hsbc/markit pmi, industrial profits, mines inside ......governor glenn stevens speaks at credit...

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BRIEF ChinaNews, aNalysis aNd CommeNtary

03.25.14www.bloombergbriefs.com

■ MONDAY, MARCH 24: U.S. President Barack Obama joined leaders from more than 20 countries including Russia, China, Japan and Germany in The Hague for a two-day summit. HSBC and Markit China manufacturing purchasing managers’

index unexpectedly fell in a preliminary March reading. The annual Mines and Money conference takes place in Hong Kong (Through March 28).

■ TUESDAY, MARCH 25: The Conference Board China February Leading Economic Index, 10 a.m.

■ WEDNESDAY, MARCH 26: U.S. durable goods orders barely increased in February after declining the previous two months, according to a Bloomberg survey, 8:30 p.m. RBA Governor Glenn Stevens speaks at Credit Suisse forum in Hong Kong.

■ THURSDAY, MARCH 27: The Federal Reserve releases results from stress tests on hypothetical bank payouts. 4 a.m. The International Grains Council’s grains and oilseeds supply and demand report, 11 p.m. China industrial profits for February, 9:30 a.m.

■ FRIDAY, MARCH 28: U.S. personal spending probably increased in February, accord-ing to forecasts, partly reflecting outlays on utilities as temperatures dropped.

HSBC/Markit PMI, Industrial Profits, Mines INSIDE

2 BIg PICTURE: Tom Orlik on how the surprise fall in the yuan is a factor behind copper’s corroding value.

3 CHART OF THE WEEk: Australia defies China gloom as rebounding jobs market signals faster growth.

4 FOMC: Joseph Brusuelas on the U.S. Fed’s decision to shift away from quantitative targets for unem-ployment and inflation during its first meeting with Janet Yellen at the helm.

5 BI INSIgHTS: Tim Craighead of Bloomberg Industries says China’s renewed urbanization drive will bolster demand for technology.

6 ONE ON ONE: Peter Cook, a professorial fellow at the Univer-sity of Melbourne and geologist, on the shale energy revolution down under.

9 CHINA gROWTH: Orlik says the unexpected drop in the HSBC Markit PMI points to deteriorating conditions, though an aggressive shift to stimulus is unlikely.

THIS WEEK Jennifer Bernstein

China’s banks bought 128 billion yuan of foreign currency in February. Continued strong capital inflows help explain why China’s money market rates fell over the course of the month. They also underline the role of the central bank in pushing yuan depreciation, as capital inflows point to market pressure for the currency to gain.

— Tom Orlik, Bloomberg Economist

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←Banks FX Purchases - billions yuan Interbank Rates →

Source: Bloomberg

Interbank Rates Drop as China Capital Inflows Are Strong

CAlENDAR DAte event SuRvey PRIoR

3/25 Confer Brd Lead Econ Indx — —

3/25 HK Exports YoY 8.0% -0.4%

3/25 HK Imports YoY 9.0% -2.7%

3/25 HK Trade Balance -39.0B -20.0B

3/27 Industrial Profits YTD YoY — 12.2%

3/28 Leading Index — 99.48

3/31 HK Budget Balance HKD — 38.4B

3/31 HK Retail Sales Value YoY — 14.5%

3/31 HK Retail Sales Volume YoY — 16.8%

3/31 HK Money Supply M1 YoY — 5.8%



4/1 Manufacturing PMI — 50.2

4/1 HSBC China Manufact PMI — —

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03.25.14 www.bloombergbriefs.com Bloomberg Brief | China 2

A surprise fall in the yuan is exposing copper’s vulnerability to shifts in China’s financial markets.

The yuan has fallen 2.8 percent against the dollar since the start of the year. That’s a major surprise. Yuan appreciation has been one of the safest bets in global markets for close to the last decade. The price of copper in Shanghai during the same period has tumbled 14.7 percent. China’s copper imports fell 26 percent month on month in February.

Tying together the fall in the red currency and the decline in the red metal is the use of copper as a financing vehicle.

In the first leg of the transaction, traders borrow cheaply in dollars to buy copper overseas. That copper is then imported into China and used as collateral to obtain yuan loans. Those funds are invested in high-yield savings products. When the products mature, the traders can repay the original loan and pocket the difference.

That trade works well as long as interest rates in China stay higher than offshore and, crucially, the yuan continues to appre-ciate. Higher prices for copper in Shanghai than London probably don’t hurt either.

In February and March, with China’s currency making a pronounced and unexpected fall, borrowing in dollars and repaying in yuan no longer looked so attractive. Imports fell in February and

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6/2013 8/2013 10/2013 12/2013 2/2014

← Dollar/Yuan Shanghai Copper - Yuan/Ton →

Source: Bloomberg CNY Curncy , CUA Comdty

Copper Prices, Yuan Have Plunged in Early 2014

BIG PICtuRe TOM ORLIK, BLOOMBERG ECOnOMIST

Copper Financing Deals in China Losing their Luster

the offloading of unwanted copper inven-tory triggered a plummet in prices. The premium of Shanghai to London copper prices narrowed.

China’s lackluster growth is also a factor behind copper’s corroding value. Falling exports and decelerating industrial output in February prompted a swathe of econo-mist downgrades. The median forecast for China’s 2014 GDP growth fell to 7.4

percent in March from 7.5 percent at the start of the year.

Still, the slowdown in China’s growth is a long-term trend. It’s the use of copper as a financing vehicle that drives sud-den and unexpected shifts in demand. With billions of dollars of metal tied up in financing trades, expect further movement in China’s currency and rates to have an outsize impact on prices.

economicscommentary and analysis of the key economic information you need to know each day. BRIEF newsletters for Professionals, from Professionals. Brief<Go> www.BloomBerGBriefs.com

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■ “Weakness is broadly-based with do-mestic demand softening further,” said Qu Hongbin, chief China economist at HSBC. “We expect Beijing to launch a series of policy measures to stabilize growth. Likely options include lowering entry barriers for private investment, targeted spending on subways, air-cleaning and public housing, and guiding lending rates lower.”

■ China won’t use fiscal stimulus to encourage investment, and instead will focus on quality of growth, Finance Min-ister Lou Jiwei said. “While much needed, the deposit-rate reform is likely to raise costs throughout the economy and will be a drag on growth,” said Dariusz kowal-czyk, a Credit Agricole strategist. Lou’s comments are positive for the long-term potential, but may temper market hopes for policy stimulus, he said.

■ “The Aussie economy looks to be strengthening domestically and, therefore, markets are pricing a small chance of rate hikes from the RBA which will be broadly Aussie-kiwi positive,” said geoffrey ken-drick, head of Asian currency and rates strategy at Morgan Stanley. “It could be very slow and you may just keep getting stuck here for a little while,” he said, pre-dicting a move to nZ$1.09 by June 30.

■ “China’s resolution to reform its econ-omy will inflict a lot of pain on its banking system,” said Richard Cao, an analyst at Guotai Junan Securities. “The growth model of depending on loan expansion and government-protected margins will be seriously challenged.”

■ More than $3.5 billion has been wiped off the value of offshore yuan structured products, Morgan Stanley estimates, as China’s slowing economy and mounting credit concerns weaken the currency. Losses on Target Redemption Forwards were probably in the region of $3.5 billion at an offshore exchange rate of 6.2 per dollar, the bank said. A slide to 6.38 is probable, a level that would lead to losses of $7.5 billion. “It’s inevitable the currency keeps weakening, and the higher-volatility environment implies that the pace will be quicker,” said geoffrey kendrick, head of Asian currency and rates strategy at Morgan Stanley.

Australia Defies China Gloom as Jobs Signal Growth

For better or worse, investors have come to regard Australia as an economic satellite of China.

The gravitational pull exerted by China’s appetite for Australian iron ore and other commodities was one of the reasons the nation of 23 million managed to avoid reces-sion during the global financial crisis. Yet the latest data show that the two economies may be decoupling. For Australia, the timing couldn’t be better: The most recent num-bers on factory output, investment and retail sales indicate China may have difficulty attaining the 7.5 percent annual growth target set by Premier Li Keqiang.

Analysts point to Australia’s rebounding jobs market and faster growth as signs that the country is defying the slowdown of its main trading partner. Citigroup Inc.’s Economic Surprise Index, which measures the gap between data reports and ana-lyst estimates, gave a reading of 50.3 in March for Australia, up from only 9.3 three months earlier. A positive reading means economic reports have been coming in above estimates. The Citi index for China has been moving the opposite way, reach-ing -110.1 in March.

Economists credit the Reserve Bank of Australia with steering the economy through the fading of the China-fueled mining investment boom. The central bank cut bor-rowing costs by 2.25 percentage points from late 2011 through August last year, to a record-low 2.5 percent, in the process nudging up home prices and building approvals.

“Why are we not following China? Because mining is not the main driver of Aus-tralia’s economy in normal times,” said Paul Bloxham, chief Australia economist at HSBC Holdings Plc in Sydney. The RBA’s rate cuts have supported a process of rebalancing in which the housing and service industries are recovering their roles as primary economic engines, Bloxham said: “Australian monetary policy is still effec-tive. It’s still working.”

Even with a cooling China, Australian employers added 80,500 full-time jobs in February, the most since just after the last recession in 1991. Companies that have announced plans to expand payrolls include Woolworths Ltd., the country’s largest retailer, and Coles Supermarkets. The positive employment numbers prompted Bill Ev-ans, an economist at Westpac Banking Corp., to drop his prediction of further rate cuts.

“The bank is setting a very high hurdle for any further policy stimulus,” Evans said.

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Australia ChinaCitigroup Economic Surprise Index

A positive reading means that data releases have been stronger than expected.

A negative reading means that data releases have been worse than expected.

Source: Bloomberg CESIAUD Index, CESICNY Index

MARket CALLS BLOOMBERG nEWS

CHART OF THE WEEk MICHAEL HEATH, BLOOMBERG nEWS

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The U.S. Federal Reserve in its first meeting with Janet Yellen at the helm chose to adopt greater discretion in its policy decisions, shifting away from quantitative targets for unemployment and inflation. This creates space for policy makers to retain a dovish stance and keep rates well below what simple policy rules would prescribe.

The Fed noted the policy rate could change based on realized and expected progress in meeting its full employment and price stability mandates. This, com-bined with a slight move forward in ex-pectations for when the first rate increase may take place, muddied somewhat the interest rate outlook.

There may be some investors who inter-pret this as creating risk of a premature rate tightening, or a quicker pace of rate increases, once they begin. Yellen noted in her press conference that a “consider-able period” may be six months after the conclusion of asset purchases. Should the Fed not deviate from its current course, that would imply the first rate increase could occur in mid-2015.

The immediate move higher in yields after the publication of the statement and the release of the Fed’s summary of eco-nomic projections is instructive of how dif-ficult the communications challenges will be for the Fed now that easily identifiable anchors for policy have been eliminated.

It would not be a surprise to see more interest rate volatility around Fed meet-ings, Congressional testimony and policy speeches. One way to clarify the confusion on the rate outlook would be for the Fed to publish and provide timely updates to the varied metrics on the labor market, infla-tion and growth that it follows, similar to the policy innovation put forth by the Bank of England when it shifted from quantita-tive to qualitative forward guidance.

The main takeaway from the statement is that the committee expects to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends. The first rate increase will also depend on growth and improvement in the broad range of labor market indicators the Fed follows.

The long-run growth potential of the U.S. economy has slowed considerably in the

wake of the financial crash and Great Re-cession. The Fed now believes the growth limit of the economy is 2.1 percent, down from 2.3 percent posted last year and well below the 2.5 percent that it identified as trend growth for most of the business cycle.

The economic reality is that a com-bination of falling productivity, broad demographic changes associated with the retirement of baby boomers, a mild form of hysteresis in the labor market and continued deleveraging by U.S. house-holds will probably mean the Fed will have to move cautiously with respect to the

timing of the first rate increase. Based on the updated central tendency forecast, the timing for this appears to be sometime in late 2015.

Yellen’s press conference, the summary of economic projections and the FOMC statement lay out an implicit acknowl-edgement of the structural challenges facing the Fed and suggest that fiscal policy, rather than monetary, is the optimal solution to the chronic underperformance of the economy and the prodigious labor and economic slack.

FoMC JOSEPH BRUSUELAS, BLOOMBERG ECOnOMIST

Fed Abandons Quantitative thresholds for Range of Data

0.25% 0.25%

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Source: Bloomberg, adapted from FOMC Summary of Economic Projections, March 2014.

(Median Projections as of March 2014)

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FOMC Implied Projections

Source: Laubach and Williams

Federal Funds Rate Projections

lower Natural Rate of Interest going Forward

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Urbanization was a principal topic at China’s national People’s Congress, which re-emphasized the goal of moving hundreds of millions of people to cities from rural areas to promote income growth, domestic consumption and social welfare.

The focus of this mass-migration policy is now moving to third- and fourth-tier cities in the central and western regions, after it increased the population of the northern, eastern and southern regions by 9 to 16 percent between 2000 and 2012. Beijing, Shanghai and Guangdong accounted for about half of a 48 million increase in China’s population between 2005 and 2012. new initiatives are de-signed to lure rural residents into develop-ing cities across the country.

Plans for urbanization focus on using information technology to execute reforms in areas including education and health care. This might spur technology and tele-com infrastructure demand, and create opportunities for companies in social-media, data and internet services. China already has 600 million high-speed mobile and broadband internet connections.

Policy makers at the nPC also outlined plans to develop “green cities,” simultane-ously tackling pollution in the cities as they promote urbanization. The policies center on six principles, including energy efficiency in new construction projects. The focus on clean energy may benefit industries related to renewable power.

BI InSIGHtS: uRBAnIzAtIon TIM CRAIGHEAD, BLOOMBERG InDUSTRIES

China’s Renewed urbanization Push May trigger tech Demand, opportunities

-3%

0%

3%

6%

9%

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2001 2003 2005 2007 2009 2011

EastNorthSouthNorthwestNortheastSouthwestCentral

Population 397.0M

168.7M 161.6M

97.8M 109.7M 194.7M 218.2M

Source: Bloomberg Industries {NSN N2O3TM6JTSFJ<GO>}

Population Growth (Rebased to 2001)

NPC Policy Will Shift to Urbanization in Central, Western Regions

Urbanization May Spur Further growth in Internet ServicesJAn-2014 DeC-2013 nov-2013 oCt-2013 SeP-2013

Wireless Subscribers (000s) 1.241M 1.234M 1.227M 1.219M 1.209M

China Mobile 771,866 767,206 763,296 759,274 755,186

China Mobile 3G 205,866 191,623 181,120 176,019 169,502

China Unicom Hong Kong 284,106 280,983 278,585 275,860 272,764

China Unicom HK 3G 126,469 122,600 119,081 115,390 111,626

China Telecom 184,780 185,580 185,470 183,410 181,140

China Telecom 3G 103,140 103,110 102,380 99,580 96,480

Broadband Subscribers (000s) 166,158 164,747 164,032 163,132 162,123

Source: Bloomberg Industries, MIIT, Company Filings

CHINA INDUSTRY DATA >>>>>>>>>>>>>>>>>>>>>>>>>>>>>> BI CHINA<GO>

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Peter Cook, a professorial fellow at the Univer-sity of Melbourne and geologist, on the shale energy revolution down under.

Q: How attractive are Australia’s shale prospects, and how quickly will the country be able to commercialize those resources? A: Australia has got a lot of rocks that are prospective, but doesn’t have too much in the way of reserves. Australia is at a fairly early stage of development. There are quite a number of companies that are now relatively active. We’ve got the first molecules of shale gas that are in the pipeline coming out of the Cooper Basin, and we’ve also got the first oil I know of coming out of the Canning Basin. These are quite positive things. There are a lot sedimentary basins here that are hardly known, so there’s still a lot of work to be done, but at the present time we appear to have some of the right sort of rocks.

Q: There are countries with bigger po-tential resources, but are there reasons to think Australia may have an advan-tage over some of them?A: Australia by tradition is a resources-focused country, so that really helps. A number of countries aren’t so comfortable with resources. There are some issues that need to be addressed. For one thing, it costs more money to drill a well in Australia. In addition to that, we don’t have the number of rigs you’ve got in the U.S. Then access to equipment, access to expertise. If you visit a fracking crew in outback Australia, you will hear quite a few north American accents. That’s fine, but I’m pointing out that quite a bit of the expertise has to be brought in. That could slow down the uptake of the industry. But at the same time there’s a lot of interest

one on one JAMES PATOn, BLOOMBERG nEWS

Australia May Be next Frontier for Fracking as energy Boom Goes Globalfrom companies, and quite a lot of acre-age that has now been let for shale gas exploration, particularly in northern and central Australia. There are companies out there proposing to drill, undertaking seis-mic surveys. It’s happening now. There is already a shale gas industry in Australia, but I suppose you’d regard it as a nascent area. The area where there’s the most activity is the Cooper Basin. They have the infrastructure you need, pipelines, gas-processing plants, and the other area is the Canning Basin in Western Austra-lia. The other inhibition on the industry steaming ahead is that there needs to be more infrastructure developed in some areas. Compare the network of pipelines in north America with the relatively sparse pipeline system in Australia.

Q: Has there been recent movement in clearing some of those hurdles?A: The ACOLA (Australian Council of Learned Academies) report highlights issues that need to be considered, such as the potential for adverse impacts on groundwater. There has to be a recogni-tion to ensure that groundwater resources are safeguarded. In some areas, you need a fair amount of water for fracking, so you have to make sure it won’t adversely impact existing users. While the report recommends safeguards should be put in place, it does not see fracking as a sig-nificant hazard. You need to be concerned about environmental issues of course, such as ensuring you have minimal sur-face impact. none of the issues are insur-mountable but do need to be considered in terms of moving ahead.

Q: In Australia, a lot of the shale re-sources are in remote areas. Is that an advantage for Australian explorers?A: These are not totally uninhabited areas, but nonetheless compared to drill-

ing in intensely farmed area in Western Europe, it’s simpler. There are fewer com-munities to express concern. That doesn’t mean they should be ignored, but realisti-cally, you’ve got less intensity of concern.

Q: Is anyone outside North America poised to develop shale more quickly?A: It’s hard to see another country moving faster than Australia. There’s a certain resource ethos here that will help to carry it along. China has potential, no question, but it seems to be uncertain with a few starts and a few stops and companies shaking their heads and finding it a bit dif-ficult. So it’s hard to see another country moving faster at the present time.

This interview was edited and condensed. It originally ran in Bloomberg Brief’s special report on hydraulic fracturing, available on your terminal: {NSN N2LA2S6JIJV2<GO>} or online: http://bit.ly/1lIwqbY

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Pollution May Cause genetic Harm in kids, China Study FindsAir pollution led to genetic changes that may have sapped learning skills in children whose mothers were exposed to a Chinese coal-fired power plant before it was shuttered a decade ago, researchers found. Babies born in the southwestern Tongliang county just before the plant was shut in 2004 had significantly lower levels of a protein crucial to brain development in their cord blood than those conceived later, a report in the Plos One journal said.

— Daryl Loo

Yuan Falls to One-Year low as Central Bank Cuts FixingChina’s yuan sank to one-year lows in onshore and offshore trading after the central bank weakened the currency’s ref-erence rate by 0.18 percen. The People’s Bank of China lowered the daily fixing to 6.1460 per dollar. The yuan has dropped 1.12 percent this month, after February’s record 1.38 percent slide amid speculation the monetary authority intervened to deter one-way appreciation bets in the currency.

— Lilian Karunungan

China Doomsayers Are Misguid-ed in Vale Stock Rout, CEO SaysInvestors betting against China and the nation’s demand for iron-ore from top producer Vale will be proven wrong, CEO Murilo Ferreira said. “The biggest enemy to our share price is a certain belief that China will be over,” Ferreira said. “They are once more betting against China as they did in 2004, 2005, 2006 and beyond and I think that people are going to fail again with their projections.”

— Juan Pablo Spinetto and David Biller

China Funds Post Record Out-flows as ETF Money Exits Bear MarketChinese equity funds are posting their biggest outflows on record as concern deepens that the world’s second-largest economy is slowing. The Hang Seng China Enterprises Index entered a bear

tHe WIRe BLOOMBERG nEWS

market and the yuan sank to a one-year low. The gauge of H shares in Hong Kong is the world’s worst-performing bench-mark index this year as data showed falling exports, weaker manufacturing and slower retail sales, while the collapse of a closely held developer and the default of a solar energy company spurred specula-tion bad debts will rise.

—Weiyi Lim

Zhejiang Xingrun Hasn’t De-clared BankruptcyZhejiang Xingrun Real Estate Co., a Chinese developer with 3.5 billion yuan ($562 million) of debt, is insolvent and the local government is “working hard to solve this problem,” a Fenghua government of-ficial said. The developer, which owes 2.4 billion yuan to banks, 700 million yuan to private lenders and the rest to construc-tion companies, hasn’t yet declared bank-ruptcy, said Xu Mengting, director of the news office of the Fenghua government.

— Iain McDonald

gold Traders Most Bearish Since 2009 as Fed Signals Higher RateGold traders are the most bearish in more than four years after the U.S. Fed-eral Reserve indicated they’ll probably increase interest rates by the middle of next year, curbing demand for the metal as store of value. Bullion rose 70 percent from December 2008 to June 2011 as the Fed pumped more than $2 trillion into the financial system and cut interest rates to a record low to boost the economy. Gold slid the most since 1981 last year in anticipa-tion of less stimulus.

— Nicholas Larkin

Sinopec Embraces Reform Amid China Push for Private CapitalSinopec, Asia’s biggest refiner, said it will push ahead this year with a government-driven agenda to open up state-controlled industries, as China’s energy companies search for private capital. The company and domestic peer PetroChina Co. are seeking private investors for some units.

Sinopec, officially known as China Petro-leum & Chemical Corp., will sell as much as 30 percent of its oil retail business, in a sale Barclays Plc estimates could raise more than $20 billion. PetroChina and its parent China national Petroleum Corp., are considering opening up areas includ-ing pipelines, oil and gas exploration and refining to private capital.

— Benjamin Haas and Aibing Guo

Yuan Jumps Most Since October 2011 as PBOC Strengthens FixingChina’s yuan climbed the most in more than two years as the central bank strengthened the reference rate for the first time in five days after comments from officials suggesting the currency wouldn’t keep falling. The People’s Bank of China set the daily fixing 0.04 percent stronger at 6.1452 per dollar today, after weakening it 0.25 percent over the previous four days.

— Fion Li

Trust Default Protesters Recall Zero-Risk PledgesDefaults in China’s $1.8 trillion trust indus-try are triggering protests and spurring calls from legal experts for clearer rules on sales of investment products. China is cracking down on its shadow-banking industry, where finance companies lend with less transparency, as inefficient al-location of capital slows the economy and threatens social unrest.

— Judy Chen

Manufacturing gauge Unexpect-edly Falls as Slowdown DeepensChinese manufacturing index unex-pectedly fell, underscoring the risk that leaders will need to add stimulus to meet this year’s economic-growth goal. The Purchasing Managers’ Index from HSBC Holdings Plc and Markit Economics dropped to 48.1 in March, the companies said. Weakening manufacturing would make it more difficult for Premier Li Keq-iang to meet a growth target of about 7.5 percent this year amid efforts to curb pollu-tion and financial risks from surging debt.

— Xiaoqing Pi

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BLooMBeRG eConoMIC StAtIStICS {ECST <GO>}

PRICeS (yoy%) CuRRent PRevIouS CHAnGeConsumer Price Index 2.0 Feb 2014 2.5 Jan 2014 -0.5

Yearly CPI 2.6 2012 5.4 2011 -2.8

Retail Price Index 0.8 Feb 2014 1.1 Jan 2014 -0.3

Industrial Product Price Index -2.0 Feb 2014 -1.6 Jan 2014 -0.4

Raw Materials Purchasing Price -2.1 Feb 2014 -1.7 Jan 2014 -0.4

Wholesale Prices -2.3 Feb 2014 -1.4 Jan 2014 -0.9

LABoR MARket CuRRent PRevIouS CHAnGeUnemployment Rate (%) 4.1 Dec 2013 4.0 Sep 2013 0.1

Urban Workforce (mn) 158 Sep 2013 153 Jun 2013 5

eConoMIC ACtIvIty (yoy%) CuRRent PRevIouS CHAnGeIndustrial Production 9.7 Dec 2013 10 Nov 2013 -0.3

Durable Goods Orders (mom %) -8.8 Jan 2014 13 Dec 2013 -21.8

Producer Goods Orders (mom %) -8 Jan 2014 0.1 Dec 2013 -8.1

Industrial Profits 12.2 Dec 2013 13.2 Nov 2013 -1

Industrial Revenue Cumulative 11.2 Dec 2013 11.2 Nov 2013 0

Fixed Assets Investment Urban Cumulative 17.9 Feb 2014 19.6 Dec 2013 -1.7

Foreign Investment 8.9 Dec 2013 9.5 Nov 2013 -0.6

Foreign Direct Investment 16.1 Jan 2014 3.3 Dec 2013 12.8

Bank Lending 14.3 Jan 2014 14.1 Dec 2013 0.2

BuSIneSS ConDItIonS CuRRent PRevIouS CHAnGeManufacturing PMI (sa) 50 Feb 2014 51 Jan 2014 -0.3

Business Climate Index 120 Dec 2013 122 Sep 2013 -2.0

Entrepreneur Confidence Index 117 Dec 2013 120 Sep 2013 -2.4

Bankers Confidence Index 68 Mar 2014 71 Dec 2013 -3.7

Loan Demand Index - Bankers Survey 78 Mar 2014 74 Dec 2013 3.8

New Orders PMI (sa) 51 Feb 2014 51 Jan 2014 -0.4

New Export Orders PMI (sa) 48 Feb 2014 49 Jan 2014 -1.1

LeADInG InDICAtoRS CuRRent PRevIouS CHAnGeOECD Leading Indicator - Trend Restored 146.3 Jan 2014 144.9 Dec 2013 1.4

OECD China Leading Indicator (yoy %) 10.2 Jan 2014 10.2 Dec 2013 0.0

CEMAC Leading Economic Index 99.5 Dec 2013 99.5 Nov 2013 0.0

CEMAC Coincident Economic Index 97.5 Dec 2013 97.7 Nov 2013 -0.2

CEMAC Business Cycle Signal Index 90.7 Dec 2013 90.7 Nov 2013 0.0

ConSuMeR ConFIDenCe CuRRent PRevIouS CHAnGeConsumer Confidence Index 101.1 Jan 2014 102.3 Dec 2013 -1.2

tHRee-MontH SHIBoR (%)

5.50 3/24/14

tHRee-MontH CHIBoR (%)

5.5 3/24/14

10-yeAR Gov't BonD yIeLD (%)

4.5 3/24/14

SHAnGHAI StoCk exCHAnGe InDex

2066.3 3/24/14

Cny/uSD exCHAnGe RAte

6.15 3/24/14

Cny noMInAL eFFeCtIve exCH. RAte

114.8 Feb 2014

Cny ReAL eFFeCtIve exCHAnGe RAte

120.6 Feb 2014

ReAL GDP (yoy %)

7.7 Dec 2013

noMInAL GDP (Cny Bn, CuMuL.)

56885 Dec 2013

-2.0 0.0 2.0 4.0 6.0 8.0

Dow Jones

S&P 500

NASDAQ

Bovespa

FTSE 100

CAC 40

DAX

Nikkei 225

SHCOMP

5-Day Change (%)Trading Volume (Standard Deviation from 6M Avg)

EQUITY MARkET

Continued on next page

1 2 3 4 5 6 7 8 9 10 11 12 13


7.2

7.4

7.6

7.8

8

8.2

8.4

8.6

47

48

49

50

51

52

53

54

55

3/12 12/12 9/13

2014 GDP Forecast→ ←HSBC Markit PMI

Source: Bloomberg

HSBC Markit PMI Flash Adds Pressure on China’s government

A surprise fall in the HSBC Markit PMI flash in March pointed to deteriorating conditions in the Chinese economy. Ex-pectations of a significant policy shift into pro-growth mode may be overdone.

A reading of 48.1 was down from 48.5 in February and marked a third month below the 50 mark that separates improving from deteriorating conditions. The con-sensus forecast was for a reading of 48.7. Other indicators like iron ore prices also point to sluggish activity in March.

With economists downgrading their forecasts for the year, the government has already hinted at a shift in policy to support growth. A meeting of the State Council last week chaired by Premier Li Keqiang prom-ised to accelerate construction projects to “keep economic activity in a suitable range”. Signs of further weakness in March will mean pressure to do more.

till, with the government facing conflicting pressures, an aggressive shift toward stim-ulus appears unlikely. That would also be a step away from controlling runaway credit, and so risk a sharper correction down the road. Premier Li has said that the 7.5 percent GDP target is flexible, pointing to greater tolerance for a slowdown.

— Tom Orlik, Bloomberg Economist

BLOOMBERG ECONOMIC STATISTICS…Continued from previous page

CHINA ECONOMIC STATISTICSECST CN<GO>

BuSIneSS CyCLe CuRRent PRevIouS CHAnGeIndustrial Production (yoy %) 9.7 Dec 2013 10.0 Nov 2013 -0.3

Fixed Asset Investment Urban Cumulative (CNY bn) 3028 Feb 2014 43653 Dec 2013 -40624

Retail Sales (CNY bn) 2306 Dec 2013 2101 Nov 2013 205

Exports (USD bn) 114.1 Feb 2014 207.1 Jan 2014 -93.0

Imports (USD bn) 137.1 Feb 2014 175.3 Jan 2014 -38.2

Gov't Revenue (CNY bn) 1543.5 Jan 2014 949.2 Dec 2013 594.2

Loans from Financial Institutions (CNY bn) 73859 Feb 2014 73214 Jan 2014 644

Consumer Price Index (yoy %) 2.0 Feb 2014 2.5 Jan 2014 -0.5

Industrial Profits Cumulative (CNY bn) 6283 Dec 2013 5334 Nov 2013 949

HouSInG MARket CuRRent PRevIouS CHAnGeReal Estate Climate Index 96.9 Feb 2014 97.2 Dec 2013 -0.3

RetAIL SeCtoR CuRRent PRevIouS CHAnGeRetail Sales (yoy %) 13.6 Dec 2013 13.7 Nov 2013 -0.1

Retail Sales (CNY bn) 2306 Dec 2013 2101 Nov 2013 205

exteRnAL SeCtoR CuRRent PRevIouS CHAnGeCurrent Account (% of GDP) 2.0 Dec 2013 2.0 Sep 2013 -0.0

Current Account Balance (USD mn) 188600 Dec 2013 138816 Sep 2013 49784

Goods and Services BoP (USD mn) 238100 Dec 2013 146600 Sep 2013 91500

Trade Balance (USD bn) -23.0 Feb 2014 31.9 Jan 2014 -54.9

Exports (USD bn) 114 Feb 2014 207 Jan 2014 -93

Imports (USD bn) 137 Feb 2014 175 Jan 2014 -38

Exports (yoy %) -18.1 Feb 2014 10.6 Jan 2014 -28.7

Imports (yoy %) 10.1 Feb 2014 10.0 Jan 2014 0.1

GoveRnMent SeCtoR CuRRent PRevIouS CHAnGeGov't Revenue (CNY bn) 1543 Jan 2014 949 Dec 2013 594

Gov't Expenditure (CNY bn) 1015 Jan 2014 2505 Dec 2013 -1489

MonetARy SeCtoR CuRRent PRevIouS CHAnGeM0 Money Supply (yoy %) 3.3 Feb 2014 22.5 Jan 2014 -19.2

M1 Money Supply (yoy %) 6.9 Feb 2014 1.2 Jan 2014 5.7

M2 Money Supply (yoy %) 13.3 Feb 2014 13.2 Jan 2014 0.1

Regulated Reserve Ratio (%) 20.0 3/21/14 20.0 3/20/14 0.0

Foreign Exchange Reserves (USD bn) 3821 Dec 2013 3789 Nov 2013 32

Source: Bloomberg

1 2 3 4 5 6 7 8 9 10 11 12 13


-16%-14%-12%-10%-8%-6%-4%-2%0%

4/16/2013 7/16/2013 10/16/2013 1/16/2014

44,000

46,000

48,000

50,000

52,000

54,000

4/16/2013 7/16/2013 10/16/2013 1/16/2014

-12%-10%-8%-6%-4%-2%0%

4/16/2013 7/16/2013 10/16/2013 1/16/2014

12,000

12,500

13,000

13,500

14,000

14,500

4/16/2013 7/16/2013 10/16/2013 1/16/2014

-2%0%2%4%6%8%

10%12%14%

4/16/2013 7/16/2013 12/18/2013

235240245250255260265270

4/16/2013 7/16/2013 12/18/2013

-8%-6%-4%-2%0%2%4%

4/16/2013 7/16/2013 10/16/2013

3,900

4,000

4,100

4,200

4,300

4,400

4,500

4/16/2013 7/16/2013 10/16/2013

30

35

40

45

50

55

60

65

60

80

100

120

140

160

180

200

3/29/2013 6/29/2013 9/29/2013 12/29/201380

85

90

95

100

105

110

3/29/2013 6/29/2013 9/29/2013 12/29/2013

CoMMoDItIeS

Shanghai Futures Exchange Copper Contracts Shanghai Futures Exchange Aluminum Contracts

Shanghai Futures Exchange gold Contracts Shanghai Futures Exchange Silver Contracts

China’s Iron Ore Import Price USD per ton China/global Agricultural PricesFine Ore 62% Tianjin PortFine Ore 58% Tianjin PortFine Ore 58% ChinaPellets 65% China

Fine Ore 63.5/63% Quingdao PortFine Ore 62% ChinaLump Ore 62% ChinaFine Ore 66% China

*Max-Min Price Spread, right side *Rebased to 100 at Start

1M Change 3M Change

Bloomberg 3M Crop/Grains Price IndexChina Wholesale Pork PricesBloomberg 3M Food/Fiber Price Index

1M Change 3M Change

Last Price Close 1M Prior Close 3M Prior

1M Change 3M Change


1M Change 3M Change


Source: Bloomberg Source: Bloomberg




1 2 3 4 5 6 7 8 9 10 11 12 13


23.3 16.8

40.0

05

1015202530354045

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

2014 2017 2020 2023

-2.0

1.0

-1.0

-8-7-6-5-4-3-2-1012

5.0%

5.1%

5.2%

5.3%

5.4%

5.5%

5.6%

2014 2017 2020 2023

20.8 24.0

44.8

0

20

40

60

3.4%3.6%3.8%4.0%4.2%4.4%4.6%4.8%5.0%5.2%5.4%

2014 2017 2020 2023

34.5 14.8

49.2

0

50

100

4.7%5.0%5.3%5.6%5.9%6.2%6.5%6.8%7.1%

2014 2017 2020 2023 2026 2029 2032 2035 2038 2041

124.9 83.9

208.8

050

100150200250

11.5%12.5%13.5%14.5%15.5%16.5%17.5%18.5%

2014 2017 2020 2023 2026 2029 2032 2035 2038 2041

30.7 14.6

45.2

0

50

100

4.7%

5.2%

5.7%

6.2%

6.7%

2014 2017 2020 2023 2026 2029 2032 2035 2038 2041

FIxeD InCoMe CuRveS

Onshore CNY Interest Rate Swap Curve Onshore CNY Interest Rate Swap SHIBOR Curve

CNY Non-Deliverable Interest Rate Swap Curve Ministry of Railways Fixed Rate Spot Curve

China Interbank “BBB+” Corporates Fixed Rate Spot Curve China Interbank “AAA” Corporates Fixed Rate Spot Curve

5Y-2Y 10Y-5Y 10Y-2Y

Last PriceClose 5D PriorClose 1M Prior

Current 5D Prior 1M Prior

5Y-2Y 10Y-5Y 10Y-2Y



5Y-2Y 10Y-5Y 10Y-2Y



5Y-2Y 10Y-5Y 10Y-2Y



5Y-2Y 10Y-5Y 10Y-2Y



5Y-2Y 10Y-5Y 10Y-2Y






1 2 3 4 5 6 7 8 9 10 11 12 13


-250-200-150-100-500

50100

4/1/2014 10/1/2014 4/1/2015 10/1/2015

0100200300400500600700

4/1/2014 10/1/2014 4/1/2015 10/1/2015

-200.00-100.00

0.00100.00200.00300.00400.00500.00

4/1/2014 10/1/2014 4/1/2015 10/1/2015

0200400600800

1,0001,2001,400

4/1/2014 10/1/2014 4/1/2015 10/1/2015

-250-200-150-100-500

50100150

4/1/2014 10/1/2014 4/1/2015 10/1/2015

0

200

400

600

800

1,000

1,200

4/1/14 10/1/14 4/1/15 10/1/15

-1.0-0.50.00.51.01.5

2014 2015 2016

1.01.52.02.53.03.54.04.55.05.56.0

2014 2015 2016

-1.2

-0.8

-0.4

0.0

0.4

2014 2015 2016 2017 2018

0.60.81.01.21.41.61.82.02.22.42.6

2014 2015 2016 2017 2018

0.00.20.40.60.81.01.2

4/1/2014 10/1/2014 4/1/2015 10/1/2015

0.0

0.5

1.0

1.5

2.0

2.5

3.0

4/1/2014 10/1/2014 4/1/2015 10/1/2015

Fx CuRveS

USDCNY Onshore Forward Points USDCNY Non-Deliverable Forward Points

USDCNH Forward Points Onshore USDCNY at the Money Option Volatility

USDCNH Forward Implied Yield USDCNY 25 Delta Risk Reversal Option Volatility


5D Change 1M Change


5D Change 1M Change


5D Change 1M Change


5D Change 1M Change


5D Change 1M Change


5D Change 1M Change




1 2 3 4 5 6 7 8 9 10 11 12 13


1900

2000

2100

2200

2300

2400

2500

1900

2000

2100

2200

2300

2400

2500

3/21/13 6/21/13 9/21/13 12/21/13 3/21/14{SHCOMP Index <GO>}

1600

1700

1800

1900

2000

2100

1600

1700

1800

1900

2000

2100

3/21/13 6/21/13 9/21/13 12/21/13 3/21/14{SHINDU Index <GO>}

1600

1700

1800

1900

2000

2100

2200

2300

1600

1700

1800

1900

2000

2100

2200

2300

3/21/13 6/21/13 9/21/13 12/21/13 3/21/14{SHCNG Index <GO>}

3000

3100

3200

3300

3400

3500

3600

3700

3800

3900

4000

3000

3100

3200

3300

3400

3500

3600

3700

3800

3900

4000

3/21/13 6/21/13 9/21/13 12/21/13 3/21/14{SHUTIL Index <GO>}

2800290030003100320033003400350036003700380039004000

280029003000310032003300340035003600370038003900400041004200

3/21/13 6/21/13 9/21/13 12/21/13 3/21/14{SHPROP Index <GO>}

1900

2000

2100

2200

2300

2400

2500

2600

2700

2800

2900

1900

2000

2100

2200

2300

2400

2500

2600

2700

2800

2900

3/21/13 6/21/13 9/21/13 12/21/13 3/21/14{SHCOMM Index <GO>}

teCHnICAL AnALySIS: ICHIMoku

Shanghai Composite Shanghai Stock Exchange Industrial Index

Shanghai Stock Exchange Conglomerate Index Shanghai Stock Exchange Public Utility Index

Shanghai Stock Exchange Property Index Shanghai Stock Exchange Commercial Index

Tenkan Line Kijun Line Chikou SpanPrice Close Senkou Span A Senkou Span B









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