PP 7767/09/2010(025354)

Economic Highlights
Global
•MARKET DATELINE

28 June 2010

1 Chinese Funds Begun To Invest In The US Equity Market

2 The US Economy Expanded Less Than The Earlier

Estimate In The 1Q

3 Japan’s Headline Inflation Fell By A Smaller Magnitude

In May

4 Singapore’s Industrial Production Picked Up In May

Tracking The World Economy...

Today’s Highlight

Chinese Funds Begun To Invest In The US Equity Market

Securities filing show that Chinese funds that cater to individual investors have been allocating a larger share of their
investments to the US market in recent months, as investors view positively on the US economic recovery. Although
the numbers are still small at less than US$700m invested in the US stocks, the shift is potentially significant, as Chinese
funds had largely bypassed the US market for years. Furthermore, increasingly new entrants are rolling out more US-
focused investment products.

In China, financial institutions must earn the designation of Qualified Domestic Institutional Investor (QDII) by the
government before they can invest abroad. The government then uses a quota system to dictate how much money they
can invest. Indeed, China has just recognised Malaysia as an approved investment destination under its QDII scheme
administered by the China Banking Regulatory Commission (CBRC) on 23 June. Over the years, the Chinese government
has allowed just over US$64bn to be invested overseas via funds run by big financial institutions. However, it has
quickened the pace of approvals, adding US$12bn worth of overseas investment since October. The move is aimed at
easing the build-up of liquidity in the Chinese economy and the trend of “going out” appears unstoppable. Reflecting
the cautiousness of Chinese funds overseas investment, 70% of the assets, however, are still stayed close to home, i.e.
being invested in Hong Kong.

Meanwhile, one factor that could discourage Chinese funds to invest abroad is the government’s announcement that it
would loosen its grip on the renminbi. Recall that the People’s Bank of China said on 19 June that it would end a two-
year peg to the US dollar and manage the renminbi with reference to a basket of currencies. If the renminbi rises,
returns on overseas stocks would be lower than they would be if the currency were unchanged. Indeed, following the
announcement, the renminbi had its biggest weekly gain since December 2008 after China set the currency’s daily
reference rate at a record high, allowing appreciation before the Group of 20 meeting. The renminbi rose 0.5% in a
week to close at RMB6.7905/US$ on 25 June, from RMB6.8262/US$ on 18 June.

Peck Boon Soon

(603) 9280 2163
Please read important disclosures at the end of this report.
bspeck@rhb.com.my

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 28 June 2010

The US Economy

The Economy Expanded Less Than The Earlier Estimate In The 1Q

◆ The US economy grew at an annualised rate of 2.7% in the 1Q, less than the +3.0% previously calculated
and compared with +5.6% in the 4Q of last year. This was due to a smaller gain in consumer spending and a
bigger trade gap. Consumer spending grew by 3.0% in the 1Q, weaker than +3.5% estimated previously but still
stronger than +1.6% in the 4Q. Net exports subtracted 0.82 percentage point from the GDP, larger than -0.66
percentage point estimated previously, due to an upward revision in trade gap as imports climbed more than
previously estimated. These were, however, mitigated by higher inventory. Despite weaker-than-expected growth
in consumer spending, the spread of a recovery in the US economy from the government’s pump priming and
inventory rebuilding to consumer spending suggests that a recovery of the US economy is becoming more
sustainable. Nevertheless, the US economy is expected to expand at a more moderate pace in 2H 2010,
after sustaining its expansion in the 1H of the year.

Asian Economies

Japan’s Headline Inflation Fell By A Smaller Magnitude In May

◆ Japan’s inflation rate fell by a smaller magnitude of 0.9% yoy in May, compared with -1.2% in April, after
improving to -1.1% in February-March and from -1.3% in January. This was the smallest decline in 13 months,
suggesting that the deflation has eased somewhat. However, it may not be sufficient to ease government’s
pressure on the central bank to fight deflation, as falling prices could still impede economic growth by
prompting companies and households to delay spending. The smaller decline in inflation was due to a smaller
decline in core inflation (which excludes fresh fruit, fish and vegetables), which fell by 1.2% yoy in May, compared
with -1.5% in April. This was due mainly to a pick-up in the costs of transport & communications and a smaller
decline in the costs of utilities and entertainment as well as prices of household goods. These were, however,
mitigated by sharper declines in the costs of housing and medical as well as the prices of clothing, while the costs
of education remained stable during the month. Similarly, food prices fell by a larger magnitude of 0.9% yoy in
May, compared with -0.7% in April.

Singapore’s Industrial Production Picked Up In May

◆ Singapore’s industrial production strengthened to 58.6% yoy in May, from +49.7% in April. This was the
sixth straight month of growth and the strongest so far this year, indicating industrial activities remained strong in
the country. Stronger growth was reflected in a pick-up in the production of biomedical products, which grew at
a faster pace of 117.0% yoy in May, compared with +96.2% in April and +99.3% in March, on account of a pick-
up in the production of pharmaceutical and medical technology products. This was, however, offset partially by a
slowdown in the production of electronic products, which eased to 51.8% yoy in May, from +60.0% in April and
+76.3% in March. The moderation was due to a slowdown in the production of semiconductors, which was mitigated
by a pick-up in the production of computer peripherals, data storage products, information & communication and
consumer electronic products. Mom, industrial production slowed down to a seasonally adjusted rate of 5.2%
in May, from +17.7% in April and compared with +3.1% in March. This suggests that Singapore’s economy will
continue to expand in the 2Q, after surging at an annualised rate of +38.6% in the 1Q.

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IMPORTANT DISCLOSURES

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