From deflation to inflation
􀂃 The Chinese economy has been in a strong V-shaped recovery since March. GDP
growth accelerated from the bottom 6.1% in 1Q, to 7.9% in 2Q, and 8.9% in 3Q;
resulting in 7.7% growth for the first three quarters. The growth acceleration is mirrored
by the improvement of PMI, industrial production and power generation/consumption.
Because of a low base in 4Q last year, GDP growth should exceed China’s 2009 target
of 8%.
􀂃 With the growth target presumably achieved, policymakers are urged to look at the sideeffects
of the stimulation policy adopted since October 2008. Excessive liquidity, from
the extremely loose monetary policy, together with less-promising agricultural supply
and a rise in commodity prices, have substantially increased inflation concerns, despite
the fact that numerous price indexes still point to deflation at this stage.
􀂃 Debating whether the unprecedented stimulation policy should continue has intensified
since July. As a compromise, on 21 October, the Chinese State Council changed its
policy stance. It shifted its target from “growth only”, to balanced and steady high growth;
to restructure production capacity and to ward off with inflation expectations.
􀂃 Policy adjustments: Since July, the monetary authorities have started to tighten banks’
new loans. CBRC demands all commercial banks set controls over new loans and
toughen lending conditions in 4Q. Regulations and rules have been reinforced or
intensified. Meanwhile, the central government aims to correct investment abuse and
funding chaos nationwide, and is determined to control overcapacity. Policy risks would
be the cloud over stock market performance.
􀂃 However, we expect growth to continue accelerating: new investment projects will
continue to propel growth, and exports are expected to regain positive growth from
November (because world economic performance is better than expected and from the
low base effect). We expect GDP to accelerate from 8.7% in 2009 to 9.6% in 2010.
􀂃 As developers have lightened their inventory and there is excessive liquidity in the
market, property prices are likely to stay firm. But investors and speculators have
stockpiled since 2Q09, bringing forward investments, so housing sales may be slow in
the year to come. Property stagflation will likely be the outstanding feature.

Contents
1) 8% Growth Target Achieved .................................................................................................................................................... 4
Industrial production momentum returns............................................................................................................ 4
Domestic demand leads the charge................................................................................................................... 5
2) Inflation concern rising ............................................................................................................................................................ 9
3) Policy adjustment on the move ............................................................................................................................................. 12
4) RMB stabilization amid hot money surge............................................................................................................................. 14
5) Forecast: Inflation revising up............................................................................................................................................... 16
6) Macroeconomic monitors ...................................................................................................................................................... 19
7) Appendices.............................................................................................................................................................................. 37
1. 12-month major economic indicators ........................................................................................................... 37
2. 12-month major industrial products.............................................................................................................. 39
3. Industrial profitability.................................................................................................................................... 40
4. Urban fixed-asset-investment growth by sector........................................................................................... 41
5. Key economic forecasts ............................................................................................................................... 42