J A N U A R Y 2 0 1 0

C H I N A  2010: E C O N O M I C THEMES AND O U T L O O K 

Joyce ChangGlobal Head of Emerging Markets and Credit ResearchJ.P. Morgan

2

China Economic Outlook

Major economic indicators and forecastsMajor economic indicators and forecasts

Source: J.P. Morgan Economics

Real GDP growthpercent change

2009 2010f 1Q09 2Q09 3Q09 4Q09 1Q10f 2Q10f 3Q10f 4Q10fHeadline GDP

%oya 8.7 10.0 6.2 7.9 9.1 10.7 11.2 9.9 9.7 9.4%q/q, saar 7.3 14.7 10.3 10.0 9.8 9.4 9.5 9.0

China: economic indicators

Average

2003-07 2008 2009f 2010 2011f

Real GDP, % change 11.0 9.6 8.7 10.0 9.4 Consumption¹ 2.5 4.3 4.4 4.5 4.5 Investment¹ 6.3 5.1 6.8 5.1 4.6 Net trade¹ 2.2 0.2 -2.6 0.4 0.2Consumer prices, %oya 2.6 5.9 -0.7 3.2 2.5 % Dec/Dec 3.3 1.2 1.9 2.7 2.8Government balance, % of GDP -0.9 -0.4 -3.3 -2.1 -1.8Merchandise trade balance (US$ bn) 154.2 323.7 258.0 281.8 290.6 Exports 796.8 1423.4 1183.7 1439.5 1664.7 Imports 642.6 1099.7 925.7 1157.6 1374.0Current account balance 180.1 404.9 307.7 335.5 342.5 % of GDP 7.4 9.4 6.3 5.9 5.1International reserves, (US$ bn) 891.1 1948.1 2348.1 2698.1 3078.1Total external debt, (US$ bn) 287.3 374.7 387.7 401.7 418.7 Short term² 109.5 148.0 164.0 182.0 202.0Total external debt, % of GDP 11 9 8 7 6Total external debt, % of exports³ 28 22 26 23 20Interest payments, % of exports³ 1 1 1 1 11. Contribution to growth of GDP.2. Debt with original maturity of less than one year.3. Exports of goods, services, and net transfers.

3

Real GDP and IP, FAI, retail sales, export growthReal GDP and IP, FAI, retail sales, export growth

1

Source: CEIC and J.P. Morgan estimates Source: CEIC and J.P. Morgan estimates

Economic recovery is broadening

Consumption (including private and government consumption) and gross capital formation (including fixed investment and inventory) contributed 3.8pts and 6.2pts, respectively, to headline real GDP growth, while net exports shaved 2.9pts off the headline.

Lift from inventory cycle is significant: gross capital formation contributed 6.2pt to 1H growth. There are widespread reports on re-stocking in many sectors including industrial metal and autos.

0

5

10

15

20

0

5

10

15%oya, both scales

Real GDP and industrial production growth

2003 2005 2009

Real GDPReal IP

20072001

0

10

20

30

40

50

60

2002 2003 2004 2005 2006 2007 2008 2009

10

15

20

25

30

35

%oya, both scalesFixed asset investment and bank loans growth

Fixed assetinvestmentBank loans

6

9

12

15

18

21

24

2002 2003 2004 2005 2006 2007 2008 2009

%oyaChina: retail sales growth

Value

Volume

-80

-60

-40

-20

0

20

40

60

80%3m/3m, saar

China: merchandise trade - sequential trend

2002 2003 2004 2005

Exports Imports

2006 2007 2008 2009

4

Fixed asset investment growth Fixed asset investment growth

Source: CEIC and J.P. Morgan estimates

Public investment growth eased Public investment growth eased

Fixed asset investment growth shows signs of moderation

Credit boom was the key driver Credit boom was the key driver Following the credit cycle Following the credit cycle

-10

0

10

20

30

40

50

60

%oya

China: fixed asset investment

Real (adjusted by PPI)Nominal

2001 2002 2003 2004 2005 2006 2007 2008 2009

10

20

30

40

50

2002 2003 2004 2005 2006 2007 2008 2009 2010

10

15

20

25

30

35

%oya, both scalesChina: FAI and bank loans growth with 2010 forecast

Fixed assetinvestmentBank loans

0

10

20

30

40

50

60

2005 2006 2007 2008 2009

Fixed investment source of funding%oya

Bank loan

Self-raised

Total

China: nominal fixed assets investment

2009 2009 1H09 3Q09 4Q09%share %oya %oya %oya %oya

Total 100.0 31.0 33.6 32.9 26.2Primary industry¹ 1.7 49.5 68.9 37.4 38.4Textile and related 2.0 16.9 11.2 15.5 28.3Metal and commodities 11.5 21.7 27.9 17.8 17.7Transportation equipment 2.6 31.1 36.7 37.5 18.0Machinery and electronic equipment 7.4 33.1 34.4 29.0 35.0Other manufacturing 7.2 30.8 28.9 33.4 31.2Electrical, gas and water production¹ 6.9 28.6 28.7 25.4 31.3Housing 22.2 22.3 15.3 33.9 22.0Transport infrastructure & construction¹ 13.0 49.4 63.4 51.2 36.3Water conservency, environment manage¹ 9.2 45.3 54.5 46.2 34.6Healthcare, social secuirty, education 4.2 46.1 55.3 55.6 28.6Other teriary 7.4 30.3 49.6 29.6 11.4¹ Sectors targeted for expansion by the government

5

4 trillion fiscal package4 trillion fiscal package

Source: CEIC and J.P. Morgan estimates

Public investment shifting towards soft infrastructure

Central government projects easedCentral government projects eased More cautious in approving new projects More cautious in approving new projects

-50

0

50

100

2006 2007 2008 2009

5

10

15

20

25

30

35

40

China: on-going and new fixed investment projects

%oya, ytd, both scales

On-going projects

New projects

05

1015202530354045

2005 2006 2007 2008 2009

20

22

24

26

28

30

32

34

China: central and local government projects%oya, ytd, both scales

Central government projectsLocal government projects

Preserving strength for 2010 and beyond? Preserving strength for 2010 and beyond?

6

Private housing FAI recovered strongly Private housing FAI recovered strongly

Source: CEIC and J.P. Morgan estimates Source: CEIC and J.P. Morgan estimates

Monetary environment still accommodativeMonetary environment still accommodative

Private investment to recover

Industrial profit growth is back Industrial profit growth is back Industrial profit growth is back Industrial profit growth is back

05

10152025303540

2006 2007 2008 2009

China: real estate investment growth

%oya

Real estate FAI

Note: TOT: total; PTR: petroleum and gas mining; COA: coal mining; CNM: construction materials; SEQ: special equipment; TRP: transportation equipment; TEL: telecom products; ELT: electricity and power

-150

-100

-50

0

50

100

150

TOT PTR COA CNM SEQ TRP TEL ELT

China: industrial profit growth by sector %oya Mar-May 09 Jun-Aug 09

Sep-Nov 09

-60

-30

0

30

60

90

3

4

5

6

7

%oyaChina: industrial enterprise profit growth and profit margin

2004 2006

Profit growth

Profit margin

% of sales

2008

0

1000

2000

3000

4000

5000

2004 2005 2006 2007 2008 2009

RMB, bn

FAI bank loan funding

FAI bank loan funding

China: FAI bank loan funding and new medium and long term loan

7

Consumption growth outpaced GDP growth Consumption growth outpaced GDP growth Labor market improving Labor market improving

Source: CEIC and J.P. Morgan estimates

Household spending to strengthen

Labor market improvingLabor market improving Decent income growthDecent income growth

0

2

4

6

8

10

12

14

%oya

China: GDP and household expenditure

2006 2007 2008 2009

Real urban household per capita consumption

expenditure

Real GDPReal rural household per capita cash expenditure

0

5

10

15

20

%oya

China: GDP and household income

2006 2007 2008 2009

Real GDP

Real urban household per capita disposable

income

Real rural household per capita cash income

42

44

46

48

50

52

54

56

index, sa

China: PMI employment indices

2004 2005 2006 2007 2008 2009

PMI - employment index (Markit)

PMI - employment index (NBS)

5

10

15

20

25

30

%oya

China: total remuneration for urban employees

2006 2007 2008 2009

All sectors

Construction

Manufacturing

8

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