20090112 UBS Greater China Conference 2009 China The Changing Dynamics

Our guide to Chinese monthly data – what the numbers are, what they mean,
and our outlook going forward:
Overview and summary . . . . . . . . . . . . . . . . 22
UBS activity indicators . . . . . . . . . . . . . . . . 23
Business indicators . . . . . . . . . . . . . . . . 24
Inflation . . . . . . . . . . . . . . . . 25
Money and credit . . . . . . . . . . . . . . . . 26
Base money and sterilization . . . . . . . . . . . . . . . . 27
Fixed asset investment . . . . . . . . . . . . . . . . 28
Industrial production . . . . . . . . . . . . . . . . 29
Industrial inventories . . . . . . . . . . . . . . . . 30
Industrial profits . . . . . . . . . . . . . . . . 31
Consumption and retail . . . . . . . . . . . . . . . . 33
Property and construction . . . . . . . . . . . . . . . . 34
Trade . . . . . . . . . . . . . . . . 35
FDI . . . . . . . . . . . . . . . . 37
FX reserves and capital flows . . . . . . . . . . . . . . . . 38
Exchange rate . . . . . . . . . . . . . . . . 39
Financial markets . . . . . . . . . . . . . . . . 40
Data tables . . . . . . . . . . . . . . . . 41

Overview and summary
Data from the last couple of months show that:
• Domestic demand continued to weaken on account of falling construction activity, and exports took a
nose dive as economies outside of the US grinded to a halt
• Our physical indicators point to a sharper deceleration of industry-related activity than in the rest of the
economy, and industrial profits dropped as heavy industrial margins got squeezed
• As deflationary pressure rose, the government has gone all out in adopting policy stimulus, rolling out
major fiscal stimulus and monetary easing, and is actively promoting property sector development
Both domestic demand and exports slowed sharply. Industrial production growth and construction activity fell
further in November while export growth collapsed. The fall in demand especially from Europe and commodity
exporting countries point to a continued negative export growth in the coming months. This is expected to result in a
decline in export-related manufacturing investment and job losses. Our physical activity index dropped sharply, led
by the slump in construction activity and steel production, which is consistent with a fall in electricity consumption.
Production cuts and de-stocking are expected to last at least a few more months, before increased infrastructure
spending start to be reflected in recovering demand. Recent property sector policies should help to bring about a
recovery in investment, but only in H2 2009. We see GDP growth to trough in Q1/Q2 2009, but recover in H2, with
the annual average above 7%.
Rapid disinflation could turn into deflation. Headline CPI inflation dropped to 2.4% in November as pork price fell
and other food prices stabilized. The collapse of global commodity prices also helped PPI inflation to freefall, as did
weaker domestic and external demand. Fallen food and energy prices could lead to negative headline CPI inflation in
the first few months of 2009, and core inflation is also likely to face downward pressure. The government has raised
procurement prices for grain, and could raise other utilities and resource prices modestly in 2009. On balance, we see
a rising risk of deflation but still expect average headline CPI to remain positive in 2009.
Strong policy responses. Placing growth as the top priority, the government has rolled out policy stimulus from all
key areas. The fiscal stimulus package concentrates on infrastructure investment and other constructions, which is
expected to help put a floor on demand for construction related products. On monetary policy, the government has
lifted the credit quota, cut interest rates aggressively, pumped liquidity into the system and announced a series of
measures to boost bank lending and financial leverage. Measures have also been adopted to promote property
demand and real estate investment. Other measures include tax cuts benefiting corporate and exporters, and increased
social spending and transfer payment for the poor to mitigate the impact of rising unemployment.