PP 7767/09/2010(025354)

Economic Highlights
Global
•
MARKET DATELINE

8 April 2010

1 China Government Facing Hard Choice Between Inflation

And Bad Loans

2 Global Services Activities Strengthened In March

3 US Consumer Credit Fell In February

4 Euroland’s Services Activities Picked Up In March, While

The Economy Stagnated In 4Q 2009

5 Japan Kept Its Key Rate Unchanged At 0.1% And Said

Recovery Remains Intact

Tracking The World Economy...

Today’s Highlight

China Government Facing Hard Choice Between Inflation And Bad Loans

Jiangbei International Airport, which is busy expanding, will begin work on a third terminal when the second is done in
2011. This is one of the projects under the RMB15trn (US$2.2trn) package that begun in 2009, almost twice the economy
of India. Most of the projects were started by Chongqing local government, in tandem with China’s economic stimulus
spending, which sparked a record RMB9.6trn of loans. Chongqing is a prime example of how provincial governments
multiplied the effect of the central government’s stimulus plan. Chongqing’s economy expanded by 14.9% in 2009, with
investment in factories and property expanding the most in 13 years. The city will spend at least RMB8bn on rail
construction and another RMB15.5bn on 288 kilometers of new expressways. The city had RMB900bn in loans and credit
lines outstanding at the end of 2009, according to an estimate. A stockbroker estimates that Chongqing local government
projects started in 2009 totalled RMB10trn or 2.5 times the official RMB4trn stimulus plan.

Chongqing is not alone. An economist estimates that local governments have proposed projects with a value of more
than RMB20trn since the stimulus package was announced in November 2008. They include high-speed rail links between
Wuhan in central China and Guangzhou in the south, the Hong Kong-Macao-Zhuhai Bridge and the construction or
upgrading of 35 airports.

China’s local governments have set up investment vehicles to circumvent regulations that prevent them from borrowing
directly and the central government’s control. These vehicles borrow money against the land injected into them and
guarantees by local governments. Estimate of the total debt accumulated by investment vehicles set up by local
governments ranged from RMB6-11trn. About 40% of China’s RMB9.6trn in new loans in 2009 went to local governments,
according to a state media’s report. The Chinese authorities have pledged to limit the risks posed by these vehicles and
it plans to nullify guarantees provided by local governments for some loans.

The construction boom has pushed up material costs and raised concerns of a bubble. At the same, it could exacerbate
a rise in property prices and inflationary pressure in the country. As it stands, inflation accelerated to 2.7% yoy in
February, the highest in 16 months. One economist warned that failure to rein in local government spending could push
inflation to 15% by 2012 and the boom may end in a property-market collapse. Increasingly the choice facing the
Chinese government is between inflation and bad loans. Attempts to curb borrowing and control inflation by raising
interest rates would boost debt-servicing costs for local governments and a build-up of bad loans.
Peck Boon Soon
(603) 9280 2163
Please read important disclosures at the end of this report.
bspeck@rhb.com.my

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 8 April 2010

Global Services Activities Strengthened In March

◆ The global Purchasing Manager Index (PMI) for services, based on a survey conducted by JP Morgan and Markit
Economics in London, rose to 56.0 in March, from 52.7 in February. This was the eight consecutive month the
index was above the 50-mark, suggesting that global services activities continued to expand and at a faster pace,
on account of a recovery in consumer spending and trade activities. The pick-up in services activities was due to
stronger growth in new business activities and backlogs of work. As a result, businesses slowed down their
retrenchment during the month. Input costs, however, picked up, pointing to an upward price pressures. Stronger
manufacturing and services activities pushed the global composite index to 56.6 in March, from 53.8 in February
and 53.2 in January. This suggests that global economic activities will likely continue to expand in 1Q
2010, after picking up momentum in the 4Q.

The US Economy

Consumer Credit Fell In February

◆ US consumer credit slipped into a contraction of US$11.5bn or at an annual rate of 5.6% in February,
after rising by US$10.6bn or +5.2% in January. The drop was the 12th in 13 months and the renewed weakness
in borrowings suggests that consumers are still repairing their balance sheets and are reluctant to take on more
debt. This implies that a recovery in consumer spending is likely to be gradual. The decline was reflected
in a drop in revolving debt such as credit cards, which fell by US$9.4bn in February, compared with +US$1.5bn in
January. This was made worse by a decline in non-revolving debt such as loans for automobiles and mobile homes,
which fell by US$2.1bn in February, after rising by US$9.1bn in January. The Fed’s report does not cover borrowing
secured by real estate.

The Euroland Economy

Services Activities Picked Up In March, While The Economy Stagnated In 4Q 2009

◆ Euroland’s Purchasing Manager Index (PMI) for the services sector rebounded to 54.1 in March, from the
preliminary estimate of 53.7 and 51.8 in February. This was the fastest pace of expansion since November 2007,
suggesting that services activities expanded at a faster pace during the month, in tandem with an improvement in
trade activities. This, together with a pick-up in manufacturing activities during the month, pushed the region’s
composite index to 55.9 in March, after remaining stable at 53.7 in the previous months. This was the fastest pace
of expansion since August 2007, suggesting that the Euroland economy will likely bounce back to a growth in 1Q
2010, after stagnating in the 4Q.

◆ Euroland’s economy unexpectedly stalled in 4Q 2009, the latest economic data showed, as companies cut
spending more than previously estimated. Real GDP stagnated in the 4Q, after recording a growth of +0.4% qoq
in the 3Q. This was attributed to a sharper decline in gross capital formation, which contracted by 1.3% qoq,
compared with -0.8% estimated initially. Nevertheless, the Euroland economy has shown signs of rebounding, as
the global recovery prompts companies to step up investment and offsets concerns that Greece’s fiscal crisis will
hurt the region. At the same time, economic confidence improved in March and the region’s services and manufacturing
growth accelerated to the fastest pace since August 2007 even though unemployment is at an 11-year high.

Asian Economies

Japan Kept Its Key Rate Unchanged At 0.1% And Said Recovery Remains Intact

◆ The Bank of Japan kept its key policy rate unchanged at 0.1% even as deflation remains a critical challenge.
Nevertheless, it said that economic recovery led by exports remains intact, as reports showed a revival in sales
abroad is instilling confidence in businesses and consumers even as prices and wages fall. Indeed, the Tankan
survey last week showed confidence among large manufacturers climbed to the highest since September 2008.
Similarly, exports rose at the fastest pace in 30 years in February, mainly on account of a pick-up in Asian demand,
and the jobless rate held stable at 4.9% of total labour force during the month, the lowest since March 2009.

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 8 April 2010

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