3.14 3.39 3.10 3.10 3.35 3.60 3.60 3.60 

New Zealand n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 

Philippines 6.12 3.89 0.77 1.12 2.88 4.49 4.49 4.49 4.74 4.99 4.99 

Singapore 0.96 0.68 0.44 0.44 0.44 0.37 0.40 0.40 0.40 0.40 0.40 

Taiwan 1.01 0.53 0.74 0.79 0.87 1.12 1.12 1.12 1.24 1.37 1.49 

Thailand 2.95 1.35 2.15 2.70 3.35 3.80 3.80 3.80 3.80 4.05 4.30 

Source: HSBC, CEIC, Bloomberg 

29

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This page has been left blank intentionally . 

30

Macro 



abc 

Country profiles 

31

Macro 



abc 

Australia 

Not entirely immune 

As we expected, growth in domestic demand in 1H 

was strong in Australia, despite the Queensland 

floods holding back exports. Household 

consumption and mining investment were the key 

drivers and household incomes also grew strongly. 

But things have weakened since then, as Australia 

is not entirely immune to the global slowdown. 

Consumer and business confidence have fallen and 

the labour market has softened into 3Q. Global 

financial concerns largely explain the weaker 

confidence, although it also reflects the divergence 

apparent across industries due to the high exchange 

rate. Australian households have sizable equity 

holdings and the barrage of bad news from the 

West has weighed on local confidence. 

But before we get too carried away, keep in mind 

that Australia’s position is still pretty positive. 

While the weaker global outlook would keep the 

RBA on hold for longer than previously expected, 

Australia’s sovereign position is sound, its major 

trading partners are in Asia, and are continuing to 

grow, and the prices of its key exports – bulk 

commodities – are still at high levels. Barring an 

event that pushes China off track and commodity 

prices sharply down, growth is still expected to be 

supported by the ongoing mining boom and 

continued modest growth in other sectors. 

Nonetheless, in response to the weaker global 

outlook, we have revised down our GDP forecasts to 

1.8% in 2011 (from 2.2%) and 3.9% in 2012 (from 

4.5%). Underlying inflation is still expected to rise 

above the RBA’s target band, to 3.2% this year, and 

remain elevated next year. We expect the RBA to be 

on hold for the rest of this year. Our central case 

remains that the next move for rates is up, to keep 

inflation in check, but this is highly contingent on 

how global financial risks evolve. 

Paul Bloxham 

Economist 

HSBC Bank Australia Limited 

+612 9255 2635 

paulbloxham@hsbc.com.au 

2Q 11 3Q 11f 4Q 11f 1Q 12f 2Q 12f 3Q 12f 4Q 12f 1Q 13f 2Q 13f 3Q 13f 

GDP (% y-o-y) 1.4 2.2 2.5 4.3 4.0 3.8 3.7 3.7 3.8 3.8 

GDP (%q-o-q) 1.2 1.1 1.1 0.9 0.9 0.9 1.0 0.9 0.9 0.9 

Industrial production (% y-o-y) -4.7 1.6 1.1 3.9 2.0 3.0 3.0 4.1 4.1 4.1 

CPI(% y-o-y) 3.6 3.5 3.7 2.8 2.6 3.4 3.6 3.6 3.6 2.9 

Core CPI (%y-o-y) 2.7 2.8 3.2 3.0 3.0 2.9 2.8 2.8 2.8 2.8 

PPI (% y-o-y) 3.4 2.9 3.6 3.3 3.3 3.3 3.2 3.0 2.9 2.8 

Merchandise Trade balance (% GDP) 1.6 2.0 2.3 2.1 1.9 1.6 1.2 1.1 0.9 0.7 

Current account (% GDP) -2.1 -2.5 -2.6 -2.9 -3.3 -3.7 -4.2 -3.2 -2.2 -1.2 

Policy rate, end quarter (%) 4.75 4.75 4.75 5.00 5.00 5.25 5.25 5.50 5.50 5.50 

10yr yield, end quarter (%) 5.49 4.20 4.00 3.90 4.10 4.20 4.40 4.30 4.30 4.30 

USD/AUD, end quarter 1.02 0.97 0.95 0.94 0.94 0.93 0.93 0.93 0.93 0.93 

EUR/AUD, end quarter 0.42 0.68 0.70 0.68 0.66 0.65 0.65 0.65 0.65 0.65 

CPI, q-o-q ar 3.7 2.6 2.4 2.6 2.9 5.9 3.3 2.6 2.9 3.0 

Exports G& S (% y-o-y) 4.6 9.4 14.3 20.1 13.9 11.3 9.8 9.8 9.8 9.8 

Imports G & S (% y-o-y) 6.4 8.3 12.8 13.8 12.9 14.0 15.4 15.2 15.0 14.2 

Source: HSBC, ABS, RBA and Thomson Reuters DataStream; 

32

Macro 



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Global financial problems are impacting local confidence 

NAB Business Survey 

Conditions 

30 

Confidence 

15 

0 

-15 

-30 

-45 

1997 2000 2003 2006 2009 

30 

15 

0 

-15 

-30 

Australia is not entirely immune to the downturn in the West. 

While the economy has become much more tied into Asia in 

recent years, and is now far less dependent on the US than 

previously, developments in the West still flow through to 

Australia via financial market linkages, business and consumer 

confidence. 

Business confidence has fallen in the past couple of months to 

be below its average level, although it is still well above levels 

reached during the 2008/09 downturn. Business conditions are 

also a little below their average levels. This has impacted on 

local hiring decisions and seen some weakening of the 

Australian labour market. 

The economy is exhibiting multi-speeds, with strong conditions 

in mining and more lacklustre conditions in other industries. 

Source: Datastream; National Australia Bank 

Growth to be largely driven by mining investment 

% GDP Growth Forecasts 

% 

8 

8 

Inventories 

6 

4 

2 

0 

-2 

-4 

Public demand 

Net Exports 

Business 

Investment 

2005 2006 2007 2008 2009 2010 2011 2012 2013 

6 

4 

2 

0 

-2 

-4 

We have revised down our GDP forecasts to 1.8% in 2011 

(from 2.2%) and 3.9% in 2012 (from 4.5%), on the back of 

downward revisions to the global outlook. 

Weaker global conditions are expected to see slower growth in 

household spending and non-mining investment. But growth is 

expected to continue to be supported by the mining investment 

boom, which is forecast to contribute over half of all growth in 

the economy over the next two years. 

Coal exports are also expected to continue to bounce back 

after being disrupted by the Queensland floods. After 

subtracting significantly from growth in 2011, net exports are 

expected to make only a small subtraction in 2012. 

Source: ABS; HSBC 

Mining investment pipeline is over twice its late 2008 level 

25 

20 

15 

10 

5 

0 

Mining Investment Pipeline* 

Engineering Construction Work 

yet to be Done* 

1986 1989 1992 1995 1998 2001 2004 2007 2010 

*Per cent of quarterly nominal GDP 

Source: ABS 

25 

20 

15 

10 

5 

0 

The economy is expected to be supported by a very large 

pipeline of mining investment that is already in train. This year 

AUD85 billion of projects (6% of annual nominal GDP) have 

been commenced in the liquid natural gas sector alone. 

The pipeline of mining investment is at extraordinarily high 

levels and is expected to see the share of mining investment in 

the Australian economy to new record highs, from 4% in 2010 

to around 7% in 2012. 

The pipeline of investment is more than twice as large as it was 

in late 2008, when Lehman failed. Even then Australia only 

recorded a levelling out – not a decline – in engineering 

construction. This time around there is a lot more work yet to be 

done on projects already commenced. 

33

Macro 



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Commodity prices are very high, but are expected to fall 

180 

160 

140 

120 

100 

80 

60 

40 

20 

0 

Commodity Prices 

2008/09 = 100 The prices of the commodities that Australia exports are now 

close to their peak, though as recently as September (see 

chart) they were at extraordinarily high levels relative to history. 

We expect them to decline further, but to still remain well above 

their historical average levels. In particular, iron ore, coking coal 

In USD 

and thermal coal (Australia’s main exports) are expected to 

stay high. We forecast iron ore prices to decline from their 

current level of USD185 a tonne to USD160 a tonne next year, 

while we expect coking coal to fall from USD300 to USD240 

In AUD 

next year. 

There is a clear risk, however, that commodity prices fall 

further, weakening Australian incomes by more than expected. 

1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 

Source: RBA 

Weaker exchange rate should support inflation 

1.15 

1.10 

1.05 

1.00 

0.95 

0.90 

0.85 

0.80 

Jan 

2010 

Mar 

2010 

May 

2010 

Jul 

2010 

Sep 

2010 

AUD/USD 

Nov 

2010 

Jan 

2011 

Mar 

2011 

May 

2011 

Jul 

2011 

Sep 

2011 

In line with the current global risk off environment and the 

recent decline in commodity prices, the Australian dollar has 

dropped below parity against the USD, after six months of 

trading well above it. 

The appreciation from mid-2010 to mid-2011 of around 15% on 

a trade-weighted basis is estimated to have pushed inflation 

down to the tune of around 0.3-0.5ppt this year. By the same 

token, most models would suggest that the recent depreciation, 

if sustained, will add around 0.1-0.2ppt to inflation. 

Of course, these models assume all else is equal, and it rarely 

is. The depreciation largely reflects concerns about the global 

economy, which have the capacity to weaken demand enough 

that it puts downward pressure on inflation. However, an 

offsetting factor is the likely policy response from the West and 

the extent to which is boosts global inflation. 

Source: ABS; HSBC; RBA 

Inflation is still expected to be elevated 

% 

6 

5 

4 

3 

2 

1 

0 

Inflation* 

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 

*Trimmed Mean 

Quarterly Year-ended 

Despite weaker demand than previously expected, we are still 

forecasting underlying inflation to rise to above the RBA’s target 

zone in 2H as the supply side of the economy is weak due to 

structurally low productivity growth. 

Inflation is expected to remain in the upper part of the RBA’s 

target zone over the forecast horizon, given persistently 

elevated levels of global inflation, the recent depreciation of the 

Australian dollar and solid growth in unit labour costs. 

We see the risks to inflation as remaining to the upside, and 

thus still expect that the next move from the RBA is more likely 

to be up than down. 

Source: ABS, HSBC, RBA 

34

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Australia: Macro framework* 

2007 2008 2009 2010 2011f 2012f 2013f 

Production, demand and employment 

GDP growth (% y-o-y) 4.6 2.6 1.4 2.7 1.8 3.9 3.7 

Nominal GDP (USDbn) 894.2 1105.4 930.9 1161.4 1386.9 1437.0 1521.2 

GDP per capita (USD) 43199.9 52457.6 43301.3 52907.4 62425.7 63656.7 66318.0 

Private consumption (% y-o-y) 5.5 1.9 1.0 2.8 3.1 2.5 2.6 

Government consumption (% y-o-y) 3.3 3.2 1.6 3.6 3.3 2.7 2.8 

Investment (% y-o-y) 10.1 7.9 -3.2 5.8 5.5 8.4 7.6 

Stock building (% GDP) 0.6 0.3 -0.1 0.3 0.8 0.6 0.6 

Business Investment (% y-o-y) 10.6 13.4 -3.0 -0.9 9.3 15.0 10.4 

Dwelling Investment (% y-o-y) 3.7 1.7 -3.9 4.2 4.1 6.5 4.4 

Public Investment (% y-o-y) 4.3 16.6 0.6 29.0 -1.6 -7.9 1.5 

Exports of G&S (vol growth) % y-o-y 2.4 4.7 2.6 5.7 -0.5 12.5 11.7 

Imports of G & S (vol growth)% y-o-y 12.2 11.5 -9.0 13.7 10.8 11.8 12.1 

Net Exports % of GDP 0.3 -1.2 1.6 -0.1 -2.7 -2.7 -3.0 

Net exports (contribution to GDP growth, ppt) -2.0 -1.5 2.7 -1.6 -2.7 -0.2 -0.4 

Final Domestic demand % y-o-y 6.3 3.8 -0.1 3.8 3.8 4.2 4.1 

Domestic Demand % y-o-y 7.0 3.6 -0.6 4.2 4.3 4.0 4.1 

Industrial production (% y-o-y) 4.3 2.8 -2.5 5.3 0.3 3.2 4.1 

Gross national saving (% of GDP) 23.2 24.4 23.5 24.5 25.1 25.4 26.0 

Household saving rate (%) 3.0 5.6 9.9 9.3 10.3 8.1 6.6 

Unemployment rate, avg (%) 4.4 4.3 5.6 5.2 5.1 5.2 4.9 

Prices & wages 

Trimmed mean CPI, end (% y-o-y) 2.9 4.3 3.5 2.6 2.8 3.0 2.8 

CPI (% y-o-y) 2.3 4.4 1.8 2.8 3.6 3.1 3.3 

PPI (% y-o-y) 2.6 5.4 1.2 1.4 3.2 3.3 2.9 

Core CPI (% y-o-y) 2.9 4.3 3.5 2.6 2.8 3.0 2.8 

Labor Cost Index, nominal (% y-o-y) 4.0 4.2 3.6 3.3 3.8 3.8 3.6 

Money, FX & interest rates 

Money Supply M1, average (% y-o-y) 13.8 7.6 8.0 2.2 n/a n/a n/a 

Broad money supply, average (% y-o-y) 13.7 17.9 11.4 3.2 n/a n/a n/a 

Private credit growth-nominal (% y-o-y) 13.7 17.9 9.0 4.6 n/a n/a n/a 

Policy rate, end-year (%) 6.50 7.00 3.00 4.75 4.75 5.25 5.50 

10yr yield, end-year (%) 6.15 5.40 5.45 4.99 4.00 4.40 4.30 

USD/AUD, end-year 0.85 0.96 0.80 0.84 0.95 0.93 0.93 

USD/AUD, average 0.79 0.89 0.76 0.88 0.96 0.94 0.93 

EUR/AUD, end-year 0.58 0.67 0.56 0.60 0.70 0.65 0.65 

EUR/AUD, average 0.57 0.60 0.55 0.65 0.61 0.66 0.65 

Real Trade-Weighted-Index 136.9 139.7 137.3 146.7 n/a n/a n/a 

External sector 

Exports of G&S (USD bn) 173.4 229.2 201.3 238.0 308.4 340.4 373.2 

Imports of G&S (USD bn) 187.5 246.4 198.3 233.4 284.2 316.1 361.1 

Goods and Services Balance (USDbn) -14.1 -17.1 3.0 4.6 24.2 24.3 12.1 

Current account balance (USDbn) -55.5 -49.4 -39.8 -31.4 -34.4 -41.9 -48.8 

Current account balance (% GDP) -6.3 -4.6 -4.3 -2.7 -2.5 -2.9 -3.2 

Net FDI (USDbn) 27.5 5.4 17.7 7.7 n/a n/a n/a 

Net FDI (% GDP) 3.1 0.5 1.9 0.7 n/a n/a n/a 

Exports (% y-o-y) 4.1 27.0 -9.3 13.8 10.8 13.6 9.6 

Imports (% y-o-y) 7.8 19.2 -10.7 5.7 8.6 14.1 14.3 

International FX reserves (USDbn) 42.6 31.6 31.8 27.8 n/a n/a n/a 

Import cover (months) 2.7 1.5 1.9 1.4 n/a n/a n/a 

Public and external solvency indicators 

Central government balance (% GDP) 1.6 1.7 -2.2 -4.3 -3.6 -1.5 0.0 

Net External debt (AUDbn) -577.5 -648.6 -622.8 -674.3 n/a n/a n/a 

Net External debt (% GDP) -51.8 -53.3 -49.9 -51.2 n/a n/a n/a 

Gross public domestic debt (AUDbn) 58.3 60.5 101.1 147.1 n/a n/a n/a 

Gross public sector debt (% GDP) 5.2 5.0 8.1 11.2 n/a n/a n/a 

Net public sector debt (% GDP) -4.0 -1.3 3.4 6.0 n/a n/a n/a 

Macro-prudential indicators 

Capital Adequacy Ratios 7.4 7.6 8.9 9.5 n/a n/a n/a 

Non-performing loan ratio 0.2 0.5 1.1 1.2 n/a n/a n/a 

Household debt/Income (%) 154.4 153.2 151.7 156.8 n/a n/a n/a 

Total credit/GDP (%) 158.9 156.5 154.2 150.3 n/a n/a n/a 

House prices growth (%y-o-y) 11.3 4.7 3.6 12.9 n/a n/a n/a 

Loan/deposit ratio 1.8 1.8 1.8 1.7 n/a n/a n/a 

Stock market capitalization/GDP (%) 139.3 98.8 96.3 103.4 n/a n/a n/a 

Source: HSBC, ABS, RBA and Datastream; IMF *Macroeconomic forecasts based on market expectations for the Australian dollar exchange rate 

35

Macro 



abc 

China 

On track for a soft landing 

Policy tightening continues to filter through, leading 

to a peaking in inflation and continued moderation in 

growth. Headline CPI eased to 6.2% y-o-y in August 

from a cyclical high of 6.5% y-o-y in July, while real 

growth in fixed-asset investment and retail sales is 

still holding up at levels above 10% y-o-y. 

We expect the credit tightening and global 

slowdown to have a lagged impact, slowing growth 

in coming quarters. But China is on track for a soft 

landing. First of all, with inflation passing its peak, 

the tightening cycle is close to an end. So there is no 

need to worry about the risk of over-tightening. In 

fact, the current pace of credit growth (14-16%) is 

more than sufficient to support 8-9% GDP growth. 

Second, despite credit tightening, domestic demand 

still remains resilient. Credit tightening is cooling 

investment growth, but it is slowing not melting 

down, thanks to massive ongoing infrastructure 

projects, the acceleration of public housing 

construction and robust consumption, which 

supports consumer-related investment. The 

acceleration of investment in newly started projects 

points to future strength in investment growth. 

Moreover, consumption is still resilient thanks to 

faster growth in wages over the last two years and 

household sector’s strong balance sheets. 

In addition, Chinese growth has become much 

less dependent on external demand in the postcrisis 

era; net exports contributed almost nothing 

to the 9.6% GDP growth recorded in 1H11. This 

is in contrast to the picture in 2007-08 when net 

exports accounted for 3-4ppt of the 11.9% GDP 

growth for that period. This indicates a new global 

recession would have much less of a knock-on 

effect on China than the last one. 

As such, we reiterate our call of around 8-9% growth 

this year and the next. There is no need for Beijing to 

rush into a massive stimulus package this time. The 

PBOC will likely maintain stable monetary policy in 

the coming months, not least because headline CPI 

should remain sticky before slowing meaning fully 

towards the year-end. 

Qu Hongbin 

Economist 



+852 2822 2025 


Sun Junwei 

Economist 


GDP (% y-o-y) 9.5 8.7 8.6 8.4 8.5 8.6 8.7 8.7 8.7 8.8 

GDP sa (% q-o-q) 2.0 1.9 2.1 2.0 2.2 2.1 2.1 2.0 2.2 2.2 

Industrial production* (% y-o-y) 13.2 13.3 13.8 13.0 12.5 12.2 12.5 12.5 12.5 12.5 

CPI, (% q-o-q saar) 5.3 3.4 1.1 1.6 0.9 1.5 1.5 0.9 1.7 0.7 

CPI, average (% y-o-y) 5.9 6.0 3.8 3.3 2.5 2.3 3.1 3.2 2.8 2.3 

PPI, average (% y-o-y) 5.4 5.9 5.8 4.7 4.5 4.5 4.5 4.7 5.0 5.0 

Exports, value (% y-o-y) 22.0 17.0 11.0 15.0 10.0 11.0 13.0 11.0 12.0 12.5 

Imports, value (% y-o-y) 24.0 23.0 11.0 15.0 14.0 17.0 18.0 13.0 14.0 14.5 

Trade balance (% GDP) 1.5 1.7 1.0 -0.1 1.1 0.7 0.7 -0.6 0.8 0.5 

International reserves (USDbn) 3197 3251 3298 3297 3321 3345 3386 3379 3399 3419 


5yr lending rate, end quarter (%) 6.7 6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9 

RMB /USD, end quarter 6.57 6.38 6.35 6.30 6.25 6.20 6.15 6.10 6.05 6.05 

RMB /EUR, end quarter 9.33 8.55 8.76 8.82 8.88 8.93 8.86 8.78 8.71 8.71 

Source: HSBC, CEIC, *Industrial production is the output of companies with annual sales over RMB5m. 

36

Macro 



abc 

Tightening measures are filtering through … 

40 

%Yr, 3mma 

35 

30 

25 

20 

15 

10 

5 

%Yr, 3mma 

99 00 01 02 03 04 05 06 07 08 09 10 11 

M1 M2 Loans 

40 

35 

30 

25 

20 

15 

10 

5 

… and the current tightening cycle is close to an end 

Policy tightening measures continued to filter through to cool 

credit and money supply growth to a level in line with historical 

average rate (14-16%). 

China’s tightening cycle is likely to close to an end after the 

PBOC’s latest move of indirect reserve ratio hikes (equal to 

100-150bp). 

Despite the downside risk to external demand Policy easing is 

unlikely, not least because of still elevated inflationary 

pressures and still resilient growth. 

We expect Beijing to maintain a stable monetary policy stance 

in the coming months before inflation slows meaningfully 

towards year-end. 


Growth is moderating … 

… but not collapsing 

25 

20 

15 

10 

5 

0 

%Yr,3mma 

05 06 07 08 09 10 11 

IP (Lhs) 

HSBC China manufacturing PMI (Rhs) 

60 

55 

50 

45 

40 

Industrial production (IP) growth cooled to a three-month low at 

13.5% y-o-y in August (vs. 14% in July), translating into a 

modest pick-up of seasonally adjusted m-o-m growth of 1.0% in 

August (vs. 0.9% in July). 

Heavy industries, which accounted for 70% of IP, reduced their 

production activities from 14.5% y-o-y in July to 13.5% in 

August, causing a 0.7ppt reduction in IP growth. On the other 

hand, light industries IP growth quickened to 13.4% y-o-y in 

August from 12.8% in July. 

This is just a moderation of growth in response to the tightening 

measures. The current level of IP growth is consistent with 

around 9% GDP growth. 

Source: Markit, HSBC 

Inflation peaked in July … 

… but the subsequent slowdown is likely to be very gradual 

25 

20 

15 

10 

5 

0 

-5 

%Yr 

%Yr 25 

20 

15 

10 

5 

0 

-5 

98 99 00 01 02 03 04 05 06 07 08 09 10 11 

CPI Non-food CPI Food CPI 

Headline CPI eased to 6.2% y-o-y in August from the cyclical high 

of 6.5% y-o-y in July, thanks to a lower carry-over effect (2.7ppt in 

August vs. 3.3ppt in July) and decelerating food inflation. 

Non-food inflation edged up slightly to 3.0% y-o-y in August 

from 2.9% y-o-y in July, translating to 0.2% m-o-m increase (sa, 

vs. zero growth in July) 

We believe CPI has peaked, but the subsequent slowdown is likely 

to be very gradual, not least because of still high food prices. 

Inflation is set to slow to around 4% by year-end but the year 

average CPI is set to overshoot the official annual target of 4% 

this year. 


37

Macro 



abc 

Investment growth started to slow … 

… but this is just a slowdown not meltdown 

50 

40 

30 

20 

10 

%Yr, 3mma 

05 06 07 08 09 10 11 

Nominal grow th of FAI Real grow th of FAI 

Credit tightening is cooling investment growth; nominal fixed 

asset investment growth slowed to 22% y-o-y in August from 

over 25% in 1H, but real growth remains resilient at around 

15% y-o-y. 

But this is just a slowdown not a meltdown, not least because 

the current credit growth is still sufficient to support around 15- 

20% investment growth in the coming quarters. 

Investment should find support from more than 100,000 

ongoing infrastructure projects, public housing construction and 

resilient consumer spending driving investment in consumerrelated 

businesses. 

Moreover, the recent acceleration of investment in newly 

started projects indicates future strength in investment growth. 


Retail sales growth remains resilient … 

30 

25 

20 

15 

10 

5 

0 

-5 

-10 

%Yr 

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 

Retail sales 

Total w age 

… thanks to rapid income growth 

Retail sales growth moderated to 17.0% y-o-y in August from to 

17.2% in July. Seasonally adjusted m-o-m growth picked up to 

1.4% in August from 1.3% in July. In real terms, retail sales 

growth edged up to 10.8% y-o-y in August from 10.7% in July. 

Car sales expanded by 12.4% y-o-y in August, significantly 

more than 11.9% in July. 

Chinese households now have deeper pockets – on a real 

basis, urban household disposable income was up 7.6% y-o-y 

in 1H11, while rural household cash income was up 13.7% 

The tight correlation between wage income and retail sales 

suggests the latter would remain resilient in the coming 

quarters. 


China has become more dependent on domestic demand … 

… which should be sufficient to support 8-9% growth 

16 

12 

8 

4 

0 

-4 

ppts 

2005 2006 2007 2008 2009 2010 1H11 

Consumption Gross capital formation Net ex ports 

In light of cooling global economic growth, growth in China’s 

exports is set to slow from above 20% in July-August period to 

the teens in the coming months. 

But China’s growth has become much less dependent on 

external demand in the post-crisis era; net exports contributed 

almost zero to the 9.6% GDP growth in 1H11. 

This is in contrast to the picture in 2007/08 when net exports 

accounted for 3-4ppt out of 11.9% GDP growth during that 

period. This indicates a new global recession would have much 

less of a knock-on effect on China than the previous recession. 

Still resilient investment and consumption demand should be 

sufficient to support around 8-9% growth in coming quarters. 


38

Macro 



abc 

China: Macro framework 

2007 2008 2009 2010 2011f 2012f 2013f 


GDP growth (% y-o-y) 14.2 9.6 9.2 10.4 8.9 8.6 8.8 

Nominal GDP (USDbn) 3,504 4,535 4,990 5,886 7,004 8,121 9,603 

GDP per capita (USD) 2,665 3,432 3,758 4,389 5,197 5,996 7,055 

Retail sales (% y-o-y) 16.8 21.6 15.5 18.5 19.0 17.0 18.0 

Fixed Asset Investment (nominal, % y-o-y) 25.8 26.1 30.5 24.5 21.5 19.0 19.0 

Net Exports (contribution to GDP growth, ppt) 2.5 0.8 -3.7 0.8 0.3 0.1 -1.0 

Industrial production (% y-o-y) 16.0 12.9 12.9 15.7 13.2 12.5 13.5 

Gross domestic saving (% GDP) 51.0 51.4 50.0 50.5 50.0 50.0 49.5 

Unemployment rate, average (%) 4.0 4.2 4.3 4.1 4.3 4.3 4.3 


CPI, average (% y-o-y) 4.8 5.9 -0.7 3.3 4.8 2.9 2.6 

CPI, end-year (% y-o-y) 6.5 1.2 1.9 4.6 3.5 2.8 2.2 

Core CPI, average (% y-o-y) 0.9 0.9 -1.1 0.9 1.8 1.0 1.0 

Core CPI, end-year (% y-o-y) 0.9 -0.4 0.0 1.7 1.5 0.9 0.8 

PPI, average (% y-o-y) 3.1 6.9 -5.4 5.5 5.8 4.5 5.0 

PPI, end-year (% y-o-y) 5.4 -1.1 1.7 5.9 5.8 4.3 5.0 

Manufacturing wages, nominal (% y-o-y) 16.2 15.8 9.0 13.0 13.0 12.0 13.5 


Central bank money M0, average (% y-o-y) 13.6 12.4 12.1 14.9 11.0 11.0 11.0 

Broad money supply M2, average (% y-o-y) 17.5 16.7 26.5 23.7 17.9 15.5 15.5 


5yr lending rate, end-year (%) 7.74 5.76 5.76 6.16 6.85 6.85 6.85 

Real private sector credit growth (% Yr) 17.0 15.0 13.0 15.5 13.3 14.0 14.0 

RMB /USD, end-year 7.30 6.82 6.83 6.62 6.35 6.15 6.05 

RMB /USD, average 7.59 6.93 6.83 6.76 6.49 6.25 5.90 

RMB /EUR, end-year 10.66 9.48 9.77 8.87 8.76 8.86 8.71 

RMB /EUR, average 10.55 10.08 9.55 8.92 8.98 8.86 8.50 


Merchandise exports (USDbn) 1,219 1,429 1,202 1,578 1,863 2,086 2,336 

Merchandise imports (USDbn) 956.0 1,133.1 1,005.6 1,394 1,673 1,940 2,212 

Trade balance (USDbn) 262.7 295.5 196.1 184.5 189.9 145.8 124.4 

Current account balance (USDbn) 372 426 284 250 260 210 190 

Current account balance (% GDP) 10.6 9.4 5.7 4.2 3.7 2.6 2.0 

Net FDI (USDbn) 83.5 108.3 90.0 105.8 121.7 135.1 151.3 

Net FDI (% GDP) 2.4 2.4 1.8 1.8 1.7 1.7 1.6 

Current account balance plus FDI (% GDP) 13.0 11.8 7.5 6.0 5.4 4.2 3.6 

Exports, value (% y-o-y) 25.8 17.2 -15.9 31.4 18.0 12.0 12.0 

Imports, value (% y-o-y) 20.8 18.5 -11.3 38.6 20.0 16.0 14.0 

International FX reserves (USDbn) 1,528 1,946 2,399 2,850 3,300 3,450 3,600 

Import cover (months) 17.7 18.9 27.9 24.8 25.0 23.5 22.5 


Commercial banks’ FX assets (USDbn) 188.7 181.3 115.3 128.1 146.9 167.7 195.4 

Gross external debt (USDbn) 389.2 390.2 428.6 548.9 653.9 708.9 743.9 

Gross external debt (% GDP) 11.1 8.6 8.6 9.3 9.3 8.7 7.7 

Short term external debt (% of int’l reserves) 15.4 11.6 10.8 13.2 14.4 15.2 15.4 

Consolidated government balance (% GDP) 0.6 -0.4 -2.2 -2.5 -2.0 -1.7 -1.4 

Public Sector Debt (% GDP) 37.3 35.5 45.0 44.8 41.5 39.3 37.0 

Macro prudential indicators 

Capital adequacy ratio 8.4 12.0 11.4 12.2 n/a n/a n/a 


Household Debt/ GDP (%) 12.3 11.8 16.2 18.9 n/a n/a n/a 

Total Credit/GDP (%) 98.5 96.6 117.2 120.4 n/a n/a n/a 

Residential House prices (% y-o-y) 14.8 -1.7 23.2 7.4 n/a n/a n/a 

Loan/Deposit ratio 67.2 65.1 66.9 66.7 n/a n/a n/a 

Stock Market Capitalization/GDP (%) 123.1 38.6 71.6 66.7 n/a n/a n/a 

Note: Industrial production is the output of all industrial companies 

Source: HSBC, CEIC, IMF, ADB 

39

Macro 



abc 

Hong Kong 

Sticky stuff 

With Hong Kong’s headline inflation hitting a post- 

1995 high on a y-o-y basis, the question on 

everyone’s mind right now is: are we about to see 

runaway inflation? Moreover, as one of Asia’s most 

export-reliant economies, is Hong Kong inevitably 

heading into recession? The answer to both 

questions, in our opinion, is no. 

Despite the strength of inflation, there is little 

evidence that rising prices have undermined 

household purchasing power as Hong Kong’s real 

retail sales numbers attest. On a sequential 

annualised basis, real retail sales (one of the closest 

proxies for Hong Kong’s real private consumption) 

are still expanding at roughly the same 25% 

(3m/3m, saar) rate as in 2Q11. 

Despite the West’s increasingly grim growth 

outlook, buyers in Hong Kong continue to spend 

thanks to buoyant local consumption demand and 

tourist spending. That said, weakening Western 

demand is starting to weigh on business conditions 

and hiring activities. With consumers in the US and 

EU looking increasingly strained, Hong Kong’s 

export growth is set to be weaker in the second half 

of the year. Continued income growth, strong 

inflows of visitors from the mainland and 

government policies should all help to 

counterbalance this. But if inflation does not slow 

then Hong Kong’s second key driver of growth, 

domestic consumption, could start to slip before the 

year is up. 

Ironically, such an outcome could be just what is 

needed to bring inflation back down to earth, and 

for the economy to strike a more healthy 

macroeconomic balance. We continue to see 

inflation and financial market turbulence as the two 

top risks to the resilience of domestic demand. 

Donna Kwok 

Economist 



+852 2996 6621 

donnahjkwok@hsbc.com.hk 


GDP (% y-o-y) 5.1 4.4 3.2 2.3 2.5 5.3 7.5 5.9 6.3 5.7 

GDP sa (% q-o-q) -0.5 0.3 0.5 2.1 0.0 2.6 2.6 0.5 0.5 1.9 

Industrial production (% y-o-y) 1.9 -7.0 0.1 17.0 9.0 3.5 4.0 2.3 3.0 8.0 

CPI, (% q-o-q saar) 7.5 -1.1 5.5 7.7 6.0 7.2 6.4 1.4 1.4 1.7 



Exports, value (% y-o-y) (BOP, goods) 7.8 7.3 11.5 6.6 8.0 4.3 8.3 10.0 8.5 11.3 

Imports, value (% y-o-y) (BOP, goods) 10.1 7.3 9.0 9.8 8.1 5.6 7.1 8.8 10.5 12.3 

Trade balance (% GDP) (BOP, goods) -28.2 -13.8 -15.8 -28.3 -30.4 -16.1 -13.6 -26.9 -35.2 -19.0 

G&S balance (% GDP) -2.9 11.7 10.1 10.0 5.2 12.6 11.1 10.7 4.9 11.5 

International reserves (USDbn) 277.2 291.1 299.8 329.5 365.7 376.7 391.8 396.9 400.8 397.2 



HKD /USD, end quarter 7.78 7.78 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 

HKD /EUR, end quarter 11.05 10.43 10.76 10.92 11.08 11.23 11.23 11.23 11.23 11.23 


40

Macro 



abc 

Local demand and service exports are still powering … 

Ppt contribution to real GDP grow th (% y oy ) 

5 

3 

1 

-1 

-3 

-5 

4Q 2010 

1 

1Q 

2 

2011 

2Q 

3 

2011 

Priv ate spending 

Gov t spending 

GFCF 

Net exports of goods 

Net ex ports of serv ices 

Source: HK Censtatd, HSBC 

… Hong Kong’s robust recovery 

After clocking a super solid 7.5% y-o-y growth rate in 1Q, Hong 

Kong’s GDP cooled to a more moderate 5.1% pace of growth in 

2Q as the region’s trade hub slowed in response to supply 

chain disruptions related to an earthquake in Japan in March. 

Partly also in pay-back for an extremely strong print in 1Q 

(fastest in seven quarters) real GDP thus contracted marginally 

on a sequential basis in 2Q by -0.5%.q-o-q (sa), or on an 

annualized basis by -2.1% saar. 

But with private consumption rising by 9.5% saar, Hong Kong is 

still far from entering a recession of any sort. 

Mainland demand for “made in HK” goods and services, easy 

money conditions, and local shoppers boosted by forever 

improving job market conditions continue to lend strong support 

to the economy. 

Hong Kong exports ride off… 

60 

45 

30 

15 

0 

-15 

-30 

%y oy %y oy 

Aug-05 Aug-07 Aug-09 Aug-11 

HK ex ports lagged one month (Lhs) 

CN: Exports fob 

CN: Imports cif 


100 

50 

0 

-50 

… mainland demand 

Trade activity started strong in 1Q, with goods exports leaping 

up by over 71.2% saar. Going into 2Q, the impact of supply 

chain disruptions and the lagged effect of a mini mainland 

inventory correction brought goods exports growth rudely back 

down to earth, when it contracted by 37.6% saar. 

With Japan supply chain disruptions now a thing of the past, we 

expect trade to resume expansion on a sequential basis in 3Q. 

That said, with the persistence of global economic 

uncertainties, much would depend on the appetite of China’s 

consumers for not only imported goods, but for Hong Kong 

more specifically, for imported services. 

China absorbs over half of all shipments leaving Hong Kong, 

while the US accounts for over a tenth. Unlike the US, where 

consumer sentiment is starting to soften as a result of rising 

energy prices, Chinese consumers are buffered by relative 

energy price controls and enjoying sustained real wage growth. 

A falling unemployment rate, rising incomes and mainland … 

0 %, reversed %, yoy, 3mma 50 

40 

3 

30 

20 

10 

6 

0 

-10 

9 

-20 

Aug-91 Aug-96 Aug-01 Aug-06 Aug-11 


Unemploy ment rate (sa) 

Retail sales (v al)(Rhs) (Lagged 3 months) 

… visitors continue to keep the retail industry buoyant 

Where retail sales are concerned, the feel-good vibe is still 

circulating Hong Kong, supported by: mainland visitor inflows 

which have topped 2m each month y-t-d; robust job market 

conditions; record low non-property borrowing costs; and 

resilient property prices. 

Four months on, the new minimum wage appears to have 

boosted income levels without slowing job creation in May. 

Underpinned by strong domestic and mainland demand, Hong 

Kong’s job market continues to hire defying turbulence in the 

global financial markets and weakness in global investor 

sentiment. The effects of weakening Western demand will likely 

start cooling local hiring activities soon, but it will likely take a 

while given that the local labour market has been operating at 

close to or above capacity for most of this year. 

Hong Kong’s unemployment rate fell to a post-1998 low of 

3.2% in August (sa). 

41

Macro 



abc 

Inflationary pressures should start to peak out … … towards the end of 2011 

10 

%yoy 

8 

Headline CPI growth 

6 

4 

2 

0 

-2 

Aug-05 Aug-07 Aug-09 Aug-11 

Housing 

Food 

Clothing and footwear 

Durable goods 

Utility 

Misc. services 

Alcohol and tobacco 


Hong Kong’s underlying inflation shot up to a three-year high in 

August. Inflation is showing no meaningful signs of a cool-down. 

Although Western demand is starting to slow, robust mainland 

demand and firm wage growth and household spending at 

home continues to keep the economy operating close to 

capacity. That said, as business conditions and hiring activities 

soften in response to persistent global economic uncertainties 

and financial market turbulence, we think inflationary pressures 

will likely peak in the coming months. 

Hong Kong inflation is spearheaded first and foremost by 

mainland food prices, the trickle through of private residential 

property price increases to private rental costs (time lag of 11- 

12 months), commodity costs, and rising wages. 

For now, sustained income growth is buffering household 

spending from being eroded by inflation. 

Hong Kong private residential property prices still high … 

… but have started to show signs of cooling 

200 1999=100 2008:- 15% 

The HKD-USD peg system transmits difficult corrections into 

2009: +30% 

local asset and general consumer prices whenever US and HK 

175 

2010: +21% 

macro fundamentals are not in synch. 

150 

Jan-Aug 2011: +12.4% 

This isn’t the first time the territory has had to import monetary 

conditions that were designed for the US, not itself. 

125 

The Authority has made multiple credible attempts to ensure 

that stability is maintained in the financial system. For example 

100 

by raising transaction costs in the frothy property market and 

tightening how banks manage associated exposures. 

75 

Until the US Fed makes its first rate hike (not until late 2013), 

50 

liquidity conditions will stay loose in Hong Kong. 

96 98 00 02 04 06 08 10 

Centaline City Leading Index 


That said, the recent mix of higher mortgage borrowing costs, 

tightened mainland liquidity conditions, and rising global 

investor risk aversion appears to have started taking some heat 

out of the property market. 

Hong Kong’s RMB deposit base looks set to exceed … 

700 

600 

500 

400 

300 

200 

100 

0 

RMB bn 

Aug 2011: RM B 609bn 

2009: +11% 

2010: +402% 

Jan-A ug 2011: +93% 



W 

k 

… RMB1.2trn by year-end 

We expect Hong Kong to dominate offshore RMB (aka “CNH”) 

business for a while for a number of reasons. 

As the first offshore market to be endorsed by Beijing for CNH 

business, Hong Kong has had a significant head-start in 

developing a suitable regulatory framework and experimenting 

with new CNH product innovations. 

In this regard, a close working relationship between the PBoC 

and the HKMA has been critical. 

Just as important, however, has been the striking growth of 

RMB liquidity in Hong Kong, spearheaded by the rapid uptake 

of the RMB as a key trade settlement currency. 

Trade settlement is the top source of RMB liquidity for Hong 

Kong, accounting for around 70% of incremental growth. 

42

Macro 



abc 

Hong Kong: Macro framework 

2007 2008 2009 2010 2011f 2012f 2013f 


GDP growth (% y-o-y) 6.4 2.3 -2.7 7.0 5.0 4.5 5.3 

Nominal GDP (USDbn) 207 216 209 224 238 247 260 





Net Exports (contribution to GDP growth, ppt) -0.6 0.8 -3.4 0.3 0.6 0.9 0.4 

Industrial production (% y-o-y) -1.5 -6.7 -8.3 3.5 -0.6 8.1 3.8 


Unemployment rate, end-year (%) 3.4 4.1 5.1 4.0 3.4 3.0 3.0 


CPI, average (% y-o-y) 2.0 4.3 0.6 2.3 5.0 5.3 4.8 


Core CPI, average (% y-o-y) 1.6 2.8 2.2 0.9 3.7 1.5 1.5 

Core CPI, end-year (% y-o-y) 3.0 2.4 0.7 2.1 2.5 2.5 2.5 


PPI, end-year (% y-o-y) 4.4 3.8 -0.3 7.6 5.0 6.0 7.0 





Real private sector credit growth (% y-o-y) 18.0 6.7 -0.5 26.2 14.6 5.0 5.5 



HKD /USD, end-year 7.80 7.75 7.76 7.77 7.80 7.80 7.80 

HKD /USD, average 7.80 7.78 7.75 7.77 7.79 7.80 7.80 

HKD /EUR, end-year 11.39 10.77 11.09 10.42 10.76 11.23 11.23 

HKD /EUR, average 10.84 11.33 10.83 10.25 10.78 11.06 11.23 


Merchandise exports (USDbn), (BOP, goods) 346.0 365.4 321.9 394.0 441.3 471.3 520.8 

Merchandise imports (USDbn), (BOP, goods) 365.7 388.6 348.7 437.0 487.7 524.8 580.9 

Trade balance (USDbn), (BOP, goods) -19.7 -23.1 -26.9 -43.0 -46.4 -53.4 -60.1 

G & S balance (USDbn) 22.4 22.1 15.6 12.6 14.8 24.3 24.9 

G & S balance (% GDP) 10.8 10.3 7.5 5.6 6.2 9.8 9.6 

Net FDI (USDbn) -6.7 9.0 -11.6 -7.2 4.8 5.3 5.0 

Net FDI (% GDP) -3.3 4.2 -5.5 -3.2 2.0 2.1 1.9 

G & S balance plus FDI (% GDP) 7.6 14.5 1.9 2.4 8.2 12.0 11.5 

Exports, value (% y-o-y), (BOP, goods) 8.9 5.6 -11.9 22.4 12.0 6.8 10.5 

Imports, value (% y-o-y), (BOP, goods) 10.3 6.3 -10.3 25.3 11.6 7.6 10.7 

International FX reserves (USDbn) 152.7 182.5 255.8 268.7 299.8 391.8 401.2 



Commercial banks’ FX assets (USDbn) 789 867 792 962 978 960 1,100 

Gross external debt (USDbn) 711 663 669 803 850 700 700 

Gross external debt (% GDP) 343 308 319 358 357 283 269 

Consolidated government balance (% GDP) 7.7 0.1 1.6 4.3 1.4 3.7 3.1 

Public Sector Debt (% GDP) 1.4 1.2 1.0 0.7 0.6 0.5 0.5 


Capital adequacy ratio (local Authorized Institutions) 13.4 14.7 16.8 16.1 16.0 15.5 15.5 

Non-performing loan ratio 0.9 1.2 1.3 1.0 1.1 1.3 1.3 

Household Debt/ GDP (%) 52.2 52.3 56.7 60.3 60.8 59.5 59.5 

Total Credit/GDP (%) 141 151 152 173 180 175 175 

Residential House prices (% y-o-y) 24.2 -15.2 29.0 20.7 N/A N/A N/A 

Loan/Deposit ratio 38.8 41.7 38.7 43.9 75.0 68.0 68.0 

Mortgage loan-to-value ratio – mass market properties 70.0 70.0 70.0 70.0 70.0 70.0 70.0 

Mortgage loan-to-value ratio – mid market properties 70.0 70.0 70.0 60.0 60.0 60.0 60.0 

Mortgage loan-to-value ratio – luxury or non-owner occupied properties 70.0 70.0 60.0 50.0 50.0 50.0 50.0 

Stock Market Capitalization/GDP (%) 1,271 611 1,095 1,201 N/A N/A N/A 

Note: Public debt refers to government debt only 


43

Macro 



abc 

India 

Inflation still the key concern 

India’s economy slowed a little more in 2Q11, 

with GDP up 7.7% y-o-y (versus 7.8% y-o-y in 

1Q). Private consumption growth eased (6.3% y- 

o-y versus 8.0% in 1Q11), but this partly reflects a 

base effect. Government consumption also 

slowed. Investment, on the other hand, rebounded 

(up 7.9% y-o-y versus 0.4% in 1Q), but this also 

partly reflected a base. While exports grew at a 

healthy rate, net exports slowed as there was a 

sharp rise in imports. 

High frequency indicators show that growth is 

declining, particularly in the manufacturing sector. 

Industrial production growth eased in annual terms 

in July, but this was largely because of the volatile 

nature of the capital goods segment. HSBC’s PMI 

indices for manufacturing and services also show 

signs of sequential deceleration, but the economy 

remains in expansionary territory. Moreover, 

private credit growth is robust. 

Even so, the economy is facing the lagged effects of 

monetary tightening, the uncertainty associated with 

high inflation, and the natural speed limit imposed 

by tight capacity. While the domestic orientation of 

the economy limits the spill over from adverse 

global economic conditions, it is not immune, and 

global weakness has spilled over through the trade 

and confidence channels. For this reason, we have 

lowered our 2011 forecast to 7.4% from 7.6% and 

our 2012 forecast to 8.1% from 8.2%. 

Despite slower growth, inflationary pressures are 

not abating. Excess demand is still pushing up 

core inflation and is not set to disappear anytime 

soon. Adjustments to regulated diesel and 

kerosene prices have also added to inflationary 

pressures, and we have not yet seen a discernable 

decline in global commodity prices. Consequently 

the inflation rate should stay elevated for awhile. 

The 2011/12 central government budget target of 

4.6% of GDP may not be achieved due to slower 

growth and a larger-than-budgeted fuel subsidy 

bill. Consequently, fiscal policy will at best be 

neutral, leaving monetary policy with the 

responsibility of tackling inflation. We expect the 

policy rate to rise another 25bp over the rest of 

2011/12, taking the repo rate to 8.50%. 

Leif Eskesen 

Economist 


Banking Corporation Limited, 

Singapore Branch 

+65 6239 0840 

leifeskesen@hsbc.com.sg 

Prithviraj Srinivas 

Economics Associate 

Bangalore 


GDP (% y-o-y) 7.7 6.0 8.2 7.9 7.7 8.1 8.2 8.2 8.4 8.6 

GDP sa (% q-o-q) 1.8 1.9 1.7 2.1 1.9 2.0 2.1 2.1 2.0 2.1 

Industrial production (% y-o-y) 4.0 7.5 5.7 4.0 5.6 7.2 8.8 9.8 7.5 7.5 

WPI, (% q-o-q saar) 4.1 7.6 7.5 7.6 7.2 5.9 5.2 4.8 4.6 6.7 


WPI, average (% y-o-y) 9.6 9.5 8.7 7.0 7.4 7.8 6.8 5.6 5.1 5.3 

Exports, value (% y-o-y) 46.2 56.2 11.3 -8.4 10.2 19.8 38.7 46.6 34.5 22.8 

Imports, value (% y-o-y) 32.8 40.4 18.2 -7.4 11.6 22.6 38.2 36.5 28.6 24.6 

Trade balance (% GDP) -7.6 -9.2 -7.2 -4.7 -7.1 -9.8 -8.6 -4.6 -7.2 -11.0 

Current account (% GDP) -1.8 -2.6 -3.4 -0.3 -1.6 -3.1 -4.2 0.6 -1.0 -4.2 




INR /USD, end quarter 44.73 48.97 49.00 48.20 47.40 46.60 45.50 45.00 44.00 44.00 

INR /EUR, end quarter 63.51 65.62 67.62 67.48 67.31 67.10 65.52 64.80 63.36 63.36 


44

Macro 



abc 

GDP growth held steady in 2Q11 … 

… but is set to ease in the quarters ahead 

10 

8 

6 

4 

2 

0 

-2 

% y /y contribution 

08 09 10 11 

Agriculture 

Ind ustr y 

Serv ic es 

GDP grow th % y-o-y 

Following the boost to growth from the wet monsoons in 2010, 

the agriculture sector is expected to grow at a more normal 

pace in 2011. 

Industrial production is also expected to see slower growth in 

response to tighter monetary policy, uncertainty from 

persistently high inflation and weaker external demand 

conditions. Planned investments in infrastructure will, however, 

offer some support. 

Service sector growth should also ease in response to tighter 

monetary conditions. However, robust private consumption, 

propped up by favourable labour market conditions, will shore 

up demand. 

Overall, we expect the economy to see a soft not hard landing. 

Source: CEIC. HSBC 

This is confirmed by high frequency indicators … 

In dex 

70 

60 

50 

40 

06 07 08 09 10 11 

PMI Manufacturing PMI Services 

… signalling the slowdown has broadened 

HSBC’s PMI readings suggest that the growth momentum in 

the economy has eased, but remains in expansionary territory. 

This is also the message from the official IP index, where 

growth on a sequential basis has slowed. 

Service sector growth moderated driven by a deceleration in 

business activity, particularly in the interest rate sensitive parts 

of the economy affected by the tightening of monetary policy. 

Other high frequency indicators, including credit growth and 

advance tax payments, have also confirmed that growth is 

moderating. 

Source: Markit 

The trade balance has widened … 

2 

0 

-2 

-4 

-6 

-8 

-10 

-12 

-14 

-16 

USD Bn 

T rade Balanc e 

T rade Balanc e (Sea. Adj.) 

00 01 02 03 04 05 06 07 08 09 10 11 

… and could remain elevated 

The resilience in domestic demand growth and high oil prices is 

supporting import growth. 

This has recently been offset by quite a strong pickup in 

exports led by increased diversification of export destinations 

and improved demand from traditional markets in the West. 

Looking ahead, however, weaker demand growth in advanced 

economies is likely to drag exports growth, while imports are 

set to grow at a healthy pace thanks to resilient domestic 

demand. 


45

Macro 



abc 

Inflation has become difficult to dislodge … 

… with a shift in inflation dynamics 

% 

20 

15 

10 

5 

0 

-5 

07 08 09 10 11 

WPI % y-o-y 

WPI: Food % y-o-y 

WPI core: % y-o-y 

WPI:Core % m/m sa (RHS) 

% 

8 

6 

4 

2 

0 

-2 

India has seen a shift in inflation dynamics from the supply side 

to the demand side. 

Food prices have been coming off with supply factors 

improving, although the decline has not been as rapid as 

expected due to both structural and cyclical factors keeping 

prices up. 

Demand pressures have instead taken over as a key driver of 

inflation. With capacity tight, this has driven up core inflation. 

Rising international commodity prices are adding to inflation 

pressures, although subsidy schemes have reduced the extent 

of pass through. 


Monetary policy has been tightened … 

… but slightly more is needed to quell inflation pressures 

% 

9.00 

8.50 

8.00 

7.50 

7.00 

6.50 

Current policy 

rate 

HSBC forecast 

Tay lor rule 

The RBI has been one of the most active central banks in terms 

of hiking rates and reserve requirements. 

However, they have also faced a more significant inflation 

problem and monetary policy only just moved into 

contractionary territory. 

The RBI is expected to hike rates throughout 2011, not calling it 

quits until the repo rate hits 8.50%. 

This would bring policy settings further into contractionary 

territory, which is needed to bring down core inflation notably 

over the policy horizon. 


Fiscal policy needs to been tightened … … but would remain too loose for comfort in 2012/13 

% of GDP 

4 

Fiscal impulse by FY 

2 Loosen 

0 

-2 

Tighten 

-4 

-6 

05 06 07 08 09 10 11 12 

The final fiscal outcome for 2011/12 was better than expected, 

but primarily due to 3G license windfall gains. Adjusting for this, 

the fiscal performance was less impressive. 

The 2012/13 budget targets a fiscal deficit of 4.6% of GDP, but 

the reluctance to reform fuel subsidies will raise the subsidy bill 

beyond budget targets. 

Moreover, the 2012/13 budget is predicated on overly optimistic 

growth of 9 percent, which put revenue targets at risk. 

The government is consequently expected to miss its 2012/13 

fiscal target, even under the assumption of some under 

execution of infrastructure-related spending. As such, fiscal 

policy should at best be in neutral gear and leave the RBI to 

fight a lone battle against inflation. 


46

Macro 



abc 

India: Macro framework 

2007 2008 2009 2010 2011f 2012f 2013f 


GDP growth (% y-o-y)* 9.3 6.8 8.0 8.5 7.4 8.1 8.3 

Nominal GDP (USDbn)* 1,220 1,252 1,353 1,720 2,067 2,500 2,751 

GDP per capita (USD)* 985 1,027 1,083 1,347 1,586 1,906 2,158 

Private consumption (% y-o-y)* 9.3 7.7 7.3 8.6 7.9 8.1 8.3 

Government consumption (% y-o-y)* 9.5 10.7 16.4 4.8 3.7 3.8 3.7 

Investment (% y-o-y)* 16.2 1.5 7.3 8.6 7.1 8.5 8.8 

Net Exports (contribution to GDP growth, ppt)* -1.5 -3.1 -0.8 1.2 -3.5 -1.2 -1.5 


Gross domestic saving (% GDP)* 35.6 32.3 32.3 33.7 34.5 35.1 35.2 


CPI, average (% y-o-y)* 6.2 9.1 12.4 10.4 8.0 7.7 6.5 

CPI, end-year (% y-o-y)* 5.5 9.7 15.0 9.5 6.9 7.7 6.5 

Core WPI, average (% y-o-y)* 5.2 6.6 -0.3 4.9 7.5 6.1 4.5 

Core WPI, end-year (% y-o-y)* 4.4 4.6 1.1 6.2 7.4 4.5 4.5 

WPI, average (% y-o-y)* 4.7 8.1 3.8 9.6 8.7 6.9 5.6 

WPI, end-year (% y-o-y)* 7.7 1.6 10.4 9.7 7.0 5.2 6.4 




Real private sector credit growth (% y-o-y) 15.6 14.0 6.8 12.0 11.5 16.0 17.5 



INR /USD, end-year 39.42 48.46 46.69 44.81 49.00 45.50 44.00 

INR /USD, average 40.88 44.58 48.39 45.74 46.46 47.36 44.44 

INR /EUR, end-year 57.55 67.35 66.76 60.04 67.62 65.52 63.36 

INR /EUR, average 56.82 64.92 67.62 60.37 64.34 67.14 63.99 


Merchandise exports (USDbn) 153.8 198.6 168.2 225.7 312.7 358.9 462.5 

Merchandise imports (USDbn) 231.6 323.9 275.2 357.9 463.3 541.1 674.7 

Trade balance (USDbn) -77.8 -125.3 -107.0 -132.2 -150.6 -182.2 -212.1 



Net FDI (USDbn) 8.2 24.1 19.7 10.0 15.6 24.0 24.0 

Net FDI (% GDP) 0.7 1.9 1.5 0.6 0.8 1.0 0.9 

Current account balance plus FDI (% GDP) 0.0 -0.5 -0.5 -2.4 -1.5 -1.3 -1.2 










Consolidated government balance (% GDP)* -4.1 -8.5 -9.3 -7.7 -6.8 -6.5 -6.1 

Central government balance (% GDP)* -2.5 -6.0 -6.4 -4.7 -5.2 -4.4 -3.7 

Primary balance (% GDP)* 0.9 -2.6 -3.1 -1.7 -2.2 -1.7 -1.2 

Gross public sector debt (% GDP)* 77.3 76.8 73.1 72.9 72.4 70.4 68.0 


Capital adequacy ratio (system wide)* 12.3 13.0 13.2 13.6 n/a n/a 0.0 

- tier 1* 8.3 9.1 9.0 9.4 n/a n/a 0.0 

- tier 2* 4.0 3.9 4.2 4.1 n/a n/a 0.0 

Non-performing loan ratio 1.0 1.0 1.1 1.1 n/a n/a 0.0 

Household Debt/ GDP (%) 5.39 5.21 4.97 4.79 n/a n/a 0.0 

Residential house price index (Mumbai metropolis, % y-o-y)** 31.7 -9.4 53.4 n/a n/a n/a 0.0 

Loan/Deposit ratio 74.1 73.6 72.4 72.2 n/a n/a 0.0 

Stock Market Capitalization/GDP (%) 150.5 57.4 99.1 98.2 n/a n/a 0.0 


Note: * data on fiscal year basis (Apr–Mar) e.g. fiscal year 2010-11 refers to 2010 in the table 

Source: Central Statistical Organisation, Reserve Bank of India, Bloomberg, ADB, IMF, CEIC and HSBC 

47

Macro 



abc 

Indonesia 

Domestic engine powers 

growth 

Indonesia’s 2Q GDP rose 6.5% y-o-y, unchanged 

from 1Q. In seasonally adjusted terms, the 

economy grew 1.6% q-o-q, above the 1% q-o-q 

expansion in 1Q and slightly faster than the 

historical average. Examination of the expenditure 

components shows that private consumption held 

up (4.6% y-o-y versus 4.5% in 1Q), government 

consumption accelerated (4.6% y-o-y versus 3.0% 

in 1Q) and net exports rose (22.9% y-o-y versus 

1.3% in 1Q) led by strong exports. Meanwhile, 

investment also picked up smartly (9.2% y-o-y 

versus 7.3% in 1Q). 

Looking ahead, we expect growth in Indonesia to 

hold up well, sustained by its strong domestic 

economy; we believe both private consumption 

and investment will remain stellar over the 

forecast horizon. Still very loose monetary policy 

settings also clearly play a role here. Moreover, as 

the economy is more domestically oriented, the 

expected softening in exports will not do much 

damage to headline growth, in our view. 

With growth looking strong, inflation pressures 

are still lurking. In August, headline inflation 

came in at 4.8% y-o-y and core inflation picked 

up, reaching a two-year high of 5.2% y-o-y. 

However, gold prices appear to have been the 

culprit, and their impact may well prove largely 

temporary. Nevertheless, as growth is set to 

remain strong this year and next, core inflation 

pressures are likely to remain firmly in place. 

Still, Bank Indonesia (BI) is in no hurry to tighten 

policy rates despite its very accommodative 

stance. In fact, it slipped in a stealth easing at the 

last policy meeting, when it kept the policy rate 

unchanged at 6.75%, but then lowered the floor of 

its rates corridor to 150bp below the policy rate 

from 100bp before. Given its reluctance to tighten 

even before this summer’s drama on the global 

stage, we do not see BI tightening policy until 

next year. 

Leif Eskesen 

Economist 




+65 66588782 



GDP (% y-o-y) 6.5 6.4 6.2 6.3 6.7 6.9 6.8 6.3 6.4 6.4 

GDP sa (% q-o-q) 1.5 1.4 1.7 1.7 1.8 1.6 1.5 1.3 1.9 1.6 


CPI, (% q-o-q saar) 3.0 4.8 6.0 7.9 6.8 5.4 6.1 6.5 6.0 5.5 





Trade balance (% GDP) 4.6 3.2 3.7 3.8 4.0 2.4 2.7 3.4 3.4 1.9 

Current account (% GDP) 0.1 0.2 0.7 1.0 1.4 -0.1 0.1 0.9 1.1 -0.3 


Policy rate, end-quarter (%) 6.75 6.75 6.75 6.75 7.25 7.50 7.50 7.50 7.50 7.50 


IDR/USD, end quarter 8,597 8,950 8,800 8,700 8,550 8,400 8,300 8,200 8,100 8,100 

IDR/EUR, end quarter 12,208 11,993 12,144 12,180 12,141 12,096 11,952 11,808 11,664 11,664 


48

Macro 



abc 

GDP growth is holding up … 

10 

8 

6 

4 

2 

0 

-2 

% y-o-y contribution 

Mar-08 Mar-09 Mar-10 Mar-11 

Private Consumption 

Investment 

Others 

Government 

Net Exports 

GDP % y-o-y 

… supported by both the domestic and external engine 

Indonesia’s consumers again delivered, helping to hold up 

growth at 6.5% y-o-y in the second quarter of 2011, unchanged 

from the previous quarter. 

However, the government also chipped in, raising consumption 

during the quarter. 

Investment activities continue to be a close second to watch, 

but net exports also rebounded. 


Indonesia could be a real contender … 

… but much depends on further structural reforms 

400 

300 

200 

100 

0 

01 02 03 04 05 06 07 08 09 10 

Indonesia 

China 

Vietnam 

Thailand 

One important factor contributing to Indonesia’s appeal as a 

key FDI destination in the region is its relatively low wage costs 

– at about one-third that of China’s. 

With increasing focus on rising production costs, more and 

more manufacturers are likely to be attracted by the wage 

competitiveness and ample supply of labour that the country 

has. 

To fully capture such interests, especially for the labourintensive 

industries, the administration still has to tackle the 

restrictive labour laws, among other things. 


Foreign ownership of government bonds … 

IDR trn 

300 

250 

200 

150 

100 

50 

0 

09 10 11 

38 % 

34 % 

30 % 

26 % 

22 % 

18 % 

14 % 

10 % 

… remains sizeable 

The positive story about Indonesia, predicated on its growth 

momentum and the building likelihood of a re-attainment of 

investment grade this year, has brought in considerable 

portfolio inflows. 

Foreign ownership of government bonds, for instance, has 

been reaching record levels. 

N onresident holding 

% of o utsta nding (R HS) 


49

Macro 



abc 

Foreign exchange reserves have increased significantly … 

… offering some cushion against capital outflows 

140 

120 

100 

80 

60 

40 

Fx reserves, USD bn 

08 09 10 11 

Along side the pace of capital inflows, Indonesia’s foreign 

exchange reserves have been on the uptick, as well. In fact, the 

latest figure shows that its reserves stand at an all-time high of 

close to USD120bn. 

The size of the foreign reserves should go some ways in 

protecting the economy, in a scenario in which capital suddenly 

stops because of adverse global development. 

The level is equivalent to nearly eight months’ worth of imports, 

for instance. 


While headline inflation readings have eased … 

% y-o-y 

10 

8 

6 

4 

2 

0 

Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 

… core inflation is still trending up 

Inflation pressure has turned less acute for Indonesia in recent 

months, with headline inflation coming down to 4.6% in 

September, within the central bank’s target range of 4-6%. 

However, we continue to see some inflation risks on the 

horizon for Indonesia. 

Core inflation, for instance, remains fairly elevated at 4.9%, 

suggesting that the underlying demand-led price pressure is 

still a force to reckon with. 

However, the central bank is expected to remain on hold into 

next year in light of the weaker global economic backdrop. 

Headline 

Core 


Inflation expectations have been drifting down … 

index 

200 

180 

160 

140 

J an 1 0 J ul 10 Jan 11 Jul 11 

… in tandem with headline inflation 

One major risk when it comes to inflation in Indonesia remains 

the possibility that the government may be making changes to 

its ongoing fuel subsidy policy. 

While the government has been adamant in saying that it will 

not be raising the price of subsidized fuel this year, this could 

happen soon enough. 

Apart from the pass-through effect of this measure, it is also 

likely to push up inflation expectations further. 

3 M onth s Hence 6 M onths Hence 


50

Macro 



abc 

Indonesia: Macro framework 

2007 2008 2009 2010 2011f 2012f 2013f 


GDP growth (% y-o-y) 6.3 6.0 4.6 6.1 6.4 6.7 6.5 

Nominal GDP (USDbn) 432.4 510.6 538.4 706.9 845.8 987.7 1,112.0 




Investment (% y-o-y) 9.3 11.9 3.3 8.5 9.4 10.7 9.3 

Net Exports (contribution to GDP growth, ppt) 0.6 0.7 1.2 0.8 0.7 0.6 0.6 









WPI, average (% y-o-y) 14.7 23.8 -0.2 4.7 7.1 1.9 14.6 

WPI, end-year (% y-o-y) 21.9 9.7 4.6 3.9 7.9 7.2 6.4 





Policy rate, end-year (% y-o-y) 8.00 9.25 6.50 6.50 6.75 7.50 7.50 


IDR /USD, end-year 9,419 10,950 9,400 8,991 8,800 8,300 8,100 

IDR /USD, average 9,138 9,691 10,409 9,086 8,784 8,550 8,150 

IDR /EUR, end-year 13,752 15,221 13,442 12,048 12,144 11,952 11,664 

IDR /EUR, average 12,702 14,113 14,546 11,993 12,166 12,120 11,736 





Current account balance (USDbn) 10.5 0.1 10.6 5.6 4.4 5.8 4.0 


Net FDI (USDbn) 2.3 3.4 2.6 10.7 6.5 7.0 8.0 

Net FDI (% GDP) 0.5 0.7 0.5 1.5 0.8 0.7 0.7 










Private sector external debt (USDbn) 56.0 62.6 73.6 83.8 93.0 103.0 113.0 

Central government balance (% GDP) -1.3 -0.1 -1.6 -0.7 -1.9 -1.7 -1.7 

Primary balance (% GDP) 0.8 1.7 0.1 0.6 -0.5 -0.3 -0.3 

Gross public domestic debt (IDRtrn) 1385.0 1448.3 1577.6 1639.7 1779.5 1914.7 2067.0 

Gross public domestic debt (% GDP) 34.0 25.9 31.2 25.8 25.3 23.4 22.4 

Gross public external debt (USDbn) 80.6 86.6 99.3 118.6 129.0 139.0 149.0 

Gross public external debt (% GDP) 18.6 17.0 18.4 16.8 15.3 14.1 13.4 

Gross public sector debt (% GDP) 52.7 42.9 49.6 42.6 40.6 37.4 35.8 

Macroprudential indicator 





Residential House prices (% y-o-y) -9.4 2.4 2.2 2.8 n/a n/a n/a 



Source: HSBC, CEIC, ADB, IMF 

51

Macro 



abc 

Japan 

Back to growth 

Japan’s economy has delivered an impressive V- 

shaped recovery from the devastating tsunami that 

hit the country in March. Most activity indicators 

are now back near their February levels. Growth 

should continue over the coming quarters, not 

least because of a powerful fiscal stimulus that 

should support reconstruction in the affected 

areas. A third supplemental budget to this effect, 

the largest to date, is expected to be passed by 

parliament in October. 

There are, however, signs that the pace of 

recovery has begun to slow from the rapid rise in 

output of the last few months. This was always to 

be expected; the speed of the recovery was, after 

all, driven by unusual factors, such as inventory 

restocking that ultimately runs its course. There 

are two other factors, however, that are limiting 

the potential for further gains in production. The 

first is the unexpected strength of the exchange 

rate at a time of rapidly weakening overseas 

demand. Export growth, as a result, is likely to 

start to falter in 4Q. 

The second factor is lingering policy uncertainty. 

The appointment of a new prime minister 

promises to change this, but Japan is facing grave 

decisions on energy and fiscal policy, which will 

not be easily resolved in the coming months. In 

fact, the third supplemental budget may need to be 

financed ultimately through tax hikes or cuts in 

other government spending, both of which would 

weigh on growth. Companies will be reluctant to 

invest until there is clarity on these issues. 

The Bank of Japan will thus be forced to maintain 

its policy accommodation, if not to add more 

stimulus. Further asset purchases appear likely, 

not least because global financial jitters have 

taken their toll on local confidence as well. 


Economist 



+852 2822 4556 



GDP (% y-o-y) -1.1 -0.1 0.0 2.1 2.3 2.3 1.1 1.0 0.8 0.9 

GDP sa (% q-o-q) -0.1 0.9 -0.8 -0.9 -0.8 1.4 0.8 0.7 0.5 0.1 

Industrial production (% y-o-y) -6.8 14.0 5.9 -2.5 -7.0 -7.2 0.6 10.2 13.1 9.8 

CPI, (% q-o-q saar) -0.5 -1.8 0.8 -0.7 0.9 -0.9 0.2 -1.2 0.5 0.5 

CPI, average (% y-o-y) -0.4 -0.2 -0.7 -0.6 -0.6 -0.1 0.0 -0.1 -0.3 -0.2 

Dom. CGPI, average (% y-o-y) 2.6 1.8 1.5 1.0 0.8 0.2 0.0 0.2 0.4 0.4 

Exports, value (% y-o-y) -7.8 -3.3 -9.4 -10.7 -8.2 -3.3 2.2 5.0 5.0 5.0 

Imports, value (% y-o-y) 13.0 0.3 -3.2 -9.0 -5.6 0.3 6.1 6.0 7.0 8.0 

Trade balance (% GDP) -0.9 1.2 0.7 0.2 -1.2 0.7 0.2 0.1 -1.5 0.4 

Current account (% GDP) 1.3 3.5 2.6 2.5 0.7 2.8 2.1 2.4 0.4 2.4 



10-yr yield, end quarter (%) 1.1 1.0 1.0 0.9 1.0 1.1 1.2 1.3 1.3 1.3 

JPY/USD, end quarter 80.4 77.1 74.0 73.0 73.0 72.0 72.0 72.0 72.0 72.0 

JPY/EUR, end quarter 114 103 102 102 104 104 104 104 104 104 


52

Macro 



abc 

Net exports a huge drag on 2Q GDP growth … 

… domestic demand to drive economy in second half 

100% 

ppt % y -o-y 

10 

In annual terms, Japan’s economy contracted for two quarters 

5 

in a row over the first half. 

50% 

This, however, masks a V-shaped recovery, especially in 

0 

consumption and investment. 

0% 

-5 Growth is likely to turn positive in sequential terms in the third 

quarter, led by consumption, investment and net exports. 

-50% 

-10 Construction spending should support economic activity in the 

-100% 

-15 

fourth quarter and the first quarter of next year. 

However, export momentum should slow markedly, reflecting 

Mar-08 Mar-09 Mar-10 Mar-11 

both weakening overseas demand and a strong yen. 

Gov t. Con Pv t Cons Inv . 

Net Exports GDP (RHS) 

Source: Cabinet Office 

Capacity is gradually being rebuilt … 

120 

110 

IP index (2005=100) 

October 

100 

90 

80 

70 

March 

60 


… but slowing exports will weigh on growth 

Production is nearly back to its February level, although 

producers are forecasting a contraction in September. 

This deceleration probably reflects electricity shortages. 

However, easing global demand is also weighing on industrial 

production again, despite the continued need for inventory 

rebuilding in some sectors. 

Without a further recovery in production, there is a risk of more 

severe job losses in the economy, especially given that 

producers have held on to staff through the post-tsunami 

slump, a policy that may become unsustainable if production 

does not rise further. 

Source: Reuters 

Consumption should strengthen … 

4 

% y-o-y 

2 

0 

-2 

-4 

-6 

Mar-01 Mar-06 Mar-11 

HH consumption Real Wages 

… but weak labour market outlook to limit recovery 

Impending reconstruction activity should provide a powerful 

boost to Japan’s economy, with money being spent both by the 

government and the private sector to restore infrastructure, 

housing and factories. 

An additional boost should come from households as residents 

of the affected areas increase spending to replace lost items, 

something that has already raised sales in the north east of the 

country. 

Over the longer term, however, real employee income growth 

may slow further, with firms showing caution in their hiring. 

Source: Cabinet Office 

53

Macro 



abc 

Expect capex investment to go up … 

30 

% y-o-y 

15 

0 

-15 

-30 

Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 

… in response to support packages announced by govt. 

One bright spot this year has been relatively robust machinery 

and equipment investment as firms continued to raise their 

capital spending budgets right through the post-tsunami period. 

There is some risk that the strong yen and fading global 

demand could weigh on capex spending over the coming year, 

with companies at the margin investing more overseas to 

bypass the disadvantages of a rising currency. 

However, the government’s reconstruction program, which is 

expected to pull in private capex spending, should help support 

investment spending even if a strong yen starts to bite. 

Fix ed Capital Formation 

Building & Structures 

Other machinery and Eqipments 


Impact of the quake on prices seems negligible … 

1 

0 

-1 

-2 


CPI ex Food and Energy (% y -o-y ) 

… government has room to support the economy 

Despite expectations that the damage from the tsunami might 

rid Japan of deflation via the destruction of capital stock and 

rising demand, core prices continue to fall. 

In fact, a recent base year revision of the national CPI has again 

lowered inflation reading, making it unlikely that Japan will 

emerge from persistent deflation over the coming two years. 

The appreciation of the yen is helping to put a limit on inflation 

pressures as well, with cheaper import costs helping to curtail 

price pressures. 


The trade balance is back to the positive territory … 

4,000 

JPY bn 

3,000 

2,000 

1,000 

0 

-1,000 

-2,000 

Jul-07 Nov -08 Mar-10 Jul-11 

… and current account balance is rising too 

After dipping into negative territory in the second quarter, the 

trade balance has again turned positive. 

Rising energy imports, both due to volume and value effects, 

would continue to weigh on Japan’s trade position, but not 

sufficiently to push the trade position into permanent deficit. 

Moreover, the current account remains in deeply positive 

territory due to the substantial surplus in the income account. 

A persistent current account surplus meanwhile, biases the 

currency towards further strength, likely leading to a gradual 

deterioration in the trade balance over time. 

Current account balance 

Trade balance 


54

Macro 



abc 

Japan: Macro framework 

2007 2008 2009 2010 2011f 2012f 2013f 


GDP growth (% y-o-y) 2.4 -1.2 -6.3 4.0 -0.6 1.9 0.9 

Nominal GDP (USDbn) 4,383 4,892 5,038 5,476 5,974 6,642 6,694 


Private consumption (% y-o-y) 1.6 -0.7 -1.9 1.8 -0.4 0.5 0.3 


Investment (% y-o-y) -1.2 -3.6 -11.7 -0.2 -0.5 6.0 2.0 

Net Exports (contribution to GDP growth, ppt) 1.1 0.2 -2.1 2.1 -0.4 0.1 0.2 

Industrial production (% y-o-y) 2.8 -3.3 -21.9 16.5 2.8 -4.0 9.6 




CPI, average (% y-o-y) 0.1 1.4 -1.3 -0.7 -0.5 -0.3 -0.2 

CPI, end-year (% y-o-y) 0.7 0.4 -1.7 -0.4 -0.5 -0.1 -0.1 

Core CPI, average (% y-o-y) -0.3 0.0 -0.8 -1.2 -1.0 -0.6 -0.4 

Core CPI, end-year (% y-o-y) -0.1 0.0 -1.3 -1.2 -0.9 -0.5 -0.4 

Dom. CGPI, average (% y-o-y) 1.7 4.6 -5.3 -0.2 2.0 0.5 0.3 

Dom. CGPI, end (% y-o-y) 2.6 0.9 -3.8 1.2 1.5 0.0 0.4 

Total wages, nominal (% y-o-y) -1.0 -0.3 -3.9 0.6 -0.5 -0.2 0.0 


Central bank money M0, average (% y-o-y) -7.8 0.1 5.8 4.8 10.8 4.8 5.0 

Broad money supply M2+CDs, average (% y-o-y) 0.1 0.8 1.7 2.1 2.0 2.0 2.0 


10yr yield, average (%) 1.7 1.5 1.3 1.2 1.0 1.2 1.3 

Nominal credit growth (% y-o-y) 2.0 3.9 0.2 -2.6 -1.2 -0.3 N/A 

JPY /USD, end-year 112 91 90 83 74 72 72 

JPY /USD, average 118 103 94 88 80 73 72 

JPY /EUR, end-year 164 127 129 112 102 104 104 

JPY /EUR, average 164 151 131 116 110 103 104 




Trade balance (USDbn) 105.1 38.4 43.3 91.0 23.0 -0.3 -14.5 



Net FDI (USDbn) -51.7 -106.2 -62.5 -58.8 -65.1 -60.0 -60.0 

Net FDI (% GDP) -1.2 -2.2 -1.2 -1.1 -1.1 -0.9 -0.9 




International FX reserves (USDbn) 973.4 1,030.6 1,049.4 1,096 1,100 1,250 1,300 



Commercial banks’ FX assets (USDbn) 1,783 1,860 1,878 2,150 2,200 2,250 n.a. 

Gross external debt (USDbn) 1,781 2,107 2,137 2,555 1,650 1,700 n.a. 

Gross external debt (% GDP) 32 29 33 28 28 27 n.a. 

Private sector external debt (USDbn) 816.1 812.8 934.1 900 900 900 n.a. 

General government balance (% GDP) n.a. n.a. n.a. n.a. n.a. n.a. n.a. 

Primary balance (% GDP) -1.9 -3.4 -9.4 -8.4 -8.8 -6.2 -6.0 

Gross public domestic debt (JPY trn) 861 878 914 960 1,010 1,050 n.a. 

Gross public domestic debt (% GDP) 167.1 174.1 205.4 194.0 212.7 206.9 n.a. 

Gross public external debt (USDbn) 965.3 1294.3 1203.3 1654.8 750.0 800.0 n/a 

Gross public external debt (% GDP) 22.0 26.5 23.9 30.2 12.6 12.0 n/a 

Gross public sector debt (% GDP) 189.1 200.6 229.3 224.2 225.2 218.9 n/a 

Macro-prudential indicator 

Capital adequacy ratio 12.3 12.42 15.82 n/a n/a n/a n/a 

Non-performing loan ratio 1.38 1.66 1.86 n/a n/a n/a n/a 






55

Macro 



abc 

Korea 

That beta feeling 

South Korea has delivered an impressive recovery 

since being battered by the global financial crisis in 

2008. In large part, this is due to the extraordinary 

competitiveness of Korea’s export sector, setting the 

country up to benefit more than others from 

rebounding world trade. However, this dependence 

on external demand is now likely to prove more of a 

liability than an asset as growth slumps in much of 

the world. 

Korean exports, in short, should prove a major drag 

on overall economic growth in the coming quarters. 

However, with demand in China expected to hold up 

better than elsewhere – the majority of Korean 

shipments are now heading there – we still do not 

expect an outright collapse. In addition, a tight 

labour market domestically, spurring robust retail 

spending, will help Korea’s economy to escape an 

outright recession. 

The Bank of Korea, however, will not overplay its 

hand and is likely to suspend its tightening cycle 

until the end of the first quarter of 2012. Outright 

cuts in the policy rate, however, appear unwarranted, 

with growth expected to remain positive throughout 

the forecasting period. 

Moreover, sticky inflationary pressures, especially at 

the core level, will make policymakers reluctant to 

soften the growth slowdown by running a more 

accommodative monetary policy. Continued growth 

in household debt, meanwhile, continues to reinforce 

a hawkish bias among monetary officials. 

All considered, Korea appears in more robust shape 

than in 2008, when the global credit freeze hit the 

country especially hard. The banking sector is today 

less reliant on wholesale funding and, although 

external debt has not declined as much as hoped, the 

Bank of Korea now commands an even more 

impressive war chest of FX reserves to counter 

volatility in US dollar funding markets. 


Economist 



+852 2822 4556 



GDP (% y-o-y) 3.4 2.4 3.5 2.8 3.4 5.5 4.7 3.9 4.5 4.5 

GDP sa (% q-o-q) 0.8 -0.6 2.1 0.9 1.1 1.4 1.1 0.3 1.6 1.3 


CPI, (% q-o-q saar) 1.9 6.4 2.0 3.0 3.9 3.8 3.9 2.9 3.9 3.6 










KRW /USD, end quarter 1,098 1,178 1,150 1,130 1,110 1,090 1,070 1,060 1,050 1,050 

KRW /EUR, end quarter 1,559 1,579 1,587 1,582 1,576 1,570 1,541 1,526 1,512 1,512 


56

Macro 



abc 

Core inflation breached 4% 

% y-o-y 

7 

6 

5 

4 

3 

2 

1 

0 


Headline 

Core 

But Bank of Korea will be more cautious in hiking rates 

Headline inflation has continued to stampede upwards, 

climbing further above the Bank of Korea’s (BoK) 2-4% target. 

Core inflation, too, followed suit and recently exceeded 4%, 

indicating that inflation is now more than just limited to 

agricultural and oil goods. 

Continued upward momentum in inflation would make the Bank 

of Korea increasingly cautious of any rate hikes as growth 

concerns are feeding from Western economies into Asia. 


Exports are on track for a soft landing 

% 

% 

60 

40 

40 

20 

20 

0 

0 

-20 

-20 

-40 

-40 

-60 

Sep-08 Sep-09 Sep-10 Sep-11 

Exports % y-o-y (LHS) Exports sa % 3m/3m (RHS) 

Global conditions to weigh further on shipments 

Exports have continued to hold up relatively well despite 

intensified concerns over a slowdown in the global economy, 

indicating that weakening in Western economies may not be 

feeding into Asia as fast as expected by consensus. 

Gradual easing in Korea’s export growth, however, is still 

dominating the scene and may lead to continued easing in 

export growth over the coming months. 

Despite a boost from the 9% depreciation in the Korean won 

against the USD in 3Q, which was the sharpest drop in the 

Korean currency since the same period in 2008, weakening 

external demand still dominates concerns. 


Korea’s manufacturing sector too, is gradually slowing down 

% y/y 3mma Index level 

40 

65 

30 

60 

20 

55 

10 

50 

0 

45 

-10 

40 

-20 

35 


Indus trial Produc tion (LHS) 

HSBC PMI (RHS) 

Business sentiment remains elevated 

After a strong first half of the year, Korea’s manufacturing 

sector is now heading towards a prolonged slowdown. 

Recent surveys reveal that the outlook for Korea’s 

manufacturing sector has deteriorated at a faster pace, driven 

by a significant decline in new business. 

Business sentiment, however, has stayed resilient for both the 

short and medium term outlook. 


57

Macro 



abc 

Consumer sentiment have stabilised 

% y /y Index level 

20 

15 

10 

5 

0 

-5 


Retail s ales (LHS) 

120 

115 

110 

105 

100 

95 

90 

85 

80 

Consumer Sentiment Index (RHS) 

Retail sales growth will therefore begin to moderate 

At home, retail sales growth has been remarkably resilient, 

continuing its upward trend this year. 

Consumer sentiment, too, has stabilised despite an 

increasingly gloomy outlook. 

In part, this reflects the tight labour market with a declining 

unemployment rate, which is below its long term average of 3-4%. 


HSBC PMI shows competition held output prices from rising 

Index lev el 

70 

65 

60 

55 

50 

45 

40 


Output Prices 

Input Prices 

Manufacturers are being squeezed by higher input prices 

Strong competition for new business has held down price 

increases from producers onto consumers with the Output 

Price Index hovering around the 50.0 no-change threshold. 

For the Bank of Korea, this is good news as pressure to hike their 

policy rate has eased, especially as global growth is looking 

increasingly jittery with Brazil leading cuts in policy rates. 

Input prices, however, have consistently risen and are currently 

driven by higher prices of raw materials. 

Collectively, this means profit margins in the manufacturing 

sector are being squeezed. 


Rising inventories-to-shipments ratio to lower production 

Ratio 

1.3 

1.2 

1.1 

1.0 

0.9 

Employment growth will be threatened as demand falls 

A slightly worrying sign is the rise in inventories-to-shipments 

ratio, which climbed to its highest level since March 2009. 

Recently, this movement was driven by higher inventories as 

shipments remained relatively constant. 

With too many inventories in hand, South Korean 

manufacturers may look to reduce production in the remainder 

of the year to stabilise stock levels. 

In turn, this may slow down employment growth. 

0.8 


Inv entories to Shipments ratio 


58

Macro 



abc 

Korea: Macro framework 

2007 2008 2009 2010 2011f 2012f 2013f 


GDP growth (% y-o-y) 5.1 2.3 0.3 6.2 3.4 4.1 4.2 

Nominal GDP (USDbn) 970.9 945.9 843.9 1,004 1,148 1,288 1,416 




Investment (% y-o-y) 4.2 -1.9 -1.0 7.0 0.1 3.0 3.8 











PPI, end-year (% y-o-y) 3.6 5.6 1.8 5.3 4.6 5.0 5.0 





Real private sector credit growth (% y-o-y) 12.4 9.4 1.2 0.6 1.6 2.4 -3.6 



KRW /USD, end-year 935 1,260 1,166 1,126 1,150 1,070 1,050 

KRW /USD, average 928 1,085 1,262 1,160 1,128 1,110 1,055 

KRW /EUR, end-year 1,365 1,751 1,667 1,509 1,587 1,541 1,512 

KRW /EUR, average 1,290 1,580 1,764 1,531 1,562 1,573 1,519 







Net FDI (USDbn) -17.9 -16.9 -14.9 -19.4 -14.8 -8.0 -8.0 

Net FDI (% GDP) -1.8 -1.8 -1.8 -1.9 -1.3 -0.6 -0.6 

Current account balance plus FDI (% GDP) -0.4 0.5 -1.4 1.3 0.9 0.9 0.7 

Exports, value (% y-o-y) 16.1 15.8 11.6 -17.6 15.2 9.0 11.0 

Imports, value (% y-o-y) 18.7 15.5 21.9 -25.4 19.4 11.1 12.5 

International FX reserves (USDbn) 239 262 233 237 256 272 286 







Central government balance (% GDP) 0.5 -2.0 -4.8 -2.1 -2.7 -2.9 -3.1 

Primary balance (% GDP) 5.2 2.6 -0.2 2.9 2.2 2.0 1.8 

Gross public domestic debt (KRW bn) 278,790 288,720 334,910 363,739 394,933 428,321 471,741 





Macroprudential indicators 





Residential House prices (% y-o-y) 9.0 4.0 0.2 2.4 n/a n/a n/a 





59

Macro 



abc 

Malaysia 

Headwinds 

Growth in Malaysia slowed to 4.0% y-o-y in the 

second quarter of 2011 (versus 4.9% in the first 

quarter) amid the supply chain disruptions in the 

region that adversely affected the country’s 

exports. Domestic demand stood up better, with 

continued support from private consumption and 

investment. There was, however, a significant 

decline in government expenditure, but that is 

likely to be partly reversed during the second half. 

We have reduced our growth forecasts for the 

whole of 2011 to 4.8% y-o-y (from 5.7%). We 

expect domestic demand to hold up in the next two 

quarters as more investment projects are rolled out 

under the Economic Transformation Programme. 

However, the recent slowdown in global growth 

should continue to dampen export growth. 

On a positive note, this cooling of global demand 

should help to reduce inflationary pressures, 

including to the extent that it contains 

international commodity price inflation. 

Consequently, inflation in Malaysia is likely to 

moderate in the coming months, but could pick up 

again if the government, as expected, cuts 

subsidies on energy and food items again. Overall, 

we still believe that the inflation rate will be 

above 3% for this year. 

In light of weaker global economic conditions, 

Bank Negara Malaysia has started to sound more 

dovish of late. Consequently, we believe that it 

will once again keep the policy rate unchanged at 

3.0% at its November meeting, which will be the 

last meeting of the year. 

Despite the high fiscal deficit, which led S&P to 

downgrade Malaysia’s sovereign rating, the 

budget for 2012 is unlikely to lower the deficit 

significantly. On the contrary, it could be 

expansionary with a general election scheduled to 

be held no later than 2013. In turn, this is likely to 

add to inflationary pressures and subsequently the 

need for Bank Negara to lift policy rates in 2012. 

Leif Eskesen 

Economist 




+65 6658 8782 


Namrata Mittal 


Bangalore 


GDP (% y-o-y) 4.0 5.6 4.7 4.0 3.8 5.4 6.6 6.1 5.7 4.9 

GDP sa (% q-o-q) 0.9 1.8 0.7 0.5 0.7 3.4 1.9 0.1 0.3 2.6 


CPI, (% q-o-q saar) 3.4 2.8 2.4 4.5 2.8 2.4 2.0 3.6 2.4 2.0 







International reserves (USD bn) 134 133 134 139 143 148 154 162 168 175 



MYR/USD, end quarter 3.02 3.18 3.10 3.05 3.00 2.95 2.88 2.85 2.82 2.82 

MYR/EUR, end quarter 4.29 4.26 4.28 4.27 4.26 4.25 4.15 4.10 4.06 4.06 


60

Macro 



abc 

GDP growth is externally challenged … 

… but internally driven 

ppt, % y -o-y 

15 

10 

5 

0 

-5 

-10 

07 08 09 10 11 

Priv ate Consumption 

GFCF 

Govt exp 

Net Ex ports 

GDP 

Malaysia’s 2Q GDP grew at a slightly slower rate of 4.0% y-o-y 

(vs. 4.9% in 1Q), with the slowdown attributable partly to Japan 

related supply chain disruptions that roiled the region in 2Q. 

However, on the export side, commodities provided a buffer 

during the quarter. 

On domestic front, private consumption continues to be a 

considerable driver of growth helped by robust employment 

prospects 

Investment activities have not added to materially to growth, but 

government-led infrastructure spending may pick up in 2H11. 


The global headwinds … 

… are having an impact on manufacturing activity 

% 3m/3m sa 

10 

5 

0 

-5 

-10 

-15 

05 06 07 08 09 10 11 

% 3m/3m sa 

15 

5 

-5 

-15 

-25 

While the Japan-related supply chain disruptions have begun to 

dissipate during the course of 3Q, new risks to external 

demand have emerged from the weaker global economic 

backdrop, particularly in the West. 

With Malaysia being one of the high beta economies and 

exports in excess of 100% of GDP, manufacturing activities are 

likely to remain subdued in coming months. 

IIP 

Exports: RH S 


Net foreign direct investment continues to improve … 

MYR bn 

20 

10 

0 

-10 

-20 

-30 

. 

06 07 09 10 

FDI: Outflow FDI: Inflow FDI: Net 

… partly related to government initiatives 

Government of Malaysia announced its commitment to spur 

private domestic and foreign investment under its flagship 

Economic Transformation Programme (ETP) in September 

2010. 

Further, in July this year, it added that 33 companies have been 

identified as ready for either complete or partial privatisation 

over the next 12 to 18 months. 

These factors have contributed to the pick up in FDI inflows 

seen since 2H10. 

However, a more meaningful implementation of the long list of 

government projects is important to further boost Malaysia’s 

investment climate. 


61

Macro 



abc 

Headline inflation has started to moderate … 

… but core continues to inch upwards 

% y-o-y 

13 

11 

9 

7 

5 

3 

1 

-1 

-3 

07 08 09 10 11 

% y-o-y 

3.0 

2.5 

2.0 

1.5 

1.0 

0.5 

0.0 

Headline CPI has started to moderate from July onwards and 

currently stands at 3.3% for August. 

This is partly attributable to a high comparative base in the 

transport category, courtesy of the July 2010 upward 

adjustments in energy prices under the government’s subsidy 

rationalization programme. 

However, the core components (excluding food and energy) 

still pose some stiff resistance and continue to edge up. 

Overall, we believe that the moderation in prices will be very 

gradual and inflation may stay above 3% for rest of the year. 

CPI CPI: Food CPI: Core-RHS 


Bank Negara Malaysia may keep rate on hold near term … 

% y-o-y, % 

4 

3 

2 

1 

0 

10 11 

-1 

… against the weaker global economic backdrop 

Despite the recent moderation in inflation, Malaysia continues 

to face negative real interest rates, a situation that the central 

bank has expressed discomfort about. 

BNM re-embarked on hiking in May, but global concerns 

compelled it to pause in the two successive meetings in July 

and September. 

As the downside risks to growth have further heightened in the 

recent months, BNM may keep rates on hold in its last meeting 

of the year in November. 

Real Policy rate CPI Policy rate (% ) 


Fiscal deficit likely to improve in 2011 … … but this may change in 2012 

MYR bn 

250 

200 

150 

100 

50 

% GDP 

8 

6 

4 

2 

Malaysia’s fiscal deficit is expected to narrow significantly in 

2011 to 4.4% of GDP against the budget target of 5.4%. 

This is mainly due to higher-than-expected commodity prices, 

which will bring in better-than-estimated revenues. Moreover, 

there has been some under-execution on the spending side. 

However, with general elections coming up no later than 2013 the 

upcoming 2012 budget may entail some fiscal easing in 2012. 

0 

2005 2006 2007 2008 2009 2010 2011f 

0 

Expenditure Rev enue Fiscal Deficit: RHS 


62

Macro 



abc 

Malaysia: Macro framework 

2007 2008 2009 2010 2011f 2012f 2013f 


GDP growth (% y-o-y) 6.5 4.8 -1.6 7.2 4.8 5.0 5.2 






Net Exports (contribution to GDP growth, ppt) -1.4 -0.2 0.4 -3.5 -0.8 0.1 0.4 











Manufacturing wages, nominal (% y-o-y) 7.3 0.5 -5.0 2.0 4.0 4.0 5.0 


Central bank money M0, end-year (% y-o-y) 9.8 7.2 -20.0 11.8 7.0 7.0 7.0 


Real private sector credit growth (% y-o-y) 6.1 4.9 7.1 6.0 5.0 n/a n/a 



MYR /USD, end-year 3.31 3.45 3.42 3.08 3.10 2.88 2.82 

MYR /USD, average 3.43 3.32 3.52 3.22 3.08 3.00 2.84 

MYR /EUR, end-year 4.83 4.80 4.89 4.13 4.28 4.15 4.06 

MYR /EUR, average 4.77 4.83 4.91 4.25 4.27 4.25 4.08 


Merchandise exports (USD bn) 176.2 200.0 157.6 198.9 230.3 262.3 291.9 

Merchandise imports (USD bn) 138.5 148.2 117.3 157.1 183.3 209.8 234.0 




Net FDI (USD bn) -2.7 -7.8 -6.5 -4.2 -4.1 -3.5 -2.9 

Net FDI (% GDP) -1.5 -3.5 -3.4 -1.8 -1.5 -1.1 -0.8 




International FX reserves (USD bn) 101.5 120.2 96.9 95.2 133.6 153.7 161.6 








Primary balance (% GDP) -1.2 -3.1 -4.9 -3.6 -2.2 -2.4 -1.8 

Gross public domestic debt (MYR bn) 247.1 286.1 348.6 390.4 390.9 403.1 423.4 






Capital adequacy ratio 12.8 12.2 14.9 14.4 n./a n./a n./a 

Non-performing loan ratio 3.2 2.2 1.8 2.0 n./a n./a n./a 

Household Debt/ GDP (%) 67.0 64.0 76.0 74.0 n./a n./a n./a 

Total Credit/GDP (%) 100.3 97.0 113.9 113.8 n./a n./a n./a 

Residential House prices (% y-o-y) 2.3 2.5 5.5 6.2 n./a n./a n./a 

Loan/Deposit ratio 71.9 72.7 78.4 80.6 n./a n./a n./a 

Stock Market Capitalization/GDP (%) 161.1 116.3 122.4 144.8 n./a n./a n./a 

Source: HSBC, CEIC, ADB, IMF, BNM; Public debt refers to government debt only 

63

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New Zealand 

Recovery continues 

After a long period of malaise, the economic 

recovery now looks on track. The upswing that 

began at the tail end of last year continued in 1H, 

despite disruptions caused by the Canterbury 

earthquake in February. Growth has been 

supported by trade, with strong growth in exports 

and high dairy and meat prices boosting incomes. 

We expect trade to continue to be supported by 

demand from Asia, though there is clearly a risk 

that the global slowdown weakens export demand. 

High farm incomes are also expected to drive a 

rise in rural investment. 

In 2H, growth should also be supported by the 

Rugby World Cup, which is currently in progress, 

and the rebuilding of quake-affected Canterbury. 

While rebuilding has been slower to commence than 

expected, it is largely prefunded and will begin to 

boost the economy later this year and into 2012. 

Given the growing momentum we are revising up 

our forecasts for 2011 growth to 2.0% (from 

1.7%). But, at the same time, we have shaved next 

year’s forecasts (3.8%, down from 4.3%) 

reflecting slower expected global growth. 

We still expect uncomfortably high inflation to 

prompt the RBNZ to lift rates soon and to move 

rates towards neutral through 2012. Indeed, the 

RBNZ is currently one of the few central banks in 

the world actively planning to lift rates noticeably 

(of course it has a lot of scope to do so, with rates 

still at earthquake-related emergency lows of 

2.5%). While the recent global financial ructions 

kept them on hold in September, the RBNZ’s 

latest statement implies that they still expect to lift 

rates multiple times over the next year, which is 

also our expectation. 

Paul Bloxham 

Economist 

HSBC Bank Australia Limited 

+612 9255 2635 



GDP (% y-o-y) 1.5 2.4 2.6 2.8 3.8 4.2 4.5 4.3 3.7 3.5 

GDP-sa (%q-o-q) 0.1 0.6 0.7 1.1 1.4 1.0 0.9 0.8 0.8 0.8 


CPI,(% y-o-y) 5.3 4.8 3.0 3.1 3.0 3.0 2.9 2.6 2.4 2.4 

PPI (% y-o-y) 5.3 4.5 4.4 4.2 2.6 2.8 3.0 3.1 3.2 3.2 

G & S Balance (% GDP) 2.2 2.3 2.4 2.7 2.8 2.7 2.6 2.5 2.5 2.4 

Current account (% GDP) -2.4 -3.2 -4.0 -2.5 -1.3 -1.4 -1.3 -1.3 -1.1 -1.0 

International reserves (USD bn) 20.1 n/a n/a n/a n/a n/a n/a n/a n/a n/a 



USD/NZD, end quarter 0.76 0.76 0.76 0.76 0.75 0.74 0.74 0.74 0.74 0.74 

EUR/NZD, end quarter 0.54 0.57 0.55 0.54 0.53 0.51 0.51 0.51 0.51 0.51 

CPI, q-o-q ar 3.9 2.4 2.4 3.6 3.3 2.4 2.2 2.2 2.2 2.2 

Exports G & S (% y-o-y) 12.5 18.5 17.8 16.3 12.7 11.2 10.5 10.5 12.4 16.2 

Imports G & S(% y-o-y) 12.8 15.3 11.6 12.0 10.8 10.2 9.9 11.3 13.8 17.5 

Source: HSBC, RBNZ, StatsNZ and Thomson Reuters DataStream 

64

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We expect an upswing from here to continue 

% Real GDP Growth 

8 

6 

4 

2 

0 

-2 

-4 

-6 

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 

Year-ended 

While the economy was somewhat constrained in 1H by the 

earthquake, GDP still rose by a solid 1.5% over the year to 2Q, 

particularly reflecting continued recovery outside of the 

Canterbury region. 

We continue to expect strong growth in 2H, supported by 

spending during the Rugby World Cup in September/October, 

the elevated level of dairy and meat prices boosting incomes 

and the rebuilding of quake-damaged Canterbury. 

Weaker global demand for New Zealand’s exports is a growing 

risk, though our central case remains that continued solid 

demand from the emerging economies will support the demand 

for soft commodities. 

Source: Bloomberg 

We have revised up 2011 but revised down 2012 

% Annual GDP Growth 

6 

4 

2 

0 

-2 

Previous 

forecasts 

The momentum in the economy is such that we have revised 

up our forecasts for growth this year from 1.7% to 2.0%. 

For 2012, we have revised down our forecasts reflecting the 

expected impact of the global slowdown on the New Zealand 

economy. 

The key risk is that sharper global downturn has a more 

sustained impact on rural commodity prices, reducing incomes 

by more than expected, and limiting the extent to which rural 

investment picks up from here. 

-4 

1995 

2000 

2005 2010 

1900 1900 1900 1900 1900 1900 1900 1900 1900 


Trade has been a key driver of the economy recently 

% Export Growth 

15 

10 

5 

0 

Given our expectation for continued solid growth in the 

emerging economies, we still expect that trade will be the key 

driver of the New Zealand economy over the forecast horizon. 

After almost a decade of trade deficits, New Zealand has now 

managed to record trade surpluses for the better part of the 

past 18 months. 

The risk, however, is that a larger global slowdown sees 

weaker growth in exports than currently expected. 

-5 

-10 

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 

Year-ended 

Source: Thomson Reuters Datastream; HSBC estimates 

65

Macro 



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Commodity prices remain at high levels 

Commodity Prices, 2000=100 

350 

300 

Dairy 

250 

200 

Meat 

150 

100 

50 

0 

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 

Dairy and meat prices remain around high levels, boosting rural 

incomes and motivating increased investment intentions in the 

rural sector. 

Continued strong growth in demand from Asia and adverse 

weather conditions elsewhere are expected to keep commodity 

prices at high levels. 

There is some risk that rural investment is delayed further, as 

farmers become more concerned about global economic 

prospects. This is particularly the case given recent memories 

of the effect that the Lehman failure had on rural commodity 

prices and the painful deleveraging period they faced over the 

past couple of years. 


Inflation expectations remain at a high level 

% Inflation expectations two years ahead % 

4 

3 

2 

1 

RBNZ target band 

4 

3 

2 

1 

The RBNZ’s measure of inflation expectations for two years 

ahead remains around the top of the RBNZ’s comfort zone. 

With inflation expectations at an already elevated level, the 

RBNZ are expected to remain focused on the upside risks to 

inflation, despite the ongoing global financial problems. 

The challenge for the RBNZ remains that there is an upswing in 

progress with inflation starting at an already elevated level. This 

means there is risk that inflation expectations rise above the 

RBNZ’s target zone in coming quarters, especially given the 

current ‘emergency low’ OCR level. 

0 

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 

0 


Inflation is expected to remain elevated 

% Headline Inflation 

6 

5 

4 

3 

2 

1 

A high starting point for inflation and inflation expectations, 

global inflationary pressures and strong growth in 2H are 

forecast to see inflation remain at high levels over the forecast 

horizon. 

In response, the RBNZ is still expected to be lifting interest 

rates soon, although the timing is highly contingent on global 

financial issues settling down. 

We expect rates to head towards neutral through 2012. 

0 

-1 

-2 

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 

Quarterly 

Year-ended 

Source: Thomson Reuters Datastream; HSBC estimates 

Top of target band 

on quarterly basis 

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Macro 



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New Zealand: Macro framework 

2007 2008 2009 2010 2011f 2012f 2013f 


GDP growth (% y-o-y) 2.8 -0.1 -2.0 1.7 2.0 3.8 3.7 



Private consumption (% y-o-y) 4.1 -0.3 -0.8 2.3 1.4 1.7 2.1 



Exports of G&S (vol growth) % y-o-y 3.9 -1.8 1.9 2.8 4.1 5.4 6.0 

Imports of G & S (vol growth)% y-o-y 8.7 2.6 -14.9 9.9 6.6 6.8 8.3 

Net Exports % of GDP -5.5 -7.0 -0.8 -3.1 -4.0 -4.5 -5.5 

Contribution of Net exports to Growth, ppt -1.8 -1.5 6.2 -2.3 -1.0 -0.7 -1.1 

Final Domestic demand % y-o-y 4.5 -0.1 -3.5 2.6 2.6 4.3 4.5 

Domestic Demand % y-o-y 4.8 0.3 -5.7 4.3 1.9 4.3 4.5 

Industrial production (% y-o-y) 5.4 -7.6 -1.4 -0.5 4.3 3.2 1.4 

Gross national saving (% of GDP) N/A N/A N/A N/A N/A N/A N/A 



CPI (% y-o-y) 2.4 4.0 2.1 2.3 4.4 3.0 2.4 

PPI(% y-o-y) 2.4 9.4 1.8 0.8 4.6 3.2 3.2 

Core CPI (% y-o-y) 2.3 3.6 2.0 3.4 n/a n/a n/a 

Labor Cost Index (% y-o-y) 3.2 3.6 2.5 1.6 2.1 2.8 2.7 


Money Supply M1, average (% y-o-y) 1.3 4.1 2.0 3.2 n/a n/a n/a 

Broad money supply M3, average (% y-o-y) 8.2 5.7 1.0 3.3 n/a n/a n/a 

Private credit growth (% y-o-y) 13.4 8.3 1.7 0.5 n/a n/a n/a 



USD/NZD, end-year 0.76 0.67 0.72 0.73 0.76 0.74 0.74 

USD/NZD, average 0.72 0.76 0.62 0.71 0.76 0.75 0.74 

EUR/NZD, end-year 0.53 0.48 0.49 0.54 0.55 0.51 0.51 

EUR/NZD, average 0.54 0.50 0.44 0.53 0.54 0.54 0.51 


Exports (G&S, USDFn) 36.9 42.5 33.0 40.1 50.6 57.5 66.1 

Imports (G&S, USDbn) 38.3 44.8 31.5 38.1 47.3 52.8 61.4 

G&S Balance (USDbn) -1.4 -2.3 1.4 2.1 3.3 4.7 4.7 

Current Account Balance (USDbn) -10.8 -12.1 -3.6 -5.7 -3.9 -2.8 -2.0 


Net FDI (USD bn) 3.1 5.2 -1.2 0.6 n/a n/a n/a 

Net FDI (% GDP) 2.3 3.7 -1.0 0.4 n/a n/a n/a 

Exports (NZD, % y-o-y) 5.2 14.0 -7.1 6.5 14.8 12.6 15.1 

Imports (NZD, % y-o-y) 3.7 15.5 -15.7 5.7 13.1 10.7 16.3 

International FX reserves (USDFn) 16.9 12.8 15.6 15.9 n/a n/a n/a 

Import cover (months) 5.3 3.4 5.9 5.0 n/a n/a n/a 


Central government balance (% GDP) 3.3 3.1 -2.1 -3.2 n/a n/a n/a 

Gross External Debt (NZD bn) 217.3 251.5 240.7 248.3 n/a n/a n/a 

Gross External Debt (% GDP) 121.57 136.56 129.48 127.50 n/a n/a n/a 

Gross public sector debt (NZDmn) 30,647.0 31,390.0 43,356.0 53,591.0 67,400.0 72,551.0 75,077.0 


Macro-prudential Indicators 

Capital Adequacy Ratios- Tier 1 capital ratio 7.8 8.2 9.1 9.9 n/a n/a n/a 

Capital Adequacy Ratios- Total capital ratio 10.6 11.2 12.2 12.9 n/a n/a n/a 


Household debt/Income (%) 155.2 158.5 158.2 155.7 n/a n/a n/a 

Total credit/GDP (%) 152.6 163.1 166.7 161.6 n/a n/a n/a 

House prices growth- Dwelling sales price (%y-o-y) 11.0 -2.1 1.4 2.9 n/a n/a n/a 

Source: HSBC, RBNZ, StatsNZ , Thomson Reuters Datastream, ADB, IMF 

67

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The Philippines 

Feeling the global headwinds 

GDP growth in 2Q slowed to 3.4% y-o-y (versus 

4.6% in 1Q) and 0.5% q-o-q sa (versus 1.5% in 1Q). 

The main culprits were exports and investment, 

which contracted 0.3% and 5.7% y-o-y, respectively. 

Sluggish global demand weakened both electronic 

and service exports, and the associated deterioration 

in sentiment pulled down investment – although 

fiscal consolidation also contributed to that decline, 

especially in construction. Encouragingly, private 

consumption held up and government consumption 

rebounded after the slump in 1Q. 

Looking ahead, global economic problems will 

continue to weigh on growth through the trade and 

confidence channels. However, we expect private 

consumption to remain a key source of growth, 

supported by remittance inflows, which have proven 

resilient so far. Of course, those flows could ease if 

global conditions weakened further, but they have in 

the past been a relatively stable source of income 

even during times of global distress. Following slow 

execution during the first half of the year, public 

spending is likely to pick up in 2H and provide a 

much-needed boost to the economy. However, in 

light of the weak global economic backdrop, we 

have cut our 2011 forecast to 4.3% y-o-y (from 5.2% 

in the previous global quarterly). 

Inflation is still high. While headline inflation eased 

a bit in August, it was close to the top end of the 3- 

5% target range and core inflation remains sticky. 

However, we expect slower growth and cooling 

commodity prices to bring inflation below the 

central bank’s target range for the rest of the year, 

partly helped by a gradual decline in food inflation. 

This should keep average headline inflation for 2011 

at 4.7% (using the 2006 base year series). 

Following two policy rate hikes and three RRR 

hikes earlier in the year, the uncertain global 

economic picture is likely to keep the Bangko 

Sentral ng Pilipinas (BSP) in “wait and see” mode 

for a while, with rates on hold until 2Q12. Excess 

liquidity due to “hot money” inflows is still a 

concern for the central bank, however. Another 

100bp RRR hike is, therefore, still on the table. 

Trinh Nguyen 

Economist 



+852 2996 6975 

trinhdnguyen@hsbc.com.hk 


GDP (% y-o-y) 3.4 4.0 5.3 3.6 4.7 5.2 5.6 4.6 4.0 4.5 

GDP sa (% q-o-q) 0.5 0.5 0.5 2.0 1.6 1.0 0.9 1.0 1.0 1.5 


CPI, (% q-o-q saar) 4.8 1.5 3.8 6.0 5.9 3.8 3.0 5.3 4.3 2.6 










PHP /USD, end quarter 43.37 43.77 43.50 43.00 42.50 42.00 41.00 40.50 40.00 40.00 

PHP /EUR, end quarter 61.58 58.66 60.03 60.20 60.35 60.48 59.04 58.32 57.60 57.60 


68

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Contribution to GDP 

Private consumption remains the engine 

% Weaker demand elsewhere, a disruption of the global supply 

7.5 

chain due to the Japanese natural disaster, and lower fiscal 

spending in 1H locally were the main culprits behind 2Q’s 

2.5 

deceleration. 

Investment is expected to pick up in 2H due to increased 

-2.5 

government spending. 

-7.5 

1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 

Priv ate Cons. 

Gov t Cons. 

Inv estment 

Change in Stocks 

Net Ex ports 

Discrepancy 

GDP (% y-o-y) 


Exports, which have contracted since May, are expected to 

worsen in the coming months due to sluggish regional and 

global demand for Philippine electronics. 

Private consumption is expected to drive growth, as it is 

supported by steady inflows of remittances. 

Inflation: showing signs of easing 

40 

30 

20 

10 

0 

-10 

-20 

-30 

CPI, % 3m/3m saar 

Aug-07 May -08 Feb-09 Nov -09 Aug-10 May -11 

Energy Food Core 

Inflation already peaked in 2Q 

This year, agricultural prices have been remarkably well 

behaved, exhibiting, in fact, none of the severe upward 

pressures currently seen in some neighbouring economies. 

We expect low food prices to prevail for now. One risk, 

however, is that the cost of rice has started to climb again in 

other ASEAN countries. 

Tightening measures earlier in the year should filter through to 

bring inflation down to 4.4% y-o-y by the end of 4Q. 

With growth likely to remain below trend for the coming two 

quarters, a perk-up on this front is also not in the cards. 


BSP is expected to hold 

12 

10 

8 

6 

4 

2 

0 

2006 2007 2008 2009 2010 2011 

CPI (% y-o-y) Ov ernight Rate (%) 

Growth prospect is weakening 

With the global economy slipping up again in recent months, a 

quick rebound in Philippine growth does not appear likely for now. 

After spending three months above the target range, inflation 

eased to 4.7% and is expected to be within the range for the 

rest of the year. 

Although excess liquidity is still a concern, we expect the BSP 

to hold the rate until 2Q12 due to weakened growth prospects 


69

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Fiscal consolidation is well above target 

The 2011 budget deficit likely to beat the government’s 

target of PHP300bn 

2000.00 

1500.00 

1000.00 

500.00 

0.00 

2004 2006 2008 2010 2012f 

Rev. (bn pesos, LHS) 

Ex p. (bn pesos, LHS) 

Fiscal Bal (% of GDP, RHS) 

0.00 

-1.00 

-2.00 

-3.00 

-4.00 

-5.00 

For January-August 2011, total disbursements were only 

PHP947bn, 8% lower than the previous year. 

Weakened growth prospects have prompted the government to 

speed up spending for the rest of the fiscal year. 

In the same period, revenue collections reached PHP912bn, 

13.7% higher than the previous year. 

Even with increased government expenditure in 2H, the 2011 

budget deficit is expected to be around 2.4% of GDP 


Remittances are resilient … 

35 

15 

-5 

Global slowdown has not dampened inflows from OFWs 

Events in the Middle East, Japan and the West have had 

limited impact on remittances. 

Total remittances sent to the Philippines from January to July 

reached USD11.4bn, a 6.3% y-o-y increase from a year earlier. 

We expect a slight deceleration of remittances due to global 

headwinds; however, we still expect the flows to be robust. 

-25 

Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 

% 3m/3m saar % y -o-y 


Remittances help offset chronic trade deficits 

% of GDP 

11 

6 

1 

-4 

-9 

2001 2003 2005 2007 2009 2011F 2013F 

Merch. Trade Bal 

Services Trade Bal 

Net Inc. 

Net Trans 

Current Account 

OFW inflows help keep current account positive 

With exports declining for a third straight month and the trade 

deficit widening, remittances have become an important source 

of foreign exchange. 

At around 10% of GDP in recent years, remittances have 

helped offset the negative impact of persistent trade deficits 

and are expected to do the same in the coming months. 

With exports declining and imports unlikely to decline enough to 

narrow the trade deficit, remittances would continue to help 

keep the current account positive and buffer the economy from 

its exposures to global turbulence. 


70

Macro 



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Philippines: Macro framework 

2007 2008 2009 2010 2011f 2012f 2013f 


GDP growth (% y-o-y) 7.1 3.5 1.1 7.6 4.3 4.8 4.6 

Nominal GDP (USD bn) 153.8 173.6 168.5 199.6 228.7 264.6 288.6 





Net Exports (contribution to GDP growth, ppt) 5.3 0.5 0.6 0.0 -2.1 -2.8 -3.1 



Unemployment rate, average* (%) 7.2 7.5 7.4 7.4 7.1 7.0 7.0 






WPI, average (% y-o-y 3.1 11.8 -4.0 5.9 9.2 4.5 6.2 

WPI, end-year (% y-o-y) 6.7 1.8 5.7 5.1 6.6 6.2 6.2 

Manufacturing wages, nominal** (% y-o-y) 4.5 5.3 2.2 3.4 5.5 6.5 6.5 







PHP /USD, end-year 41.7 48.1 46.4 44.0 43.5 41.0 40.0 

PHP /USD, average 45.3 44.5 47.6 45.1 43.6 42.4 40.1 

PHP /EUR, end-year 60.9 66.9 66.4 58.9 60.0 59.0 57.6 

PHP /EUR, average 63.0 64.8 66.6 59.5 60.3 60.2 57.7 







Net FDI (USDbn) -0.6 1.3 1.6 1.2 1.4 1.2 1.2 

Net FDI (% GDP) -0.4 0.8 1.0 0.6 0.6 0.5 0.4 


Exports, value (% y-o-y) 6.4 -2.5 -22.1 34.8 3.1 3.8 6.0 










Consolidated government balance (% GDP) 0.3 0.4 -3.3 n/a n/a n/a n/a 


Primary balance (% GDP) 3.8 2.8 -0.3 -0.2 0.6 0.6 0.8 

Gross public domestic debt (PHP bn) 2,201 2,414 2,470 2,718 2,851 2,975 3,093 





Macro prudential measures 



Household Debt/ GDP (%) n/a n/a 15.5 16.2 n/a n/a n/a 

Total Credit/GDP (%) 27.9 29.4 31.0 30.4 28.7 28.6 n/a 



Note: *Sep 2005, the ILO definition of unemployment has been adopted by official sources; **refers to minimum wage index 


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Singapore 

Facing global weakening 

GDP growth slowed significantly in the second 

quarter of 2011 to 0.9% y-o-y (after 9.3% in 1Q11). 

Private consumption held up, supported by 

favourable labour market conditions, and 

government consumption and investments bounced 

back. However, export growth slowed significantly, 

partly due to the supply-chain disruptions associated 

with the natural disaster in Japan. On the supply side, 

manufacturing drove the sequential drop, led by 

biomedical and electronics which were most affected 

by global economic conditions. Services growth also 

slowed during the quarter. 

Growth is expected to ease in the coming quarters. 

While retail sales are holding up, the weakening 

global economic conditions are spilling over to 

Singapore’s economy, hurting exports, industrial 

production, and trade-related services. While private 

consumption growth is expected to hold up 

reasonably well, supported by good job and wage 

prospects, Singapore’s high-beta economy should 

see exports and inventories take a hit. This has led us 

to lower our growth forecasts significantly to 5% in 

2011 (from 6.2%) and 5.1% in 2012 (from 6.3%). 

Inflation has been on the rise. This was initially due 

to rising accommodation costs and politically 

engineered increases in car prices. However, 

inflation has now become more broad-based as 

capacity is tight and demand-led price pressure has 

built up. Inflation is likely to remain elevated for a 

while, even though growth is easing, given that the 

economy is operating above its long-term potential. 

Given the lingering inflation pressures, we expect 

the MAS will maintain the tightening bias in 

October. However, with growth set to ease over the 

policy horizon, the MAS may feel compelled to 

lessen the slope of the NEER band. Fiscal policy 

could turn out to be tighter than planned given the 

conservative assumptions underlying the 2011/12 

budget, although these assumptions now look less 

conservative than previously given the slower 

growth now expected. 

Leif Eskesen 

Economist 




+65 6239 0840 




Bangalore 


GDP (% y-o-y) 0.9 5.4 4.6 0.6 4.6 7.2 8.0 6.8 5.9 4.7 

GDP sa (% q-o-q) -1.7 0.0 0.2 2.1 2.2 2.5 1.0 1.0 1.3 1.3 

Industrial production (% y-o-y) -5.9 6.3 6.4 -5.2 2.2 8.0 11.1 9.0 7.6 6.0 

CPI, (% q-o-q saar) 3.2 3.7 3.4 2.6 2.9 2.9 2.9 3.6 1.8 1.3 








3M interbank rate, end-quarter (%) 0.44 0.37 0.40 0.40 0.40 0.40 0.40 0.90 0.90 0.90 

5yr yield, end-quarter (%) 1.0 0.50 0.60 0.60 0.60 0.70 0.80 1.0 1.1 1.3 

SGD /USD, end-quarter 1.23 1.31 1.27 1.25 1.23 1.21 1.19 1.18 1.17 1.17 

SGD /EUR, end-quarter 1.75 1.75 1.75 1.75 1.75 1.74 1.71 1.70 1.68 1.68 


72

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Growth has eased … 

… due to global economic headwinds 

30 

% contribution 

20 

10 

0 

-10 

-20 

-30 

Jan 08 Jan 09 Jan 10 Jan 11 

Pv t. c ons umption 

Govt. consumption 

F ix ed Inv estm ent 

Net exports 

In v entory 

Residual 

GDP % y -o-y 

Second quarter growth was on the supply side held down by 

changes in the product mix in the volatile pharmaceutical sector 

as well as global economic headwinds impacting the 

electronics sector and trade-related services. 

On the demand side, the global economic headwinds showed 

up in weaker exports. 

However, private consumption remained robust supported by 

favourable labour market conditions. Moreover, government 

consumption rebounded and investments picked up. 


Retails sales remain buoyant … 

% y-o-y 

20 

10 

0 

-10 

-20 

Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 

Nominal retail sales: Total 

Nominal retail sales: Ex. auto 

… as local and visiting shoppers spend confidently 

Local shoppers have been able to keep up their spending 

habits thanks to strong job and wage growth, and with 

unemployment levels very low, workers are going to be in high 

demand for a while and should have good bargaining power 

when it comes to the take-home pay. 

Moreover, it is not just locals who are shopping. The increasing 

stream of tourists is also stopping by the city state for not just 

shopping on the famous Orchard Road but also for gambling 

and dining. Many of them come from neighbouring Asian 

countries, with Chinese tourists a big and permanent fixture 

Of course, Singapore’s high-beta economy cannot escape the 

global economic headwinds, so we could see shoppers contain 

themselves somewhat in the coming months as they gauge the 

direction and the strength of the global economic winds. 


Non-oil domestic exports have eased … 

… in line with the softening in the global trade cycle 

%3m/3m saar 

60 

40 

20 

0 

-20 

-40 

-60 

Ja n 08 J ul 08 J an 09 Jul 09 Jan 10 Ju l 10 Ja n 11 J ul 11 

Nodx: non electronics Nodx 

Exports have held up in recent months due to temporary spikes 

on shipping of boats, optical equipment, and pharmaceuticals. 

However, core components such as electronics continued to 

decline in response to weak demand in the West. 

By destination, exports destined for China remain relatively 

firm, whereas those headed to the EU and the US are 

contracting sequentially. 

Looking ahead, export growth is set to remain subdued in line 

with final demand in advanced economies. 


73

Macro 



abc 

Headline inflation has accelerated … 

… driven by more generalized price pressures 

10 

5 

0 

-5 

% 

07 08 09 10 11 

CPI % y-o-y 

CPI: Core (MAS) % y-o-y 

CPI: Core (MAS) % 3m/3m saar 

Annual headline inflation has accelerated to a 3-year high of 

5.7% y-o-y due to costlier housing and transport. 

Housing has gone up due to the increase in imputed rents on 

owner occupied buildings, a side effect of the boom in the real 

estate market. 

Likewise, the ever increasing demand for cars has pushed up 

the price of entitlement certificates, which are still being bought 

at these high prices. 

Inflationary pressures are likely to remain at over 5% in the 

coming months due to the still strong domestic demand 

conditions. 

Source: CEIC, HSBC *MAS core ( ex. pvt. Transport & accommodation) 

Property markets have been booming … 

… but have cooled a bit in recent months 

50 

25 

0 

-25 

% y -o-y 

The rise in property prices has eased following the strong 

bounce-back in 2010. 

This is mainly due to macro-prudential and tax measures 

introduced to cool the property markets, in August 2010 and in 

January 2011. 

-50 

05 06 07 08 09 10 11 

Pvt. residential prices 

Pvt. residential (non-landed, core central region) 

Source: CEIC, HSBC, as at end June 2011 

Monetary policy will need to be recalibrated slightly … 

120 

115 

110 

105 

Jan-10 Jul-10 J an-11 Jul-11 Jan-12 

HS BC S$N EER 

Ba nd 

2% annual appreciation 

… through “Operation Tweak” 

Singapore uses the nominal effective exchange rate as its 

instrument to control inflation. 

The persistent uptrend in inflation suggests a need for 

continued monetary policy tightening. 

As such, we expect the MAS to maintain its tightening bias via 

modest and gradual appreciation of the SGD NEER, but also 

retain the current width of the trading band as an insurance 

against global jitters. 

However, with growth set to ease over the policy horizon in light 

of the weaker global economic outlook, the MAS may feel 

compelled to launch “Operation Tweak”, lessening the slope of 

the band. 

Source: Bloomberg, HSBC 

74

Macro 



abc 

Singapore: Macro framework 

2007 2008 2009 2010 2011f 2012f 2013f 


GDP growth (% y-o-y) 8.8 1.5 -0.8 14.5 5.0 5.1 5.6 






Net Exports (contribution to GDP growth, ppt) 6.0 -9.7 4.6 10.5 1.5 1.9 2.1 

Industrial production (% y-o-y) 5.9 -4.2 -4.2 29.7 5.3 4.0 6.6 


Unemployment rate end-year (%) 1.8 2.7 2.3 2.2 2.1 2.1 2.1 





Core CPI, end-year (% y-o-y) 1.7 9.1 -2.6 3.4 1.5 3.3 2.1 

PPI, average (% y-o-y) -1.6 3.4 -13.4 1.7 4.0 2.5 2.1 

PPI, end-year (% y-o-y) 4.9 -11.2 0.0 -0.9 3.5 2.6 2.4 






3M interbank rate, end-year (%) 2.38 0.96 0.68 0.44 0.40 0.40 0.90 


SGD /USD, end-year 1.44 1.44 1.40 1.29 1.27 1.19 1.17 

SGD /USD, average 1.50 1.41 1.45 1.36 1.27 1.23 1.18 

SGD /EUR, end-year 2.10 2.00 2.01 1.73 1.75 1.71 1.68 

SGD /EUR, average 2.09 2.05 2.03 1.80 1.75 1.74 1.69 







Net FDI (USDbn) 4.3 8.8 -3.1 19.1 19.2 6.8 7.0 

Net FDI (% GDP) 2.4 4.6 -1.7 8.6 7.1 2.2 2.2 







Budget balance (% GDP) 3.0 1.5 12.7 -1.7 0.4 0.6 0.9 

Gross external debt (USD bn) 350 417 406 477 570 645 668 

Gross external debt (% of GDP) 197 219 221 214 212 211 210 

Public sector debt (% of GDP) 87 95 109 106 100 97 97 


Capital adequacy ratio (system wide) 13.5 14.7 16.5 n/a n/a n/a n/a 

- tier 1 n/a n/a n/a n/a n/a n/a n/a 


Non-performing loan ratio 1.5 1.7 2.3 n/a n/a n/a n/a 


Residential House prices (% y-o-y) 31.2 -4.7 1.8 17.6 n/a n/a n/a 

Loan/ deposit ratio 71.2 75.6 69.0 69.8 n/a n/a n/a 



75

Macro 



abc 

Sri Lanka 

Still going strong 

Sri Lanka’s GDP grew at a faster clip in 2Q, at 

8.2% y-o-y versus 7.9% in 1Q, led by a recovery 

in agriculture after devastating floods early in the 

year. Non-agricultural sectors moderated slightly 

but are still running at a pretty fast pace of 9% 

versus 10% in 1Q. Manufacturing improved on 

the back of reconstruction activities at home and 

solid demand for Sri Lanka’s industrial exports. 

Services picked up on the back of strong 

sentiments at home and the sharp rise in tourist 

arrivals (36% year-to-date) as well as remittances 

(23% year-to-date). 

Looking ahead, exports will likely slow due to 

weaker demand in advanced economies. 

Nevertheless, the peace dividend and 

accommodative policy settings should cushion 

against the slowdown in external demand. 

Overall, the economy is still on track to achieve 

8% GDP growth this year, but growth could ease 

next year as policies become less accommodative. 

Inflation is beginning to moderate on the back of 

international commodity prices. However, demandled 

inflation risks are still lingering and cannot be 

ignored. Countering this point, the central bank 

believes that strong growth will improve supply and, 

therefore, help keep inflation in check. But, the rapid 

rise in credit demand (35.7% y-o-y in July) and fast 

broad money growth (22.7% versus the central bank 

assumption of 14.5% for 2011) suggest that demand 

may be running a bit too fast. 

With growth holding up, the central bank should 

keep an eye on inflation. For now, the weaker global 

economic backdrop has added to the central banks’ 

dovishness and we expect it will remain on hold well 

into 2012. 

What is more, fiscal policy could also turn out a little 

less tight this year. This is thanks to tax cuts 

announced together with a broadening of the tax 

base. All in all, we believe the economy is well 

supported on the policy front to ride out any 

sluggishness in the global economy. 

Leif Eskesen 

Economist 




+65 6239 0840 




Bangalore 


GDP (% y-o-y) 8.2 8.0 8.5 6.8 6.8 6.8 6.9 7.5 7.6 7.5 

GDP sa (% q-o-q) 3.0 1.6 1.8 1.6 1.4 1.4 1.6 2.0 2.0 2.2 


CPI, (% q-o-q saar) 5.8 4.6 3.9 5.8 6.9 7.5 7.7 7.7 7.7 7.6 


WPI, average (% y-o-y) 15.8 10.7 1.5 -2.0 5.7 13.2 11.7 8.0 5.9 5.8 







LKR/USD, end quarter 109.6 110.2 109.0 108.3 107.5 106.8 106.0 105.5 105.0 104.5 

LKR/EUR, end quarter 155.6 147.7 150.4 151.6 152.7 153.8 152.6 151.9 151.2 150.5 


76

Macro 



abc 

Growth remains resilient ... 

% y -o-y c ontribution 

10 

8 

6 

4 

2 

0 

-2 

Mar 07 Mar 08 Mar 09 Mar 10 M ar 11 

Agriculture 

Industry 

Services 

GDP % y/y 

… with policy settings firmly supporting growth 

The partial recovery from devastating floods in the early part of 

the year improved GDP growth to 8.2% y-o-y in 2Q from 7.9% 

y-o-y in the previous quarter. 

Agriculture grew 1.9% in 2Q after contracting 5% in the quarter 

before. 

The ex-agriculture economy, on the other hand, grew 9% y-o-y, 

slightly slower than 10% recorded in 1Q. 


Export growth is tapering off … 

… while imports are held up by solid domestic demand 

70 

50 

30 

10 

-10 

-30 

-50 

% y-o-y, 3mth roll sum 

07 08 09 10 11 

Imports 

Exports 

The momentum in exports has eased due to a slowdown in key 

export markets in the West. This trend will likely continue as 

global economic prospects have weakened considerably in 

recent months. 

Imports, on the other hand, have gained in strength due to 

strong local demand. Moreover, imports should remain solid as 

the nation-building efforts continue. 

Moreover, the rise in commodity prices in the last six months 

has added to the import bill. 


Reserves are at record levels … 

… but rising imports have reduced buffer levels 

8 

6 

4 

2 

0 

00 01 02 03 04 05 06 07 08 09 10 11 

10 

8 

6 

4 

2 

0 

The deterioration in the trade balance should be partially offset 

by the improving outlook for remittances and services receipts. 

Moreover, significant official flows have also helped shore up 

reserves. 

Remittances are expected to remain resilient. Also, high oil 

prices are generally positive for remittances, since nearly all of 

Sri Lankan overseas workers head to the Middle East for work. 

FDI inflows have picked up with total inflows reaching 

USD413m in 1H. The government is hoping to receive USD1bn 

in FDI inflows this year. 

Reserves (USDbn) Import C ov er (R HS, m) 


77

Macro 



abc 

Improved food supply and stable commodity prices … 

% 3m/3m saar 

30 

20 

10 

0 

-10 

08 09 10 11 

Core CPI Headline CPI 

… have slowed CPI inflation 

CPI inflation is decelerating on a sequential basis following 

improved food supply output has partially recovered from the 

flood related damages early in the year. 

Moreover, the recent stabilization in international commodities 

prices and a strong rupee has helped ease headline inflation. 

Core inflation has also eased a bit, but with domestic capacity 

utilization running high and demand growth strong under easy 

policy settings, demand-led inflation pressures should continue 

to linger. 


Credit growth has risen steeply … 

… supported by accommodative monetary policy settings 

40 

30 

20 

10 

0 

-10 

% 

02 03 04 05 06 07 08 09 10 11 

Pv t. cr edit growth % y -o-y 

Prime lending rate % 

Policy rate % 

Positive sentiment, historically low lending rates and tax cuts on 

imports announced early in the year sparked off a spurt in 

credit demand. 

In April this year, policymakers rolled back excise tax cuts to 

slow the steep rise in demand for imported cars, which was part 

of the story behind the big jump in credit. Despite these 

measures, credit growth has continued to climb. 

Moreover, with policymakers in pursuit of growth, rate hikes 

could be held off until 2Q12. 


Government is committed to fiscal consolidation … 

% of GDP Fiscal impulse by FY 

2 

Loosen 

1 

0 

-1 

-2 

-3 

-4 

Tighten 

05 06 07 08 09 10 11 12 

… but revenue collections may disappoint 

The government’s fiscal plans are, to a large extent, bound by 

the IMF’s fiscal consolidation program, as part of the country’s 

USD2.6bn loan arrangement with the Fund. 

In line with this arrangement, the government has planned to 

cut the budget deficit to 6.8% for 2011 from 7.9% in 2010. 

However, the tax cuts could leave revenue collections short of 

target, despite tax broadening measures and strong growth. 

This could leave the deficit a notch higher than planned (HSBC 

estimates 7.1% of GDP), leaving the fiscal stance a little less 

tight. 


78

Macro 



abc 

Sri Lanka: Macro framework 

2007 2008 2009 2010 2011f 2012f 2013f 


GDP growth (% y-o-y) 6.8 6.0 3.5 8.0 8.1 6.8 7.6 


GDP per capita (USD) 1634.0 2014.0 2057.0 2399.0 2768.2 3236.8 3928.9 

Private consumption (% y-o-y) 7.8 6.7 -2.5 12.0 9.7 7.3 8.2 

Government consumption (% y-o-y) 5.5 6.0 15.8 -3.7 11.1 10.2 6.4 


Net Exports (contribution to GDP growth, ppt) -1.6 -6.5 6.6 -4.1 -3.9 0.9 1.0 










WPI, end-year (% y-o-y) 26.8 0.7 13.3 17.6 -1.1 8.2 6.3 

Minimum wages, nominal (% y-o-y) 18.2 2.0 5.9 9.0 10.0 8.0 8.0 


Central bank money M1, end (% y-o-y) 2.7 4.0 21.4 20.9 21.2 19.8 20.5 

Broad money supply M2, end (% y-o-y) 15.6 11.7 19.9 18.0 20.6 18.2 19.0 

Real private sector credit growth (% y-o-y) 9.3 -11.2 -4.7 3.9 15.3 11.9 13.4 

Policy rate, end-year (% y-o-y) 12.00 12.00 9.75 9.00 8.50 10.00 10.25 


LKR /USD, end-year 108.7 113.3 114.4 111.1 109.0 106.0 104.0 

LKR /USD, average 110.7 109.2 114.9 112.7 109.8 107.2 104.8 

LKR /EUR, end-year 158.7 157.5 163.6 148.9 150.4 152.6 149.8 

LKR /EUR, average 153.9 159.0 160.6 148.7 152.1 151.9 150.8 







Net FDI (USDbn) 0.5 0.7 0.6 0.5 1.0 1.5 1.5 

Net FDI (% GDP) 1.6 1.7 1.7 1.4 1.0 1.7 2.2 

Current account balance plus FDI (% GDP) -2.5 -7.6 1.2 -1.9 -2.8 -1.4 -0.5 

Exports (% y-o-y) 11.0 6.0 -12.7 16.1 32.2 23.9 28.3 

Imports (% y-o-y) 8.9 26.0 -27.6 32.4 35.2 14.0 18.4 







Budget balance (% GDP) -6.9 -7.0 -9.8 -7.9 -7.1 -6.2 -5.5 

Gross public domestic debt (USDbn) 15.5 19.8 20.9 22.8 24.4 26.6 29.1 






Capital adequacy ratio (system wide) 14.1 14.5 16.1 15.5 n/a n/a n/a 



Non-performing loan ratio n/a n/a n/a n/a n/a n/a n/a 


79

Macro 



abc 

Taiwan 

Bracing for turbulence 

Taiwan’s disproportionate reliance on the fickle 

global electronics cycle for growth is a double-edged 

sword. When Western demand is strong, growth 

soars – along with the price of global commodities 

on which Taiwan depends for 99% of its energy 

needs. When Western demand stumbles, growth dips 

uncomfortably sharply, but imported inflationary 

pressures also ease. 

The recent plummet in Taiwan’s PMI readings is 

more a reflection of deteriorating US demand than a 

signal that Chinese demand is declining. This is in 

contrast to 1Q11, when the weakening of China’s 

manufacturing PMI seemed to be the key drag upon 

Taiwan’s shipment growth. That said, global trade 

has yet to revisit the depths seen in 2008-09. 

To put things in perspective, although the current 

decline has taken PMI readings lower than in last 

summer’s soft patch, PMIs, exports and industrial 

production (IP) remain well above 2008-09’s trough 

in seasonally adjusted terms. Moreover, we do not 

expect global supply chains to collapse as they did 

during the 2008-09 global financial crisis, because 

central banks today are both ready and willing to 

prevent a full-scale global credit crunch from reoccurring. 

The key risk to this view is if financial 

volatility continues unabated, weighing down on 

global consumer sentiment and spending. 

In addition, regional demand remains strong. 

Provided Taiwan’s manufacturers are able to gear 

themselves more towards mainland than US demand 

via Economic Cooperation Framework Agreement’s 

preferential trade tariff channels, Taiwan electronics 

should at least have some cushion against declines in 

US demand. 

Taiwan’s central bank (CBC) is still keeping a close 

eye on elevated global commodity prices, but it will 

also have noticed Western consumers are reining in 

spending. The CBC remains prudent, in our view, 

but must strike a balance between addressing 

concerns about inflation and growth. So we expect it 

to pause, in line with its peers in exporting Asia. 

Donna Kwok 

Economist 



+852 2996 6621 


Ayushi Bajaj 


Bangalore 


GDP (% y-o-y) 5.0 3.3 2.0 -1.3 -0.2 3.0 5.0 6.8 6.4 6.1 

GDP sa (% q-o-q) 0.2 -0.7 -0.9 0.1 1.3 2.3 1.2 1.8 1.0 2.0 

Industrial production (% y-o-y) 6.2 4.0 2.0 -9.0 -2.5 7.0 14.0 19.0 22.0 17.0 

CPI, (% q-o-q saar) 1.5 0.2 2.4 2.8 2.2 1.9 1.1 2.6 2.2 3.1 



Exports, value (% y-o-y) (BOP, goods) 14.5 11.6 3.7 -9.6 -5.0 3.4 11.8 20.7 18.9 12.9 

Imports, value (% y-o-y) (BOP, goods) 19.5 6.0 -4.0 -14.9 -7.6 0.3 7.0 22.9 19.9 20.9 

Trade balance (% GDP) (BOP, goods) 5.1 9.2 9.1 7.5 6.4 10.3 11.0 6.9 6.1 6.7 





TWD /USD, end-quarter 28.80 30.48 30.00 29.50 29.00 28.50 28.00 27.70 27.40 27.40 

TWD /EUR, end-quarter 40.90 40.84 41.40 41.30 41.18 41.04 40.32 39.89 39.46 39.46 


80

Macro 



abc 

Taiwan economy remains very much manufacturing and … 

… exports driven 

12 

10 

8 

6 

4 

2 

0 

-2 

Ppt contribution to real GDP grow th 

2003 

2004 

2005 

2006 

2007 

2008 

2009 

2010 

1Q11 

2Q11 

Others Manufacturing Services 

Despite the lifting of supply-chain disruptions related to Japan and 

the decline in global commodity prices from their April peak, 

manufacturing conditions in Taiwan continue to deteriorate. 

Taiwan remains one of Asia’s highest beta economies, highly 

reliant on external demand and more exposed to Western 

demand than its peers. 

With simultaneous sovereign debt crises playing out in both the 

US and Europe, global economic uncertainty looks set to 

persist for while. 

Although Taiwan’s fairly resilient domestic demand will to a 

certain extent help to counter the drag posed by slowing 

shipments, it will unlikely provide a full counter-balance. 


Real output growth is set to dip, but by less and for … … a shorter period than in 2008-09 

20 

15 

10 

5 

0 

-5 

-10 

-15 

-20 

04 05 06 07 08 09 10 11 12 13 


%y -o-y (Lhs) %qoq, sa (Rhs) 

6 

4 

2 

0 

-2 

-4 

-6 

As such, we now expect Taiwan’s economy to dip back into 

recession, albeit a shallower and shorter one than in 2008. 

However, both exports and IP remain high above 2008-09’s 

trough in seasonally adjusted terms. 

Moreover, we do not expect global supply chains to collapse as 

they did during the global financial crisis. Central banks today 

are both ready and willing to prevent a full-scale global credit 

crunch from spreading, while Asia’s key engine of growth – 

China – is no longer as reliant on exports or Western demand. 

Real GDP growth will likely decelerate from 5.6% y-o-y in 1H11 

to 2.6% y-o-y in 2H11. For 2011, we expect it to ease to 4.0% 

y-o-y and for 2012 to 1.7% (2010: 10.9%). 

On a sequential basis, we expect GDP to contract 0.7% q-o-q 

(sa) in 3Q11 and 0.9% in 4Q11, compared to the four quarters 

of sequential contraction seen during the 2008-09 crisis which 

bottomed at -5.1% q-o-q (sa). 

The China catalyst: A critical support for Taiwan’s exports … 

… and potential support for its services sector 

20 

15 

10 

5 

0 

% ppt contr, y oy 

15 

10 

Aug-10 Nov -10 Feb-11 May -11 Aug-11 

Europe (Lhs) 

US (Lhs) 

CN (Lhs) 

Total ex ports growth 


` 

%y oy China has propelled Taiwan’s exports revival in the past year 

40 

(except in May 2011 when Japan related supply chain 

35 

disruptions and the impact of Beijing’s tightening measures 

30 

kicked in), more than making up for the void left by Western 

demand during the depths of the global financial crisis. 

25 

20 

5 

0 

Mainland demand drove well over a third of Taiwan’s headline 

exports growth through 2010 and 1H 2011. Exports to China 

and Hong Kong (which acts as an entrěpot for China-bound 

goods) today account for 40-42% of Taiwan’s shipments, 

almost double the 22-23% destined for the US and Europe. 

Besides exports however, China should also be viewed as a 

critical means for developing Taiwan’s services economy (think 

tourism, health, education), especially as implementation of the 

Economic Cooperative Framework Agreement (ECFA) 

progresses and the number of mainland visitors travelling on 

individual visas continues to rise. 

81

Macro 



abc 

Consumer confidence at a record high … 

115 

95 

75 

55 

35 

Consumer confidence index 


Nex t 6 months: Ov erall consumer confidence 

Nex t 6 months: Durable Goods Spending 

Nex t 6 months:Stock Market Prospect 

… but at risk of being dragged down by the TWSE 

Consumer spending is the island’s second strongest growth 

driver, accounting for a quarter of 2Q11’s headline GDP growth 

rate versus net exports contribution of around a half. 

To date, it is still expanding on a sequential basis, supported by 

robust consumer confidence (index hit a new record high of 

86.89 in August, compared to 1H08’s average 64.5). 

The key risk here is the performance of the local equity market, to 

which household spending is highly correlated. The latter tends to 

lag the former by a quarter via a wealth effect. Assuming all else 

equal, for every 10 percentage point drop in the Taiwan stock 

market index, we estimate that there is a corresponding 0.5 

percentage point decrease in real retail sales volume. 

So, unless financial market turbulence subsides soon, Taiwan’s 

private household spending buffer will likely start to slip in 4Q11. 


WPI inflation not being fully transmitted to CPI inflation … 

6 %y oy %y oy 15 

10 

3 

5 

0 

0 

-5 

-10 

-3 

-15 


CPI (Lhs) 

WPI (Rhs) 

… keeping inflationary pressures lagging the rest of Asia 

Excluding Japan, our 2011 forecast for Taiwan’s CPI inflation 

(1.5%) is the lowest within the region. 

CPI pressures are muted in part because businesses have not 

been passing on the full hit of input cost inflation, choosing to 

absorb higher input costs rather than pass them on to consumers, 

for fear of losing customers in a tough business environment. 

With the property market now starting to show real signs of 

cooling (our Taiwan property analyst currently expects prices in 

the important greater Taipei area to fall 5-15% in the next 6-12 

months), and inflationary pressures still so modest (core and 

headline inflation have hardly budged on a sequential m-o-m, 

seasonally adjusted basis in recent months), consumer price 

growth has in recent months faded as a policy priority for the 

central bank relative to growth. 


The CBC responds quickly to serious growth concerns … 

… so we expect rates to stay on hold at least until mid-2012 

ppt % qoq, sa 6 Now that Taiwan’s rate normalization cycle has been paused, 

0.25 

we expect mainland growth to dominate the CBC’s attention in 

-0.25 

4 

the next few months ahead, as it debates on whether there is 

-0.75 

2 

the need to start cutting instead of keeping its policy rate on 

-1.25 

hold. 

-1.75 

0 Should financial market turbulence continue to undermine 

-2.25 

(2) 

global consumer spending growth, or the China economy takes 

-2.75 

an unexpected stumble, the pause may turn into a cut in 

(4) 

coming quarters. 

-3.25 

-3.75 

(6) 

That said, based on our expectations for China’s growth to 

continue moderating at around 8-9% y-o-y through 2012, we 

3-01 3-03 3-05 3-07 3-09 3-11 

think the CBC will be able to avoid having to cut, and will likely 

Rate changes* (Lhs) Real GDP 

stick with a pause until mid-2012, by which time the global trade 

cycle should have started to stabilize somewhat. 


82

Macro 



abc 

Taiwan: Macro framework 

2007 2008 2009 2010 2011f 2012f 2013f 


GDP growth (% y-o-y) 6.0 0.7 -1.9 10.9 4.0 1.7 6.6 



Private consumption (% y-o-y) 2.1 -0.9 1.1 3.7 3.1 1.9 4.0 




Industrial production (% y-o-y) 7.8 -1.8 -8.1 26.9 6.4 2.5 18.9 


Unemployment rate, ave (%) 3.9 4.1 5.8 5.2 4.6 4.8 4.2 



CPI, end-year (% y-o-y) 3.3 1.3 -0.2 1.2 1.7 1.9 2.7 

Core CPI, average (% y-o-y) 1.4 3.1 -0.1 0.4 1.1 1.5 1.5 

Core CPI, end-year (% y-o-y) 2.6 2.1 -0.7 0.9 1.2 1.5 0.0 


WPI, end-year (% y-o-y) 8.6 -9.7 5.8 2.3 5.1 4.4 5.5 

Manufacturing wages, nominal (% y-o-y) 1.8 -0.3 -9.2 8.6 3.8 4.2 5.0 




Real private sector credit growth (% y-o-y) 0.9 -1.0 1.9 5.8 1.9 4.1 4.1 



TWD /USD, end-year 32.44 32.86 32.03 30.37 30.00 28.00 27.40 

TWD /USD, average 32.79 31.51 33.01 31.61 29.54 29.00 27.55 

TWD /EUR, end-year 47.37 45.68 45.80 40.69 41.40 40.32 39.46 

TWD /EUR, average 45.58 45.89 46.12 41.72 40.91 41.11 39.67 


Merchandise exports (USDbn) (BOP, goods) 246.5 254.9 203.4 273.8 306.6 307.1 360.3 

Merchandise imports (USDbn) (BOP, goods) 216.1 236.4 172.8 247.3 273.0 261.9 315.0 

Trade balance (USDbn) (BOP, goods) 30.4 18.5 30.6 26.5 33.7 45.2 45.3 



Net FDI (USDbn) -3.3 -4.9 -3.1 -9.1 -9.0 -2.3 -4.0 

Net FDI (% GDP) -0.8 -1.2 -0.8 -2.1 -1.9 -0.4 -0.7 


Exports, value (% y-o-y) (BOP, goods) 10.1 3.4 -20.2 34.6 12.0 0.1 17.3 

Imports, value (% y-o-y) (BOP, goods) 8.2 9.4 -26.9 43.1 10.4 -4.1 20.3 

International FX reserves (USDbn) 270 292 348 382 429 487 554 







Central government balance (% GDP) -0.1 -0.8 -3.4 -2.7 -2.2 -0.6 0.9 

Gross public domestic debt (TWD bn) 3,190 3,390 3,610 4,405 4,757 4,842 4,692 






CAR – Tier 1 8.41 8.75 8.65 8.99 N/A N/A N/A 

CAR – Total 10.60 10.80 11.70 11.79 N/A N/A N/A 

Non-performing loan ratio 1.80 1.50 1.20 0.61 N/A N/A N/A 

Household Debt/ GDP (%) 52.1 52.6 52.9 49.5 N/A N/A N/A 

Total Credit/GDP (%) 131.2 137.7 140.8 137.9 N/A N/A N/A 

Residential house price – Taipei city (%y-o-y) 14.9 4.8 1.7 23.8 N/A N/A N/A 

Residential house price – Taiwan area (%y-o-y) 13.2 -0.3 5.0 16.8 N/A N/A N/A 

Loan/deposit ratio 87.5 85.0 78.4 79.4 80.3 81.3 82.3 

Stock Market Capitalization/GDP (%) 166.7 92.8 168.6 175.0 N/A N/A N/A 



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Thailand 

Populist pressure 

In the second quarter of 2011 GDP growth eased 

to 2.6% y-o-y, from 3.2% y-o-y in the first quarter 

with sequential growth turning negative. While 

both private and public consumption eased 

modestly, the slowdown was primarily driven by 

deceleration in investment and exports. This was 

mostly the result of supply chain disruptions 

associated with the natural disaster in Japan, 

which had a particularly large impact on the 

manufacturing and exports of Japanese cars 

produced in Thailand. 

Looking ahead, growth could get some support in 

the short term as the Japan-related supply chain 

disruptions dissipate. However, the weaker global 

economic conditions will constrain growth 

through the trade channel and confidence channel 

as domestic sentiments are affected. We have, 

therefore, revised down our GDP forecasts to 

3.9% in 2011 (from 4.4%) and 5.0% in 2012 

(from 5.4%). 

While the global factors pose downside risks to 

growth, the risks to inflation are skewed to the 

upside. Both headline and core inflation have 

continued to trend up. At the same time, a host of 

populist measures that the new government plans 

to roll out (both higher minimum wages and 

minimum support prices for rice, among others) 

will add to underlying inflation pressures. 

In light of this, the Bank of Thailand (BoT) is 

likely to remain hawkish and continue to nudge its 

policy rate up to normalise monetary policy 

settings, which are still accommodative. BoT’s 

proactive stance was evident when it tightened in 

August even in the context of heightened global 

economic uncertainty. However, it is, of course, 

not agnostic about external factors and is likely to 

condition the speed of further hikes on both global 

economic developments and the likely impact 

from the new populist measures. 


Economist 



+ 852 2822 4556 


Tushar Arora 


Bangalore 


GDP (% y-o-y) 2.6 4.9 4.9 3.5 5.3 5.5 5.5 5.4 5.0 4.7 

GDP sa (% q-o-q) 0.3 1.7 1.0 0.8 1.7 1.5 1.3 1.0 1.1 1.2 

Industrial production (% y-o-y) -0.3 2.0 1.0 1.0 4.0 5.0 4.0 4.5 4.0 4.0 

CPI, (% q-o-q saar) 4.5 5.1 3.4 3.2 3.5 2.9 2.7 3.2 3.4 2.8 





Trade balance (% GDP) 1.9 3.9 2.8 -0.2 -0.3 3.8 3.6 -0.2 -1.4 3.8 

Current account (% GDP) 2.1 3.5 4.2 2.6 0.3 3.8 5.2 2.4 -1.1 4.1 




THB /USD, end-quarter 30.7 31.2 30.7 30.2 29.7 29.2 28.8 28.5 28.0 28.0 

THB /EUR, end-quarter 43.6 41.8 42.4 42.3 42.2 42.0 41.5 41.0 40.3 40.3 


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GDP growth and its components (contribution in ppt) 

15 

10 

5 

0 

-5 

-10 

-15 

y-o-y/ ppt 

Jun-08 Jun-09 Jun-10 Jun-11 

Pv t Cons. Gov t. Cons Inv estm ent 

Inv entories Net Ex ports GDP 

GDP data for 2Q came in short of expectations, with the chief 

culprit being Japan’s earthquake, which roiled down the supply 

chains across the auto and semi-conductor sectors. 

The drag was felt from external demand too, where net exports 

added just 0.3ppt to growth in 2Q, compared to 2.5ppt in 1Q. 

By now, supply chain disruptions appear to have largely eased. 

However, there are additional concerns related to the slowdown 

in the US and Europe. 

While we will likely see Thailand getting affected by the 

lingering uncertainties in the West, we still expect 2011 growth 

to remain close to trend at 3.9%. 


Exports and industrial production growth picked up again 

45 

% y-o-y, 3mma 

30 

15 

0 

-15 

-30 


Ex ports Production 

Given its close economic linkages to Japan, Thailand’s 

industrial production has been visibly hit by the supply chain 

disruptions affecting the region. 

In the latest August figure, however, we are starting to see 

strong signs of a turnaround. Both industrial production and 

capacity utilisation levels have now picked up sequentially. 

While Japan’s supply crunch worries are over, there are still 

concerns about demand for Thai exports, given the uncertain 

global outlook will become more dominant. 

While the impact from the external front will indeed be felt, we 

remain relatively sanguine about the overall growth outlook, mainly 

because of the resilience that private consumption. 


Confidence Index stabilizing after a clear election mandate 

85 

80 

75 

70 


TH: Consumer Confidence Index 

2 per. Mov . Av g. (TH: Consumer Confidence Index ) 

A decisive win at the ballot box, with no major political tensions 

reported subsequently, helped boost consumer confidence and 

suggests that private consumption spending will pick up over the 

second half of the year. 

Moreover, for the remainder of 2011, consumer confidence will 

see a positive push coming from the populist measures of the 

new government. 

Lingering global uncertainties on the other hand might have a 

negative impact but in our view this would be very marginal and 

overall domestic demand s remain the key engine of growth 

with private consumption expected to grow by 3.5% in 2011. 


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In annual terms, inflation is still pushing higher 

10 

8 

5 

3 

0 

-3 

-5 


After many months of tame-looking inflation, Thailand has 

started to see more marked price pressures since 2Q. 

Populist measures of the new government, like a rise in 

minimum wages and official support for rice prices, is only 

expected to add further to price pressures. 

There remains a risk of core inflation breaching 3%, the top end of 

the central bank target range, especially if the new government 

pursues populist policies prove exceptionally expansionary. 

In this regard, commodity prices might be a source of respite 

due to declining consumer demand in the West and we expect 

inflation to peak in 4Q11. 

CPI (% y-o-y) Core CPI (% y -o-y ) 


Monetary policy on hold for the time being 

8 

6 

4 

2 

0 


Policy rate (%), end period 

Prime Loan rate, (%) 

The Bank of Thailand has maintained a consistent tightening 

bias this year, increasing policy rate for the seventh straight 

meeting in August. 

So far, the central bank has focused on curbing inflation pressure 

via policy rates rather than adopting currency appreciation or 

reserve requirement ratio hikes 

Although domestic demand momentum is strong, we believe 

the Bank of Thailand needs to buy some time to gauge the 

impact that global uncertainties of new populist measures can 

have on the domestic economy, before it can take any further 

action. 


Visitor arrivals (thousands) 

2000 

1500 

1000 

500 

0 

Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 

Around 3.5m foreign tourists came to Thailand in 1H11, up 35% 

y-o-y. The majority of them were from China, India, Japan, 

Korea and Russia. 

Higher growth this year has been reflective of more stable 

political environment relative to last year, when domestic riots 

led to a decline in arrivals for two months. 

For the rest of the year, the Tourism Council of Thailand 

believes that economic woes from the Western world can have 

a dampening effect on the sector. 

No doubt, the relative strength of the sector may be tested but 

growing importance on Asian tourists means this sector will 

show some level of immunity to global economic woes. 


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Thailand: Macro framework 

2007 2008 2009 2010 2011f 2012f 2013f 


GDP growth (% y-o-y) 5.0 2.5 -2.3 7.8 3.9 5.0 4.9 



Private consumption (% y-o-y) 1.8 2.9 -1.1 4.8 3.5 3.7 4.0 



Net Exports (contribution to GDP growth, ppt) 2.9 -1.2 3.4 -0.5 1.3 0.7 1.4 











Manufacturing wages, nominal (% y-o-y) 3.0 10.2 -2.5 6.5 5.9 3.6 3.5 


Central bank money M0, end (% y-o-y) 7.9 11.3 6.1 12.7 8.0 8.0 8.0 

Broad money supply M2, end (% y-o-y) 6.3 9.2 6.8 10.9 6.0 6.0 6.0 




THB /USD, end-year 33.7 34.7 33.3 30.0 30.7 28.8 28.0 

THB /USD, average 34.6 33.3 34.3 31.7 30.6 29.7 28.2 

THB /EUR, end-year 49.2 48.2 47.6 40.2 42.4 41.5 40.3 

THB /EUR, average 48.1 48.5 47.9 41.9 42.4 42.1 40.6 


Merchandise exports (USDbn) 151 175 151 194 225 245 262 

Merchandise imports (USDbn) 138 176 131 180 214 237 254 

Trade balance (USDbn) 12.8 -0.4 19.4 14.1 11.3 7.6 8.1 



Net FDI (USDbn) 8.3 4.4 2.3 0.1 1.9 8.0 8.0 

Net FDI (% GDP) 3.5 1.6 0.9 0.0 0.5 2.0 1.9 












Gross public domestic debt (THB bn) 3,197 3,434 3,977 4,218 5,027 5,143 5,214 






CAR: Capital Funds/Risk Assets (%) 14.3 14.7 15.5 16.3 n/a n/a n/a 

CAR: Teir 1 Capital/Risk Assets (%) 11.4 11.4 11.6 12.0 n/a n/a n/a 




Residential House prices (% y-o-y) 1.1 -1.1 -1.6 0.4 n/a n/a n/a 




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Vietnam 

Inflation remains a challenge 

The economy accelerated by 6.1% y-o-y in 3Q 

(versus 5.7% in 2Q), recording 2.3% seasonally 

adjusted growth from the previous quarter. All 

sectors of the economy expanded, with 

manufacturing and services growing by 6.8% y-o-y 

and 6.5% y-o-y, respectively. 

Looking forward, we see adverse global 

conditions affecting the economy. Net exports are 

expected to worsen as a result of global economic 

softness. Investment and consumption, which 

have traditionally been supported by steady 

inflows of FDI and remittances, would remain 

important sources of growth. However, they too 

are set to decelerate. In light of this, we have cut 

our 2011 GDP forecast slightly from 6.1% y-o-y 

to 5.8%. 

Vietnam’s biggest challenge, however, is still 

high inflation, with the rise in September headline 

CPI hitting 22.4% y-o-y. While food inflation is a 

key part of the story, core inflation pressures have 

also picked up. Moreover, the planned increase in 

minimum wages in October is likely to add to 

underlying inflation pressure. 

On the monetary policy front, however, the SBV 

now seems to have little appetite for further hikes. 

Following aggressive tightening (increasing the 

OMO rate from 9% to 15%) earlier in the year, 

the SBV lowered the OMO rate to 14% in July 

despite rising inflation. Banks have also recently 

been encouraged to lower their lending rates for 

production enterprises to avoid a credit squeeze. 

These steps have created uncertainties about the 

monetary policy strategy. 

Looking ahead, we expect the SBV to hold the 

OMO rate steady at 14% well into next year in 

light of the more challenging growth outlook, 

domestically and abroad. However, it may resort 

to further targeted quantitative tightening through 

hikes in RRRs. 

Trinh Nguyen 

Economist 



+852 2996 6975 


2Q11 3Q11f 4Q11f 1Q12f 2Q12f 3Q12f 4Q12f 1Q13f 2Q13f 3Q13f 

GDP (% y-o-y) 5.7 6.1 5.8 6.5 6.5 7.4 7.5 8.1 7.4 6.8 

GDP sa (% q-o-q) 2.6 2.3 3.3 -1.8 2.7 3.1 3.4 -1.2 2.0 2.5 

Industrial production (% y-o-y) 14.2 na na na na na na na na na 

CPI, (% q-o-q saar) 30.5 18.2 7.9 9.6 8.8 8.6 8.7 10.4 9.8 9.8 







5-yr yield, end quarter (%) 11.00 11.00 11.00 11.00 11.00 11.00 11.00 11.00 11.00 11.00 

VND/USD, end quarter 20,600 20,830 21,500 21,500 21,500 21,500 21,500 21,500 21,500 21,500 

VND/EUR, end quarter 29,252 27,912 29,670 30,100 30,530 30,960 30,960 30,960 30,960 30,960 


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Expenditure contribution to GDP 

Consumption and investment continue to boost growth 

25 

15 

5 

-5 

-15 

2001 2003 2005 2007 2009 2011f 2013f 

Capital formation 

Inv entories 

State Cons. 

Priv ate Cons. 

Net ex ports 

Discrepancy 

GDP 

Tightening measures earlier in the year, which reduced credit 

and money supply, have negative affected growth 

Private consumption is expected to decelerate this year due to 

persistently high inflation, limited access to consumer credit, 

and declining property values 

Investment is also expected to slowdown in 2011 as a result of 

the credit squeeze; however, it will be buoyed by strong FDI 

inflows, which have been a reliable source of investment 

Foreign investors are still interested in tapping into Vietnam’s 

burgeoning market, but they are increasingly more concerned 

about Vietnam’s macroeconomic uncertainty 


Sector contribution to GDP 

Industrial and service sectors: the backbone of the economy 

% y -o-y The industrial and service sectors each make up about 40% of 

20 

Vietnam’s GDP. 

15 

The industrial sector decelerated in 3Q; agriculture sector, on 

the other hand, accelerated. 

10 

State-owned industrial production still lags behind privatelyowned 

industrial production; increasing SOEs’ efficiency should 

5 

spur growth. 

0 

Dec-07 Sep-08 Jun-09 Mar-10 Dec-10 Sep-11 

Agriculture Industry Serv ice 


Trade balance: persistent deficits put pressure on the dong 

10 

8 

6 

4 

2 

0 

-2 

-4 

2007 2008 2009 2010 2011 

Deficits (USD bn) 

Ex ports (USD bn) 

Imports (USD bn) 

Slow to develop industries, such as petrochemicals and 

machinery, to support export sector 

By value, heavy industrial products and light industrial and 

handicraft goods make up 83% of total exports. 

Fuel and raw material production goods make up 61% of total 

imports and machinery and instrument production goods make 

up 29% of total imports. 

Vietnam’s import-dependent exports would cause it to have 

trade deficits in the coming years. We project Vietnam’s trade 

deficit to reach USD13.5bn this year. 


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abc 

But steady FDI inflows (along with remittances and aid) 

support foreign exchange 

15.00 

10.00 

5.00 

0.00 

-5.00 

-10.00 

-15.00 


1999 2001 2003 2005 2007 2009 2011f 2013f 

FDI Inflow s (% GDP) 

Current account balance (% GDP) 

Current account balance plus FDI (% GDP) 


Vietnam’s cheap labour and burgeoning market attract investors 

FDI disbursements from January-August increased 1% y-o-y to 

USD7.3bn, while pledges for FDI slumped 30% to USD7.9bn. 

Exports from foreign invested sector increased 34% y-o-y, making 

up more than 50% of total exports in the first eight months. 

Total FDI disbursements from January-August are more than 

the total trade deficit of USD6.4bn for the period of January to 

September. 

However, high inflation remains a major challenge 

Food and core prices are easing very gradually 

70 

50 

30 

10 

-10 

-30 

%3m/3m saar 

Inflation peaked in 3Q and should ease only very gradually, as 

inflationary pressures remain strong. 

Food prices (rising 33.4% y-o-y in September) are not letting up in 

Vietnam, putting severe strains on consumer purchasing power. 

Recent reduction in fuel prices helped ease transportation 

inflation, although it is still rising by 20.1% y-o-y in September 

(versus 21.5% in August). 

Dec-07 Sep-08 Jun-09 Mar-10 Dec-10 Sep-11 

Transportation Food Headline 


More tightening is needed to curb inflation but … 

27 

22 

17 

12 

7 

2 

Q1 2004 Q3 2005 Q1 2007 Q3 2008 Q1 2010 Q3 2011 

GDP (% y-o-y) 

CPI (% y-o-y, end) 

Policy Rate 

… the SBV appears to prioritize growth over inflation 

The government had taken the right steps to tighten credit and 

money supply earlier in the year but appears to have switched 

gears recently. 

The government decreased the OMO rate in July and directed 

12 large banks in Vietnam to ease VND lending interest rates 

for the business and production sector to 17-19% in August. 

Although inflation is still high, a worsening global outlook would 

motivate the SBV to keep the OMO rate steady at 14%. 


90

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Vietnam: Macro framework 

2007 2008 2009 2010 2011f 2012f 2013f 


GDP growth (% y-o-y) 8.5 6.3 5.3 6.8 5.8 7.0 7.2 


GDP per capita (USD) 843 1,052 1,064 1,156 1,382 1,569 1,796 




Industrial production (% y-o-y) 17.1 14.6 7.6 14.0 na na na 








PPI, average (% y-o-y) 6.8 20.0 7.7 12.1 17.8 12.9 11.2 

PPI, end-year (% y-o-y) 11.0 21.8 7.3 12.6 20.1 10.2 9.0 



Money supply M1, average (% y-o-y) n/a n/a n/a n/a n/a n/a n/a 



Policy rate (Refinance rate), end-year (%) 6.50 9.50 8.00 9.00 14.00 14.00 13.00 


VND /USD, end-year 16,017 17,483 18,200 19,498 21,500 21,500 21,500 

VND /USD, average 16,096 16,759 18,317 19,260 20,953 21,500 21,500 

VND /EUR, end-year 23,385 24,301 26,026 26,127 30,960 30,960 30,960 

VND /EUR, average 22,414 24,943 25,674 25,432 29,860 30,960 30,960 







Net FDI (USDbn) 8.0 11.5 10.0 11.0 10.0 11.0 14.0 

Net FDI (% GDP) 11.3 12.7 10.7 10.8 8.0 7.6 8.5 











Consolidated government balance (% GDP) -5.7 -4.6 -7.0 -5.5 -3.9 -3.8 -3.7 

Primary balance (% GDP) -0.8 0.3 -7.4 -4.5 -2.9 -2.8 -2.7 

Gross public domestic debt (VND trn) 11.8 14.5 19.2 22.2 24.3 26.0 29.4 




Gross public sector debt (% GDP)* 44.6 42.9 51.2 52.8 51.5 51.0 51.3 

Macroprudential indicator 

Total credit/GDP (%, year end) 93.4 90.2 112.7 118.0 na na na 

Loan/deposit ratio 94.7 96.7 103.9 105.4 na na na 

Stock market capitalisation/GDP (%) 43.7 14.2 36.0 36.3 na na na 



91

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Notes 

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Notes 

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Notes 

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Disclosure appendix 

Analyst Certification 

The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the 

opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their 

personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific 

recommendation(s) or views contained in this research report: Frederic Neumann, Qu Hongbin, Donna Kwok, Paul Bloxham, 

Leif Eskesen and Trinh Nguyen 

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Additional disclosures 

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95

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Disclaimer 

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96

Main contributors 


Co-Head of Asian Economic Research 

The Hongkong and Shanghai Banking Corporation Limited (HK) 

+852 2822 4556 


Frederic Neumann, PhD, is Managing Director and Co-Head of Asian Economic Research, based in Hong Kong. Before joining HSBC, Frederic was an 

adjunct professor at a number of US universities, including Johns Hopkins University, teaching graduate courses on Asian sovereign risk analysis, 

financial markets, monetary policy, and Southeast Asian political culture. He also served as a consultant to international organizations and governments, 

and as a research associate of the Institute for International Economics in Washington, DC. A former Fulbright scholar, Frederic Neumann holds a PhD in 

International Economics and Asian Studies. 

Qu Hongbin 

Co-Head of Asian Economic Research, Chief China Economist 


+852 2822 2025 


Qu Hongbin is Managing Director, Co-Head of Asian Economics Research, and Chief Economist for Greater China. He has been an economist in financial 

markets for 17 years, the past eight at HSBC. Hongbin is also a deputy director of research at the China Banking Association. He previously worked as a 

senior manager at a leading Chinese bank and other Chinese institutions. 

Leif Eskesen 

Chief Economist, India & ASEAN 

The Hongkong and Shanghai Banking Corporation Limited (Singapore) 

+65 6658 8782 


Leif Eskesen joined HSBC in October 2010 as Chief Economist for India and ASEAN and is based in Singapore. Before joining HSBC, he worked for 

close to 10 years at the International Monetary Fund’s headquarters in Washington, DC. In addition to macroeconomic and financial sector analysis, his 

responsibilities included assessing macroeconomic and structural policies and discussing policy priorities with country authorities. Leif has also held 

positions at Danmarks Nationalbank and one of Denmark’s large commercial banks. He has published a number of papers across a wide range of topics, 

including fiscal policy and labour market issues. He holds a master’s degree in economics from the University of Aarhus, Denmark. 

Paul Bloxham 

Chief Economist, Australia & New Zealand 

HSBC Bank Australia Ltd (Sydney) 

+612 9255 2635 


Paul joined HSBC in late 2010 as Chief Economist for Australia and New Zealand. Prior to this, he spent almost 12 years working as an economist at the 

Reserve Bank of Australia, where he held a range of different roles in the Economic Analysis Department. These included heading up the overseas 

economies and financial conditions sections, and working in the domestic forecasting and prices areas. Paul has published a number of papers, including 

on housing and household finances, as well as on asset prices and monetary policy. Paul holds a Masters degree in public financial policy from the London 

School of Economics. 

Donna Kwok 

Economist, Greater China 


+852 2996 6621 


Donna Kwok is a Greater China Economist for HSBC Global Research, based in Hong Kong. Before joining HSBC in 2010, Ms Kwok worked as an economist for 

the Hong Kong-China equities research arm of a global equities research provider. Prior to that, she was East Asia analyst at Strategic Forecasting Inc. (US) and 

a strategy consultant at Deloitte Consulting (London). Ms Kwok holds a Master of Arts in International Relations (Economics and China Studies) from the 

Johns Hopkins University School of Advanced International Studies, and a Bachelor of Arts (Hons) in Economics and Management from Oxford University. 

Sun Junwei 

Economist 

Sun Junwei is an economist for China on the Asian Economics team. Prior to this, she worked as an economic analyst at a leading US bank and in the 

public sector. Junwei holds an MSc in Economics from the London School of Economics and a BA in Economics from Peking University. 

Trinh Nguyen 

Economist 


+852 2822 6975 


Trinh joined HSBC in August 2011, primarily covering the Philippines and Vietnam economies. Prior to HSBC, she worked as a consultant for the World Bank 

Group researching foreign direct investment and skills development in Washington, DC. She holds an MA in International Affairs and International 

Economics from Johns Hopkins University. 

Ronald Man 

Economist 


+852 2996 6571 

ronaldman@hsbc.com.hk 

Ronald Man is a North Asia Economist for HSBC Global Research based in Hong Kong. He has experience in various asset classes, having previously 

worked on the Fixed Income and Equity Quants teams. Ronald holds a Masters of Philosophy in Economics with Distinction from the University of 

Cambridge and a Bachelor of Science in Economics with First Class Honours from the London School of Economics and Political Science.

Asian Economics Quarterly-Will Asia crack?

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