Left Brain Right B - the DBS Vickers Securities Equities Research

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Regional Equity Strategy 4Q 2009 Country Assessment overcapacity problems in the long-run. Understanding the stock market may find it too early to start pricing in the risk of potential non-performing loans in a few years time, there seems to be a need for fine-tuning of the pace and intensity of new credit creation. China fixed asset investments RMB m % 3,000,000 45 2,500,000 40 35 2,000,000 30 1,500,000 25 20 1,000,000 15 500,000 10 5 0 0 Source: CEIC, Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 China FAI Yoy % growth Pre-mature for material tightening expectation We continue to believe stock market fear towards material liquidity tightening in China in the near future is pre-mature. China will remain passive, awaiting concrete evidence of a sustainable US economic recovery, in determining the timing of liquidity tightening. China export US$m % 150,000 60 50 100,000 40 30 50,000 20 10 0 0 (10) (50,000) (20) (30) (100,000) (40) Source: CEIC, Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 China exports Yoy % growth China utilized FDI US$m % 27,000 120 22,000 100 17,000 80 60 12,000 40 7,000 20 2,000 0 (3,000) (20) (8,000) (40) (13,000) (60) Source: CEIC, Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 China utilized FDI Yoy % growth The availability of short-term loans at low interest rates encourages individuals and corporates to take speculative risks in both the equity and property markets, which will likely be the focus of any Chinese policy shift. The sharp 28% YoY jump in corporate deposits alongside the 27% YoY fall in SOE profits in the first half of the year imply that the surge of funds at corporate accounts most likely originated from bank credit. China loan growth 2008: 4,904 2009F: 9,208 2010F: 6,524 (RMBbn) 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 (200) (400) 1Q09: 4,580 (50% of total) 2Q09: 2,787 (30% of total) 3Q09F: 1,100 (12% of total) 4Q09F: 742 (8% of total) 804 243 283 464 319 332 382 272 375 182 477 772 592 665 356 410 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Source: CEIC, DBS Vickers 1,620 1,070 1,890 Retail Medium/LT & other enterprise Discounted bills ST enterprise loans 1,530 Page 67
Regional Equity Strategy 4Q 2009 Country Assessment Our economist is confident that the Chinese authorities will not slow down medium-to-long term loans (tenors ranging from 3yrs-5yrs) too much as 52% of outstanding loans in the state banking sector were used for financing long-term fiscal projects. Sudden withdrawal of credit support will jeopardize the progress of these projects and create enormous amounts of economic wastage. In fact, projects such as railway construction will not start to yield economic value-added until they are completed and fully functional. As such, our economist does not expect as increase in interest rates nor reserve requirement ratio for the remainder of the year. The CNY should also remain stable and trade in a tight range in 4Q09. China M1 and M2 growth % 30 25 20 15 10 5 0 Jan-00 Jan-01 Source: CEIC Jan-02 Jan-03 Jan-04 M1 Jan-05 Jan-06 Retail consumption growth remains stable Jan-07 M2 Jan-08 Jan-09 Retail sales growth has been relatively stable at around 15% YoY in the past few months despite a series of favourable policies, eg subsidizing home appliance purchases for rural areas. Chinese consumers are still saving despite economic and wage growths. Saving deposits are still advancing at an average rate of 29% YoY in the first seven months of this year, up significantly from 11.3% YoY in the same period last year. Such strong saving bias amidst a low interest rate environment suggests that it is difficult to rely solely on private consumption to propel economic growth in the short-run. China retail sales RMB bn % 1,200 25 1,000 800 600 400 200 0 Jan-07 Source: CEIC, Apr-07 Jul-07 Oct-07 Jan-08 China Retail Sales Hong Kong quick turnaround Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Yoy % growth While a low-interest rate environment may be instrumental in driving a quick economic turnaround, the strong inflow of liquidity from mainland China as a partial result of its lax credit policy may play an even bigger role. Downward price adjustment in the current downturn has been the mildest amongst other major crisis in the past decade In the near-term, both the Fed and the PBOC are likely to refrain from raising interest rates, not until they see sustainable domestic-demand recovery. Under the growth assumptions of 10% (QoQ, saar) and 5% (QoQ, saar) in 3Q09 and 4Q09 respectively, projection of real GDP growth for 2009 has been revised upward by our economist to -2.4% YoY from the previous forecast of -6.5% YoY. It is expected to continue to grow at 5.5% YoY in 2010. Jul-09 Material earnings upgrade based on mid-cycle outlook Our analysts have upgraded the earnings of various sectors based on mid-cycle outlook, which is consistent with our regional strategist’s outlook. Within the HS Index, the biggest upward adjustment came from Banking and Property sectors while Commodity, Banking and Consumer sectors were upgraded the most among the HSCEI constituents. 20 15 10 5 0 Page 68
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Left Brain Right B - the DBS Vickers Securities Equities Research

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