assessing the base for chinese growth 20130927

8/13/2019 Assessing the BASE for Chinese Growth 20130927

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September 27, 2013

Issue No: 13/35

Asia Economics Analyst

Economics Research

Assessing the BASE for Chinese growth

Chinas industrial production (IP) has rebounded sharply in recent months,but investors doubts about the durability of the recovery remain high,partly reflecting skepticism over the global outlook and concerns about thestructural vulnerabilities that are increasingly constraining the domesticpolicy space.

To provide a perspective on the potential length of the recovery, this reportlooks at the breadth of the growth rebound so far. This is motivated by theidea that an activity pickup which receives support from a broader range ofeconomic sectors is likely to be more entrenched and therefore moresustainable.

For this purpose, we introduce a Breadth of Activity S upport Estimate,or BASE , which is a simple diffusion index summarizing the percentage ofa select set of 15 Chinese economic indicators that show sequentialpickupi.e., the greater the BASE of a recovery, the more broad-basedsupport derived by headline activity. Our analysis shows that our BASEhas statistically significant predictive power regarding both the strengthand direction of near-term sequential IP momentum relative to its recentlevel.

As of August, the BASE indicates that over 70% of the underlyingindicators are accelerating, a reading that is in the top 10 percenthistorically. Our stylized model suggests average sequential IP growth inChina at around 9-10% over the next 6 monthswhile only an indicativeestimate, this is roughly in line with our growth projection.

Contents of this issue

Andrew Tilton+852-2978-1802 [email protected] Sachs (Asia) L.L.C.

Goohoon Kwon, CFA+82(2)3788-1775 [email protected] Sachs (Asia) L.L.C., Seoul Branch

Tushar Poddar+91(22)6616-9042 [email protected] Sachs India SPL

Li Cui+852-2978-0784 [email protected] Sachs (Asia) L.L.C.

Yu Song+86(10)6627-3111 [email protected] Gao Hua Securities Company Limited

Mark Tan+65-6889-2472 [email protected] Sachs (Singapore) Pte

Chiwoong Lee+82(2)3788-1722 [email protected] Sachs (Asia) L.L.C., Seoul Branch

MK Tang+852-2978-6634 [email protected] Sachs (Asia) L.L.C.

Jonathan Sequeira+852-2978-0698 [email protected] Sachs (Asia) L.L.C.

Maggie Wei+852-2978-0106 [email protected] Sachs (Asia) L.L.C.

Vishal Vaibhaw+91(80)6637-8602 v [email protected] Sachs India SPL

Hui Ying Chan+65-6654-5459 [email protected] Sachs (Singapore) Pte

Investors should consider this report as only a single factor in making their investment decision. For Reg AC certificationand other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html.

The Goldman Sachs Group, Inc. Global Investment Research

Assessing the BASE for Chinese growth page 2

Regional recap: Broad recovery continues, albeit at a moderated pace page 9

Asia exJapan economic calendar page 13

Forecast tables page 15


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September 27, 2013 Asia Economics Analyst

Goldman Sachs Global Investment Research 2

Assessing the BASE for Chinese growth

Why does the size of the BASE of recovery matter?Chinas industrial production (IP) rebounded sharply in July and August, growing at over15% in seasonally-adjusted, month-over-month, annualized terms. However, investors

doubts about the durability of the recovery remain high, partly reflecting skepticism overthe global outlook and concerns about the structural vulnerabilities that are increasinglyconstraining the domestic policy space.

To provide a perspective on the potential length of the recovery, we look at the breadth ofthe growth rebound so far, based on the idea that the two are closely related. Our overallassessment takes the following two steps:

First, we quantify the breadth of pickup by constructing a simple diffusion index (whichis a sum of 0 and 1 binary signals) to quantify the share of various economicsectors that are moving in support of headline growth. This index is our Breadth ofActivity S upport Estimate, or BASE . That is, the greater the BASE of the pickup, thelarger the number of sectors from which activity receives support.

Next, we relate the BASE to future growth, evaluating the extent to which the indexcan help shed light on the near-term outlook. We find that BASE is a significantpredictor for both the strength and direction of IP evolution over a 3-6 month horizon.

Compared to the practice of employing composite leading indicators (e.g., the onecompiled by the OECD for China) 1 to forecast growth, our approach has a fewcharacteristics which we believe are relatively favorable, as set out below:

Intuitively linking breadth to length . While strong specialized factors could give asignificant lift to growth, such a boost is arguably likely to be fleeting. Once thespecific support dissipates (e.g., temporary inventory restocking), so would theheadline growth momentum, unless the initial impetus has spilled over to the rest ofthe economy and triggered positive reinforcing dynamics. In contrast, a generalized or

more broad-based recovery receiving support from a wide range of sectors isintuitively more likely to have a firmer footing and hence more likely to be sustained.

Less undue influence from volatile spikes in any single data series . Individual dataseries could be occasionally distorted (pure noise or possible misreporting). Whilecomposite indicators compiled as a weighted average of individual data series arepartly shielded from idiosyncratic elements, diffusion indices such as the BASE, whichare composed of only 0 and 1 signals, provide a more effective mitigation.

No revision (unless data for underlying components are revised) and onlydependent on past and concurrent information . Unlike some composite indicatorsthat are derived with statistical filtering where the final observations for a given periodare partly reliant on data for the subsequent periods, our index makes use of only

raw (albeit seasonally adjusted) data and there is no need for revision to incorporateincoming data.

In trading for these benefits, however, there are some information costs associated withour approach:

Loss of magnitude information . In constructing the breadth index, we considerwhether momentum in each of the economic sectors has changed, but do not gaugeby how much.

1 See, e.g., http://stats.oecd.org/mei/default.asp?lang=e&subject=5&country=CHN for discussion on the OECD compositeleading indicator for China.


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Equal weight . While we select the component series underlying the BASE largelybased on their historical predictive performance (15 eventually picked out of a wide setconsidered), we give each the same weight in the final index, even though some of theselected series may have higher predictive power than the others.

The benchmark for our BASE indexIn broad terms, the ultimate variable of our interest is the near-term evolution of IPmomentum relative to its recent past.

Before going further in the discussion, we feel it would be helpful to specify how we definethe following timing conceptsnear-term, coincident, and recent:

Near-term. We look at three different horizonsa) average over the next 3-monthperiod (denoted as 3m); b) average over the next 6-month period (6m); and c)average over the 3-month period which is 3 months forward (3m3m).

Coincident. Ideally, this refers to the reading of the latest month. In practice,however, monthly data can be quite noisy. In striking a balance between suppressing

noise and preserving information at a high frequency, we measure coincident byaveraging the monthly readings of the latest two monthsi.e., average over months tand t-1.

Recent. This refers to the average reading of the 3-month period immediatelybefore the coincident windowi.e., average over months t-2, t-3 and t-4.

More precisely, therefore, what we are eventually interested in is the change in IPsequential growth averaged over the next 3m (t+1, t+2 and t+3), 6m (t+1, t+2, , t+6) or3m3m (t+4, t+5, t+6) horizon, from that averaged in the recent past (t-2, t-3 and t-4). Apositive number implies IP acceleration, and vice versa.

The BASE is then constructed with a main objective of helping us predict such IPperformance.

Building the BASEWe start out with a wide set of indicators which we believe capture a broad range ofeconomic sectors. These include, but are not confined to, the component series we use forour Current Activity Indicator (CAI, see Asia Economics Analyst : 13/05 - Measuring growthin emerging Asia, March 1, 2013) and for our composite cyclical indicators on constructionactivity, trade and financing (see EM Macro Daily - How strong is Chinas cyclical turn?November 2, 2012).

For each component series, we extract a binary signal for each month: 1 indicates thatthe coincident momentum of that component is faster than its recent past, and 0

otherwise.2

In other words, each binary signal denotes whether the component shows anacceleration.

We then whittle down this preliminary set of binary-signal series to a final 15, primarilybased on their performance to help predict future IP movement. During the selection, wealso make sure that every economic sector which we believe is important is represented inthe final set.

The final set is derived from the indicators listed in Exhibit 1, drawing from themanufacturing, trade, construction, logistics/services, and financing sectors.

2 In computing the momentums, we adopt the same timing concepts as those specified above.


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Exhibit 1: Binary signals from these 15 components form the BASE

Source: Goldman Sachs Global Investment Research.

Our diffusion index of the breadth of activity support, BASE, is the percentage of these 15indicators that show a 1 signal (Exhibit 2). Thus, a greater BASE means a larger numberof economic sectors that are accelerating, in support of headline activity momentum. Byconstruction, BASE is bounded between 0 and 100; since 2006, it has ranged between 13and 80.

The index showed six distinct peaks between mid-2006 and mid-2013. On the 1 st , 2 nd , 4 th ,and 5 th occasions (late 2006, mid 2007, early 2009 and late 2010, respectively), the jumps inBASE were followed by an acceleration in near-term IP after several months. Two clear

exceptions were the 3rd

and 6th

peaks around mid-2008 and much of 2012, respectively. Inthe former case, the lack of a subsequent rise in IP momentum is likely a reflection of theGFC that would not have been visible in BASE. In the latter, the eventual pickup in IPhappened with a particularly long lag after the initial climb in BASE.

Exhibit 2: A greater BASE appears to be followed by a faster IP momentum

Source: Haver, CEIC, Goldman Sachs Global I nvestment Research.

While the breadth of activity support is largely proportional to the coincident strength of IPacceleration, these two dimensions are not often aligned (their simple correlation is about0.5). Faster growth acceleration is not necessarily associated with a broader base ofsupport, and vice versa. Importantly, as we discuss below, the breadth of support appearsto have predictive power regarding the durability of the pickup, in addition to that of thecoincident strength of the pickup, especially beyond the 3m horizon.

Manufacturing Trade Construction Logistics/services Financing Industrial production Real exports New projects started Freight volume Overall total social financing NBS PMI production index Korean exports Floor space started Passenger volume Bank loans Electricity production Real imports Cement production HSBC Service PMI Auto sales

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3m IP change (RHS)

6m IP change (RHS)

3m3m IP change (RHS)

"X IP change" (X: 3m, 6m or 3m3m) refers to the change in sequential IP momentum in the latest X monthsfrom that in the 3 months prior.

3-month moving average; index 3-month moving average; percent


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How well does the BASE predict durability?As Exhibit 2 optically suggests, BASE appears to lead IP acceleration. Regression exercisesconfirm this observation.

For the full sample period including the global financial crisis (GFC), simple diffusionindices have limited predictive power, probably reflecting the scale and speed of the GFCs

shock effects. Excluding the GFC, however, the predictive power of BASE is clear (Exhibit3). The index, coupled with coincident IP momentum change, explains about 45% of thesubsequent IP momentum change over the 3m horizon, 37% over the 6m horizon, and 17%over the 3m3m horizon.

It is worth noting that the predictive power primarily comes from us taking the componentindicators collectively as a gauge of the breadth of activity support. Individually, singlecomponents do not tend to carry systematic forecasting ability regarding future IPevolution.

For instance, including PMIs (often thought to contain leading information) does notmaterially affect the results of our regressions, and the coefficients on them are notsignificant. 3

Exhibit 3: Regression results confirm that the greater the BASE of a growth pickup, thestronger the subsequent activity momentum


Positive feedback dynamics may amplify the breadth effectWe conduct an additional exercise to show how the breadth matters for the length of anactivity recovery, more explicitly taking into account the possible positive feedbackdynamics. In particular, a longer and/or stronger growth rebound may propel a pickup in awider range of economic sectors, which may in turn help prolong or strengthen therecovery.

Specifically, we estimate a simple vector auto regression (VAR) model on sequential IPchanges and our BASE, controlling for the global industrial cycle (proxied by compositeglobal manufacturing PMI) and our China Financial Conditions Index (FCI).

3 This continues to be true if we use some sub-indices of PMIs and/or certain transformed variants that our recent researchfinds contain typically more information about IP than headline PMIs do (see EM Macro Daily - Three more things to note onChinas PMIs, September 18, 2013 and EM Macro Daily - Chinas manufacturing PMIs: Which one should we look at andwhat are they telling us?, August 13, 2013).

Avg next 3m Avg next 6m Avg 3m, 3m forward

BASE 0.15*** 0.15*** 0.14***

Coincident IP momentum change 0.44*** 0.30** 0.17

Constant -8.20*** -8.56*** -8.35***

Sample period# Obs 73 70 70R-sq 0.45 0.37 0.17

Notes:***, **, * denote 1%, 5%, 10% statistical significantIP momentum change is relative to the recent pastT-stats are Newey-West adjusted to account for overlapping observations

Near-term IP momentum change

since 2006, excl GFC


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Largely corroborating with the regression analyses discussed above, the VAR resultsuggests that a more broad-based support for activity tends to give rise to a more durablegrowth pickup (Exhibit 4). Quantitatively, a 1 standard deviation shock to the size of theBASE of recovery generates a sustained positive impulse to IP growth for the subsequent 8months and with a cumulative effect of 0.6 percentage point (estimate at 1% statisticalsignificance).

Exhibit 4: A more broad-based support for activity tends to give rise to a longer-lastinggrowth upturn


BASE also gives meaningful signals on cyclical turnsThe above analyses show that a higher BASE reading, on average, implies a faster rise innear-term IP momentum than a lower reading does, above and beyond what the recentgrowth in IP itself suggests. A related but slightly different way to gauge the forecastingability of BASE would be to ask to what extent the index can help us reaffirm and/orforesee the directional turns of the growth momentum. That is, how well can BASE predictthe likelihood that near-term IP growth will be faster (or slower) than its recent level?

To measure this, we estimate a probability model (technically known as a logitregression) with the dependent variable being a binary indicator that takes on 1 if near-term IP growth is above its recent level, and 0 otherwise. As before, the near-termhorizons we consider are 3m, 6m and 3m3m.

Results suggest that BASE can be a significantly useful input in judging the momentumdirection for all the three horizons we consider. In contrast, the coincident change in IPmomentum does not add to the predictive power regarding the future direction of IPmomentum (although it is statistically significant in regression without BASE as anexplanatory variable). The results are essentially unaffected if we include the PMIs or theirsubcomponents in the regression, suggesting that BASE contains different and usefulinformation about the likely change in the economys momentum.

For an easier visualization of the relevance of directional signals sent by BASE, for eachreading on the index we tabulate the corresponding historical probability of a positivenear-term IP momentum change relative to its recent level (Exhibit 5).

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Accumulated Response of IP Growth

BASEChina FCI (easing)

China IPGlobal PMI

1-standard dev shock


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The upward slopping relationships depicted in the exhibit are a reflection of the usefulnessof BASE in gauging the l ikelihood of an upshift in near-term momentum: 4

The dots at the bottom left-hand corner represent the lowest BASE reading in oursample and the corresponding (unconditional) probabilities of an upshift in IPsequential growth for the three horizons (the probabilities are each about 35%).

The middle dots represent roughly the median reading of BASE, and thecorresponding probabilities of an upshift in IP momentum when BASE reading is at orabove that reading are around 56% for the 3m and 6m horizons and 49% for the 3m3mhorizon.

The dots at the top right-hand corner correspond roughly to the 15 th percentile readingof BASE. When the index is at or above this threshold, the probabilities of an upshift inthe IP momentum rise to as high as 90% for the 3m and 6m horizons, and 70% for the3m3m horizon.

Exhibit 5: A greater BASE means a higher probability that near-term IP momentum willaccelerate from its recent level


Where do we stand now?BASE has been increasing since May this year, and as of August stands at 73.3, which is inthe top 10 percent historically.

While we believe that domestic inventory restocking has likely been a key contributor to

the strong IP rebound in July and August, the notable breadth of the pickup suggests thatactivity is also receiving support from other main factors. For instance, the acceleration intrade, freight, service PMI and longer-term financing such as bank loans seems to indicatea genuine improvement in end-demand (Exhibit 6). This implies that even an end of therestocking cycle would probably weaken, but will likely not be enough to derail theongoing growth recovery.

4 Some commonly watched leading indicators, such as PMIs, i n fact do not systematically share such a predictivecharacteristic. We find that plotting Exhibit 6 with PMIs in stead of BASE would not produce the kind of upward slopingrelationships.

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Probability of acceleration in IP, relative to recent pace:

Over next 3 months

Over next 6 months

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Percent Percent


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In quantitative terms, the simple probability distributions that we show in Exhibit 5 abovewould suggest that at the current BASE reading, there is roughly 90% chance thatsequential IP growth would be faster than the average April-June level at the 3m and 6mhorizon, and 70% chance of that at the 3m3m horizon. These high implied probabilities areperhaps not too surprising, given the low benchmark comparison, with the average April-June IP growth at only about 6% annualized. Nevertheless, the high BASE reading is

giving a strong signal that the bottom of sequential IP growth is firmly behind us over thenext 3-6 months.

Exhibit 6: The BASE has been increasing since May, boding well for the durability of theongoing growth pickup

Source: Haver, CEIC, Goldman Sachs Global I nvestment Research.

Alternatively, mechanically applying the regression results presented in Exhibit 3, ouranalyses suggest that IP month-over-month would average at a solid pace of 12% over thenext three months and at a 9% pace over the next few months thereafter.

These exact estimates are meant to be indicative only as they do not take into accountmany other key forecasting factors, not least our global and Chinese policy outlooks. Yet,they give clear support to our baseline expectation of a sustainable recovery. While IPmomentum is likely to ease in the near term from the extraordinary levels in July andAugust, 5 we believe we will continue to see a healthy pace of IP expansion, averagingaround 10% in the remainder of the year to bring full-year GDP growth to 7.6%.

MK Tang

5 The near-term IP acceleration that our stylized estimates suggest is from the average April-June level (which is therecent period relative to the present, based on our earlier timing definitions), rather than the July-August level (which infact represents the coincident period relative to the present).

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80Contribution of each sector to the BASE:

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Regional recap: Broad recovery continues, albeit at a moderatedpace

Inflation and monetary policy in Asia is diverging. In India, the central bank raised the reporate on concerns about inflation, while August inflation in Singapore rose modestly from alow level and that in Hong Kong fell. The central bank in Taiwan kept its policy rate on holdgiven continued low inflation. As for growth, Chinas flash reading of the HSBC/Markit PMIfor September was better than expected, which could be positive for exports from the restof Asia to China. Korean exports are likely to maintain their positive momentum inSeptember, albeit at a moderated pace.

Inflation and monetary policy in AsiadivergingThe Reserve Bank of India (RBI) surprised the markets by raising the repo rate by25bps and cutting the Marginal Standing Facility (MSF) rate by 75bps . On the hike,the RBI stated that WPI inflation will be higher than initially projected for the rest of theyear and it raised its concerns on the high level of retail inflation. At the same time, it alsoeased liquidity by cutting the MSF rate, signaling that the RBI has moved from a focus oncurrency defense to inflation reduction.

Overall, these moves, which are the first rate decision by the RBIs new governor, weremore hawkish than the markets expected, but were more dovish than our expectationsgiven the MSF rate cut. Going forward, we see the RBI reducing the interest rate corridorby initially cutting the MSF rate. Subsequently, we see the RBI moving the effective policyrate from the MSF to the repo by Q1 2014, and gradually increasing the repo rate by100bps to 8.50% by March 2014 to curb inflationary expectations.

Inflation has risen modestly in Singapore in August, while inflation in HongKong fell . Headline CPI in Singapore rose a modest 2% yoy from 1.9% yoy in July. Whilelower than expected, this reading was significantly impacted by a drop in administeredtransport costs and suggests that inflationary pressures appear to be building elsewhere.On a seasonally-adjusted, month-over-month basis, CPI rose 0.6% from a flat reading inJuly, the strongest since February this year, driven by broad-based gains in majorcomponents including housing costs and food. The Monetary Authority of Singaporescore inflation measure (which strips out private road transport and accommodation costs)increased 0.3% month-over-month s.a. from a contraction of 0.2% month-over-month s.a.previously (i.e., to 1.8% yoy from 1.6% yoy previously). Separately, Hong Kongs inflationwas at 4.5% yoy for August, down from 6.9% yoy in July, due to base effects (the July 2012reading was unusually soft due to a waiver in some public housing rental fees).

Taiwans central bank kept its policy rate on hold given low inflation. We expect the centralbank to stay on hold through 2013, and believe that more clarity is needed on both thedomestic and external outlooks before further monetary policy adjustments are made.


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Exhibit 1: Inflation in Korea and Singapore remains low, while inflation in India continuesto be elevated

Source: Haver.

ProductionChina Flash PMI continued to recover, albeitmoderatelyThe recovery in Chinese activity indicators likely continued in September, albeitat a moderated pace . Chinas September HSBC/Markit manufacturing PMI flash readingrose to 51.2 from 50.1 in August, a 6-month high and stronger than expected (Bloombergconsensus: 50.9). Most of its sub-indexes showed signs of cyclical improvement,

especially new orders and new exports orders. The Chinese PMI tends to move along withAsian exports to China, suggesting that exports of Asian countries to China could remainstrong in September (Exhibit 2). With regard to the final PMI, we expect external demandto hold up well, as indicated by the healthy first 20-day exports data reported by Koreaalthough Chinas 30%+ annualized exports growth will likely moderate on the phase-out ofinventory restocking after an initial turn in the cycle. Therefore, we believe sequentialindustrial activity growth is likely to moderate from the above trend 15%+ annualized ratein July and August to a lower but still decent level of closer to 10% annualized.

Singapores industrial production (IP) was slightly weaker than expected, rising 3.5% yoy inAugust from 3.0% yoy in July. Production fell 1.4% on a month-over-month basis, weighedupon by electronics. Our Singapore Current Activity Indicator (CAI) is now in negativemomentum territory, registering -1.2% quarter-over-quarter s.a. in August after this IP print(from 0.0% qoq s.a. previously), signaling slower sequential GDP momentum in Q3 fromthe acceleration in Q2.

Taiwans Industrial Production Index fell 0.7% yoy in August, weaker than Bloombergconsensus expectations. With two-thirds of the components of our CAI for the month ofAugust now released, our Taiwan CAI stands consistent with 4.3% quarter-over-quarterannualized growth in August, down from 4.5% quarter-over-quarter annualized growth inJuly.

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Year-over-year change Year-over-year change


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Exhibit 2: Improving Chinese PMI could boost Asian exports to China given historicalcorrelations (81%)

Source: Haver.

Asian exports could maintain the positive momentum in SeptemberKorean exports remained strong in September, based on high frequency data. Koreasexports for the first 20 days of September were up 13% yoy from a 16% yoy increase inAugust 2013. However, total headline exports were down 3% yoy due to the long KoreanThanksgiving holiday last week, which reduced business days to 12 from 14 in 2012. Dailyexports slipped 2.5% month-over-month to US$2.2bn from a record high in August, whichsurged 15.6% month-over-month to US$2.3bn (Exhibit 3).

Total headline imports for the first 20 days of September fell 4% yoy versus a 3% yoy

decline for the comparable period in August. The trade balance recorded a deficit ofUS$0.4bn, a slight deterioration from a close to zero balance during the first 20 days ofAugust. The full-month trade data for September and details of destinations and productswill be released next week.

Exhibit 3: Korean exports remained strong for the first 20 days of September albeitslipping from the record high in August

Source: Korea Customs Office.

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Exports in other countries show overall positive momentum, although the data releasetends to be lagging. Exports from the Philippines rose 2.1% month-over-month s.a. in July,while monthly merchandise exports from Hong Kong, which are highly volatile, fell 7.4%month-over-month s.a. in August from 11.4% in July. The positive momentum has beenobserved in most Asian countries since July this year (Exhibit 4). Taiwan export ordersrose 0.5% yoy in August, unchanged from 0.5% yoy in July but lower than the Bloomberg

consensus of 1.3% yoy.

Exhibit 4: We saw upturns in exports momentum in July in Asia, which was maintained in many Asian countries inAugust as well

Source: Haver.

Goohoon Kwon

Asian Exports Score card (mom s.a.)Jan 12 Feb 1 2 M ar 12 Apr 12 May 12 Jun 12 Jul 12 Aug 1 2 Sep 12 O ct 1 2 Nov 12 Dec 12 Jan 13 F eb 1 3 Ma r 13 Apr 13 May 13 Jun 13 Jul 1 3 Aug 13

China 2.3% 13.3% 17.9% 1.5% 6.5% 2.8% 4. 5% 2.7% 3.0% 1. 7% 3.3% 7.2% 1.1% 3. 9% 3.1% 2.2% 6.6% 6 .4% 4.0% 4 .4%Hong Kong SAR 1.1% 8 .1% 10.6% 1.1% 5 .2% 5.6% 0. 6% 4.2% 3.2% 4 .7% 7.5% 5 .1% 5.0% 9.9% 11.1% 0.6% 4.7% 4.6% 11.4% 7.4%India 2.2% 0.6% 6.2% 2.5% 2 .8% 0 .6% 2. 9% 4.0% 2.7% 1. 4% 2.3% 0.4% 2.6% 1. 6% 1.8% 9.1% 0.4% 0.7% 15.0% 4.5%Indonesia 0.2% 3.0% 1.3% 2.3% 1.8% 5.6% 4.4% 15.9% 17.1% 3.2% 5.0% 6.8% 10.0% 0.9% 9 .4% 2 .4% 3.1% 5.8% 2.5%Japan 0.2% 0.5% 4.2% 2.1% 0.2% 1.3% 0.3% 2.6% 1.7% 3.2% 3.0% 0.4% 2.6% 2.9% 0.2% 2.2% 0.1% 4.7% 3.9% 4.1%Korea 4.4% 11.9% 9.5% 3.4% 3.3% 2.1% 2. 3% 3.9% 0.7% 1. 1% 3. 8% 7.8% 12.2% 7.0% 1.3% 2.5% 5.6% 5 .1% 1.0% 8 .3%Malaysia 1.3% 6.1% 5.7% 0.1% 0.5% 1.9% 5.1% 0.5% 8.5% 1.4% 1.5% 5.2% 5.0% 1.0% 5 .1% 2 .3% 1.3% 5.3% 5.2%Phi lippines 17.5% 10.0% 13.0% 7.4% 4 .2% 12.6% 5.1% 17.0% 19.0% 2.4% 1.9% 6.4% 2.2% 4.5% 3.6% 5.2% 16.8% 7.5% 2.1%Singapore 0.3% 8.9% 12.3% 0.8% 1 .9% 3.8% 0.7% 2.0% 1.9% 4. 2% 1.1% 7.6% 5 .6% 1.0% 8.0% 10.8% 1.3% 7.3% 5.7% 4.5%Taiwan 1.2% 2.6% 2.8% 1.0% 1.6% 0.3% 1.2% 0 .6% 8 .0% 3.1% 1.0% 5.7% 5.4% 0.8% 3.1% 6 .4% 3.5% 7 .7% 8.4% 3.1%Thailand 3.8% 11.4% 6.4% 0.0% 8.9% 7.5% 0. 7% 1.5% 0.3% 1. 6% 3. 6% 1.9% 5.6% 9.5% 3.2% 0.8% 0.2% 5.7% 1.2%Vietnam 16.8% 44.9% 12.0% 0.1% 5 .4% 3.4% 0. 8% 0.7% 3.4% 3.9% 1. 0% 4.0% 18.5% 23.5% 19.8% 4.7% 14.0% 10.6% 2.6% 1.3%Comove ratio 75% 92% 92% 67% 83% 92% 58% 58% 100% 50% 58% 50% 67% 75% 58% 67% 67% 83% 83% 58%Memorandum

Australia 3.5% 4.4% 4.0% 0.0% 4.4% 0 .2% 0.8% 2.9% 3.5% 0. 8% 3. 3% 1.7% 2.7% 2.2% 1.6% 6.0% 1.6% 5.0% 1.2%New Zealand 5.1% 5.5% 3.2% 2.5% 0 .2% 8 .4% 5.8% 7.4% 0.2% 5 .5% 8.6% 1.5% 4.9% 9.3% 3.4% 6.3% 5.7% 7 .1% 2 .6% 3.0%


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Asia ex-Japan Economics Calendar

India current account balance (Sep 30): We expect the current account deficit to worsen in the April-June quarter(Q2 2013) to US$24.0bn (5.4% of GDP), from US$18.1bn (3.6% of GDP) in Q1 2013, driven mainly by a widening tradedeficit. Provisional monthly trade data show that exports declined 3.2% yoy in Q2 2013, compared to 5.9% yoy growth in

Q1 2013. Imports growth jumped to 6.3% yoy, driven by high gold imports in April and May.China manufacturing PMI (Oct 1): We expect the official PMI to rise from its August level. The headline PMI readingtends to lag sequential industrial production growth slightly, so the strong industrial growth in August should bereflected in the September headline PMI. In addition, there is typically an upward seasonal bias in September, though ithas become smaller in recent years.

Korea exports (Oct 1): We expect September headline exports to fall 2.5% yoy given the long Korean Thanksgivingholiday last week, which reduced working days to 18, the lowest in 6 years (except some winter months entailing LunarNew Year holiday). On a per-day basis, we expect exports to rise 8.3% yoy, a moderation from the 12.8% yoy gain inAugust but still a strong increase.

Source: Bloomberg, Goldman Sachs Global Investment Research.

Date Country Indicator/Event Period Forecast Previous

Time (HKT) GSBloombergConsensus

Fri Sep 27

7:00 Korea Current Account Balance Aug US$6.8bn9:30 China Industrial Profits Aug +11.6% yoy15:30 Thailand Foreign Reserves 20-Sep US$169.1bn# Thailand Capacity Utilization Aug 64.6# Thailand Manufacturing Production Aug -1.3% yoy -4.5% yoy

Mon Sep 307:00 Korea Industrial Production Aug +0.7% yoy +2.0% yoy +0.9% yoy9:45 China HSBC/Markit Manufacturing PMI Sep 51.2 50.115:30 Thailand Exports Aug -1.3% yoy15:30 Thailand Imports Aug -0.2% yoy15:30 Thailand Trade Balance Aug US$258mn15:30 Thailand Current Account Balance Aug (US$709mn)19:30 India Current Account Balance Q2 (US$23bn) (US$18bn)


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Asia ex-Japan Economics Calendar (continued)

Source: Bloomberg, Goldman Sachs Global Investment Research.

Date Country Indicator/Event Period Forecast Previous

Time (HKT) GSBloombergConsensus

Tue Oct 1

7:00 Korea CPI Sep +1.2% yoy +1.2% yoy +1.3% yoy8:00 Korea Exports Sep -2.5% yoy +2.0% yoy +7.7% yoy8:00 Korea Imports Sep -1.8% yoy +0.8% yoy8:00 Korea Trade Balance Sep US$4.55bn US$4.85bn9:00 China Manufacturing PMI Sep 51.5 51.5 51.012:00 Indonesia CPI Sep +9.3% yoy +8.8% yoy12:00 Indonesia Exports Aug -6.1% yoy12:00 Indonesia Imports Aug +6.5% yoy12:00 Indonesia Trade Balance Aug (US$2.3bn)# Thailand CPI Sep +1.7% yoy +1.6% yoy +1.6% yoy

Thu Oct 3

16:30 Hong Kong Retail Sales Aug +9.5% yoy

Fri Oct 4

9:00 Philippines CPI Sep +2.5% yoy +2.5% yoy +2.1% yoy12:00 Malaysia Exports Aug +4.5% yoy12:00 Malaysia Imports Aug +6.2% yoy12:00 Malaysia Trade Balance Aug RM2.9bn15:30 Thailand Foreign Reserves 27-Sep16:20 Taiwan Foreign Reserves Sep US$409.4bn

# Release time uncertain, time shown (if any) is the approximate typical release time.


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Forecast Tables

Real GDP Growth (year-over-year)

GS Consensus GS ConsensusAsia ex-Japan 6.3 5.9 6.0 6.3 6.3

China 7.8 7.6 7.5 7.7 7.4India 5.0** 4.0** 4.9** 5.4** 5.9**South Korea 2.0 2.7 2.6 3.5 3.4Hong Kong 1.5 3.2 3.0 3.4 3.6 Taiwan 1.3 2.8 2.4 3.9 3.7 ASEAN 5.7 4.8 4.9 4.9 5.3

Singapore 1.3 2.3 2.8 3.2 3.7 Malaysia 5.6 4.6 4.4 4.8 5.1Thailand 6.5 4.0 3.6 4.3 4.5

Indonesia 6.2 5.4 5.7

5.5 5.9

Philippines 6.8 6.8 7.0 5.5 6.1USA 2.8 1.6 1.6 2.9 2.7 Euro area -0.6 -0.4 -0.4 0.9 0.9Japan 2.0 1.9 1.9 1.5 1.7 *GS estimates for annualized growth rate of potential output from 2013-16**Fiscal year basis, 2013 is India FY14 (Q2 2013-Q1 2014).Source: Consensus Economics, Goldman Sachs Global Investment Research.

20122013 2014 Potential

Growth*

8.06.53.84.03.5

4.05.04.5

6.05.02.51.30.8

Consumer Prices (year-over-year)

GS Consensus GS ConsensusAsia ex-Japan 3.4 3.7 3.4 3.5 3.7

China 2.6 2.5 2.6 2.6 3.0 India 7.4* 7.0* 5.9* 5.8* 5.9* South Korea 2.2 1.5 1.5 2.6 2.6 Hong Kong 4.1 3.6 4.1 3.3 3.8 Taiwan 1.9 1.8 1.2 1.7 1.8 ASEAN 3.5 4.8 4.4 4.6 4.3

Singapore 4.6 3.0 2.6 3.3 2.9Malaysia 1.7 2.3 2.1 2.4 2.7 Thailand 3.0 2.5 2.4 3.2 2.9

Indonesia 4.3 8.2 7.3 6.8 6.4Philippines 3.2 3.2 3.0 3.8 3.8

USA 2.1 1.6 1.6 1.8 1.9Euro area 2.5 1.5 1.5 1.5 1.5 Japan 0.0 0.2 0.1 2.3 2.2 *WPI for India on fiscal year basis, 2013 is India FY14 (Q2 2013-Q1 2014); inflation objective rather than target**Core inflation target***ECB aims to maintain inflation rates "below, but close to, 2% over the medium term"Source: Consensus Economics, Goldman Sachs Global Investment Research.

-

2012 2013

2.0

2.5-3.5-

3.0-5.02.0

2.0***

2014 InflationTarget/Range

3.55.0*

--

0.5-3.0 **3.5-5.5


16/19



Forecast Tables (continued)

Policy Interest Rates (percent)Current

Sep 26 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4QAsia ex-Japan

China 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.25India 7.50 7.50 7.25 7.50 8.00 8.50 8.50 8.50 8.50South Korea 2.50 2.75 2.50 2.50 2.50 2.50 2.50 2.75 3.00Hong Kong - - - - - - - - -Taiwan 1.9 1.9 1.9 1.9 1.9 1.9 1.9 2.0 2.0ASEAN

Singapore - - - - - - - - -Malaysia 3.00 3.00 3.00 3.00 3.00 3.00 3.25 3.50 3.50Thailand 2.50 2.75 2.50 2.50 2.50 2.50 2.75 3.00 3.00Indonesia 7.25 5.75 6.00 7.25 7.75 7.75 7.75 7.75 7.75

Philippines 3.50 3.50 3.50 3.50 3.50 3.50 3.75 4.00 4.00USA 0.07 0.14 0.09 0.13 0.13 0.13 0.13 0.13 0.13Euro area 0.50 0.75 0.50 0.50 0.50 0.50 0.50 0.50 0.50Japan 0.07 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10

Policy interest rates: China: 1-year lending rate, India: repo rate; Korea: 7-day repo; Malaysia: overnight policy rate;

Thailand: 1-day repo, Philippines: repo rate, Indonesia: 1-month SBI rate, Taiwan: rediscount rate; USA: Fed funds effective rate;Euro Area: Main refinancing operations: fixed rate; Japan: Overnight call rate.


2013 2014

Exchange Rates (local currency units per USD)

Current 3-Month Horizon 6-Month Horizon 12-Month Horizon

Sep 26 Forward Forecast Forward Forecast Forward ForecastAsia ex-Japan

China 6.15 6.15 6.16 6.16 6.16 6.19 6.16India 62.72 64.40 70.00 65.76 72.00 67.80 70.00South Korea 1079 1086 1110 1091 1100 1098 1100Hong Kong 7.8 7.8 7.8 7.8 7.8 7.8 7.8Taiwan 29.6 29.4 30.3 29.3 30.3 29.2 30.3ASEAN

Singapore 1.25 1.25 1.27 1.25 1.25 1.25 1.23Malaysia 3.18 3.19 3.40 3.21 3.30 3.24 3.20Thailand 31.1 31.3 33.0 31.5 32.5 31.8 32.0Indonesia 11140 11485 12000 11780 12000 12240 11800Philippines 43.3 43.0 43.5 43.0 42.3 43.1 40.0

Euro area* 1.35 1.35 1.38 1.35 1.40 1.35 1.40Japan 99.3 99.3 105.0 99.2 105.0 99.0 110.0* USD per Euro



17/19



Highlights of Recent GS ECS Research

Asia ex Japan

How emerging Asia reacts to higher US yields Sep 13, 2013

A deep dive into regional financial flows: Possible impact of US Fed tapering Sep 6, 2013

Cutting growth forecasts for South and Southeast Asia; more near-term momentum in China Sep 3, 2013

Modeling a sudden drop risk for Asian currencieswhich is the most vulnerable? Aug 5, 2013

Emerging Asiastill coupled to DM demand Jun 7, 2013

Cyclicality of Asian financial marketsseen from our Global Leading Indicator Jun 3, 2013

A redesigned MAP of emerging Asia data May 10, 2013

Greater China

Three more things to note on Chinas PMIs Sep 18, 2013

When the world is not enough: Chinas expanding need for sustainable internal growth Sep 10, 2013

Can the recovery in the DM cycle help lift Chinas growth this time? Aug 20, 2013

Chinas manufacturing PMIs: Which one should we look at and what are they telling us? Aug 13, 2013

China: Labor market conditions supported by slower wage growth, so far Aug 8, 2013

The China credit conundrum: Risks, paths and implications Jul 26, 2013

China: Liconomics: Not just about reform and not just about Premier Li Jul 23, 2013

Chinese exporters are upgrading, but grappling with fast rising labor cost Jul 18, 2013

Chinas growth headwinds through the lens of a new FCI Jun 21, 2013

Global Economics Paper: 218 - China: More efficient cities key to a brighter growth path May 21, 2013

Korea

Koreas current accountheaded for a 14-year-high surplus of 5% of GDP this year Sep 4, 2013

Korearecovery still on track Jul 3, 2013

Could under-hedging by Korean exporters give rise to KRW strength? Apr 23, 2013

Revision of our macro forecasts for Korea on aggressive monetary easing in Japan Apr 16, 2013

Korea: Cutting the Gordian knota large supplementary budget to be unveiled soon Apr 3, 2013

Recent yen-won movementsa manageable headwind for Korean exports Feb 1, 2013

India

India: RBI shifts focus to battling inflation; changes to our rate forecasts Sep 23, 2013

Indias positive and negative feedback loops Sep 16, 2013

India - What are the policy options? Aug 26, 2013

Indianesia elevated vulnerability in the rupee and rupiah Jul 16, 2013

India: A more challenging external environment, downgrading our GDP forecasts Jul 4, 2013

India: What next for the INR and the current account? Jun 14, 2013

ASEAN

ASEAN markets roiledwhere do we go from here? Aug 22, 2013

Indianesiaelevated vulnerability in the rupee and rupiah Jul 16, 2013

ASEAN: Assessing the impact from recent market moves and a slowing China-revising down our growth forecasts Jun 25, 2013

Indonesia: Policy headwinds are abatingimplications of the potential fuel price hike Jun 20, 2013 ASEANs half a trillion dollar infrastructure opportunity May 30, 2013

ASEAN soft patchstronger than meets the eye May 29, 2013

Japan (this section is provided by our Japan Economics Team based in Tokyo)

Japan: Construction industry supply capacity militates against over-reliance on the second arrow Sep 20, 2013

Japan: Was VAT hike really responsible for the prolonged economic slump in the late 1990s? Sep 12, 2013

Japan: Market inflation expectations imply a low opinion of Abenomics third arrow Aug 23, 2013

Japan: Assessing the BOJ's aims from the standpoint of real interest rates Aug 16, 2013

Japan: Abenomics vs. Takahashi economic policy: Q&A roundup Jul 26, 2013


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Disclosure AppendixReg ACI, Goohoon Kwon, CFA, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company orcompanies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specificrecommendations or views expressed in this report.

We, Andrew Tilton, Tushar Poddar, Li Cui, Yu Song, Mark Tan, Chiwoong Lee, MK Tang, Jonathan Sequeira, Maggie Wei, Vishal Vaibhaw and HuiYing Chan, hereby certify that all of the views expressed in this report accurately reflect our personal views, which have not been influenced byconsiderations of the firm's business or client relationships.

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