Chief Economist of Guotai Junan Securities

Lin Caiyi

May 2015

2015 China’s Macro Economic

Situation and

Policy Expectation

Aggregate growth is slowing down, the structure carries out a

continuous improvement.

End of the era of investment-led growth

Growth driver has changed, consumption has become the engine

Monetary policy has been steadily loosened, the management system

of budget has been reformed

Macro-economy:

Policy Expectation:

The reform of investment and financing system

Marketization of factor price breaks the monopoly

The reforms of social security, household registration and land transfer system

Domestic macroscopic view: Aggregate growth is slowing down

Since the fourth quarter of 2011 the growth rate of the tertiary industry has been higher

than that of the secondary industry

Since the fourth quarter of 2011, the effects of "four trillion" stimulus policy has subsided, the economic growth rate has declined

In 2012, the growth rate of the tertiary industry has exceeded that of the secondary industryIn 2013, the proportion of the tertiary industry has exceeded that of the manufacturing industryIn 2014, the added value of the tertiary industry accounts for 48.2 % of GDP

2009-12 2010-12 2011-12 2012-12 2013-12 2014-12

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

12.20

12.10

10.30 9.70

9.50

9.80

9.60

9.30

8.70 7.90

7.40

7.30

7.90

7.70

7.50

7.80

7.70 7.40

7.50

7.30

7.30

GDP当季同比 GDP in the same quarter YoY

The growth of GDP is slowing down

2009-12 2010-12 2011-12 2012-12 2013-12 2014-12

0

2

4

6

8

10

12

14

16

第一产业增速 第二产业增速 第三产业增速

Tertiary industry growth

Primary industry growth

Secondary industry growth

Domestic macroscopic view: The structure carries out a continuous improvement

44.3%The tertiary industry

48%The sec-ondary in-dustry

2011

48.2%

The tertiary industry

42.6%

The secondary industry

2014

Energy consumption per unit of GDP falls by 4.8％

The tertiary industry accounts for half of the national economy

Domestic macroscopic view: The structure carries out a continuous improvement

Generating capacity declines synchronously with GDPEnergy consumptionper unit of GDPdeclines

With the changes in the industrial structure, energy consumption per unit of GDP keeps declining

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

0.60

0.70

0.80

0.90

1.00

1.10

1.20

0.94 0.91

0.95

1.01 1.00 0.97

0.92 0.88

0.84 0.81 0.79 0.77

0.74 0.70

每万元 GDP所消耗标准煤（吨）

2009-12 2010-12 2011-12 2012-12 2013-12 2014-12

4

6

8

10

12

14

0

5

10

15

20

25

GDP累计同比 发电量累计同比

The coal consumption per ten thousand yuan GDP (ton)

Accumulative GDP YoY

Accumulative generating capacity YoY

Domestic macroscopic view: End of the era of investment-led growth

11

26.6%The proportion of real estate in fixed assets in-

vestment

The manufacturing industry accounts for 34.7%

Capital construction accounts for 20.4%

The service industry accounts for 12.6%

2012/12 2013/3 2013/7 2013/10 2014/1 2014/4 2014/7 2014/10-20

0

20

40

60

80

100

10.00

14.00

18.00

22.00

26.00

30.00

房地产销售额 房地产开发投资

Real estate sales volume and development investment continue to decline

The real estate market reaches an inflection pointSales are fallingReal estate investment growth rate slows down

The decline of real estate market drags down the investment growth rate

Real estate sales Real estate investment

Domestic macroscopic view:End of the era of investment-led growth

26.6%The proportion of real estate in fixed assets in-

vestment

The manufacturing industry accounts for 34.7%

Capital construction accounts for 20.4%

The service industry accounts for 12.6%

Real estate sales volume and development investment continue to decline

The real estate market reaches an inflection pointSales are fallingReal estate investment growth rate slows down

The decline of real estate marketdrags down the investment growth rate

2012-12 2013-06 2013-12 2014-06 2014-12

10.00

14.00

18.00

22.00

26.00

30.00

-20.00

0.00

20.00

40.00

60.00

80.00

100.00

房地产开发投资累计同比 房地产销售额累计同比Accumulative real estate sales YoYAccumulative investment in

real estate YoY

Growth driver has changed consumption has become the engine

2013-12 2014-03 2014-06 2014-09

0.0

2.5

5.0

7.5

10.0

2,500

2,550

2,600

2,650

2,700

2,750

2,800

2,850

全国居民人均可支配收入增速

The demand for labor market exceeds the supply Per capita disposable income growth and the average monthly income of migrant workers

Demographic changes andthe tertiary industry booming result in a flourishing job market

In 2014a survey of unemployment in 31major cities and townsacross the country

unemployment rate is 5.1%

In 2014 10.82 million urban dwellers have found employment, the annual goal of 10

million people is achievedinadvance

Residents’ disposable personal income grows faster than GDP growth

The demand for job market exceeds the supply, the opening rate

continues to rise

Job market is booming

Rise in wages

2008-12 2009-12 2010-12 2011-12 2012-12 2013-12 2014-12

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

0.80

0.85

0.90

0.95

1.00

1.05

1.10

1.15

1.20

需求人数 求职人数 求人倍率Opening rate

Number of employees needed

Number of job seekers

Growth rate of residents’ per capita disposable income

Domestic macroscopic view:Growth driver has changed consumption has become the engine

Consumption

Investment

Consumption has replaced investment as the main engine of economic growth

Employment boom and residential income increases constitute a solid foundation for consumption growth

Demographic changes, the proportion of the population aged 40-50 rises and brings power to consumption

Government increases spending on people’s livelihood to reduce residents' precautionary savings and boost consumption

2009-12 2010-12 2011-12 2012-12 2013-12

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

消费 投资 净出口Net export

0-4岁

10-14岁

20-24岁

30-34岁

40-44岁

50-54岁

60-64岁

70-74岁

80-84岁

90-94岁

0 1 2 3 4 5 6 7 8 9 10

2013 2003

The proportion of the population aged 40-50 rises significantlyIn 2014 the rate of the stimulation of consumption on GDP growth

consumption

investment

Domestic macroscopic view:The monetary policy has been steadily loosened

14

Monetary policy enters the lowering RRR cycle

Increase of funds outstanding for foreign exchange and bi-

directional volatility are no longer the major driving forces for

basic money supply

With the reversal of RMB appreciation trend, monetary policy

enters the lowering RRR cycle, since February 2015 RRR has

been lowered twice, sharper than market expectations

Cutting interest rates

Since Novemberthe central bank has cut interest ratesfor the second time,

indicating the tendency to loosen monetary policy

Cutting interest rates and lowering the reserve requirement

ratio (RRR) simultaneously will be the basic trend of the

future monetary policy

Raising the floating upper limit of deposit and introducing the

description of deposit insurance system interest rate liberalization is

the key point of the next reform of the central bank

2013-1 2013-4 2013-7 2013-10 2014-1 2014-4 2014-7 2014-10

3

4

5

6

7

8

一般贷款加权平均利率 信托业加权平均利率 10年期国债收益率

The financing cost for the real economy is still high

It remains to be seen whether the liquidity released by cutting interest

rates can enter the real economy

The weighted average interest rate of General loan

The weighted average interest rate of Trust Industry

10 year bond yields

Domestic macroscopic view:Positive fiscal policy is characterized by restructuring expenses

20072008

20092010

20112012

2013

2014年...

27%

28%

29%

30%

31%

32%

33%

29.25%29.67%

28.88%

29.47%

31.16%

32.61%

31.93%

32.61%

教育医疗社保支出占比

2010 2011 2012 2013 2014年前 10月

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

住房保障支出（亿元）

The proportions of Education, Health Care, Social Security in national fiscal expenditure are rising

Housing security expenditure

Positive fiscal policy is characterized by restructuring expenses

Increasing the investment in the construction of social

security housing

Increasing the spending on people's livelihood in the context of budget reform

Stimulating consumption and promoting the development of related industries simultaneously

The percentages of the expenditures in education health care and social security

2007 2008 2009 2010 2 011 2012 2013 1st 10 months of 2014

Housing security expenditure (billion)

2010 2011 2012 2013 1 st 10 months of 2014

Policy expectation:Reform of the budget management system

16

Fiscal and tax reform

Social Equality

Power Constraint

Rights and responsibilities are clearly defined

Improving the budget management system

Full-caliber budget, promoting a more transparent government

budget

The reform of the tax system

Reducing the proportion of indirect taxes and increasing

the proportion of direct taxes

Adjusting the financial relationship between the central and local governments

The central authorities centralize powers; extend general transfer payments, reduce special transfer

payments; issue local government bonds

Policy expectation:The reform of investment and financing system

17

Capital Market

Registration System Reform

The transition of capital

market supervision model will

promote direct financing

market and the business

development of investment

bank, release the vitality of

capital market;

registration system is the

system guarantee of financial

products innovation;

shares, bonds, options, and

other multi-level capital

markets will enter a new

period of development.

Opening up to the world

RMB internationalization Domestic capital elements go

abroad, foreign investors and

financiers come in, the degree

of capital market

internationalizationis

improved, the marketization

of interest rates and exchange

rate is accelerated.

From the competitive industry

in conformity with

international standards to the

further integration of financial

system and the international

market.

The construction of infrastructure

PPP model, asset securitizationProject revenue bonds

With the standardization of

local debt financing

mechanisms, local government

financing platform will be

stripped of government

financing functions, new

means of financing future

construction of infrastructure

shortfall will be project

revenue bonds, PPP model

and asset securitization

projects

Through the reform of investment and financing system, gradually lifting financial repression: opening up both internationally and domestically(breaks the monopoly)

Policy expectation: State-owned enterprises take capital management as the core of their reform

18

Establishing companies run by state-owned capital

Restructuring qualified state-owned enterprises into state-owned capital investment company

By "mixed ownership" starting the privatization of state-

owned enterprises

Managing state-owned assets with the market approach

The core of the SOE reform Since 2014 22 provinces have published the

program of state-owned enterprises reform

July 2014 four contents of State-owned Assets Supervision and Administration Commission (SASAC) pilot reform Six state-owned key enterprises enter the list of pilot reform

The pilot of restructuring state-owned key enterprises into state-owned capital investment companies

The pilot of state-owned key enterprises developing the mixed ownership economy

The pilot of the corporate boards of SOE adopting the personnel selection of senior executives, performance appraisal and

remuneration management authority

The pilot of sending discipline inspection group to state-owned key enterprises

Policy expectation:The marketization of factor price breaks the monopoly

19

Administrative power fades out of the distribution field of factors

Terminating the dual pricing system of factor price

The essential elements of the factor market reform:

Breaking the monopoly, gradually realizing fair competition

By means of SOE reform to achieve progressively "the country steps back while the people step forward"

Petroleum Natural gasElectric power

TransportationTelecommuni

cation

Policy expectation: Social security system, household registration system and land transfer reform

20

Social Security System Reform

Getting rid of the

existing social security

management system

①Impeding

migration endangeri②ng the fairness of

system

Two major drawbacks,

achieving actuarial

balance on the basis of

national co-ordination

Land transfer system reform

Achieving "the separation

of three rights"of

ownership, contract

authority and franchise

Introducing large - scale

management in agricultureThe household registration system reform

No more distinction between

"Agriculture accounts" and "non-

agricultural accounts"

Migrant workers and urban

residents enjoy the same social

welfare

Urbanization

Urbanization is the urbanization of population,so we must first solve

the social security problem of farmers after they've gone into town,

then the problem of property disposal after farmers have left the land

Policy Expectation:Objectives of the reform

21

Chinese model 1.0 Chinese model 2.0

Low quality high-speed

Low quality low-speed

High quality high-speed

Government-leading Market-leading

Prophase Anaphase

The Third Plenary Session of the Eleventh Central Committee

The Third Plenary Session of the Eighteenth Central Committee

Market Economy

A country under the rule of law

Culturally diverse

Reform

The final objective of this reform: to establish the basic

framework for modern country

The risks that macro economy are likely to encounter in 2015 22

Domestic dimension:

Credit risk detonated by market clearing

International dimension:

Dollar asset strength causes liquidity fluctuation

The effective prescription for digesting risk is economic transition and a successful structural adjustment

CB A

Thanks for your attention!

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