asia economic and stock market outlook leading global growth, even as oecd momentum ebbs

Asia Economic and Stock Market Outlook

Leading global growth, even as OECD momentum ebbs

August 2010

Prasenjit K. Basu, Chief Economist (Asia ex-Japan), Daiwa Capital MarketsTel: (65) 6321 3069

E-mail: [email protected]

2

ISM new orders and OECD CLI both suggest Asian exports in 2010 will expand at their fastest pace in 20 years

The OECD composite leading indicator has been rising at its fastest pace in 20 years. We expect intra-emerging-market (EM) demand to provide an additional fillip to demand for Asia’s exports, ensuring that they rise in 2010 at their fastest pace in two decades.

With ISM new orders expanding sharply in 1H10 (and US inventories low), we forecast Asian exports to the US to rise by 15-20% YoY through the rest of 2010, before decelerating at the beginning of 2011. We expect Asian imports to outpace exports this year, boosting intra-Asian exports and ensuring a powerful acceleration in Asian real GDP this year. Next year, growth will depend more on domestic demand, with exports propped up mainly by intra-EM demand.

Source: CEIC, Thomson Reuters, Daiwa Source: CEIC, Daiwa

OECD CLI recovering, but bigger boost likely from intra-EM demand

(40)

(30)

(20)

(10)

0

10

20

30

40

50

Nov -89 Nov -92 Nov -95 Nov -98 Nov -01 Nov -04 Nov -07 Nov -10

(12)

(8)

(4)

0

4

8

12

Ex ports: Asia-9: YoY%: 3mma (LHS) OECD CLI (12 mth rate): 6 m lag (RHS)

US imports from Asia to moderate next year, after double-digit growth in 2010

22

32

42

52

62

72

Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11

(30)

(20)

(10)

0

10

20

30

US ISM new orders (6m lag, LHS) US imports from Asia-10 (% YoY, 3mma) (RHS)

3

Private consumption in EM (Asia10+EM6) is three quarters of that in the US, but increasing three times as fast

Non-Japan Asia-10 plus EM6 (Brazil, Russia, Mexico, South Africa, Argentina and Turkey) have seen private-consumption expenditure (PCE) increase at more than twice the pace of the US PCE since 2003 (and nearly three times that for 2008). We believe PCE growth in the Asia-10+EM6 should outpace that of the US considerably over the next five years.

Asia10+EM’s private consumption is about three quarters of that in the US. Even with our expectation of private consumption in the US remaining weak from 2011-14, we believe there will be ample consumption growth available in the emerging markets – not replacing the US completely, but becoming a substantial substitute for it.

Source: CEIC, Thomson Reuters, Daiwa Source: CEIC, Thomson Reuters, Daiwa

Aggregate private consumption expenditure

0

2,000

4,000

6,000

8,000

10,000

12,000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008(10)

(5)

0

5

10

15

20

25

Asia-10+EM6: US$bn (LHS) US: US$bn (LHS)

Asia-10+EM6: YoY% (RHS) US: YoY% (RHS)

Aggregate private consumption expenditure (as a % of US PCE)

102030405060708090

100

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Asia-10+BRM Asia-10 Asia-11 Asia-10+EM6

4

Asia’s exports less dependent on the OECD markets, and much more driven by intra-Asia demand

Asia is not immune to an OECD recession, but its dependence on OECD markets has declined, with an increasing share of exports going to emerging economies.

Medium-term weakness in OECD demand will probably hurt Asia, but barely 30% of Asia-9’s exports go to OECD markets, while 60.3% goes to Asia (including Japan), and nearly two-thirds goes to non-OECD emerging economies. China is more dependent on the OECD, but over half of its exports go to non-OECD economies too.

Given the large current-account surpluses, we think Asia has ample room to boost domestic demand in 2010 and in subsequent years.

Source: CEIC, Daiwa; Asia-9 excludes China Note: EU = European Union, OPEC = Organization of Petroleum Exporting Countries, BRM = Brazil, Russia and Mexico

1997 2007 2009 1997 2007 2009 1997 2007 2009 1997 2007 2009 1997 2007 2009

China 17.9 19.1 18.4 42.2 38.2 39.2 17.4 8.4 8.2 13.0 20.1 19.7 3.9 8.1 9.4HK 21.7 13.7 11.6 47.2 61.1 64.3 6.1 4.5 4.4 14.7 13.5 12.5 2.3 2.2 2.2India 18.4 13.5 11.3 17.2 28.1 27.5 5.3 2.2 1.8 23.9 21.3 20.3 10.8 18.1 23.8Indonesia 13.4 10.2 9.3 36.6 46.1 52.4 23.4 20.7 15.9 16.5 11.3 11.2 4.1 4.3 4.0Korea 15.9 12.3 10.4 38.6 45.5 48.3 10.8 7.1 6.0 12.4 14.8 12.8 6.7 10.3 11.6Malaysia 18.4 15.6 10.9 48.3 50.2 54.5 12.6 9.1 9.8 14.7 11.7 11.3 2.7 4.3 5.8Philippines 34.9 17.0 17.7 25.8 46.9 40.1 16.6 14.5 16.1 18.0 17.0 20.5 1.0 1.4 2.1Singapore 18.4 8.8 6.5 52.8 64.9 66.6 7.1 4.8 4.5 14.1 10.7 9.5 2.8 2.9 3.4Taiwan 24.2 13.0 11.6 40.8 60.2 61.7 9.6 6.5 7.1 14.4 10.9 10.4 NA 3.1 3.0Thailand 19.0 12.8 11.0 37.3 41.2 42.0 14.8 12.0 10.4 15.7 14.1 11.9 3.2 4.9 6.2

Asia-10 19.5 15.1 13.6 42.4 46.7 47.9 11.5 7.8 7.4 14.5 16.0 15.4 3.9 6.7 8.0

Asia-9 19.8 12.5 10.4 42.5 52.0 53.8 10.2 7.4 6.8 14.9 13.4 12.5 3.9 5.8 7.1

% of total exports to OPEC+BRM% of total exports to US

% of total exports to Asia ex-Japan % of total exports to Japan % of total exports to EU

5

Asia: not a consumer market, did you say?

In 2009, 13.6m automobiles were sold in China – almost a seven-fold increase on the 2m units sold in 2000. (Korea recorded a similar surge in sales from 1986-96, although Korea’s per capita GDP in 1986 was similar to China’s in 2007.) China’s savings rate is high – but declining slightly from its lofty levels – and consumption is thus rising faster than the rapid pace of nominal income growth.

India also has a high savings rate (35%), but consumption is rising rapidly there too: cellular-phone subscribers have increased 250-fold over the past decade. As China does not export cars (but imports components), and India produces few handsets, these countries’ strengthening demand for these products generates imports from the rest of Asia.

Source: CEIC, Daiwa Source: CEIC, Daiwa

China: automobile sales have risen 7-fold over the past 9 years

0

500,000

1,000,000

1,500,000

2,000,000

May -00 May -02 May -04 May -06 May -08 May -10

Automobile sales (unit) Automobile sales: 12mMA

India: cellular-phone subscriptions expanded 250-fold in the last decade;

still rising rapidly

0

100,000,000

200,000,000

300,000,000

400,000,000

500,000,000

Jun-00 Jun-02 Jun-04 Jun-06 Jun-08 Jun-10

0

20

40

60

80

100

120

140

Cellular subscribers: units (LHS) Cellular subscribers: YoY% (RHS)

6

Risks from the EU-periphery contained until end-2011; moral hazard reduced through IMF conditionality

We believe there is little scope for contagion to Asia from the EU periphery via the external debt route, as seven Asian economies – China, India, Malaysia, Singapore, Hong Kong, Taiwan, Thailand – are net creditors to the world. Foreign reserves exceed short-term external debt in the rest of Asia.

ECB purchases of government bonds (QE) should not be inflationary, in our view, given that M3 growth is negative in the Eurozone: money multipliers have collapsed in both the EU and US, and core CPI inflation is below 1% YoY, so central banks have ample room to boost base money. Moral hazard from the massive EU rescue package is reduced via the involvement of the IMF, and the necessity to meet IMF/EU surveillance targets before withdrawing ‘rescue’ funds from the pool.


US: money multiplier still falling sharply

2

4

6

8

10

12

14


(20)

0

20

40

60

80

100

120

Money Multiplier (M2x ): LHS Base Money : YoY% Money supply : M2: YoY%

EU: M3 declining despite ex panding monetary base

4

6

8

10

12

14

Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10

(20)

(10)

0

10

20

30

40

50

Money multiplier (x ): LHS Base money : YoY% Money supply : M3: YoY%

7

The crucial IT sector looks set for a powerful rebound in 2010 after nine sluggish years

US new orders for IT products (computers and electronic items) are a good leading indicator of US imports from the six Asia economies that depend on IT exports (Singapore, Taiwan, Malaysia, the Philippines, Thailand and Korea – the last is the most diversified out of IT). US IT new orders have bottomed out – the actual level of orders is still 30% lower than that for 2000 – and we expect the strength of new orders to be aided by low inventories. Increased demand from the US has sparked a recovery in Asian electronics exports in the past two quarters.

Last year, there was a major IT-inventory adjustment, which appears to have been prolonged by the credit crisis. However, we think the long-awaited turnaround has now begun, and looks likely to be reinforced by a long-delayed replacement cycle in IT hardware.

Source: CEIC, Daiwa Source: US Census Bureau, CEIC, Daiwa

IT new orders growth has peaked, as inventories

begin to rise

(40)

(30)

(20)

(10)0

10

20

30

40

Jun-96 Jun-98 Jun-00 Jun-02 Jun-04 Jun-06 Jun-08 Jun-10

(YoY %)

US Inv entories: Computer & Electronic products

US New Orders: Computer & Electronic products

Asia's electronics exports to stay robust with strong

IT orders

(30)

(20)

(10)

0

10

20

30

Sep-96 Sep-98 Sep-00 Sep-02 Sep-04 Sep-06 Sep-08 Sep-10

(40)

(30)

(20)

(10)

0

10

20

30

US imports from Asia-6, YoY% 3mma (LHS)

US Electronic NO, Yoy % 3mLag (RHS)

8

Food-driven inflation a near-term threat; risk of higher asset and goods inflation from excessive capital inflows in 2010

China and (especially) India switched quickly from deflation to inflation in 4Q09. The major culprit (as in 2007) was food inflation (6.1% YoY in China for May 2010, 16.5% YoY in India). Smaller Asia economies (Singapore, Taiwan, Thailand, Malaysia) made the same switch to positive inflation in 1Q10. Korea and Indonesia avoided deflation altogether, but inflation remains tame except in Chindia.

Rapid monetary growth in China has contributed to the rise in inflation, but monetary aggregates have been muted elsewhere in Asia. Given its already-high inflation rate, we expect India to raise policy rates 50bp by end-July. In China, we forecast another 50-basis-point hike in the reserve requirement and a 54-basis-point rise in the policy rate. We expect other central banks in Asia to tighten in 2H10.


Headline inflation (YoY%)

(5)

0

5

10

15

20

Jul-00 Jul-02 Jul-04 Jul-06 Jul-08 Jul-10

China India Indonesia Korea

Broad money supply

(YoY%)

0

5

10

15

20

25

30


China (M2) India (M3) Indonesia (M2) Korea (M2)

9

Global imbalances: Asia is helping to redress them (a little)

Asia’s large current-account surplus was arguably a major contributor to the excess-liquidity that led to the global crisis. The US deficit has shrunk over the past year, as has China’s current-account surplus (which contracted to 6% of GDP for 2009, from 9.8% for 2008).

The rest of Asia’s surplus widened in 2009, so the region as a whole recorded scant reduction in its surplus. As domestic demand rebounds in 2010, we expect Asia’s surplus to shrink further, to a still-healthy 4.5% of GDP.

Structural surpluses in Southeast Asia are partly a consequence of an investment drought. China’s low cost of capital (and under-valued Renminbi) has resulted in an investment boom there, and an excessively capital-intensive pattern of economic growth. To address such internal imbalances, we expect China to allow the Renminbi to appreciate to US$:Rmb6.45 by the end of 2010.


Gross fixed-capital formation: 1996-2008 (% change)

-150 -100 -50 0 50 100 150 200 250 300 350

Thailand (-27.4%)Japan (-18.0%)

Malaysia (-4.3%)HK (+9.6%)

Korea (+13.2%)Philippines (+19.9%)

Taiwan (+23.9%)Indonesia (+24.2%)

OECD (+41.2%)Eurozone (+41.4%)

Singapore (+48.1%)US (+49.9%)

India (+222.8%)China (+305.3%)

Asia-10's current account surplus shrinks, as does the US's deficit

(as % of GDP, 4Q rolling sum)

(8)

(4)

0

4

8

12

Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09

Asia-10 ASEAN-4 + Korea US

10

Asian REERs broadly stable over time; the argument for Renminbi appreciation rests mainly on addressing internal imbalances


The currencies in Asia are all stronger against the US dollar than at their trough in 1997-98. However, only the Singapore dollar is stronger now than in 1993 (and even it has appreciated by less than 1% a year against the US dollar); the Rupiah, Rupee and Won are the weakest relative to their 1993 levels.

The real effective exchange rates (REERs) of all the currencies in Asia have been broadly stable since 1998; China and India’s REERs are close to 1993 levels (although they have recorded more real effective appreciation since 1996 than the other currencies).

The argument for China to appreciate the Renminbi is not that its REER has weakened. However, rapid productivity growth (relative to the rest of the world), driven by much higher investment spending in China, requires China’s real exchange rate to appreciate. In our view, the more compelling argument for Renminbi appreciation is the need to address internal imbalances (over-investment, export-reliance, under-consumption).

Asian exchange rates vs US$: 1993 =100

50

80

110

140

170

200

230

Jul-94 Jul-96 Jul-98 Jul-00 Jul-02 Jul-04 Jul-06 Jul-08 Jul-10

China India Korea Malaysia Singapore Taiwan Thailand

Asian REERs (Jan96=100): Broadly stable for the past decade

20

40

60

80

100

120

140

Jun-94 Jun-96 Jun-98 Jun-00 Jun-02 Jun-04 Jun-06 Jun-08 Jun-10

China India Indonesia Korea

Malaysia Singapore Taiwan Thailand

11

US and Japan had prolonged bear markets after a five-fold surge in market cap

US equity-market capitalisation increased more than five-fold in the decade ended August 2000, but only surpassed those levels again briefly (June-October 2007) before falling back. In effect, the US has been in an eight-year bear market since August 2000 – a lot like Japan, which recorded a similar five-fold surge in the 1979-89 period followed by a decade-long bear market until the end of 1999.

The key difference between the two economies lies in their approach to monetary policy – the Bank of Japan (BoJ) tightened policy to deflate the asset bubble entirely, while the Federal Reserve has kept real interest rates low.

Market capitalisation-to-GDP ratios are similar across developed and developing countries, with the ratios for most countries converging toward one, although there is no reason for this to be true always. Emerging markets see manifold increases in market cap typically (as Japan did from 1951-80, before the 1980s increase).


Market Cap to GDP Ratios

0

1

1

2

2

3

Dec-89 Mar-92 Jun-94 Sep-96 Dec-98 Mar-01 Jun-03 Sep-05 Dec-07 Mar-10

US UK Japan China

Brazil India Russia China+HK

Market Capitalisation trajectories (US$bn)

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Dec-

89

Jul-

91

Feb-

93

Sep-

94

Apr-

96

Nov -

97

Jun-

99

Jan-

01

Aug-

02

Mar-

04

Oct-

05

May -

07

Dec-

08

Jul-

10

US UK Japan China+HK India China (A+B+H)

12

Non-Japan Asia should narrow its market-capitalisation gap with the US/Japan over the medium term

High savings rates (over 50% for China, 35% for India, and 34% on average for the other economies in Asia) and stable banking systems with robust domestic deposit bases should provide the platform for strong economic growth over the medium term for Asia’s 10 big economies.

Superior medium-term growth prospects for emerging economies should ensure faster increases in their market capitalisations, as compared with those of developed economies. The market capitalisations of the BRIC economies look set to narrow the gap with the US’s market cap over the medium term – and in fact did so quite sharply in 2009.


Market Capitalization - ASEAN and East Asia

(US$bn)

0

500

1,000

1,500

2,000

2,500

3,000

Jun-92 Jun-95 Jun-98 Jun-01 Jun-04 Jun-07 Jun-10

Singapore HK Malay sia Thailand Korea Taiw an

Market Capitalization - BRICs

(US$bn)

0500

1,0001,5002,0002,5003,0003,5004,0004,5005,0005,500

Jul-92 Jul-95 Jul-98 Jul-01 Jul-04 Jul-07 Jul-10

China (A+B+H) Brazil India Russia

13

The rest of Asia has lost US market share to China, but less so over the past two years

China gained market share in the US at the expense of all of Asia (except India, which had a tiny share) from 1997-05. Since 2006 (and in 2009 in particular), China’s market-share gains have been at the expense of non-Asia economies, while the rest of Asia held its US market share stable.

China lost market share in 2008 as the Renminbi appreciated, but has resumed gaining market share with the Renminbi stable since August 2008.

All of Asia (with the exception of India) has large bilateral trade surpluses with China (including Hong Kong), and we think that mitigated the impact of the loss of market share in the US.


China has rapidly gained US market share in the past decade, less so recently (12-month

mov ing av erages)

0

5

10

15

20

May -94 May -96 May -98 May -00 May -02 May -04 May -06 May -08 May -10

(%)

ASEAN ex ports: mkt share in US China ex ports: mkt share in US

Taiw an ex ports: mkt share in US S Korea ex ports: mkt share in US

S Asia ex ports to the US: trend decline in ASEAN economies' share, India gains from a low

base

0

1

1

2

2

3

3

May -94 May -96 May -98 May -00 May -02 May -04 May -06 May -08 May -10

(%)

Malay sia ex port: mkt share in US Indonesia ex port: mkt share in US

Philippines ex ports: mkt share in US Thailand ex ports: mkt share in US

Singapore ex ports: mkt share in US India ex ports: mkt share in US

14

‘Stable disequilibrium’: China’s large surplus with the US and deficits with Asia (ex-India) both declined in 2009, but are set to widen anew

We believe China’s large deficit with Asia will increase anew now that China’s loan and investment growth is rebounding after the inventory correction in 4Q08-1Q09. Note, however, that Taiwan, Korea and Japan are the main net suppliers of capital and intermediate goods to China – and have large bilateral trade surpluses with China. ASEAN’s surplus reversed in 2009, but is rising slowly once again, while India has a deficit.

China’s large bilateral surplus with the US shrank in 2009, but looks likely to shrink less in 2010. However, China’s strong domestic demand should increase its bilateral deficits with Taiwan, Korea and Japan in 2010.


Trade surpluses w ith the US

US$m, 12m rolling sum

0

50,000

100,000

150,000

200,000

250,000

300,000

May -94 May -98 May -02 May -06 May -10

China+HK ASEAN-5 Korea+Taiw an+India

China's bilateral trade w ith Asian economies

US$m, 12 month rolling sum

(100,000)

(80,000)

(60,000)

(40,000)

(20,000)

0

20,000


ASEAN Taiw an India Japan Korea

15

The terms of trade have turned negative again – for March, import prices rose by 17.6% YoY while export prices increased by just 1.4% YoY.

Gross exports rose by 29% YoY for January-April, but net exports declined by 79% YoY. Half of the surplus decline was due to the price effect (import price inflation and export

price deflation), and the other half was due to the volume effect (domestic-demand surge driven by the stimulus).

Source: CEIC, Daiwa

Import prices rise much faster than export prices

China: global price environment turns unfavourableNet exports are shrinking

(25)(20)(15)(10)(5)

05

10152025

Jan-

05M

ar-0

5M

ay-0

5Ju

l-05

Sep-

05No

v-05

Jan-

06Ap

r-06

Jun-

06Au

g-06

Oct

-06

Dec-

06Fe

b-07

Apr-0

7Ju

n-07

Sep-

07No

v-07

Jan-

08M

ar-0

8M

ay-0

8Ju

l-08

Sep-

08De

c-08

Feb-

09Ap

r-09

Jun-

09Au

g-09

Oct

-09

Dec-

09M

ar-1

0M

ay-1

0

Export price index Import price index

(YoY %)

-ve ToT

+ve ToT -ve ToT

(100)0

100200300400500600700800900

1,000

Apr-

01Au

g-01

Dec

-01

Apr-

02Au

g-02

Dec

-02

Apr-

03Au

g-03

Dec

-03

Apr-

04Au

g-04

Dec

-04

Apr-

05Au

g-05

Dec

-05

Apr-

06Au

g-06

Dec

-06

Apr-

07Au

g-07

Dec

-07

Apr-

08Au

g-08

Dec

-08

Apr-

09Au

g-09

Dec

-09

Apr-

10

Net exports Gross exports

(Rmb bn, monthly)

16

The PPI is rising more rapidly than the CPI. It is difficult to pass on price pressure fully to consumers when supply capacity remains excessive.

Heavy industries react to the PPI, while light industries are sensitive to the CPI-PPI differentials.

Source: CEIC, Daiwa

CPI-PPI

China: industrial margins are under pressure

Industrial production

(6)

(4)

(2)

0

2

4

6

8

Apr-

99O

ct-9

9Ap

r-00

Oct

-00

Apr-

01O

ct-0

1Ap

r-02

Oct

-02

Apr-

03O

ct-0

3Ap

r-04

Oct

-04

Apr-

05O

ct-0

5Ap

r-06

Oct

-06

Apr-

07O

ct-0

7Ap

r-08

Oct

-08

Apr-

09O

ct-0

9Ap

r-10

(YoY %)

0

5

10

15

20

25

Apr-

99O

ct-9

9Ap

r-00

Oct

-00

Apr-

01O

ct-0

1Ap

r-02

Oct

-02

Apr-

03O

ct-0

3Ap

r-04

Oct

-04

Apr-

05O

ct-0

5Ap

r-06

Oct

-06

Apr-

07O

ct-0

7Ap

r-08

Oct

-08

Apr-

09O

ct-0

9Ap

r-10

Light Heavy

(YoY %)

17

FAI still rose by a sharp 25.6% YoY for 1Q10 (from a high base for 1Q09). Its contribution to GDP growth still reached 6.9 percentage points. Urban projects by local governments still increased by 27.6% YoY for January-April, while

those by the central government slowed to 10.6% YoY. Real-estate FAI accelerated to 37.6% YoY for January-April, from 19.9% YoY for 2009.

Source: CEIC, Daiwa

Central vs. local government projects

Investment demand overshoots

Growth contribution from FAI

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Apr-06Jun-06Aug-06O

ct-06Dec-06Feb-07Apr-07Jun-07Aug-07O



ct-09Dec-09Feb-10Apr-10

Central govt projects Local govt projects

(3MMA, YoY %)

-8

-6

-4

-2

0

2

4

6

8

10

12

199

0 1

991

199

2 1

993

199

4 1

995

199

6 1

997

199

8 1

999

200

0 2

001

200

2 2

003

200

4 2

005

200

6 2

007

200

8 2

009

1Q10

Final consumption Fixed asset investment Net exports

(Percentage point)

18

Money/credit growth tends to overshoot real GDP growth in a reflation cycle, because China’s monetary policy’s transmission mechanism is relatively weak – a large increase in money/credit can only have a minor impact on real economic variables.

The need for massive monetary stimulus is now over, as real GDP has picked up significantly.

Inflation is a monetary phenomenon

China: we think money and loans are still rising too rapidly

Loan growth is still too high

Source: CEIC, Daiwa

(3)

(1)

1

3

5

7

9

11

13

Apr-0

1Au

g-01

Dec-

01Ap

r-02

Aug-

02De

c-02

Apr-0

3Au

g-03

Dec-

03Ap

r-04

Aug-

04De

c-04

Apr-0

5Au

g-05

Dec-

05Ap

r-06

Aug-

06De

c-06

Apr-0

7Au

g-07

Dec-

07Ap

r-08

Aug-

08De

c-08

Apr-0

9Au

g-09

Dec-

09Ap

r-10

0

5

10

15

20

25

30

35

40

45(YoY %) (YoY %)

M1

CPI

(500)

0

500

1,000

1,500

2,000

Apr-0

0Au

g-00

Dec

-00

Apr-0

1Au

g-01

Dec

-01

Apr-0

2Au

g-02

Dec

-02

Apr-0

3Au

g-03

Dec

-03

Apr-0

4Au

g-04

Dec

-04

Apr-0

5Au

g-05

Dec

-05

Apr-0

6Au

g-06

Dec

-06

Apr-0

7Au

g-07

Dec

-07

Apr-0

8Au

g-08

Dec

-08

Apr-0

9Au

g-09

Dec

-09

Apr-1

0

(Monthly new loans, Rmb bn)

19

Source: 103-City Labour Market Survey, CEIC, Daiwa

Labour shortages are serious … … especially in the coastal provinces

In our view, the output gap has been completely closed. Exports have risen by more than 50% from the trough in 1Q09. The Rmb4tn stimulus has created millions of extra jobs, competing directly with the manufacturing sector.

More permanently, the demographic dividend is now dwindling. The surplus of young, rural labour is no longer in rich supply.

China: the labour market is tighter than in 2007-08

Demand-supply Ratio Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10

Overall 98% 98% 97% 85% 86% 88% 94% 97% 104%

Eastern 101% 99% 102% 89% 87% 90% 99% 101% 107%

Central 96% 97% 87% 82% 83% 88% 89% 92% 100%

Western 91% 94% 92% 86% 84% 80% 87% 93% 101%

Pearl River Delta 189% 145% 122% 97% 72% 81% 84% 126% 109%

Changjiang River Delta 96% - - - 89% 89% 99% 99% 100%

Bohai Rim 109% 106% 110% 90% 86% 93% 100% 95% 101%

Southeastern Fujian 99% 111% 105% 95% 92% 92% 98% 114% 127%

0

1

2

3

4

5

6

7

Mar

-01

Aug-

01Ja

n-02

Jun-

02No

v-02

Apr-0

3Se

p-03

Feb-

04Ju

l-04

Dec-

04M

ay-0

5O

ct-0

5M

ar-0

6Au

g-06

Jan-

07Ju

n-07

Nov-

07Ap

r-08

Sep-

08Fe

b-09

Jul-0

9De

c-09

60%65%70%75%80%85%

90%95%100%105%110%

Demand-supply ratio (RHS) Demand (LHS) Supply (LHS)

(m)

20

Current-account surplus and net capital inflows contribute to the emergence of a property bubble

In our view, money supply growth has been too high for too long. Capital is trapped domestically because of the closed capital account.

Mainland citizens have limited access to foreign investments, artificially increasing the appeal of domestic investments such as property.

Very low or negative real interest rates. The People’s Bank of China (PBOC) has been holding down interest rates for too long, in our view.

Local governments’ reliance on land sales for income (typically accounting for up to 50% of revenue).

Infrastructure programmes make it easier for the local governments to develop properties.

Cultural pressures encourage home ownership, particularly for men seeking a wife.

21

Pegging the Renminbi to the US dollar was problematic for China. The 2Q10 US-dollar bounce was mostly against the EUR, CHF and GBP. Oil and commodity prices

remain stubbornly high. To mitigate the impact, we believe China will have to allow the Renminbi to rise against the US dollar to US$:Rmb6.45 by end-2010, a 5% rise from the current level.

The trailing PE-ratio for the stock-market is still close to a decade-low, suggesting that the under-valued market has room to move higher by end-2010.

Source: CEIC, Daiwa

Wild swings in terms of trade

China: we expect steady Rmb appreciation vs the US dollar; the stock-market appears inexpensive

(25)(20)(15)(10)(5)

05

10152025

Jan-

05M

ar-0

5M

ay-0

5Ju

l-05

Sep-

05No

v-05

Jan-

06Ap

r-06

Jun-

06Au

g-06

Oct

-06

Dec-

06Fe

b-07

Apr-0

7Ju

n-07

Sep-

07No

v-07

Jan-

08M

ar-0

8M

ay-0

8Ju

l-08

Sep-

08De

c-08

Feb-

09Ap

r-09

Jun-

09Au

g-09

Oct

-09

Dec-

09M

ar-1

0M

ay-1

0

Export price index Import price index

(YoY %)

-ve ToT

+ve ToT -ve ToT

China: Shanghai B-share index v s trailing PE ratio

0

50

100

150

200

250

300

350

400

Jul-96 Jul-98 Jul-00 Jul-02 Jul-04 Jul-06 Jul-08 Jul-10

0

10

20

30

40

50

60

70

Shanghai Stock Ex change: B-shares index PE Ratio: B Shares (RHS)

Source: CEIC, Daiwa

22

China outlook – post-stimulus slowdown from 2Q10

Inflation pressure should continue to build for the rest of the year, unless substantial tightening can be frontloaded.

We forecast the RRR to rise by 50 basis points and interest rates to increase by 54 basis points (compared with a 216-basis-point reduction in 2H08).

The benchmark real deposit rate would still be negative. We believe real GDP growth peaked in 1Q10, and will begin to slow on the

back of more tightening, waning stimulus support, and cooling external demand.

Gross exports should do well this year, but net exports should contribute less to GDP growth. We forecast the current-account surplus to shrink from 6.1% to 2.5% of GDP this year.

Our GDP forecasts: 9.8% YoY for 2010 and 8.6% YoY for 2011. Our inflation forecasts: 3.5% YoY for 2010 and 2.5% YoY for 2011.

23

India: the global downturn slowed the economy to below-potential growth, but a strong recovery now is under way

The 9.7% YoY real GDP growth for FY06-07 was India’s strongest ever (apart from one monsoon-induced year two decades ago), and the previous year’s 9.2% YoY was the next-fastest for 50 years. After 9% YoY real GDP growth for FY07-08, the economy slowed sharply to 6.7% for FY08-09, but rebounded to rise 7.4% YoY in FY09-10. We forecast 9.3% YoY real GDP growth in FY10-11.

We think the five-year moving average of real GDP growth (8.5%) is the new potential growth rate – and will rise as the gross domestic investment rate has risen to 36% at present (from 25% seven years ago), with the recent rebound in investment reflected in the continued strength of capital-goods output and imports over the past five years (the gross domestic savings rate is at 35%).


India: real GDP growth, five- and ten-year moving averages

(6)(4)(2)02468

1012

1952

/53

1955

/56

1958

/59

1961

/62

1964

/65

1967

/68

1970

/71

1973

/74

1976

/77

1979

/80

1982

/83

1985

/86

1988

/89

1991

/92

1994

/95

1997

/98

2000

/01

2003

/04

2006

/07

2009

/10

(YoY %)

Real GDP Real GDP, 10-y ear mov ing av g. Real GDP, fiv e-y ear mov ing av g.

India: real GDP growth, five- and 10-year moving averages India: GDI moderated in the last tw o y ears but is rebounding

0

2

4

6

8

10

1955 1961 1967 1973 1979 1985 1991 1997 2003 2009

0

5

1015

20

25

3035

40

45

GDP: YoY%: 5y rMA(LHS) GDI: % of GDP (RHS)

India: GDI moderated in the last two years but is rebounding

24

India: services are structurally strong, imports decelerated with industry, but oil worsened the current account

Services account for half of GDP, and have expanded at an average pace of 9.5% annually for the past 10 years (10.2% for the past five years). The wider cross-border tradability of services bolsters their growth, as India is still a price-taker in internationally traded services. After decelerating substantially over the past 15 months, we expect Services to return to the previous decade’s trend pace. Near-5% average annual growth in agriculture over the six years before last year’s drought bolstered private consumption, as did higher civil-servant salaries. NREGA, and the shift in internal terms of trade in favour of agriculture, gave a big boost to rural consumption.

The moderation in manufacturing last year would have reduced the current-account deficit – but rising oil prices caused the deficit to widen instead (to 2.5% of GDP for the 12 months to March 2009, and high defence imports partly offset the impact of lower oil prices in FY09/10 – with the stronger-than-expected manufacturing rebound led by capital goods boosting imports too).


Cyclical manufacturing rebound gives the economy a fillip

(15)

(10)

(5)

0

5

10

15

20

Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10

(YoY % )

Real GDP Agriculture Manufacturing Services

Industrial production rebounding across the board(YoY %, 3mma)

(20)

(10)

0

10

20

30

40

50

May-98 May-00 May-02 May-04 May-06 May-08 May-10

Consumer Goods Basic Goods Capital Goods Intermediate Goods

25

India: rising net exports of services boost the current account, which should also benefit from the rising substitution of net oil imports

Rising oil imports were the key factor causing the trade deficit to balloon in 2008. With oil-import values declining, and sluggish investment spending reining in other imports, the trade deficit has contracted to a two-year low. Services exports have low import content, so they help bolster the current account directly.

Exports of goods and services (‘invisibles’) have increased 12-fold over 16 years. While the trade deficit was nearly 8% of GDP, the current-account deficit was likely to have narrowed to 0.1% of GDP for FY09-10. With the KG-6 gas and Rajasthan oil fields coming on stream, we expect India’s net oil-import bill to decline by nearly 20% for FY10-11, reducing the current-account deficit to 2.2% of GDP even as fixed-investment spending rebounds this year.


Trade deficit w idened in the past tw o quarters, w eakening the CA balance

(20)

(15)

(10)

(5)

0

5

Mar-98 Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10

Current Account: % of GDP Current Account: % of GDP, 4Q MA

Customs trade balance: % of GDP

Trade deficit w orsened in 4Q-09/10, as imports soared

(125,000)(110,000)

(95,000)(80,000)(65,000)(50,000)(35,000)(20,000)

(5,000)


(40)

(20)

0

20

40

60

80

Trade Balance, 12m rollsum, US$m (LHS) Ex ports, % YoY, 3mma (RHS)

Imports, % YoY,3mma (RHS)

26

India: rising FDI inflows bolster the BoP; lower real lending rates should ignite an investment-led acceleration in GDP

Strong FDI inflows (over 3% of GDP for FY07-08 and FY08-09) are bolstering the overall balance of payments (BoP). FDI is likely to stay strong, but portfolio flows are likely to be volatile. Foreign M&As by India corporates have been funded offshore – and remain in some difficulty amid global de-leveraging.

Inflation was negative until September 2009, but surging food prices pushed headline WPI inflation to 10.2% YoY by May 2010. However, rising food prices (up more 16.5% YoY) have mitigated the impact on rural incomes from last year’s bad monsoon. Real PLRs were at a 15-year high in September 2009, but they have declined in response to banks’ excess liquidity, especially with WPI inflation rising to 10% YoY by March 2010. Lower real PLRs are helping to ignite a strong investment-led rebound in manufacturing, which we expect to push real GDP growth to 9.3% for FY10-11 (aided also by a likely improvement in agriculture).


Strong capital inflow s boost ov erall BoP

US$m, quarterly

(15,000)

(10,000)

(5,000)

0

5,000

10,000

15,000

20,000

25,000

Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10

FDI Portfolio Inv estment Ex ternal Assistance Commercial Bank Flow s

India: Industrial growth is inversely correlated with real interest rate.

0

4

8

12

16

Jun-96 Jun-98 Jun-00 Jun-02 Jun-04 Jun-06 Jun-08 Jun-10

Industrial Production: YoY %, 3mma Real Prime Lending Rate

27

India: overvalued equities slumped in 2008, but last year’s rally made them rich again; near-term rupee weakness to end when inflation recedes

The equity market’s trailing PER is slightly above its 10-year average – despite last year’s rally – as corporate earnings held up reasonably well during the global downturn and have now begun to rebound sharply. We think the pipeline of disinvestment proceeds will restrain the upside for equity prices. However, once the 3G-spectrum auction and disinvestment pipeline is completed, the government’s borrowing requirement for the year ahead will be met comfortably without pushing 10-year bond yields much above 8%.

We expect WPI inflation to moderate by June, as grain reserves (and the strong rabi harvest) are deployed to dampen food inflation. We also expect the Rupee to rebound modestly against the US dollar by March 2011, as the current account swings back to surplus with lower oil prices. However, the recent spurt in inflation has caused the REER to rise to the top of its 15-year trading range, so near-term Rupee depreciation is likely; the Rupee rally must wait for a clear moderation in inflation to below 8% YoY.


02,0004,000

6,0008,000

10,00012,00014,000

16,00018,00020,000

Jun-92 Jun-94 Jun-96 Jun-98 Jun-00 Jun-02 Jun-04 Jun-06 Jun-08 Jun-10

51015

2025303540

455055

BSE Sensex -30 Index (LHS) PER: BSE Sensex (RHS)

India: end-2009 valuations are mildly expensive, despite robust earnings The Rupee's REER is well above its central level of the past 15 years

60

70

80

90

100

110

120

May -96 May -98 May -00 May -02 May -04 May -06 May -08 May -10

REER, FY95=100 (basket of six currencies) NEER, FY95=100 (basket of six currencies)

28

India: higher interest rates rein in industrial growth; some ‘crowding-in’ of investment as rates fall

The fiscal balance deteriorated sharply over the year to November 2009 (the ‘kitchen sink strategy’), but began moderating in December 2009 as tax revenue began to benefit from the industrial recovery. The 2010 Budget contained a credible strategy to boost revenue (2p.p. rise in excise duties, MAT raised to 18% from 15%, higher customs duties on oil/gold/silver) without sacrificing the momentum of consumption spending (by lowering effective income tax rates across the board). There were also elements of reform, with a GST now genuinely likely by April 2011, oil and fertilizer subsidies to be paid in cash, and oil-product prices up.

With credible disinvestment proceeds, and stronger revenue from the industrial acceleration (and wider service tax base) we expect the actual fiscal deficit in FY10-11 to be about 5% of GDP. By the second half of the fiscal year, the moderating borrowing requirement of the government will help crowd in more private investment (even as real PLRs stabilize) and we forecast real GDP to rise by 9.3% YoY for FY10-11, albeit with higher average WPI inflation of 7.3%.

Source: Ministry of Finance (India), DaiwaSource: CEIC, Daiwa

(INR bn) 2008-2009 Actuals

2009-2010 Budget Estimates

2009-2010 Revised Estimates

2010-2011 Budget Estimates

Revenue Receipts 5,403 6,145 5,773 6,822 Tax Revenue 4,433 4,742 4,651 5,341 Non-tax Revenue 969 1,403 1,122 1,481 Capital Receipts* 67 53 302 451Total Expenditure 8,840 10,208 10,215 11,087

Revenue Expenditure 7,938 8,972 9,064 9,587 Capital Expenditure 902 1,236 1,152 1,500Revenue Balance -2,535 -2,827 -3,291 -2,765

(% of GDP) -4.5 -4.8 -5.3 -4.0Fiscal Balance -3,370 -4,010 -4,140 -3,814

(% of GDP) -6.0 -6.8 -6.7 -5.5Primary Balance -1,448 -1,755 -1,945 -1,327 (% of GDP) -2.6 -3.0 -3.2 -1.9

India: Fiscal deterioration (of Jul08-Nov09) being reversed since Dec09

(4)

(2)

0

2

4

6

8

10

May-00 May-02 May-04 May-06 May-08 May-10

Fiscal deficit: 12mma, % GDP Primary deficit: 12mma, % GDP

29

Korea: GDP looks set to stay strong, with inflation still tame

The leading indicators (both the Leading Composite Index and the shipment-to-inventory ratio) suggest to us that economic activity is likely to rebound strongly in 2010. We forecast real GDP growth of 7% YoY for 2010.

CPI inflation has been tame (at 2.7% YoY for May 2010, versus the Bank of Korea’s [BOK] official target of 2-4%), with core CPI inflation barely edging up to 1.6% YoY. We expect Won appreciation to bear some of the burden of tightening, but we also expect the policy rate to be raised by 25 basis points in 3Q10 (with more aggressive action if Won-weakness persists).


Leading indicator suggests economy peaked in 2Q10

(10)

(5)

0

5

10

15

20

Sep-86 Sep-90 Sep-94 Sep-98 Sep-02 Sep-06 Sep-10

(YoY, %)

Leading Composite Index , YoY %, 1Q lag Real GDP, YoY %

Gradual rise in inflation prompts the first rate hike

(5)

0

5

10

15

20

25

30

Jul-96 Jul-98 Jul-00 Jul-02 Jul-04 Jul-06 Jul-08 Jul-10

(%)

CPI: YoY% Core CPI: YoY% Effectiv e ov ernight call rate

30

Korea: fiscal stimulus on the wane, offsetting improved liquidity from the rebounding trade surplus

The strong fiscal position in 1H08 allowed President Lee Myung-bak to provide a massive stimulus through lower corporate, income, inheritance, and property tax rates. Fiscal policy likely to be less accommodative this year.

Improving terms of trade and a highly competitive Won are boosting the trade balance (to a record surplus of US$41bn for 2009). After a current-account surplus of 5.6% of GDP for 2009, there is ample room for a domestic demand-led rebound – and we forecast real GDP to expand by 7% as the current-account surplus moderates to 3.8% of GDP in 2010. We think exports will recover strongly as emerging economies crank up their fiscal engines: Russia/India/Latin America now take more of Korea’s exports than the US, while China (27%) and ASEAN+Japan (20%) are the biggest markets.


Trade surplus near record highs, as ex port and imports soar

(30,000)

(20,000)

(10,000)

0

10,000

20,000

30,000

40,000

50,000

Jul-90 Jul-94 Jul-98 Jul-02 Jul-06 Jul-10

(60)

(40)

(20)

0

20

40

60

Trade balance, 12m rollsum, US$mn (LHS) Ex ports: %YoY Imports: %YoY

Fiscal easing in 1H09 w as follow ed by a gradual remov al of the stimulus in 2H09

(6,000)

(4,000)

(2,000)

0

2,000

4,000

6,000


Fiscal balance, 12mMA, (Wbn) Fiscal balance, 6mMA, (Wbn)

31

Korea: consumption looks set to recover strongly, as do facility investment and exports

Facility investment was weak for 2008, affected by the policy uncertainty that usually accompanies a new president. However, President Lee’s shift of policy focus to deregulation and economic growth (from ‘distribution’) should result in an investment-led rebound in domestic demand by 2010, aided by a stable Won and robust export prospects.

Consumer confidence is near a 10-year high. After five years of subdued private-consumption spending, we expect a powerful rebound in 2010.


Korea: Facility investment moves with exports, except during the early quarters of a new president's term

(60)

(40)(20)

020

4060

80


Exports fob, % YoY Facility investment, % YoY

(YoY, %)

Korea: Consumer sentiment suggests robust priv ate consumption in 3Q10

(6)

(2)

2

6

10

14

Sep-00 Sep-02 Sep-04 Sep-06 Sep-08 Sep-10

80

85

90

95

100

105

110

115

120

Real priv ate consumption ex p, YoY % Consumer ex pectations, 1Q lag (RHS)

(YoY, %)

32

Indonesia: we look for real GDP growth to rebound, aided by exports, domestic consumption and FDI

Private consumption (4.9%) propped up GDP growth in 2009, aided by a 15.7% YoY increase in government consumption, while fixed investment rose by a more moderate 3.3%. We expect rebounding fixed investment to boost growth in 2010.

Banks are highly liquid (with a loan-to-deposit ratio of 75.6% at the end of 2009), so there is ample scope to sustain loan growth. The fiscal deficit remains among the lowest in Asia, so we see little need for any ‘exit strategy’.


Indonesia: fiscal stimulus reversed in the past two quarters

(8)

(6)

(4)

(2)

0

2

4

6

8

Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10

Fiscal balance Fiscal balance, 4qma

(% of GDP)Loan growth gradually rising, aided by low interest rates

0

20

40

60

80

100

120


(60)

(40)

(20)

0

20

40

60

80

100

Loan/deposit ratio (LHS) Comm'l bank deposits (RHS) Comm'l bank loans (RHS)

(%) (YoY %)

33

Indonesia: robust, diversified exports should ensure the trade surplus, and FDI rebound from a mild setback in 2009

Although its net exports of oil and gas are shrinking, Indonesia’s diversified export basket enables it to run a modest monthly trade surplus, which has widened sharply in recent months. Asian demand should ensure continued strength in non-oil exports this year.

FDI has staged a strong recovery in recent years, climbing to an all-time high in 2008, and boosting fixed-investment spending. Last year, FDI moderated amid the global downturn, but should rebound strongly this year and fixed-investment should remain a medium-term spur to real GDP, which we forecast to expand by 6.5% YoY for 2010 and 6.1% YoY for 2011.


Realised foreign investment still strong, but domestic capex is anemic

02000400060008000

10000120001400016000

1991 1994 1997 2000 2003 2006 2009

Domestic Investment Foreign Investment

The trade surplus is now back up to ov er US$2 bn a month

(4,000)

(2,000)

0

2,000

4,000

6,000

8,000

10,000

May -92 May -95 May -98 May -01 May -04 May -07 May -10

(60)

(40)

(20)

0

20

40

60

80(YoY %, 3mma)

Trade balance (LHS) Ex ports (RHS) Imports (RHS)

Non-oil ex ports (RHS) Non-oil imports (RHS)

(3m rolling sum, US$m)

34

Indonesia: overall BoP solidly in surplus, boosting liquidity; equity valuations still well below the pre-1997 ranges

After some severe capital flight in the early stages of the post-Lehman crisis, Indonesia’s overall BoP position had stabilised by March 2009, and has been robust ever since. With the rising current-account surplus, the overall BoP surplus should continue its trend improvement.

Despite the multi-year surge in equity prices since 2004 (and the setback during the global downturn), the trailing PER (about 15x) is well below its five-year peak, and far below the pre-1997 valuations. Consequently, portfolio inflows are likely to persist, given improved economic prospects.


Capital flight has been abating since 4Q/05

(10,000)

(5,000)

0

5,000

10,000

15,000

Mar-94 Mar-96 Mar-98 Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10

(US$m)

Current account Trade balance Ov erall balance

Indonesia: Valuations just below the post-crisis peak but not

excessively stretched vs pre-1997 PERs

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Jun-94 Jun-98 Jun-02 Jun-06 Jun-10

(5)

0

5

10

15

20

25

30

35

Jakarta Composite Index (LHS) Jkt Composite Index : PER ratio (RHS)

35

Indonesia: stable/stronger Rupiah helps restrain inflation

Foreign reserves resumed rising in April 2009, as the pressure of capital flight eased. A stable/stronger Rupiah helps restrain inflation, and the latter allows interest rates to fall. With base

money contracting, the Rupiah strengthened last year – allowing inflation to moderate as well. CPI inflation looks likely to begin rising in 1Q10, but we see little need for any monetary tightening before 2H10.


Foreign Reserv es gradually rebuilt since Oct05 as capital flight slow s

0

20,000

40,000

60,000

80,000

100,000

May -01 May -04 May -07 May -10

0

2

4

6

8

10

12

International reserv es (LHS) Reserv e import cov er (RHS)

(US$m) (mths) Indonesia: Slower base money growth strengthens IDR and helps moderate headline inflation

(20)

0

20

40

60

80

100

120

Jun-98 Jun-00 Jun-02 Jun-04 Jun-06 Jun-08 Jun-10Reserve money CPI

(YoY % , 3mma)

36

Vietnam: A clear construction-led rebound in real GDP in 4Q09 (and 2Q10) came at the price of sharply wider twin deficits

Real GDP rebounded strongly to 7.7% YoY in 4Q09 (versus 3.1% YoY, 4.4% YoY and 5.2% YoY for the first three quarters of 2009). The strong performance in 4Q09 was aided by the 14% YoY surge in Construction (which accounts for a modest 9% of GDP, but benefitted from the fiscal focus on infrastructure spending). After 5.9% YoY growth in 1Q10, construction again led the acceleration to 6.3% growth in 2Q10.

The fiscal stimulus (passed piecemeal over the course of 2009) was targeted officially to total 8.7% of GDP, although some of it (particularly interest subsidies) have spilt over into 2010. We estimate a fiscal deficit of 9% of GDP for 2009 – still a very substantial stimulus, which has contributed clearly to the overheating.

The large trade deficit in 2H09 and 1H10, and elevated inflation, necessitated a pull-back from stimulative policy – which began with the Dong’s devaluation (5% in November 2009 and 3.5% in February 2010) and a hike in interest rates.

Source: CEIC, Daiwa Source: CEIC, Daiwa, IMFNote: 2009 figures are Daiwa estimates

Fiscal and current account deficits

(15.0)

(10.0)

(5.0)

0.0

5.0

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Fiscal balance (% of GDP) CA balance (% of GDP)

GDP by industry: disaggregated contibutions (YoY%)

(2)

0

2

4

6

8

10

Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10

Agriculture Construction Industry

Serv ices Gross Domestic Product

37

Vietnam: Surging loan growth stretched the banking system, and the fiscal stimulus took the deficit to 9% of GDP

Overall credit is estimated to have increased by 38% YoY in 2009, much faster than the 27% YoY pace of deposit growth – thus stretching the banking system even more severely, pushing the loan-to-deposit ratio to about 150%. Credit decelerated to 10.3% YoY growth in June 2010, but the 2010 target of 25% is too high.

Fiscal austerity in 2H08 was crucial for reining in overheating pressure, but a renewed stimulus ensued in 2009 to counter the global downturn – including a 30% reduction in corporate tax for small-and-medium-sized enterprises (SMEs), a four percentage-point interest subsidy on some loans (part of which was disbursed in 2010), and increased infrastructure spending. We think the early-March 2010 removal of the interest subsidy was appropriate (but an outright rise in the policy rate would be more effective, in our view).

Source: CEIC, Daiwa, IMF Source: CEIC, Daiwa, MoF. Note: 2009 figures are Daiwa estimates

Fiscal deficit remains large relative to Asian peers

05

10152025303540

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009(10)

(8)

(6)

(4)

(2)

0

Govt. revenue: % of GDP (LHS) Govt. expenditure: % of GDP (LHS)Fiscal balance: % of GDP (RHS)

(% of GDP) (% of GDP)Loan growth aided by government stimulus measures

0

50

100

150

200

250

300

1993 1997 2001 2005 20090

10

20

30

40

50

60

70

Loan-deposit ratio, % (LHS) Loans, % YoY (RHS) Deposits, %YoY (RHS)

38

Vietnam: trade deficit soared for 1H08, improved in 2H08 and 1Q09, but has widened sharply in Apr09-Jun10 – limiting the improvement in the current account deficit

The 12-month rolling sum of the trade deficit burgeoned to US$23bn by May 2008 (equal to 32.5% of the previous year’s GDP), partly because of the strong Dong in the November 2007-February 2008 period. The June-July 2008 policy response (fiscal austerity and a sharp rise in interest rates) helped lower the full-year trade deficit to US$17.5bn for 2008. After being restrained in 1H09, the trade deficit deteriorated rapidly in 2H09 and 1Q10, as imports outpaced exports strongly, before stabilizing in 2Q10.

Vietnam’s services and transfers (tourism and remittances) surplus mitigates the trade deficit, but the 2008 current account deficit expanded to 11.9% of GDP (from 9.8% in 2007), partly because of higher net outflows of income (repatriation of profits by multinational corporations [MNCs]) but mainly on account of the larger trade deficit (especially in 1H08). We estimate the current account deficit moderated to 10.3% of GDP for 2009, but improved mainly in 1H09, while the May 2009-March 2010 trend is in our opinion unsustainable, and has necessitated two large Dong devaluations (November 2009 and February 2010). The Dong’s depreciation should lower the current-account deficit to 9.8% of GDP in 2010, in our view, but the unwillingness to raise interest rates faster will limit the degree of improvement in external balances.

Source: CEIC, Daiwa Source: CEIC, Daiwa, IMF Note: 2009 CA figures are Daiwa estimates

Services and transfers reduce the current account deficit

(25)

(20)

(15)

(10)

(5)

0

5

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Current account balance (% of GDP)Customs trade balance (% of GDP)

(% of GDP)Trade deficit rising still high, but exports expanding faster than imports now

(25,000)

(20,000)

(15,000)

(10,000)

(5,000)

0

Jun-02 Jun-04 Jun-06 Jun-08 Jun-10

(60)

(40)(20)

0

20

4060

80

100

Trade balance(US$m): 12 mth rollsum (LHS) Ex ports (US$m) YoY% 3mma (RHS)

Imports (US$m) YoY% 3mma (RHS)

39

Vietnam: FDI inflows remain robust, and a crucial source of support to the external balances; portfolio inflows dried up in 2008-09

Vietnam remains a darling of MNCs, especially Asian ones, and its attractiveness as a destination for foreign direct investment (FDI) remains undimmed by other macro-economic woes, in our opinion. FDI inflows rebounded in 2Q-3Q09 to over 10% of GDP, and we expect them to stabilise at a healthy 8-10% of GDP in the medium-term – an important source of support to the external balances.

Large net foreign portfolio inflows were a crucial factor in helping to buoy the stock-market index in 2006-2007. Net foreign portfolio inflows persisted throughout much of 2008, and continued for most of 2009 and 1H10. That left a large basic balance deficit for 2008-09, although tempered in 2009 by the rebound in FDI inflows.

Since FDI is bundled with technology and market-access, FDI inflows of 8-10% of GDP would boost productivity and restore annual real GDP growth to 7-8% over the medium term, in our view, once macro stability is restored. Although FDI is sufficient to finance most of the current account deficit, the latter still undermines confidence – resulting in capital outflows.


FDI moderated in 1Q09, but recovered in the next two quarters

0

500

1000

1500

2000

2500

3000

3500

Sep-99 Sep-00 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09024

681012

1416

FDI (US$ mn) FDI: % of GDP

Foreign inflows turn positive, as the equity-price index gradually recovered over the past year

(200)

(100)

0

100

200

300

400


(US$m)

0

200

400

600

800

1,000

1,200

HCMC: foreign investors: net buying (monthly) (LHS) HCMC VN Index (RHS)

40

Vietnam: foreign reserve position looks fragile to us; but the Dong’s depreciation and higher domestic interest rates should enable external balances to improve

After inflation rose rapidly to 28.3% YoY in August 2008, the State Bank of Vietnam’s (SBV) aggressive 525-bp hike in the base rate pushed the ceiling on lending rates to 21%. CPI inflation moderated to 19.9% YoY by December 2008, and sharply to 3.9% YoY for June 2009 (albeit still averaging over 10% YoY for 1H09). With month-on-month inflation moderating, the benchmark rate was cut by 700 bps to 7% in the October 2008-February 2009 period, helping to offset the impact of the global downturn.

However, inflation began rising sharply again between September 2009 and March 2010 (9.7% YoY), and the SBV raised the benchmark rate to 8% in December 2009. With CPI inflation at 8.7% YoY in June 2010, and looking likely to resume rising in the wake of the Dong’s depreciation, we expect the policy rate to rise by a further 100 bps this year (to 9%).

Foreign reserves declined to US$16.8bn in December 2009; we think the absence of timely, credible data prompts risks of speculation. The US$1bn sovereign bond issue in January 2010 bolstered reserves (but was expensive). Reserves are estimated (by the IMF) to provide only seven weeks’ import cover currently, but external debt is modest (US$24bn, with only about US$5bn short-term): fragile but not facing an imminent crisis, in our view.

Source: CEIC, Daiwa, IMF Source: CEIC, Daiwa

Foreign reserves fell in 2009, and estimates suggest further deterioration in 1H10

0

5,000

10,000

15,000

20,000

25,000

30,000

Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09

0

1

2

3

4

5

6

Foreign Reserv es: US$ mn Reserv es import cov er: mths

Inflation receded in the past 3 months, but can surge w ith accommodativ e monetary policy

0

8

16

24

32

40

48


Prime interest rate CPI: YoY% CPI (food): YoY% Ceiling Rate

41

Asia’s demographics: well-endowed until at least 2015

We expect non-Japan Asia to continue to benefit from declining dependency ratios until 2020. Typically, savings rates rise during periods of declining dependency ratios (this began to happen in Asia from 1965 onwards; in India from 1980). Higher savings should be able to fund higher investment rates, enhancing the productivity of the increasing workforce.

Technology (embodied in FDI and through imports) should ensure strong total factor productivity (TFP) growth and a rapid economic catch-up for Asia. We think India has the demographic advantage for 2020-50.

Source: CEIC, Daiwa

350

450

550

650

750

850

950

19

50

19

55

19

60

19

65

19

70

19

75

19

80

19

85

19

90

19

95

20

00

20

05

20

10

E

20

15

E

20

20

E

20

25

E

20

30

E

20

35

E

20

40

E

20

45

E

20

50

E

Dependency ratio (ratio of population aged 0-14 and 65+ perthousand population 15-64)

China India

Indonesia Republic of Korea

42

China and Japan: mirror-image demographics

Japan has entered the most daunting phase of its demographic transition, in our opinion. Savings rates look likely to decline and the old-age dependency ratio looks set to surge between now and 2020. A surge in public debt compounds the problem, but that should improve as growth picks up and deflation (especially of assets) ends.

This decade, China’s demographics are probably at their most favourable for economic growth. By 2020, the population will have aged a bit more, and its dependency ratio should be past its trough. However, we think China’s demographics will still look a lot better than Japan’s.

Source: UN, Daiwa Source: UN, Daiwa

0 10 20 30 40 50 60 70

0 - 45 - 9

10 - 1415 - 1920 - 2425 - 2930 - 3435 - 3940 - 4445 - 4950 - 5455 - 5960 - 6465 - 6970 - 7475 - 79

80+China 2020,

millions of people

010203040506070Note: females on the left, males on the right scale

0 1 2 3 4 5 6 7 8

0 - 45 - 9

10 - 1415 - 1920 - 2425 - 2930 - 3435 - 3940 - 4445 - 4950 - 5455 - 5960 - 6465 - 6970 - 7475 - 79

80+

Japan 2020,millions of people

012345678Note: females on the left, males on the right scale

43

India: demography should support steadily stronger growth

The huge number of young people in the population today will reach working age over the next 15-20 years. By 2020, India is expected to have 270m people (more than today’s total US population) between the ages of 15 and 35.

Savings rates and productive potential should be at their highest. In our view, the challenge for India is to develop a more labour-intensive growth model to take full advantage of the productive potential of the masses.

Source: UN, DaiwaNote: females on the left; males on the right

Source: UN, DaiwaNote: females on the left; males on the right

0 10 20 30 40 50 60

0 - 45 - 9

10 - 1415 - 1920 - 2425 - 2930 - 3435 - 3940 - 4445 - 4950 - 5455 - 5960 - 6465 - 6970 - 7475 - 79

80+India 2000

0102030405060 0 10 20 30 40 50 60

0 - 45 - 9

10 - 1415 - 1920 - 2425 - 2930 - 3435 - 3940 - 4445 - 4950 - 5455 - 5960 - 6465 - 6970 - 7475 - 79

80+India 2020

0102030405060

44

Asia: baseline forecasts

Source: Daiwa forecasts Note: WPI for India Note: For India, 2010 = FY10E, April 2010 to March 2011

Real GDP YoY% CPI YoY% Current account Exchange rate

( year avg) (% of GDP) (vs US$) (year end)

2010 2011 2010 2011 2010 2011 2010 2011

China 9.8 8.6 3.5 2.5 2.5 2.8 6.45 6.20

Hong Kong 3.5 3.8 3.0 2.5 7.4 6.0 7.78 7.80

India 9.3 9.0 7.3 4.2 (2.2) (1.9) 44.00 41.50

Indonesia 6.5 6.1 4.5 4.8 1.0 0.8 8,700 8,500

Korea 7.0 5.1 3.2 2.9 3.8 3.4 1,100 1,060

Malaysia 6.2 5.6 2.2 2.4 15.4 15.0 3.08 2.97

Singapore 16.0 6.5 1.9 2.0 18.6 16.0 1.35 1.31

Taiwan 9.4 4.9 1.9 1.6 7.8 7.3 31.3 30.6

Thailand 7.7 4.3 1.9 2.0 4.6 4.0 32.0 31.8

Vietnam 6.4 6.8 9.2 7.4 (9.8) (8.8) 19,600 20,300

DISCLAIMERThis publication is produced by Daiwa Securities Capital Markets Co. Ltd. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Capital Markets Co. Ltd. and/or its non-U.S. affiliates, except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Capital Markets Co. Ltd. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities Capital Markets Co. Ltd., and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person.Daiwa Securities Capital Markets Co. Ltd., its parent, holding, subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. The following are additional disclosures.JapanDaiwa Securities Capital Markets Co. Ltd and Daiwa Securities Group: Daiwa Securities Capital Markets Co. Ltd and Daiwa Securities Group: Daiwa Securities Capital Markets Co. Ltd is a subsidiary of Daiwa Securities Group.Investment Banking Relationship: Within the preceding 12 months, The Affiliates of Daiwa Securities Capital Markets Co. Ltd.* has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: China Zhongwang Holdings Ltd (1333 HK); Sundart International Holdings (2288 HK); China Automation Group (569 HK); China Kangda Food Co Ltd (834 HK); Glorious Property (845 HK); Tong Yang Life (082640 KS); China Kangda Food Co Ltd (CKANG SP); Great Group Co., Ltd (GGH SP); Patel Engineering (PEC IN); Greens Holdings Ltd (1318 HK); China High Precision Automation Group (591 HK); Mingfa Group (846 HK); Fantasia Holding Group (1777 HK); Hontex International Holding (946 HK).*Affiliates of Daiwa Securities Capital Markets Co. Ltd. for the purposes of this section shall mean any one or more of:• Daiwa Capital Markets Hong Kong Limited• Daiwa Capital Markets Singapore Limited• Daiwa Capital Markets Australia Limited• Daiwa Capital Markets India Private Limited• Daiwa-Cathay Capital Markets Co., Ltd.• Daiwa Securities Capital Markets Co. Ltd., Seoul BranchHong Kong This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (“DHK”) which is regulated by the Hong Kong Securities and Futures Commission. Recipients of this research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research.Ownership of Securities: For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at http://www2.us.daiwacm.com/report_disclosure.html.Investment Banking Relationship: For “Investment Banking Relationship”, please visit BlueMatrix disclosure Link at http://www2.us.daiwacm.com/report_disclosure.html.Relevant Relationship (DHK): DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage.DHK market making: DHK may from time to time make a market in securities covered by this research.SingaporeThis research is distributed in Singapore by Daiwa Capital Markets Singapore Limited and it may only be distributed in Singapore to accredited investors, expert investors and institutional investors as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. By virtue of distribution to these category of investors, Daiwa Capital Markets Singapore Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to disclosure of Daiwa Capital Markets Singapore Limited’s interest and/or its representative’s interest in securities). Recipients of this research in Singapore may contact Daiwa Capital Markets Singapore Limited in respect of any matter arising from or in connection with the research.AustraliaThis research is distributed in Australia by Daiwa Capital Markets Stockbroking Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act. Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research.Ownership of Securities: For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at http://www2.us.daiwacm.com/report_disclosure.html.IndiaThis research is distributed by Daiwa Capital Markets India Private Limited (DAIWA) which is an intermediary registered with Securities & Exchange Board of India. This report is not to be considered as an offer or solicitation for any dealings in securities. While the information in this report has been compiled by DAIWA in good faith from sources believed to be reliable, no representation or warranty, express of implied, is made or given as to its accuracy, completeness or correctness. DAIWA its officers, employees, representatives and agents accept no liability whatsoever for any loss or damage whether direct, indirect, consequential or otherwise howsoever arising (whether in negligence or otherwise) out of or in connection with or from any use of or reliance on the contents of and/or omissions from this document. Consequently DAIWA expressly disclaims any and all liability for, or based on or relating to any such information contained in or errors in or omissions in this report. Accordingly, you are recommended to seek your own legal, tax or other advice and should rely solely on your own judgment, review and analysis, in evaluating the information in this document. The data contained in this document is subject to change without any prior notice DAIWA reserves its right to modify this report as maybe required from time to time. DAIWA is committed to providing independent recommendations to its Clients and would be happy to provide any information in response to any query from its Clients. This report is strictly confidential and is being furnished to you solely for your information. The information contained in this document should not be reproduced (in whole or in part) or redistributed in any form to any other person. We and our group companies, affiliates, officers, directors and employees may from time to time, have long or short positions, in and buy sell the securities thereof, of company(ies) mentioned herein or be engaged in any other transactions involving such securities and earn brokerage or other compensation or act as advisor or have the potential conflict of interest with respect to any recommendation and related information or opinion. DAIWA prohibits its analyst and their family members from maintaining a financial interest in the securities or derivatives of any companies that the analyst cover. This report is not intended or directed for distribution to, or use by any person, citizen or entity which is resident or located in any state or country or jurisdiction where such publication, distribution or use would be contrary to any statutory legislation, or regulation which would require DAIWA and its affiliates/ group companies to any registration or licensing requirements. The views expressed in the report accurately reflect the analyst’s personal views about the securities and issuers that are subject of the Report, and that no part of the analyst’s compensation was, is or will be directly or indirectly, related to the recommendations or views expressed in the Report. This report does not recommend to US recipients the use of Daiwa Capital Markets India Private Limited or any of its non – US affiliates to effect trades in any securities and is not supplied with any understanding that US recipients will direct commission business to Daiwa Capital Markets India Private Limited.TaiwanThis research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd and it may only be distributed in Taiwan to institutional investors or specific investors who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd in respect of any matter arising from or in connection with the research.United KingdomThis research report is produced by Daiwa Securities Capital Markets Co., Ltd and/or its affiliates and is distributed by Daiwa Capital Markets Europe Limited in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Services Authority (“FSA”) and is a member of the London Stock Exchange, Chi-X, Eurex and NYSE Liffe. Daiwa Capital Markets Europe Limited and its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FSA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-and-regulatory. Regulatory disclosures of investment banking relationships are available at http://www.daiwausa.com/. GermanyThis document has been approved by Daiwa Capital Markets Europe Limited and is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany.DubaiThis document has been distributed by Daiwa Capital Markets Europe Limited, Dubai Branch. Related financial products or services are intended only for professional clients and no other person should act upon it. Daiwa Capital Markets Europe Limited is duly licensed and regulated by the Dubai Financial Services Authority.United StatesThis report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMA’s views at any time. Neither DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (telephone 212-612-7000). Ownership of Securities: For “Ownership of Securities” information please visit BlueMatrix disclosure Link at http://www2.us.daiwacm.com/report_disclosure.html.Investment Banking Relationships: For “Investment Banking Relationships” please visit BlueMatrix disclosure link at http://www2.us.daiwacm.com/report_disclosure.html. DCMA Market Making: For “DCMA Market Making” please visit BlueMatrix disclosure link at http://www2.us.daiwacm.com/report_disclosure.html.

http://www2.us.daiwacm.com/report_disclosure.html






DISCLAIMER (Cont’d)Research Analyst Conflicts: For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at http://www2.us.daiwacm.com/report_disclosure.html. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.Research Analyst Certification: For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at http://www2.us.daiwacm.com/report_disclosure.html. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.The following explains the rating system in the report as compared to relevant local indices, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next six months."2": the security is expected to outperform the local index by 5-15% over the next six months."3": the security is expected to perform within 5% of the local index (better or worse) over the next six months."4": the security is expected to underperform the local index by 5-15% over the next six months."5": the security could underperform the local index by more than 15% over the next six months.Additional information may be available upon request.

Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law(This Notification is only applicable where report is distributed by Daiwa Securities Capital Markets Co. Ltd.)If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items. In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction. In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan. For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements. There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements. There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us. Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. * The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc. When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us. Corporate Name: Daiwa Securities Capital Markets Co. Ltd.

Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.109Memberships: Japan Securities Dealers Association, Financial Futures Association of Japan



asia economic and stock market outlook leading global growth, even as oecd momentum ebbs

Documents

oecd demand

oecd markets

daiwa asia

intraasian exports

oecd cli

oecd recession

asia economic

asias exports