Headlines Belie Underlying Resilience


Although several key headline indicators registered a decline in year-over-year growth rates from the
high levels achieved in late last year and early this year, in part reflecting the base effect, underlying
growth momentum is still holding up reasonably well as demonstrated by resilient sequential growth
rates.
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Leading and sentiment indicators have started to roll over on the back of sharp rebound (pp 7-9).
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Moderation in fixed-asset investment (pp. 20-22) reflects not only the gradual exit of policy stimulus but also the high
base effects, as Chinese authorities have tightened controls over newly started FAI projects since the beginning of
this year (p. 21).
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Despite the dark cloud of sovereign debt gathering over Euroland, export growth came in stronger-than-expected,
reflecting ongoing global cyclical recovery in general and strength in EM economies in particular (pp. 33-39).
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The weaker-than-expected industrial production was mainly explained by seasonality and base effect (pp. 23-25),
while sequential growth has held up well (p 6). Industrial production remained broadly in good shape, in part
supported by external demand (p 23).
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Continued improvement in labor market conditions (p 26) and household income (pp 27-28), together with high
consumer confidence (p 8), underpin the resilience of retail sales (pp. 29-30).
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While CPI and PPI inflation have been edging up (pp 12 - 13), the underlying momentum is waning.
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Despite significant slowdown in property sales, property completed and new starts continued to accelerate, pointing to
limited downside to real estate investment growth but much downside to average property prices which are yet to
soften meaningfully despite austerity measures (pp 44-46).

Economic and policy outlook: in light of the recent de-peg of Renminbi from USD, we change our interest call from
“no more than one rate hike in 2H10” to “no rate hikes through 2010”. We expect the USD/CNY spot rate to reach 6.60
by end 2010 and 6.20 by end 2011. Since the inflation outlook will likely be even more benign than we originally
envisaged, we attach a high probability that the target of new bank lending of Rmb7.5tn for 2010 could be revised upward
by 4Q10. We maintain our call for a Goldilocks scenario in 2010, featuring 11% GDP growth and 3.2% average CPI
inflation, while noting that the balance of risks on both fronts is tilted slightly to the downside.