China Macro View Sector Impacts of Policy Unwind $FXI

China Economics

January-February economic data – Opportunity to assess growth momentum free of Lunar New Year
effect: China will report a complete set of economic data for January-February next week, including such items as
retail sales, industrial production and fixed asset investment, which were omitted from the January
releases. The aggregate data for the first two months will be useful in assessing the latest growth momentum free
of the distortionary effects of the timing of the Lunar New Year (February this year vs. January last year). We are
hopeful of further evidence of robust, yet not explosive, growth momentum, with moderate inflationary pressures,
consistent with our central-case ‘Goldilocks’ scenario envisaged for this year.

Trade – Further pick-up in growth momentum: We are hopeful of a further pick-up in export growth in
February, despite the holiday, on the back of the weak results in the year-ago period. We forecast 28% YoY
export growth, up from 21% in January. We expect the surge in imports to be sustained (we forecast +42%),
although slower than that in January, partly contributed by the uptrend in import prices. With China’s relative
demand strength vs. the rest of the world (hence growth in imports is outpacing that of exports), we see the trade
surplus remaining under pressure this year, after shrinking by a third in 2009. We may even see a small
deficit in February. Aggregating the first two months, we see export and import growth averaging 24% and 62%,
respectively, up from 18% and 56% in December.

Monetary data – Downsized lending in February after RRR hike and due to holiday effect: In response
to two RRR hikes (January 12 and February 12), as well as the holiday, we believe that new loan creation likely
downsized noticeably to around Rmb600 bn in February (Rmb1.39 trn in January). This brings total new loans in
the first two months to just under Rmb2 trn, down 44% YoY. This implies outstanding loan growth normalizing
to 26.9% YoY (+29.3% in January), and M2 growth easing to 23.6% (+26% in January).

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China Macro View Sector Impacts of Policy Unwind -