Asian Economics 2011 Report-HSBC

Main contributors

Macro

Asian Economics

First Quarter 2011

Disclosures and Disclaimer This report must be read with the disclosures and analyst

certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

Qu HongbinCo-Head of Asian Economic Research, Chief China EconomistThe Hongkong and Shanghai Banking Corporation Limited+852 2822 [email protected]

Qu Hongbin is Managing Director, Co-Head of Asian Economic Research, and Chief Economist for Greater China. He has been an economist in financial markets for17 years, the past eight at HSBC. Hongbin is also a deputy director of research at the China Banking Association. He previously worked as a senior manager at aleading Chinese bank and other Chinese institutions.

Song-yi KimEconomist, AsiaThe Hongkong and Shanghai Banking Corporation Limited+852 2822 4870 [email protected]

Song-yi Kim joined HSBC in September 2008, having previously worked at the International Monetary Fund both in Washington, DC, and in Seoul. At HSBC, she covers the regional economy, with a prime focus on Korea. Song-yi is further responsible for quantitative modelling within the regional economics team, andwrites on broader topics affecting the region. At the IMF, Song-yi conducted economic forecasting and general economic analysis from 2002 to 2006. She holdsmaster’s degrees in economics and in public administration and development, including from the Harvard Kennedy School of Government.

Wellian WirantoEconomist, ASEANThe Hongkong and Shanghai Banking Corporation Limited (Singapore)+65 6230 [email protected]

Wellian joined HSBC in January 2010, primarily covering the Indonesia and Vietnam economies. Prior to HSBC, he covered the Indonesia economy at the MonetaryAuthority of Singapore (Singapore’s central bank). Wellian has also worked at the International Monetary Fund in Washington DC and a brokerage house in Indonesia.He holds an MSc in Applied Economics from Cornell University and a BA in Economics from the University of Chicago.

Paul BloxhamChief Economist, Australia & New ZealandHSBC Bank Australia Ltd (Sydney) +612 9255 [email protected]

Paul joined HSBC in late 2010 as Chief Economist for Australia and New Zealand. Prior to this, he spent almost 12 years working as an economist at the ReserveBank of Australia, where he held a range of different roles in the Economic Analysis Department. These included heading up the overseas economies and financialconditions sections, and working in the domestic forecasting and prices areas. Paul has published a number of papers, including on housing and household finances,as well as on asset prices and monetary policy. Paul holds a Masters degree in public financial policy from the London School of Economics.

Frederic NeumannCo-Head of Asian Economic ResearchThe Hongkong and Shanghai Banking Corporation Limited+852 2822 [email protected]

Frederic Neumann, PhD, is Managing Director and Co-Head of Asian Economic Research, based in Hong Kong. Before joining HSBC, Frederic was an adjunctprofessor at Johns Hopkins University, the Wharton Business School of the University of Pennsylvania, and the Graduate School of Pacific Studies and InternationalRelations at UC San Diego, teaching courses on Asian sovereign risk analysis, international financial markets, international monetary policy, and Southeast Asianpolitical culture. He also served as a consultant on Asian economic and political affairs to the World Bank and the Canadian and US governments, and as a researchassociate of the Institute for International Economics in Washington, DC. A former Fulbright scholar, Frederic Neumann holds a PhD in International Economics andAsian Studies.

Now for the hard part

With the thrust of a massive monetary stimulus,

Asia has pulled off the recovery with ease

The challenge now is to strike a better balance,

normalizing policy before gravity sets in

As inflation draws closer, central bankers

will have to act fast to end their stunt with poise

By Qu Hongbin, Frederic Neumann and Song-yi Kim

ECONOMICSAsian

Seiji ShiraishiChief Economist, JapanHSBC Securities (Japan) Limited+813 5203 [email protected]

Seiji Shiraishi joined HSBC in April 2007 as Chief Economist for Japan. He had previously served as an economist at a Japanese securities company for nine yearsand, before that, spent nine years with Chuo Trust & Banking Ltd. In early 2007, he was ranked number six in the Nikkei Bonds and Financial Weekly pollof economists.

Donna KwokEconomist, Greater ChinaThe Hongkong and Shanghai Banking Corporation Limited+852 2996 [email protected]

Donna is an economist on HSBC’s Greater China economics team. Before joining HSBC in July 2010, she worked as an economist for the Hong Kong-China equitiesresearch arm of a global financial services provider. Prior to that, she served as East Asia analyst at Strategic Forecasting Inc. (US) and as a strategy consultant atDeloitte Consulting (London). Donna holds an MA in International Relations (Economics and China Studies) from the Johns Hopkins University School of AdvancedInternational Studies, and a BA (Hons) in Economics and Management from Oxford University.

Sherman ChanEconomist, ASEANThe Hongkong and Shanghai Banking Corporation Limited+852 2996 [email protected]

Sherman is a Hong Kong-based economist covering Vietnam and the Philippines. Prior to joining HSBC, she lectured for undergraduate and MBA universityprogrammes in Australia. Sherman also worked as an economist at Moody’s Analytics in Sydney and as an analyst at the Australian Prudential Regulation Authority,where she specialised in banking and superannuation supervision. Sherman holds a Bachelor of Commerce with honours in Economics from the University of New South Wales.

Leif EskesenChief Economist, India & ASEANThe Hongkong and Shanghai Banking Corporation Limited (Singapore)+65 6239 [email protected]

Leif Eskesen joined HSBC in October 2010 as Chief Economist for India and ASEAN and is based in Singapore. Before joining HSBC, Leif worked for close to 10 yearsat the International Monetary Fund's headquarters in Washington, DC, where he was a Senior Economist and a country mission chief. During his time there, hecovered a number of Asian and European countries and was engaged in regional work across Asian countries. In addition to macroeconomic and financial sectoranalysis, his responsibilities included assessing macroeconomic and structural policies and discussing policy priorities with country authorities. Leif has also heldpositions at Danmarks Nationalbank and one of Denmark's large commercial banks. He has published a number of papers across a wide range of topics, includingfiscal policy and labour market issues. He holds a master's degree in economics from the University of Aarhus, Denmark.

1

Macro Asian Economics First Quarter 2011

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Beating again For anyone watching Asia’s performance intently, the third quarter was admittedly a bit of a heart stopper.

Growth suddenly stalled, and indices pointed south. China lost momentum first, quickly followed by the

other trade-dependent economies of Korea, Singapore, and Taiwan. Australia, too, lost its swing, seemingly

in sympathy. Over recent months, however, things have quickly turned around, and the region looks now

well entrenched in its trajectory. After a mini-inventory correction, the industrial cycle has ramped up again.

Exports, meanwhile have regained momentum, partly reflecting stabilization in Western demand. Even

Japan, struggling with a different set of challenges than the rest of the region, has seen a little pick-up in

activity. The country that has once pulled others along is now getting a helpful lift from its neighbours.

Growth in 2011, then, should hold up nicely. In fact, we tweaked up our numbers even further. But it’s no

longer just about Asia’s giants. China and India have clearly led the pack. And, not to worry, growth here

should remain robust. But the real trend to watch is in Asia’s smaller economies, where the continued boom

in trade is having the biggest impact. Also, consumers, initially less quick to the starting line than in the bigger

markets, are increasingly driving demand. Our biggest growth upgrades, in fact, have come in Hong Kong,

Korea, Singapore, and the Philippines. But watch others as well: Thailand, for example, lingering political

jitters notwithstanding, has bounced back impressively, while Indonesia will push growth up another notch.

Only in Australia is growth now expected to be weaker after the central bank tightened earlier and more

convincingly than everywhere else.

That’s a lesson worth heeding. After all, despite this impressive run, Asian economies remain on monetary

steroids, pumped up by low rates and plenty of foreign liquidity. Overstimulation, in life as in economics,

usually has dire consequences. Central bankers need to worry about rising inflation pressures, asset bubbles

and excessive investment. All three symptoms are beginning to show in Asia. Still, there is sufficient time

to delve into a diet of monetary tightening and avoid the pitfalls that have so often plagued this region before.

2011, then, will be the year when the path is being laid: with growth strong and imbalances still manageable,

policymakers had better practice prevention and wean economies off their artificial support.

Summary

It’s quite a feat, frankly. Asia was pummelled like everyone else. But, propelled by an amazing policy stimulus, the region is now delivering a stunning economic pirouette. Yet the performance may not be quite as stable as it seems. Imbalances are gradually sneaking in: prices are rising, leverage is mounting, and investment has started to soar. Don’t get us wrong: Asia still looks secure in flight. But, to bring things down safely, officials need to tighten up. Quickly.

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Inflation is on everyone’s mind. The memories of 2008 evidently still sit deep. We share the concerns and

look for higher numbers than most. But it’s no longer just about fundamentals. Another speculative bubble

in oil would be needed to set off such an explosion. This can’t be ruled out, but others are better judges of

that. All we can argue is that food alone may not be enough. Its costs are undoubtedly rising, but this is a

structural as well as a cyclical phenomenon, and price pressures may ease just as quickly as they arise. Core

inflation, so far, appears well anchored. This, perhaps, is not too surprising given that growth elsewhere still

disappoints. The global output gap, in short, may help to contain Asian inflation somewhat, even if the region

itself may increasingly be responsible for the universal climb in the price of major commodities.

In our second chapter, we take a hard look at inflation in China. The story may not be quite as alarming as

many suspect. Yes, the first quarter will be tough, especially with the harsh winter bringing little relief to

food prices. But, beyond this, as long as officials stay on their tightening path, inflation should once again

ease. The country, after all, still has plenty of productive capacity and keeps rapidly adding more. Alas, the

story is a little different in India. Here, inflation remains stubbornly high, reflecting not just a structural rise

in the cost of food, but also supply bottlenecks that will fade only with time. As a result, interest rates need

to rise much further to help temper demand and allow supply to finally catch up. This, however, is not the

challenge for Japan, where prices will continue to fall this year even if the currency may finally weaken.

Other challenges abound as well. The region remains at risk of asset bubbles. Tighter regulations can help

only so much: if the cost of capital remains low, and growth strong, investors will inevitably explore ever

more creative avenues. So the message is clear: Asia needs to tighten monetary policy rapidly. If it fails at this,

it had better brace for a harsh landing.

HSBC GDP growth forecasts (current vs October 2010, red denotes HSBC above consensus, grey denotes HSBC below consensus)

2009 actual

2010f (old)

2010f (new)

2010f consensus

2011f (old)

2011f (new)

2011f consensus

2012f (old)

2012f (new)

Australia 1.3 3.4 2.7 2.8 4.1 3.6 3.2 3.9 4.1 New Zealand -0.6 1.4 1.6 2.0 2.6 2.8 3.3 3.7 3.5 China 9.1 10.0 10.0 10.1 8.9 8.9 9.1 8.6 8.6 Hong Kong -2.7 5.4 7.0 6.5 4.7 5.2 4.7 4.3 4.6 India 7.4 8.8 9.1 8.5 8.3 8.1 8.4 8.0 8.1 Indonesia 4.5 6.1 6.0 6.0 6.4 6.4 6.1 6.4 6.3 Japan -5.2 3.0 4.3 3.5 0.7 1.1 1.1 1.5 2.0 Korea 0.2 6.0 6.1 6.0 4.1 4.9 4.2 4.6 4.8 Malaysia -1.7 7.3 7.1 7.0 5.2 5.1 4.9 5.0 4.9 Pakistan 4.4 2.8 2.8 2.8 4.2 4.2 3.9 4.0 4.0 Philippines 1.1 5.9 6.8 6.8 4.6 5.0 4.9 5.6 5.8 Singapore -1.3 14.8 14.8 14.7 4.7 5.2 4.8 5.8 5.8 Sri Lanka 3.5 7.0 7.0 7.2 7.2 7.2 6.8 7.5 7.5 Taiwan -1.9 7.3 9.6 9.4 4.9 4.7 4.1 3.8 4.5 Thailand -2.3 7.9 7.9 7.7 5.3 5.3 4.2 4.1 4.3 Vietnam 5.1 7.0 6.8 6.6 7.5 7.5 7.0 7.8 7.8 Asia. Ex JP 6.1 8.8 9.0 8.9 7.5 7.6 7.6 7.3 7.4 Asia. Ex. JP & CN 2.5 7.3 7.8 7.5 6.0 6.1 5.8 5.9 6.0 Asia. Ex. JP CN & IN 0.5 6.8 7.2 7.1 5.0 5.3 4.8 5.0 5.2

Source: CEIC, HSBC, Consensus Economics

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Key forecasts 4

Monetary & fiscal policy assumptions 5

Pumped up 6

Can China cap inflation? 14

GDP 22

Inflation 23

Industrial production & unemployment 24

Consumption & saving 25

Investment 26

Trade 27

Exchange rates & interest rates 28

Country profiles 29

Australia 30

China 32

Hong Kong SAR 34

India 36

Indonesia 38

Japan 40

Korea 42

Malaysia 44

New Zealand 46

Pakistan 48

Philippines 50

Singapore 52

Sri Lanka 54

Taiwan 56

Thailand 58

Vietnam 60

Disclosure appendix 62

Disclaimer 63

Contents

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(% y-o-y) Asia average AU CH HK IN ID JP KR MA NZ PK PH SG SL TW TH VN

Real GDP 2009 3.5 1.3 9.1 -2.8 7.4 4.5 -1.2 0.2 -1.7 -1.7 4.4 1.1 -1.3 3.5 -1.9 -2.3 5.32010f 7.3 2.7 10.0 7.0 9.1 6.0 4.3 6.1 7.1 1.4 2.8 6.8 14.8 7.7 9.6 7.9 6.82011f 5.3 3.6 8.9 5.2 8.1 6.4 1.1 4.9 5.1 2.6 3.6 5.0 5.2 7.2 4.7 5.3 7.52012f 5.5 4.1 8.6 4.6 8.1 6.3 2.0 4.8 4.9 3.4 4.1 5.8 5.8 6.9 4.5 4.3 7.8Private consumption 2009 3.2 1.0 8.0 -0.4 4.3 4.9 -0.7 0.2 0.7 -0.8 3.9 4.1 0.4 -2.9 1.1 -1.1 3.72010f 5.6 2.7 9.5 5.8 6.5 4.8 2.2 4.1 6.8 2.1 1.5 4.8 5.9 9.0 3.8 5.0 6.02011f 4.7 3.2 9.4 6.0 6.1 5.0 -0.2 3.6 6.7 1.5 3.0 5.3 5.5 9.0 4.9 3.8 7.72012f 5.2 3.2 9.3 4.6 6.5 5.0 1.0 4.4 5.7 2.8 3.0 5.6 5.8 7.0 4.8 3.9 7.2Fixed investment 2009 9.5 -3.2 30.5 -1.8 7.2 3.3 -3.6 -0.2 -5.6 -11.4 -2.0 -0.4 -3.3 2.9 -11.0 -9.2 8.72010f 12.4 5.7 25.0 6.7 15.5 8.7 0.6 6.9 8.9 1.3 5.0 16.2 5.4 14.0 22.8 9.8 7.52011f 10.6 5.3 21.5 7.5 14.5 10.0 1.6 3.8 6.5 8.6 7.0 6.8 5.0 12.0 5.4 4.8 7.02012f 9.5 7.3 19.0 2.0 12.0 10.0 1.9 2.8 5.2 7.7 7.0 6.5 7.0 12.0 4.0 5.0 8.0Current account balance* (% of GDP) 2009 4.2 -4.2 5.8 7.2 -2.2 2.0 2.8 5.1 16.5 -2.8 -2.0 5.5 17.8 -0.5 11.3 8.3 -8.02010f 3.5 -2.8 4.4 9.6 -3.8 1.0 3.4 3.6 12.9 -1.8 -2.5 5.7 20.2 -3.8 8.8 4.4 -8.82011f 3.1 -2.5 3.9 7.5 -4.0 1.3 3.1 2.7 13.2 -3.8 -1.8 6.1 22.3 -6.5 5.3 4.5 -6.92012f 2.9 -3.6 2.7 9.4 -3.5 1.3 3.6 2.3 13.3 -3.2 -0.9 5.3 21.5 -7.5 4.7 4.4 -5.2CPI (period average) 2009 0.9 2.0 -0.7 0.5 10.9 4.8 -1.3 2.8 0.6 2.1 20.8 3.3 0.6 3.5 -0.9 -0.8 7.12010f 2.6 2.8 3.3 2.3 11.8 5.1 -1.1 3.0 1.8 2.3 13.6 3.8 2.8 5.9 1.0 3.3 9.12011f 2.8 3.0 3.9 4.4 7.1 6.3 -0.7 3.8 3.0 4.0 14.9 4.4 3.2 7.8 2.3 3.8 9.92012f 2.3 3.1 2.9 4.2 6.1 5.2 -0.5 3.2 2.2 2.3 11.6 4.8 2.9 6.2 2.0 3.1 9.4Money market interest rate** (%, year-end) 2009 2.9 n.a. 1.7 0.1 11.5 6.6 0.3 2.8 2.2 n/a n.a. 3.9 0.7 n.a. 0.5 1.4 n.a.2010f 3.3 n.a. 2.1 0.3 12.3 7.6 0.2 3.3 2.8 n/a n.a. 4.0 0.5 n.a. 0.9 2.3 n.a.2011f 4.0 n.a. 2.3 0.5 13.0 7.3 0.2 4.3 6.8 n/a n.a. 4.5 1.1 n.a. 1.4 3.1 n.a.2012f 4.3 n.a. 2.3 0.9 13.5 7.3 0.2 4.8 6.8 n/a n.a. 5.2 1.2 n.a. 1.9 3.1 n.a.Exchange rate (vs. USD, year-end) 2009 n.a. 0.76 6.83 7.76 46.69 9,425 93 1,166 3.42 0.72 85.5 46.5 1.41 114.4 32.1 33.3 18,200 2010f n.a. 0.91 6.67 7.80 44.81 8,800 85 1,130 3.00 0.76 88.0 41.5 1.27 111.1 29.5 29.0 19,800 2011f n.a. 0.88 6.35 7.80 42.00 8,700 95 1,070 2.88 0.76 90.0 37.5 1.23 111.0 27.0 25.0 20,000 2012f n.a. 0.85 6.15 7.80 42.00 8,700 95 1,030 2.79 0.72 92.0 35.5 1.19 111.0 27.0 24.0 20,000

* Hong Kong: current account refers to visible and invisible trade balance only ** China: 3-month time deposit; Hong Kong: 3-month HIBOR; India: 3-month T-Bill; Indonesia: 3-month SBI; Korea; 3-month CD yield; Malaysia: 3-month KLIBOR; Philippines: 3-month T-bill; Singapore: 3-month SIBOR; Taiwan: 91-day secondary CP; Thailand: 3-month BIBOR. ***India GDP forecasts are fiscal-year basis. Source: HSBC, CEIC; NB: Asia aggregate data are based on 2009 nominal USD weights and does not include Australia and New Zealand

Key forecasts

GDP (% y-o-y) CPI (% y-o-y)

-4

-2

0

2

4

6

8

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10f 11f 12f

-4

-2

0

2

4

6

8

Asia av erage

Asia ex China, India & Japan av erage F'cast

0

2

4

6

8

10

98 99 00 01 02 03 04 05 06 07 08 09 10f 11f 12f

Asia av erage

Asia ex China, India & Japan av erage

F'cast

Source: CEIC, HSBC Source: CEIC, HSBC

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Monetary policy

Period end (%) 3Q10 4Q10 1Q11e 2Q11e 3Q11e 4Q11e 1Q12e 2Q12e

Australia RBA cash rate 4.50 4.75 4.75 5.00 5.25 5.50 5.75 5.75China 1 year base lending rate 5.56 5.81 6.06 6.31 6.31 6.31 6.31 6.31Hong Kong SAR Base rate 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50India Repo rate 6.00 6.25 6.50 7.00 7.25 7.50 7.50 7.50Indonesia SBI 28 day rate 6.50 6.50 7.00 7.25 7.25 7.25 7.25 7.25Japan Overnight call rate 0.10 0.05 0.05 0.05 0.05 0.05 0.05 0.05Korea Overnight call rate 2.25 2.50 2.75 3.00 3.25 3.50 3.75 4.00Malaysia Overnight rate 2.75 2.75 2.75 2.75 3.00 3.25 3.25 3.25New Zealand RBNZ cash rate 3.00 3.00 3.00 3.25 3.50 3.75 4.00 4.25Pakistan Repo rate 13.50 14.00 14.50 14.50 14.50 14.00 14.00 14.00Philippines Reverse repo rate 4.00 4.00 4.00 4.25 4.50 4.50 4.50 4.75Singapore 3 months rate 0.51 0.50 0.70 0.80 0.90 1.10 1.10 1.10Sri Lanka Repo rate 9.00 9.00 9.00 9.25 9.75 10.25 10.50 10.50Taiwan Rediscount rate 1.375 1.625 1.750 1.875 2.000 2.125 2.250 2.375Thailand 1-day repo rate 1.75 2.00 2.00 2.25 2.75 2.75 2.75 2.75Vietnam Policy rate 8.00 9.00 9.00 9.00 9.00 9.00 9.00 9.00

Source: HSBC, CEIC

Monetary & fiscal policy assumptions

Fiscal policy assumptions for 2011

Australia Government aims to see the budget return to surplus in 2012-13, three years ahead of schedule, given upwardly revised medium-term growth projections. The stronger economic outlook has improved the prospects for tax receipts and should deliver lower deficits at 2.8% of GDP for 2010-11 from 4.2% for 2009-10. Net debt is now expected to peak at just 6.1% of GDP, which is around AUD40.8 bn. In 2010-11, the fiscal stimulus will be withdrawn in line with the gathering pace of the private-sector recovery to avoid sudden changes.

China Proactive fiscal policy will remain in place but the budget deficit to GDP ratio is likely to fall slightly to 2.5% in 2011 from around 2.7% in 2010. Fiscal policy is likely to focus on structural adjustments and increasing spending on rural areas and farmers, healthcare, public housing, etc.

Hong Kong As the bulk of 10 planned major infrastructure projects (which started coming online in late 2009) get going, real fiscal impulse began kicking in for Hong Kong in 2010, with the momentum to be sustained in 2011.

India We expect the central government deficit to decline slightly to 4.8% of GDP in FY11/12 in line with the medium term fiscal plan. This will be achieved mainly through expenditure restraint, while needed tax reforms to bolster revenues are not likely to materialize during this fiscal year.

Indonesia In 2011, with growth staying strong and the government unable to kick the curious habit of under-spending, we expect the budget deficit to be 1.7% of GDP, broadly in line with the government projection of a deficit of 1.8% of GDP.

Japan We assume the economic policy of the new government will proceed as planned in the initial budget. This should push the real GDP growth rate up by 0.3ppt in FY10, mainly through private consumption. Supplementary budget for FY2010 will boost the growth by 0.3% in FY11, not in FY10.

Korea The government is looking at a budget deficit of 2% of GDP for 2011 and aims to return to surplus in 2013-4. Public debt should subsequently ease from the peak of 37% of GDP in 2010 to 31.8% in 2014. Nevertheless, including the social security contribution, the fiscal balance has already returned to surplus. With the growth rate set to stay above trend in the next couple of years, the government’s plan looks promising.

Malaysia The government has projected a drop in budget deficit in 2011, to 5.4% from 2010’s 5.6%. The magnitude of the fiscal tightening has underwhelmed. Although fiscal sustainability is not a key issue for Malaysia, a bigger cut would have gone a long way in projecting the government’s seriousness in putting its fiscal health on a stronger footing over the long term.

New Zealand The key features of the budget for 2010 are an improvement in the fiscal outlook through spending discipline and taking the economy away from consumption towards to savings, investment and exports. We expect a budget deficit of 3.2% of GDP for 2010, 3% of GDP for 2011, and a return to surplus in 2015/16. Thus, net debt will peak at 27.4% of GDP in 2014/5.

Source: HSBC, CEIC

Fiscal policy assumptions for 2011

Pakistan The government is under pressure from the IMF to cut its deficit to 4.7% in 2011 (from 6.6% in 2009/10), but we do not expect it to achieve this. Measures to increase the tax take (one of the lowest in the world currently, at 10% of GDP) and reduce fuel subsidies have proven very difficult to implement in the current political environment, and we expect this to remain the case, while spending continues to rise in the wake of the devastating floods of 2010.

Philippines Government spending will continue to moderate as the incumbent administration remains committed to fiscal consolidation. Revenue collection may slightly improve as the government has unveiled fiscal incentive plans to strengthen tax compliance. Moreover, the economic recovery should continue to support revenue. But persistent structural bottlenecks remain a risk to the country’s fiscal outlook. We expect a fiscal deficit of PHP277bn (3% of GDP) in 2011.

Singapore While the government may deliver some “goodies” in reward for the strong growth performance, the fiscal stance in 2011 is likely to be slightly contractionary consistent with the government’s exit strategy and the need to tame inflation pressures in the economy, supplementing the monetary policy efforts in this regard.

Sri Lanka The budget deficit for 2011 is expected to shrink, but not by as much as budgeted by the government. Tax broadening measures will help support revenue collections, but the hoped for growth (and, thereby, revenue) impact from the budgeted tax cuts will prove difficult to achieve.

Taiwan The budget deficit widened in 2009 due to fiscal stimulus measures. However, with the economy now getting back on track, the revenue outlook is positive. The fiscal deficit is expected to have narrowed in 2010 and continue shrinking in 2011.

Thailand As part of the stimulus program, government identified THB1.43 trillion of ready-to-implement projects for 2009-12. With this consolidated government expenditure was expected to go up, however, gradual recovery and uncertain political environment resulted in delayed expenditure and higher-than-expected revenues- status quo FY2010 ended with a minuscule deficit of approximately THB 30bn. For revenue account, we expect same robust trend to continue going forward, however 2011 being an election year we expect expenditure to go up by 4% y-o-y. Our assumption of higher-than-expected tax revenue means a smaller budget deficit of around 1% to GDP in 2011- allowing government to borrow less and hence government debt to GDP ratio will be rising marginally from 46% in 2009 to 47% in 2011.

Vietnam Growth is expected to remain robust in 2011, which should help to improve revenue and also allow the government to rein in spending. The fiscal deficit is likely to narrow to 4.8% of GDP.

Source: HSBC, CEIC

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Still cruisin’ Looking at some of the headline numbers tracking

Asian growth, you might conclude that the region

is set to stumble. Forget it. Asia is cruising along

nicely and has even picked up speed into year-end:

our regional business index certainly points that way.

The mid-summer lull (which in some places lasted

well into the fall) has now vanished, and growth

should endure in 2011. In fact, we’ve once again

nudged up our forecasts for a number of markets,

this time for the smaller, trade-dependent ones.

Yes, we are still putting a relatively positive spin

on things. But consider two points. First, the outlook

for exports now looks much better than only a few

months ago. Back then, the restocking bounce was

fading fast. We, too, were sceptical whether the

boom in exports would last and were pinning our

forecasts (and, indeed, hopes) on resilient domestic

demand to carry the region along. Yet, after a brief

sputter, the trade engine revved up again. This time,

it’s not so much the rebuilding of inventories that

is driving shipments but improving end-demand.

Pumped up

Asian economies have rebounded strongly in the fourth quarter,

with exports especially reviving along with demand in the West

With the outlook bright, and output gaps all vanished, the region

must curtail its huge monetary stimulus and tighten more rapidly

Inflationary pressures are rising sharply, and leverage continues

to drive up asset prices, but determined action can prevent a bust

Frederic Neumann Economist The Hongkong and Shanghai Banking Corporation Limited +852 2822 4556 [email protected]

Song-yi Kim Economist The Hongkong and Shanghai Banking Corporation Limited +852 2822 4870 [email protected]

1. Asia ex Japan and Hong Kong: industrial production growth bottomed, Asia Business Index points to strong rebound

-10

-8

-6

-4

-2

0

2

4

6

8

99 00 01 02 03 04 05 06 07 08 09 10

35.0

40.0

45.0

50.0

55.0

60.0

Asia ex JP, HK IP grow th (% 3m/3m sa) Asia Business Index (RHS)

SARS

Source: CEIC, Markit, HSBC; NB: Asia Business Index is a composite of all available PMI and relevant business sentiment readings across the region compiled by HSBC

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In fact, given slightly more perky data – if that is the

term to be used – and an unexpected fiscal stimulus

delivered by fiercely negotiating politicians, our US

economists recently raised their forecast from 2.8%

to 3.4% for the coming year. In Europe, too, things

look a little brighter despite ongoing jitters on the

periphery. For instance, Germany’s IFO index, a

useful leading indicator for the continent as well

as for Asia, hit another cycle high in December. Our

European colleagues thus also pushed up their call

for next year, even if at an altogether more meagre

level, from 1.3% to 1.5% for all of Western Europe.

2. Export growth expected to strengthen into early 2011

-20

-15

-10

-5

05

10

15

Jun-03 Apr-05 Feb-07 Dec-08 Oct-10

-15

-10

-5

0

5

10

15

Ex ports Ax J, % 3m/3m saABI new orders minus inv entories (RHS)

Source: CEIC, Markit, HSBC

Smoke under the hood? In short: Asia is facing stronger and, admittedly,

somewhat unexpected, tailwinds heading into 2011.

All pretty rosy, then, you might think. Well, perhaps

not quite. After all, it’s not just about pretty GDP

numbers, but sustainability matters just as much. In

a recent piece, HSBC’s Group Chief Economist,

Stephen King, and his colleagues, pointed out that

despite upward revisions in growth, trouble remains

in the West’s financial engine room and the long-

term costs of the recent crisis are only now being

uncovered (see A mis-firing growth engine, Global

Economics Quarterly, 1Q 2011). In a nutshell, the

growth forecasts for the West mask huge downside

risks that could eventually come back to bite Asia.

And it’s by no means just the West where growth

risks remain sizeable. Which leads us to our second

point: in Asia, too, imbalances are piling up and

more needs to be done to put the ship on a more

sensible course. The region is growing, no doubt.

But don’t forget that economies are still pumped up

by a massive policy stimulus. Fiscally, of course,

the major kick from emergency packages has started

to fade, even if most governments remain rather

accommodative. The real driver, however, is loose

monetary policy – both the direct and the indirect

result of aggressive monetary easing in the West.

We’ve talked at length about these risks before (see

for example Three buckets, January 2011). To recap:

persistently loose monetary policy can have three

ultimately detrimental effects on an economy. First,

it can push up inflation. Second, it can lead to asset

bubbles. Third, it can stoke excessive investment. In

practice, a combination of the three will occur. The

final result, however, is almost inevitably financial

instability (remember: it can happen here, too).

3. Current policy rates still well below 2011 neutral levels

Current policy rate 2011 neutral rate estimate

Australia 4.75 4.50 New Zealand 3.00 5.30 China 5.81 6.20 Hong Kong 0.50 4.50 India 6.25 7.20 Indonesia 6.50 8.70 Japan 0.00 0.12 Korea 2.50 4.00 Malaysia 2.75 3.02 Philippines 4.00 7.25 Singapore* 0.50 1.90 Sri Lanka 9.00 11.00 Taiwan 1.625 2.25 Thailand 2.00 3.10 Asia x Japan 4.92 5.40

Source: CEIC, Bloomberg, HSBC; NB: neutral rate estimates mostly based on Kalman filter, others on Taylor rules; simple average for Asia, *no policy rate, 3 month Sibor used

There is still time to tighten the reins and avoid the

worst excesses. Without more determined action,

however, persistent monetary stimulus will end up

derailing growth across Asia. Monetary cycles are

tremendously powerful, of course, but they also

feed only gradually through an economy. In 2011,

therefore, Asia will still only grapple with the early

symptoms of the process: rising inflation, for sure,

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bubbly asset markets, and accelerating investment;

growth, however, should remain strong even if built

on an increasingly precarious foundation.

Still time In other words: Asia should grow around trend in

2011. The risk to our forecast, evidently, is that

the various effects of monetary over-stimulation

make themselves felt earlier than assumed. Inflation

could rise more rapidly, asset markets soar beyond

control, and rampant investment add unsustainable

levels of capacity in a very short period of time. Of

these, inflation looks the most worrying currently

– a topic about which we’ll have much more to say

in the next chapter.

However, even here, the global output gap may

restrain price pressures sufficiently for Asia to evade

a full price explosion in 2011. We are at the top of

consensus on inflation in a number of economies

(though notably not in Japan and China), but a re-run

of the 2008 inflation scare would almost certainly

require a hefty speculative bubble in energy and

agricultural commodity markets (we’ll leave you

to judge how likely this is: being economists, we

confine our calls to fundamental price drivers).

The paradox, however, is that if inflation remains

relatively well-behaved, ongoing monetary stimulus

can ultimately exacerbate its other two potential

consequences. Asset bubbles, in that case, are more

likely to continue to fester. Sure, governments are

increasingly resorting to regulatory measures to

prevent, say, property prices from spinning out of

control. But, as long as the cost of capital is kept too

low relative to growth, it remains doubtful whether

these steps are sufficient to prevent bubbles from

forming.

6. Average headline CPI inflation for 2011 and targets

Consensusforecast

HSBC forecast Central bank target

Australia 3.0 3.1 2.0-3.0 New Zealand 4.2 4.0 1.0-3.0 China 4.0 3.9 around 4.0 Hong Kong 3.6 4.4 n/a India* 6.2 6.6 5.0-6.0 Indonesia 6.1 6.3 4.0-6.0 Japan -0.3 -0.7 around 1.0 Korea 3.2 3.8 2.0-4.0 Malaysia 2.6 3.0 3.0 Philippines 4.1 4.5 3.0-5.0 Singapore 2.6 3.2 2.75 Sri Lanka 6.7 7.8 n/a Taiwan 1.6 2.3 0.9-1.0 Thailand** 3.2 3.8 0.5-3.0 Vietnam 9.0 9.9 n/a Asia x J 3.4 4.3 n/a

Source: CEIC, Consensus Economics, HSBC, National authorities; NB: * refers to WPI and FY 2011, **target for core inflation; not all countries are explicit inflation targeters.

Investment, meanwhile, will also stay strong if tame

inflation and cheap funding sustain confidence

among firms and public officials. Initially, of course,

this benefits growth. But, over time, overcapacity

can harm financial stability if banks and investors

find that projected returns are not being met (note

that this could ultimately also cause deflationary

4. Headline CPI: still moderate, but turning (% 3m/3m sa) 5. Core CPI: accelerating sharply (% 3m/3m sa)

-1

0

1

2

3

4

5

00 01 02 03 04 05 06 07 08 09 10

Asia x JP ASEAN NIEs

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

00 01 02 03 04 05 06 07 08 09 10

Asia x JP ASEAN NIEs

Source: CEIC, HSBC Source: CEIC, HSBC

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pressures to emerge in Asia, although we are likely

still some safe distance away from this occurring

– still, let it be noted that you read it here first).

Spending, for now Asia, as you will already have heard from us, is not

just about exports to the West and huge investments.

Consumption matters as well, and increasingly so.

Sure, we are still a long way from full rebalancing, but

progress is being made, notably in China, but

elsewhere in Asia as well, with households across

ASEAN, Korea, and certainly India, doing their bit to

spur demand. This will continue in 2011, so get ready

for further headlines about how Asians are breaking

more and more spending records (sorry, we couldn’t

resist including our current favourite, a chart which

compares car sales in emerging Asia with the West,

though admittedly this says just as much about

weakness in the latter as strength in the former). Consider the fundamentals. Output in emerging Asia

is now well above its pre-recession peak. As a result,

unemployment caused by the slump has largely

disappeared. In fact, hiring by firms, as proxied by

the employment index of our ABI, has rebounded

sharply in recent months. Real retail sales growth

should therefore hold up well. At the same time,

rising asset prices, along with the improving labour

market, help to maintain consumer confidence at

lofty levels (in marked contrast to the US).

Before getting too carried away about the wonders

of Asian consumer power, however, it’s important

7. Actual and forecast annual light vehicle sales (in millions) 8. Consumer confidence in Asia elevated, and stable

0

5

10

1520

25

30

35

2003 2005 2007 2009 2011e 2013e

Western Europe USA Ax J

70

75

80

85

90

95

100

105

Jan-00 Apr-02 Jul-04 Oct-06 Jan-09

20

40

60

80

100

120

140

Asia x J (simpl av g, LHS) US

September

2008

Source: IHS Global Insight, HSBC Source: CEIC, HSBC

9. Rebound in corporate employment should help sustain real retail sales growth well into 2011

4 5

4 6

4 74 8

4 95 0

5 15 2

5 3

5 45 5

0 2 0 3 0 4 0 5 0 6 0 7 08 09 10

-1 0

-5

0

5

1 0

1 5

2 0

ABI: em plo y men t sub -ind ex Re al re tai l sa les for Asia ex J P (% y -o-y , si mpl av g., R HS)

Source: CEIC, Markit, HSBC NB: ABI (Asia Business Index) is a composite of all available PMI and relevant business sentiment readings across the region compiled by HSBC

10


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to look at the risks. We already mentioned the three

consequences of persistently loose monetary policy.

Of these, asset bubbles and rampant investment will

fuel, rather than dampen consumer spending – until,

that is, the effects go into reverse. But, inflation may

prove harmful more immediately.

To be sure, a gradual, and stable, rise in prices will

not depress shoppers too much. In fact, it may even

mildly encourage them to get on with their business.

However, beyond a certain threshold, or if prices

suddenly start to rise, inflation prompts households

to cut back (note that both the level as well as the

volatility of inflation matter). Therefore, should

prices jump more sharply than we currently forecast

in 2011, this could quickly weigh on consumption

and therefore growth.

Rewind, for a moment, to 2008. Early in that year,

demand in Asia barrelled ahead even as the US

economy slid into recession (in fact, officially, it

had already been in one since December 2007).

Across the region, cost pressures then exploded in

the second quarter, led by food and energy, but

quickly followed by core prices as well. In response,

consumers cut back sharply, pushing Asia into a

downturn well before exports began to tumble. In

the end, it was the collapse of Lehman Brothers in

September 2008, and the consequent global deep-

freeze, that killed the export engine and thus turned

Asia’s downturn into a nasty recession. Note, for

example, how Asian consumer confidence had

already collapsed before the bust of the American

bank (chart 8), presumably due to rampant inflation.

There are a few lessons to be drawn here. First, price

pressures can rise in Asia even if the US economy is

hitting the skids. Second, despite tight labour markets

and high savings rates, an acceleration of inflation can

rapidly depress household spending in Asia and

therefore slow growth. Third, it’s not just the level of

inflation that matters, but its pace as well. A sudden

run-up in prices, as tends to occur especially with food

and energy, can have an equally devastating effect on

consumer confidence and spending growth.

As mentioned, at current inflation rates, there is little

risk of shoppers throwing in their bags. China and

India perhaps stand out where price pressures are

closest to the danger threshold. But, in China, our

forecast assumes a deceleration of inflation in the

second half of this year, with easing food costs and

mild monetary tightening possibly being enough to

rein in prices. In India, price pressures remain far

more stubborn, requiring more determined tightening.

In fact, a mild pick-up in inflation may be more

than compensated by rising incomes. Across the

region, tight labour markets have pushed up wages

10. Sharply rising inflation often slows private consumption spending growth (% y-o-y)

-6

-4-2

02

4

68

1012

14

Q1 1991 Q1 1993 Q1 1995 Q1 1997 Q1 1999 Q1 2001 Q1 2003 Q1 2005 Q1 2007 Q1 2009

Asia x J CPI (simple av g) Asia x J Priv ate Consumption

Source: CEIC, HSBC

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and salaries. In China, government policy is lending

a hand as well, with minimum wage hikes and

rapidly growing spending on social services

boosting spending power for discretionary items.

To be sure, reliable data for wage growth in Asia

is difficult to come by. Still, we’ve compiled the

more useful numbers into a region-wide index that

helps to track wage developments.

11. Asia ex Japan: sharp pick-up in wage growth (% y-o-y)

5.0

7.0

9.0

11.0

13.0

15.0

Jan-03 Dec-04 Nov -06 Oct-08 Sep-10

Nominal w ages Real Wages

Source: CEIC, ILO, HSBC

The above chart suggests that both nominal and real

wage growth accelerated impressively through the

third quarter. On this basis, it appears reasonable to

expect consumer spending growth to stay robust.

But, this chart also suggests caution. First, in 2008,

a jump in nominal wage growth was not sufficient

to compensate for inflation, resulting in a drop in

real wage growth and, thus, a sharp deceleration in

household spending. Second, though real wage

growth is currently reassuringly high, this is partly

because nominal wage growth is already well above

its trend level. Any pick-up in inflation, therefore,

would have to be accompanied by extraordinary

nominal wage gains.

Stimulus at work A vast monetary stimulus is winding its way through

Asia. For one, local monetary conditions are kept

ultra-loose with central banks reluctant to normalize

rates, despite strong growth. In addition, easy cash

from the West is pumping into the region, pushing

up asset prices in the process. This, evidently, is a

huge boost to local economies. With, most likely,

only tentative tightening by central banks, and cash

still pouring into Asia, the monetary stimulus looks

set to endure well into 2011.

Amazingly, misperceptions linger as to the precise

effect of this process. For instance, it is often held

that low interest rates have not yet had an overly

distortive effect because of generally subdued credit

growth. Take chart 12. Emerging Asia, with the

notable exception of China, has seen a bounce in

bank lending, but this doesn’t look terribly out of

the ordinary historically. Why, then, you might ask,

the constant obsession with low interest rates?

12. Asia ex Japan and China: credit growth (% 3m/3m sa)

-4

-2

0

2

4

6

90 92 94 96 98 00 02 04 06 08 10

simple av g w eighted av g

Source: CEIC, HSBC

Well, a number of reasons. For one, credit growth

is clearly picking up, and the longer the low interest

rate environment persists, the more bank lending

will accelerate – remember that credit growth is a

lagging indicator, and central banks need to step up

before it gets out of hand. In addition, low interest

rates are boosting, arguably artificially, the value of

assets, whether financial or property. In fact, rising

asset values over time spur bank lending as well,

and encourage debt creation, through the financial

accelerator. Once this process is under way, it takes

even more aggressive rate hikes to tighten financial

conditions and prevent excessive leverage.

Instead of focusing purely on credit growth, it is thus

also useful to look at money supply. Though bank

lending and broad money supply growth are related,

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the latter often signals excessively loose monetary

conditions first (reflecting, for example, rapid base

money creation before credit growth picks up). For

a quick take on this, consider our next chart. Here

we show broad money supply as a share of nominal

GDP. Over time, the ratio tends to rise, reflecting

growing financial sophistication in an economy. But

over the short-term, a sudden jump in the ratio can

also portend trouble, mirroring not so much healthy

financial development, but rather overly generous

monetary accommodation.

14. Broad money supply as a % of nominal GDP

50

70

90

110

130

150

170

190

Jan-92 Jan-96 Jan-00 Jan-04 Jan-08

Asia x C J simple av g CH

Source: CEIC, HSBC

The counter-argument, of course, is that Asian banks

are well capitalized and sit on healthy assets. A rise

in credit growth, therefore, may not in itself lead

to a crippling banking bust. We’ll concede that in

the short term there is little in the data that flags up a

sudden financial freeze. But, caution is warranted.

Two points. First, high capital ratios must be seen

in the Asian context of historically volatile financial

conditions, and, admittedly, still-developing risk

and corporate governance standards. Second, NPL

ratios, as impressive as they now look, can quickly

turn. In fact, low interest rates flatter the debt service

ability of debtors. When rates rise, so do NPLs.

15. Risk-weighted capital and non-performing loan ratios (%)

0

5

10

15

20

CH HK ID SK MY PH SG TW TH

CARs NPLs

Source: ADB, HSBC; NB: latest available; CARs as % of risk-weighted assets, NPLs as % of commercial loans

Taken together, the region is set for continued strong

growth. However, make no mistake: behind these

numbers lies a powerful monetary stimulus that is

still working itself through local economies. Since

this is expected to last, there is no reason to expect

an imminent slump in Asian growth. At the same

time, imbalances are starting to develop. Without

a more rapid normalization of monetary conditions,

therefore, the region may ultimately come to face

some habitual financial demons.

13. Sequential credit growth accelerating across the region, except for the Philippines (% 3m/3m sa)

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

CH HK IN ID SK MY PH SG SL TW TH Ax J

Jan-10 latest

Source: CEIC, HSBC

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Tricky, to say the least Of course, it’s easy to stand at the sidelines,

pointing the finger at central bankers, and warning

of dire consequences should officials fail to push

up rates. Apart from political realities, which

policy-makers encounter everywhere, in Asia they

also need to grapple with the delicate question of

exchange rates. After all, rate hikes would be

ineffective unless officials imposed water-tight

capital controls or allowed exchange rates to

respond freely to market whim.

The latter appears unlikely for the time being, not

least given the sizeable adjustment that would

presumably be required to temper capital flows. The

former, as we’ve argued before (see Manning the

Barricades, November 2010), are coming more and

more into play. But, even here, it is doubtful that the

measures will become draconian enough to provide

complete monetary policy independence. In fact,

China, which arguably maintains the tightest capital

controls in Asia, still faces, by its own admission,

constraints in setting policy partly due to quantitative

easing in the US and consequent capital inflows into

the country. Overall, then, for Asian economies, the

scope for aggressive rate hikes is limited, leaving the

most likely path to be prudent steps as we forecast in

the table below.

Does all this mean that policy-makers are completely

defenceless? Not necessarily. A deft combination of

capital controls, rate hikes, and rising exchange rates

might still help to mitigate the most glaring risks and

imbalances. Beyond this, regulatory tightening, as

already applied in a number of markets, especially

with respect to real estate, can help at least to reduce

the risk of asset bubbles, though perhaps less so the

by-products of rapid inflation and raging investment

that prolonged monetary stimulus often entails. For

these, more determined fiscal tightening might be

useful, although we currently detect little political

will in the region to take this route.

In sum, a combination of various policy measures is

needed to tighten conditions in Asia: capital controls,

exchange rate appreciation, rate hikes, regulatory

and fiscal tightening. Whether the region can deliver

on all of these remains to be seen. For now, it looks

as if growth will take precedence, even at the risk of

growing imbalances that might yet come back and

rattle Asia. Though that’s more an issue for 2012.

16. HSBC policy rate forecasts (hike denoted in red, cut in grey)

Q3 10 Q4 10 Q1 11f Q2 11f Q3 11f Q4 11f Q1 12f Q2 12f Q3 12f Q4 12f

Australia 4.50 4.75 4.75 5.00 5.25 5.50 5.75 5.75 5.75 5.75 New Zealand 3.00 3.00 3.00 3.25 3.50 3.75 4.00 4.25 4.50 4.50 China 5.31 5.81 6.06 6.31 6.31 6.31 6.31 6.31 6.31 6.31 Hong Kong* 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 1.00 India 6.00 6.25 6.50 7.00 7.25 7.50 7.50 7.50 7.50 7.50 Indonesia 6.50 6.50 7.00 7.25 7.25 7.25 7.25 7.25 7.25 7.25 Japan 0.10 0.0-0.10 0.0-0.10 0.0-0.10 0.0-0.10 0.0-0.10 0.0-0.10 0.0-0.10 0.0-0.10 0.0-0.10 Korea 2.25 2.50 2.75 3.00 3.25 3.50 3.75 4.00 4.00 4.00 Malaysia 2.75 2.75 2.75 2.75 3.00 3.25 3.25 3.25 3.25 3.25 Pakistan 13.50 14.00 14.50 14.50 14.50 14.00 14.00 14.00 14.00 14.00 Philippines 4.00 4.00 4.00 4.25 4.50 4.50 4.50 4.75 5.00 5.25 Singapore* 0.30 0.40 0.70 0.80 0.90 1.10 1.10 1.10 1.20 1.20 Sri Lanka 9.00 9.00 9.00 9.25 9.75 10.25 10.50 10.50 10.50 10.50 Taiwan 1.500 1.625 1.750 1.875 2.000 2.125 2.250 2.375 2.500 2.625 Thailand 1.75 2.00 2.00 2.25 2.75 2.75 2.75 2.75 2.75 2.75 Vietnam 8.00 9.00 9.00 9.00 9.00 9.00 9.00 9.00 9.00 9.00

Source: CEIC, HSBC; *no policy rates, refers in Hong Kong to HKMA discount base rate and in Singapore to 3 month Sibor.

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Inflation to remain high … Since October, both consumer price and producer

price inflation have surprised on the upside.

Following the 4.4% y-o-y above-consensus CPI in

October, the index accelerated further to a 28-

month high of 5.1% y-o-y in November, beating

consensus forecasts by a wide margin. Meanwhile,

the producer price index (PPI) also rebounded

further to an above-consensus 6.1% y-o-y,

printing the highest reading in five months.

The biggest surprise came from food prices,

accelerating to 11.7% y-o-y in November from

10.1% y-o-y in October, or contributing 74% to

the headline CPI increase. Within the food category,

vegetable prices rose 21.1% in November, compared

with 29.3% y-o-y in October, thanks to the initial

effect of accelerating vegetable supply measures.

Eggs and edible oil prices surged 17.6% and 14.3%

respectively in November (versus 10.5% and 8%

in October). But price hikes for meat (the culprit

in the 2007-08 CPI upturn) are still relatively

moderate. Meanwhile, residential and clothes

prices quickened in sequential terms, due to the

rental and utilities price increases and rising input

costs (for example, cotton).

Chart 1. Food-induced CPI hikes

-10-505

10152025

98 99 00 01 02 03 04 05 06 07 08 09 10

-10-50510152025

CPI Non-food CPI Food CPI

(%yr, 3mma) (%yr, 3mma)

Source: CEIC, HSBC

Against the backdrop of the Fed’s second round of

quantitative easing (QE2), the rally in international

commodity prices also seems to be lifting domestic

producer prices (Chart 2). However, given that

China is now the world’s biggest consumer of the

main commodities, here the causality is more

complicated than it appears, because Chinese

demand also plays a big role in pushing up global

commodity prices. So China’s “imported

inflation” could actually be made in China.

Can China cap inflation?

Inflation is likely to stay above 5% in the near term …

… but no need to panic, because Beijing has enough policy tools

to check inflation

The risk of policy tightening choking off growth too much is also

remote; we expect GDP growth to hold up at almost 9% this year

Qu Hongbin Chief China Economist The Hongkong and Shanghai Banking Corporation Limited +852 2822 2025 [email protected]

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Chart 2. Rising commodity prices not helpful

-10

-5

0

5

10

15

99 00 01 02 03 04 05 06 07 08 09 10 11

(%yr)

0

100

200

300

400

500

PPI (Lhs) CRB index (Rhs)

Source: Bloomberg, HSBC

All these brought into focus the heightened price

pressures and prompted China’s policymakers to

make battling inflation their top priority in 2011

(see Inflation’s the word, 11 December; Inflation

the top concern, 13 December). The annual

Central Economic Work Conference has pushed

price stabilisation as the fore of policy priorities

for this year. And the government has also been

responding to these upside surprises actively

through both supply-side measures and monetary

tightening (three reserve ratio hikes and two rate

hikes since October 2010).

It’ll get worse before it gets better

We believe the measures introduced so far are not

sufficient to cool inflation. Although headline CPI

growth likely eased a bit in December, we expect

it to bounce back to exceed 5% y-o-y in 1Q11,

reflecting both credit overhang and seasonal factors.

The faster-than-expected sequential growth in

food prices and headline CPI over the past three

months implies a higher-than-expected carryover

effect for 2011. Even assuming zero sequential

growth in prices in the coming months, the base

effect will likely contribute more than 3 percentage

points to year-on-year CPI inflation in 1Q11.

However, sequential growth in headline CPI has

remained strong over the past three months and is

likely to accelerate around the Lunar New Year

holidays (early February). Meanwhile, bad winter

weather this year will only make the situation

worse through disruptions to the production and

transportation of food.

More worryingly, general inflation expectations

appear to be on the rise. As Chart 3 shows, the

result of a household survey conducted by the

People’s Bank of China (PBoC) in November

2010 suggests that more than 61% of respondents

expect their cost of living to rise in the next

quarter, much higher than the 46.2% recorded in

August. If history is any guide, the decade-high

inflation expectation index means CPI inflation is

set to accelerate should there be no decisive action

to fight inflation in the near term.

Chart 3. Inflation expectations are picking up

40

50

60

70

80

90

01 02 03 04 05 06 07 08 09 10

(%)

-6

-4

-2

0

2

4

6(Index)

Inflation ex pectation (Lhs)Real 1-y r deposit rate (inv erted, Rhs)

Source: CEIC, HSBC

Despite a recent slowdown in credit growth, there

is still the massive overhang of excessive growth

in liquidity. Combined with cheap dollar inflows,

this would fuel inflation if Beijing fails to act

quickly to slow monetary growth.

… but Beijing can focus on taming inflation Beijing has for a while been trying to strike a

balance between inflation and growth. But times

have changed, with both inflation and growth

figures surprising on the upside. Beijing can now

fight inflation single-mindedly.

Both industrial production and fixed asset

investment posted upside surprises in November,

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while retail sales held up reasonably well – all

these factors underlining the strength of domestic

growth momentum. Industrial production growth

picked up to 13.3% y-o-y in November, higher

than the consensus forecast of 13% and October’s

deceleration to 13.1% y-o-y. Seasonally adjusted,

we estimate that m-o-m growth picked up to 1.2%

from 1% previously. For heavy industries, y-o-y

growth picked up to 13.6% (from 13.2% in October),

while light industries’ y-o-y growth moderated to

12.7% from 12.9%. On top of the strong demand,

the improvement in heavy industries is likely due

to the relaxation of restrictions on high-pollution

and energy-intensive sectors, as the government

has more confidence it will achieve its energy

efficiency target by year-end after several months

of tight control of related sectors.

Fixed asset investments’ year-to-date growth was

lifted to 24.9% y-o-y as of November 2010,

reversing the slowdown seen over the course 2010.

November single-month growth rebounded to 29%

y-o-y in nominal terms (versus 23.3% in October),

and 23% y-o-y in real terms (versus 18.3% y-o-y in

October) despite higher inflation. This is mainly

because the government speeded up fiscal spending

to meet its budgeted expenditure and the outstanding

portion of the stimulus package towards year-end.

Retail sales growth remained stable at 18.87% y-o-y,

marginally higher than 18.6% y-o-y in October.

Netting off higher CPI inflation, real y-o-y growth of

retail sales continued to slow to 13.6% (from 14.2%

in October). Fast food inflation may have eroded the

purchasing power of low-income groups. But, in

general, durable goods consumption has held up

reasonably well so far, with y-o-y home appliance

sales growth flat at 22.6%, a 33.6% pick-up in car

sales versus 32.2% in October, etc.

In addition, external demand has been performing

better than expected, in contrast to policymakers’

continued worries about global economic growth.

November exports growth surged 34.9% y-o-y,

beating market expectations and the reading of

22.9% in October. Seasonally adjusted, exports

rose 5% m-o-m, better than 2.9% m-o-m in October.

This is due largely to better-than-expected shipments

to the developed world. Meanwhile, new exports

orders keep flowing in, as reflected in the fourth

straight month of expansion in new exports order

components in the HSBC China Manufacturing

PMI. This heralds sequential growth in exports

growth in the coming months.

After recent measures to increase food supply and

monetary tightening – including six reserve

requirement ratio (RRR) hikes and two rate hikes

– what else can the government do to further rein

in inflation pressure? We believe Beijing has the

following main policy options – and some of them

are quite effective.

Quantitative tightening works … Quantitative tightening will be the most effective

and, hence, the primary policy tool for mopping

up liquidity and check inflation, in our view. With

banks still dominating the country’s financial

intermediation, curbing bank lending holds key to

resolving the problem of excessive liquidity. The

current rate of monetary growth (19% in November

2010) is still too high. And it needs to be cooled

down to the long-term trend rate of 16% or even

lower to cap inflation around 3-4%, in our view.

RRR hikes are the most powerful tool for

quantitative tightening. Each 50bp hike will freeze

RMB350bn in liquidity in the banking system,

limiting banks’ capacity to extend loans,

particularly since their average excess reserve

ratio already dropped to a 15-month low of 1.7%

at end-3Q10. Although the current RRR level

(18.5% for big banks, 16.5% for small banks) is

well above its 10-year average, there is no limit

for using RRR hikes to curb lending, though this

may hurt banks’ profitability.

China’s loan quota system is imperfect. But it

works to check liquidity. Back in 2009, when the

authorities set a new lending quota of RMB5trn as

the minimum amount of lending they wanted

17


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banks to extend, banks had lent RMB9.6trn that

year. This has been instrumental in financing the

infrastructure-centric stimulus package and

engineering the quickest growth recovery in the

world. Then Beijing was doing clean-up after the

party, setting RMB7.5trn as an upper ceiling for

new lending. Combined with RRR hikes and other

measures, new loans for the first 11 months of

2010 slowed substantially to RMB7.46trn, from

RMB9.2trn recorded during the same period a

year ago. Some banks have indeed increased off-

balance-sheet lending to get around the quota. But

there is a cost (extra credit risks) for these banks.

Moreover, regulators have already started to try to

fix the loopholes in the quota system through

regulating off-balance-sheet lending activities.

Growth in the both broad money supply (M2) and

credit had slowed substantially from its peak of

over 30% y-o-y in December 2009 to around 19%

in November 2010, suggesting that quantitative

tightening works in China. That said, the current

rate of credit growth is still excessive. More needs

to be done to check liquidity.

The PBoC is aiming to bring down monetary

growth (M2 broad money supply) to around 16%

this year. The most likely main tightening

measures include the following:

Credit growth to be capped below 16% for 2011

from over 19% at end-November 2010. The

regulators will likely slice the annual lending

quota into monthly targets and then use window

guidance, punitive PBoC bill issuance (force

those who lend excessively to purchase central

bank bills at a punitive yield), RRR hikes, and

other “sticks” to prevent banks from lending

excessively. They are also plugging regulatory

holes to stop banks from shifting to trust loans

and other off-balance-sheet lending.

At least another 200bp of reserve ratio hikes in

the coming quarters. Reserve ratio hikes and

central bank bills issuance are the PBoC’s main

policy tools for mopping up excess liquidity

from the banking system. Although slowing

monetary growth from 19% to 16% by end-

2011 seems easy enough, capital inflows caused

by the Fed’s QE2 require the PBoC to do more

to absorb liquidity. We expect each 50bp

reserve ratio hike to freeze RMB350bn (or

USD53bn) in liquidity in the banking system.

Last, but not least, improving macro-prudential

supervision. More specifically, dynamic

provisions and additional prudential capital

measures should mitigate the cyclical lending

pattern and smooth the credit growth at an

appropriate pace.

The implementation of these measures should

throw additional sand into the wheels of the credit

creation process, slowing growth in the money

supply to the 16% target, in our view.

Chart 4. RRR hikes: more to come

0

5

10

15

20

25

00 01 02 03 04 05 06 07 08 09 10 11

(%)

Required reserv e ratio (RRR)

RRR for large depository institution

RRR for small and medium depository institution

forecast

Source: HSBC, CEIC

Chart 5. Credit growth to slow to below 16% in 2011

5

1015

20

25

30

35

40

99 00 01 02 03 04 05 06 07 08 09 10 11

(%yr)

5

1015

20

25

30

35

40(%yr)

M1 M2 Loans

Forecast

Source: HSBC, CEIC

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Rate hikes help, but they can’t be too aggressive … Moderate interest rate hikes are also needed to

stop real interest rates from falling too fast and to

anchor inflationary expectations. We expect

another two hikes (25bp each) in 1H11.

The PBoC hiked interest rates again before 2010

came to a close. This second rate hike (the first was in

October) showed Beijing’s determination to tackle

inflation and manage inflation expectations. At 2.75%

for one-year deposits after the December rate hike,

China’s nominal deposit rate is still low by historical

standards. Actually, the real deposit rate has fallen

deeper into negative territory, with headline CPI

inflation shooting up to a 28-month high in November.

Without rate hikes, this will reinforce inflation

concerns, as there is a tight correlation between

household inflation expectations and the CPI (Chart 3).

And the latest rate hike, though a modest one,

prevented the real interest rate from falling too fast,

providing some comfort to savers.

The PBoC survey suggests that household

expectations on prices have surged to the highest

level in a decade, underlining the urgency of

managing inflationary worries. The latest

reduction in bank deposits also reflected inflows

into the equity or asset market amid heightened

inflation fears. With inflation likely to stay above

5% for the coming six months, deposit interest

rates need to rise to ease pressure on negative

interest rates and anchor inflation expectations.

That said, the PBoC can’t hike rates too aggressively,

as that may attract more capital inflows, especially

given the zero interest rate policy in the US and

Hong Kong. Another concern is local government

financing vehicles’ massive debt (RMB7.6trn at

end-June 2010); aggressive rate hikes would make

the problem worse.

Chart 6. Aggressive rate hikes face constraints

Spread between Chibor and Libor

-300

-200

-100

0100

200

300

400500

05 06 07 08 09 10

(bp)

1 month 3 month

Source: CEIC, HSBC

Currency not a main tool for checking inflation … We expect the RMB to continue to gradually

appreciate against the USD in 2011. But Beijing is

unlikely to use appreciation as a main policy tool to

combat inflation. As we have long argued (see

China Economic Insight: Three big misconceptions,

6 May 2010), since China, as the world’s largest

consumer of commodities and resources, is already a

price setter in the global commodities and resources

market, RMB appreciation will be much less

effective than many expect in containing imported

inflation. Any change in China’s demand is likely to

affect global commodity and energy prices.

Therefore, appreciation will lower the RMB prices

of imported commodities in China, but this will also

lead to a rise in Chinese demand for commodities,

which, in turn, will push up global commodity prices.

Chart 7. China’s share in global commodities consumption

0

10

20

30

40

50

60

70

Crude oil Iron Ore Aluminium Copper Steel

(%)

2005 2010e

Source: BP, IEA, WMBS, EIA, Ministry of Commerce, Ministry of Land Resources, HSBC estimates

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Supply side measures are also useful … Slowing monetary growth and checking inflation

expectations are important, but not sufficient to

combat food price-led inflation in China. Beijing

also needs to do something more specific to ease

food price pressure. Given their experience dealing

with rising food prices a few years ago, Chinese

policymakers have this time responded quickly by

launching a package of supply-side measures. The

State Council in mid-November 2010 introduced

16 detailed measures to control food prices. Chief

among them were boosting fiscal subsidies on

farming, waiving the road tolls for transportation

of food; cutting taxes for both retailers and

wholesalers of vegetables and other food staples.

Meanwhile, the government has also started to

release the state reserves of grain to the markets to

ease price increases. China’s grain production has

been on the rise continuously over the past six

years, lifting state grain reserves to a record high

of more than 40% of China’s annual consumption

at end-2010. This should give Beijing some leeway

to stabilise the domestic food prices in 2011.

More important, the recent rise in food inflation

has been caused mainly by disruptions in the

farming and transportation of fresh vegetables and

some specific food items rather than a broader-

based shortage in China’s food supply (refer to

From the Horse’s Mouth: How long will the food

inflation last?, published on 26 November 2010).

Although farming costs have been rising over the

past six months, this has so far had little impact on

production in China. In fact, the latest figures

suggest that the country’s total grain production

continued to rise 2.9% in 2010, the seventh

consecutive year of good harvests in China.

In a nutshell, we believe that Beijing has enough

policy ammunition to put inflation under better

control this year, though it will take time for the

impact of all these measures to filter through.

The implementation of these measures is likely to

start slowing inflation meaningfully by the middle

of the year. We expect the headline CPI to reach

the peak of near 6% for February-March before

slowing gradually to around 4% by end-2Q.

Will policy tightening choke off growth? We think China should and will further tighten its

policy in 2011. Concerns that this policy tightening

may choke off growth too much are unwarranted,

in our view. Despite the uncertainties of exports

growth, we expect domestic demand to hold up

and support around 9% GDP growth in 2011. This

sub-trend rate of growth will help contain inflation,

and it can still create enough new jobs to keep the

labour markets and society stable, in our view.

Slowing credit growth will surely soften the pace

of new infrastructure projects; yet, the targeted

16% credit growth for 2011 should provide

enough liquidity to support real GDP growth of

9%. To be more specific, this rate of credit growth

should provide sufficient funds to support the

completion of more than 100,000 ongoing railroad

and highway projects. Combined with the

construction of 10m additional public low-rental

housing (versus 5.8m in 2010), this should cushion

the slowdown in the fixed-asset investment.

Rate hikes positive for consumer spending Contrary to conventional wisdom, we believe that rate

hikes will boost Chinese consumer spending while the

credit slowdown will have little impact on private

consumption. Economics 101 suggests that a rate hike

will normally have two effects on consumption: A

higher interest rate makes saving more attractive than

spending, thus discouraging consumption – the so-

called substitution effect. Meanwhile, it also generates

more interest income for consumers who have more

savings than debt – the income effect. In the

developed world, where households’ savings rate is

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20


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low but their debt burden is high, the income effect

will be smaller than the substitution effect, so the net

effect of higher interest rates on consumption is

generally believed to be negative.

However, this won’t be the case in China, we

argue, because Chinese households have piled up

nearly RMB30trn in savings in banks whereas

their total debt is tiny (RMB7.4trn at end-

November). In other words, the income effect of a

rate hike will well exceed its substitution effect,

with each 25bp rate hike bringing RMB 75bn in

additional interest income to the Chinese

household sector. The likely result will be a lift in

consumer spending, in our view.

More important, China’s consumers have deep

pockets. This time round, the recovery has filtered

through to the labour market, as evidenced by

significant wage growth and continuous increases in

the employment components of the HSBC China

PMIs. Since wage income accounts for 80% of

household income, this should enable more

consumer spending. And the propensity to consume

is likely to be lifted with improvements in social

security and public housing. Consumer spending is

unlikely to be affected if the property tightening

continues in the coming quarters, not least because

of the still-low leverage of Chinese households.

Chart 9. Wage growth driving consumer spending

-10

-5

0

5

10

15

20

25

30

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

(%yr)

Retail sales Total w age

Source: CEIC, HSBC

Will the rise in the CPI undermine consumer

consumption? Not really. Increasing food prices can

serve as an income transfer tool to boost farmers’

incomes – and farmers have a relatively high

propensity to consume. While this might not be good

news for urban citizens, especially the low-income

group, the government has stepped up efforts to

subsidise the most vulnerable groups, such as poor

families and retired workers. This should effectively

offset the negative impact of rising food prices. On

balance, consumer consumption should perform well

despite higher inflation. We note that, historically,

consumer spending remained stable during the last

round of high inflation.

Chart 10. Consumer spending to stay resilient

Source: CEIC, HSBC

0

5

10

15

20

25

01 02 03 04 05 06 07 08 09 10

(%yr,3mm a)

Reta il sales Adjusted by CPI

Source: CEIC, HSBC

Chart 8. Rate hikes are positive for consumer spending

05

10

15

20

2530

35

2007 2008 2009 2010*

(RMB trn)

Household sav ings Household debt

Source: CEIC, HSBC * As of end November 2010

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22


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(% y-o-y) 2003 2004 2005 2006 2007 2008 2009 2010f 2011f 2012f

China 10.0 10.1 10.2 11.6 13.0 9.6 9.1 10.0 8.9 8.6Hong Kong 3.0 8.5 7.1 7.0 6.4 2.2 -2.8 7.0 5.2 4.6Japan 0.3 1.4 2.7 1.9 2.0 2.4 -1.2 4.3 1.1 2.0Korea 2.8 4.6 4.0 5.2 5.1 2.3 0.2 6.1 4.9 4.8Taiwan 3.7 6.2 4.7 5.4 6.0 0.7 -1.9 9.6 4.7 4.5North Asia-ex Japan 7.2 8.3 8.1 9.4 10.6 7.6 6.9 9.4 8.0 7.7Australia 3.3 3.7 3.2 2.5 4.6 2.6 1.3 2.7 3.6 4.1India 8.5 7.4 9.5 9.7 9.2 6.7 7.4 9.1 8.1 8.1Indonesia 4.8 5.0 5.7 5.5 6.3 6.0 4.5 6.0 6.4 6.3Malaysia 5.4 7.3 5.3 5.8 6.5 4.7 -1.7 7.1 5.1 4.9New Zealand 4.2 4.5 3.3 0.9 2.8 -0.2 -1.7 1.4 2.6 3.4Pakistan 7.4 7.7 6.2 5.7 2.0 3.2 4.4 2.8 3.6 4.1Philippines 4.9 6.4 5.0 5.3 7.1 3.7 1.1 6.8 5.0 5.8Singapore 4.6 9.2 7.4 8.6 8.5 1.8 -1.3 14.8 5.2 5.8Sri Lanka 5.9 5.5 6.2 7.7 6.8 6.0 3.5 7.7 7.2 6.9Thailand 7.0 6.4 4.7 5.1 5.0 2.5 -2.3 7.9 5.3 4.3Vietnam 7.3 7.8 8.4 8.2 8.5 6.2 5.3 6.8 7.5 7.8Asia-ex China, India & Japan 4.2 6.0 5.1 5.7 5.8 3.1 0.5 7.2 5.3 5.2Asia-ex China & Japan 5.2 6.4 6.2 6.7 6.7 4.1 2.5 7.8 6.1 6.0Asia-ex Japan 7.1 7.9 7.8 8.8 9.6 6.9 6.1 9.0 7.6 7.4Asia 3.6 4.7 5.5 6.0 6.8 5.3 3.5 7.3 5.3 5.5

Source: HSBC, CEIC; NB: Australia and New Zealand are not included in Asia aggregate and data are based on IMF nominal USD weights for the respective year, for which 2010, 2011 and 2012 use 2009 weights

GDP (% yr): China, Singapore, Taiwan & India to expand the most in 2010 GDP (% yr): a sharp rebound in 2010 across the region

0

3

6

9

12

15

NZ AU PK JP ID KR VN PH HK MA SL TH IN TW CH SG

2010f 2011f 2012f

F 'cast

-2

0

2

4

6

8

10

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10f 11f 12fAsia Asia-ex Japan Asia-ex China & Japan

Source: HSBC, CEIC Source: HSBC, CEIC

GDP

(% y-o-y) _______________ 2010f _______________ ________________2011f ________________ ________________ 2012f________________ 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Australia 2.3 3.1 2.7 2.9 3.2 3.0 4.0 4.2 4.1 4.1 4.0 4.0China 11.9 10.3 9.6 8.9 8.2 8.8 9.0 9.3 8.8 8.6 8.4 8.5Hong Kong 8.0 6.5 6.8 6.6 0.1 4.4 7.1 8.4 3.2 3.8 5.5 5.4India 8.6 8.9 8.9 10.3 8.5 8.3 7.0 8.3 8.6 8.3 7.9 7.9Indonesia 5.7 6.2 5.8 6.5 6.1 6.3 6.4 6.8 6.2 6.1 6.3 6.7Japan 5.9 3.5 5.3 2.9 1.4 1.0 0.3 1.6 2.0 2.0 2.0 1.9Korea 8.1 7.2 4.4 5.1 4.2 4.4 5.1 5.8 5.3 5.2 4.5 4.3Malaysia 10.1 8.9 5.3 4.6 3.1 5.9 5.9 5.3 4.9 5.1 5.1 4.6New Zealand 1.8 1.8 1.5 0.6 0.8 1.9 3.5 4.4 4.3 3.8 3.0 2.7Philippines 7.8 8.2 6.5 5.0 4.2 4.3 6.4 5.2 5.3 6.0 6.6 5.3Singapore 16.9 19.5 10.6 12.4 6.0 0.0 8.6 6.3 5.4 6.0 5.9 6.0Sri Lanka 7.1 8.5 8.0 7.4 8.8 7.1 6.2 6.7 6.7 6.7 6.9 7.3Taiwan 13.6 12.9 9.8 3.2 1.9 0.0 7.1 9.3 5.7 7.7 3.9 1.5Thailand 12.0 9.2 6.7 3.8 2.5 6.0 6.5 6.2 2.9 5.5 6.3 2.6Vietnam 5.8 6.4 7.2 7.3 7.2 7.4 7.6 7.8 7.5 7.7 7.8 8.0

Source: HSBC, CEIC, 2010- Q1 and Q2 are actual numbers

GDP

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(% y-o-y) 2003 2004 2005 2006 2007 2008 2009 2010f 2011f 2012f

China 1.2 3.9 1.8 1.5 4.8 5.9 -0.7 3.3 3.9 2.9Hong Kong -2.6 -0.4 0.9 2.0 2.0 4.3 0.5 2.3 4.4 4.2Japan -0.2 0.0 -0.3 0.2 0.0 1.5 -1.3 -1.1 -0.7 -0.5Korea 3.5 3.6 2.8 2.2 2.5 4.7 2.8 3.0 3.8 3.2Taiwan -0.3 1.6 2.3 0.6 1.8 3.5 -0.9 1.0 2.3 2.0North Asia-ex Japan 1.4 3.4 2.0 1.6 4.0 5.5 -0.2 3.1 3.8 2.9Australia 2.9 2.3 2.6 3.5 2.4 4.3 2.0 2.8 3.0 3.1India 3.7 3.9 4.0 6.3 6.4 8.3 10.9 11.8 7.1 6.1Indonesia 6.8 6.1 10.5 13.1 6.4 10.2 4.8 5.1 6.3 5.2Malaysia 1.1 1.4 3.0 3.6 2.0 5.4 0.6 1.8 3.0 2.2New Zealand 1.8 2.3 3.0 3.4 2.4 4.0 2.1 2.3 4.0 2.3Pakistan 3.1 4.6 9.3 7.9 7.8 12.0 20.8 13.6 14.9 11.6Philippines 3.5 6.0 7.7 6.3 2.8 9.3 3.3 3.8 4.4 4.8Singapore 0.5 1.7 0.5 1.0 2.1 6.6 0.6 2.8 3.2 2.9Sri Lanka 2.6 9.0 11.0 10.0 15.8 22.7 3.5 5.9 7.8 6.2Thailand 1.8 2.8 4.5 4.6 2.2 5.5 -0.8 3.3 3.8 3.1Vietnam 3.1 7.8 8.3 7.5 8.3 23.0 7.1 9.1 9.9 9.4Asia-ex China, India & Japan 2.3 3.3 4.2 4.3 3.4 7.0 3.1 3.8 4.9 4.2Asia-ex China & Japan 2.7 3.4 4.1 4.8 4.2 7.4 5.3 6.1 5.5 4.7Asia-ex Japan 2.1 3.6 3.2 3.4 4.5 6.6 2.1 4.6 4.6 3.7Asia 0.9 1.8 1.6 2.1 2.9 4.8 0.9 2.6 2.8 2.3


CPI (% yr): risk of run away inflation is abated CPI (% yr): modest inflation pressure to sustain

-2147

101316

JP TW MA NZ HK SG AU KR CH TH PH ID SL VN IN PK

2010f 2011f 2012f

F 'cast

0

2

4

6

8

10

98 99 00 01 02 03 04 05 06 07 08 09 10f 11f 12f

Asia-ex China & Japan Asia-ex Japan Asia

Source: HSBC, CEIC Source: CEIC, HSBC

CPI

(% y-o-y) _______________ 2010f _______________ ________________2011f ________________ ________________ 2012f________________ 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Qf 1Q 2Q 3Q 4Q

Australia 2.5 3.0 2.9 2.9 2.9 2.9 3.1 3.2 3.2 3.2 3.1 3.0China 2.2 2.8 3.3 4.2 5.0 4.7 3.9 3.0 2.2 2.7 3.3 3.2Hong Kong 1.9 2.6 2.3 2.6 3.8 4.2 4.7 4.9 4.8 4.2 4.0 3.8India 15.3 13.7 10.3 8.5 6.4 7.6 7.2 7.0 6.7 6.3 5.9 5.7Indonesia 3.7 4.4 6.2 6.2 6.4 6.5 6.2 6.0 5.5 5.3 5.1 5.0Japan -1.2 -1.2 -1.1 -0.8 -0.7 -0.7 -0.7 -0.6 -0.6 -0.5 -0.4 -0.3Korea 2.7 2.6 2.9 3.7 3.7 4.0 3.9 3.5 3.3 3.2 3.2 3.1Malaysia 1.3 1.6 1.9 2.4 2.7 3.1 3.0 3.0 2.5 2.3 2.2 2.0New Zealand 2.0 1.7 1.5 4.0 4.2 5.1 4.5 2.4 2.3 2.2 2.3 2.2Pakistan 12.9 12.7 14.1 16.5 16.3 17.0 14.7 13.6 12.0 11.5 10.9 9.8Philippines 4.3 4.2 3.8 2.9 3.7 4.6 4.6 4.7 4.7 4.7 4.8 4.9Singapore 0.9 3.1 3.4 3.9 3.4 3.2 3.2 3.2 3.0 2.8 2.8 2.8Sri Lanka 6.6 5.3 5.0 6.8 6.2 7.7 8.0 6.7 6.5 6.8 7.1 7.4Taiwan 1.3 1.1 0.4 1.3 1.7 2.0 2.8 2.6 2.6 2.3 1.6 1.5Thailand 3.7 3.2 3.3 3.1 3.3 3.8 4.0 3.9 3.6 3.2 2.9 2.8Vietnam 8.0 9.1 8.8 10.3 10.6 9.6 9.8 9.8 9.7 9.4 9.2 9.2

Source: HSBC, CEIC; Pakistan and New Zealand: end-quarter % y-o-y

Inflation

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Industrial production

(% y-o-y) 2003 2004 2005 2006 2007 2008 2009 2010f 2011f 2012f

China 16.7 16.3 15.9 16.2 16.0 12.9 12.9 15.5 13.2 12.5Hong Kong -9.2 2.9 2.5 2.2 -1.5 -6.7 -8.3 3.0 4.2 3.2Japan 3.3 5.5 1.1 4.8 2.8 -3.4 -22.4 16.2 1.8 7.6Korea 5.5 10.4 6.3 8.4 6.9 3.4 -0.8 16.7 8.1 8.5Taiwan 9.1 9.3 3.8 4.7 7.8 -1.8 -8.1 24.6 9.5 10.0North Asia-ex Japan 11.7 13.5 11.8 12.8 12.8 9.8 9.2 15.8 12.0 11.5Australia 0.2 0.5 1.9 2.1 3.1 2.6 -1.6 4.7 1.4 2.1India 6.6 10.8 8.8 10.4 10.4 4.9 6.6 11.4 7.0 8.5Indonesia 5.3 6.4 4.6 4.6 4.7 3.7 2.1 4.8 6.0 5.0Malaysia 8.4 11.3 5.2 6.7 2.8 1.4 -9.0 11.9 6.3 5.0New Zealand n/a n/a n/a -5.2 -0.8 -2.3 -10.5 0.7 0.5 3.0Pakistan 4.0 13.3 17.8 14.9 10.7 -3.9 4.5 -5.3 4.0 5.0Philippines 4.2 5.0 5.3 4.2 3.3 4.2 -4.4 12.8 9.2 8.5Singapore -30.3 13.9 9.5 11.9 5.9 -4.2 -4.2 30.9 6.0 10.9Sri Lanka 5.9 5.6 6.0 5.7 7.6 5.9 3.2 8.5 7.5 6.6Thailand 14.0 11.7 9.1 7.3 8.2 5.3 -5.1 18.3 7.8 8.6Vietnam 19.8 17.6 25.5 16.0 11.6 11.8 7.2 14.1 14.5 15.3Asia-ex China, India & Japan 4.0 9.5 6.7 7.2 6.1 1.6 -2.4 13.7 7.4 7.6Asia-ex China & Japan 4.6 9.8 7.2 8.0 7.2 2.5 0.2 13.1 7.3 7.9Asia-ex Japan 9.4 12.4 10.8 11.5 11.2 7.7 7.0 14.4 10.5 10.4Asia 6.3 9.0 6.4 8.8 8.2 3.8 -3.4 15.0 7.4 9.4


Industrial production (% yr): Taiwan and Singapore to lead in 2010 Unemployment rate (%): Highest in Indonesia and the Philippines

-8-327

1217222732

PK NZ HK AU ID SL IN MA PH VN CH JP KR TH TW SG

2010f 2011f 2012f

0123456789

TH SG MA KR CH HK JN AU TW VN SL NZ PH ID

2010f 2011f 2012f Source: HSBC, CEIC Source: HSBC, CEIC

Unemployment rate (average)

(%) 2003 2004 2005 2006 2007 2008 2009 2010f 2011f 2012f

China 4.3 4.2 4.2 4.1 4.0 4.2 4.3 4.3 4.3 4.3Hong Kong 7.9 6.8 5.6 4.8 4.1 3.4 5.2 4.4 4.1 4.0Japan 5.2 4.7 4.4 4.1 3.9 4.0 5.1 5.1 5.1 4.8Korea 3.6 3.7 3.7 3.4 3.2 3.2 3.3 3.7 3.3 3.2Taiwan 5.0 4.4 4.1 3.9 3.9 4.1 5.9 5.2 4.7 4.5North Asia-ex Japan 4.4 4.2 4.1 4.0 3.8 4.0 4.3 4.3 4.2 4.2Australia 5.9 5.4 5.0 4.8 4.4 4.3 5.6 5.2 4.6 4.6Indonesia 9.3 9.7 10.6 10.8 9.7 8.8 8.1 7.7 7.4 6.9Malaysia 3.6 3.6 3.6 3.3 3.2 3.3 3.7 3.3 3.2 3.1New Zealand 4.8 4.1 3.8 3.8 3.7 4.2 6.2 6.5 6.4 6.0Pakistan 4.0 7.7 7.7 7.5 7.3 7.2 7.4 8.6 7.5 7.1Philippines 11.5 11.9 8.0 7.9 7.2 7.5 7.4 7.3 7.0 7.0Singapore 4.0 3.4 3.2 2.7 2.1 2.3 3.0 2.1 2.1 2.1Sri Lanka 8.4 8.5 7.2 6.5 6.0 5.3 5.7 5.3 5.2 5.1Thailand 2.2 2.1 1.9 1.5 1.4 1.4 1.5 1.1 1.0 1.1Vietnam 5.8 5.6 5.3 4.8 4.6 4.7 5.4 5.3 4.9 4.8Asia-ex China, India & Japan 7.6 7.7 7.5 7.2 7.2 7.4 8.3 8.1 7.5 6.9Asia-ex Japan 4.8 4.7 4.6 4.5 4.2 4.3 4.6 4.5 4.4 4.3Asia 5.0 4.7 4.5 4.3 4.1 4.2 4.8 4.7 4.7 4.5


Industrial production & unemployment

25


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Consumer expenditure

(% y-o-y) 2003 2004 2005 2006 2007 2008 2009 2010f 2011f 2012f

China 6.5 7.2 8.5 8.7 9.0 8.9 8.0 9.5 9.4 9.3Hong Kong -1.3 7.0 3.0 5.9 8.5 2.4 -0.4 5.8 6.0 4.6Japan 0.4 1.6 1.3 1.5 1.5 1.6 -0.7 2.2 -0.2 1.0Korea -0.4 0.3 4.6 4.7 5.1 1.3 0.2 4.1 3.6 4.4Taiwan 2.9 5.2 2.9 1.5 2.1 -0.9 1.1 3.8 4.9 4.8North Asia-ex Japan 4.0 5.4 6.8 7.0 7.6 6.9 6.3 8.3 8.3 8.2Australia 3.8 5.4 3.7 3.1 5.6 1.9 1.0 2.7 3.2 3.2India 8.2 1.3 9.0 8.2 9.8 6.8 4.3 6.5 6.1 6.5Indonesia 3.9 5.0 4.0 3.2 5.0 5.3 4.9 4.8 5.0 5.0Malaysia 6.6 10.5 9.1 6.8 10.5 8.5 0.7 6.8 6.7 5.7New Zealand n/a n/a n/a 2.2 4.1 -0.3 -0.8 2.1 1.5 2.8Pakistan 10.1 12.9 1.0 4.7 -1.3 9.8 3.9 1.5 3.0 3.0Philippines 5.3 5.9 4.8 5.5 5.8 4.7 4.1 4.8 5.3 5.6Singapore 1.6 6.1 3.6 3.1 6.5 2.7 0.4 5.9 5.5 5.8Sri Lanka 6.5 4.7 2.6 7.3 7.8 6.7 -2.9 9.0 9.0 7.0Thailand 6.4 6.1 4.9 3.2 1.8 2.9 -1.1 5.0 3.8 3.9Vietnam 8.0 7.1 7.3 8.3 9.6 9.3 3.7 6.0 7.7 7.2Asia-ex China, India & Japan 2.5 4.5 4.3 4.2 4.9 3.4 1.5 4.7 4.8 4.8Asia-ex China & Japan 3.9 3.7 5.5 5.2 6.3 4.3 2.3 5.2 5.1 5.3Asia-ex Japan 4.9 5.1 6.7 6.7 7.5 6.6 5.4 7.5 7.4 7.4Asia 2.6 3.4 4.3 4.6 5.3 4.9 3.2 5.6 4.7 5.2


Consumer expenditure(% y-o-y): China, India and Sri Lanka to lead in 2010 Savings as a % of GDP: China, Singapore and Malaysia the highest

-10123456789

10

NZ JP AU TW KR ID PH TH SG HK VN IN MA SL CH

2010f 2011f 2012f

-5

5

15

25

35

45

55

NZ PH SL AU JP TW HK VN IN TH KR ID MA CH

2010f 2011f 2012f

Source: HSBC, CEIC Source: HSBC, CEIC Gross saving ratios

% of GDP 2003 2004 2005 2006 2007 2008 2009 2010f 2011f 2012f

China 43.2 45.7 48.2 50.1 51.0 51.4 50.0 50.5 50.0 50.0Hong Kong 30.4 30.2 33.3 33.3 31.0 30.1 28.0 29.0 28.8 28.9Japan 25.7 26.7 26.2 27.1 26.5 26.0 26.0 25.5 24.5 24.0Korea 33.0 35.0 33.2 31.5 30.8 35.8 35.3 36.7 37.7 38.0Taiwan 26.9 27.4 27.1 28.8 30.1 27.3 26.3 28.9 29.1 29.3North Asia-ex Japan 38.3 40.5 41.9 43.3 44.5 46.7 46.0 46.7 46.5 46.5Australia 21.3 21.2 22.0 22.2 23.2 24.4 23.4 24.7 25.4 25.6India 27.0 32.5 33.8 34.8 35.6 32.6 32.2 35.3 36.5 37.7Indonesia 23.7 24.9 27.5 28.7 28.1 31.0 31.8 42.3 42.6 42.9Malaysia 42.5 44.0 43.5 43.4 46.3 49.2 44.0 46.9 48.0 48.0New Zealand 18.1 17.6 16.5 14.9 15.8 14.3 12.0 13.1 14.1 15.1Pakistan 17.6 15.2 14.1 15.4 11.0 11.4 10.5 9.4 9.1 8.7Philippines 19.3 21.2 21.0 20.1 20.8 19.3 9.8 13.2 12.2 11.3Singapore 42.7 47.0 49.4 51.0 53.4 50.2 47.7 50.7 50.9 51.3Sri Lanka 19.5 21.6 21.6 23.7 25.3 25.0 23.7 23.8 23.5 23.5Thailand 32.0 31.7 30.9 32.4 34.4 32.6 31.3 35.8 38.6 38.6Vietnam 30.6 32.0 34.6 36.5 31.8 27.9 31.6 30.9 32.5 34.1Asia-ex China, India & Japan 30.2 31.4 31.4 31.5 31.4 32.7 31.1 34.5 35.2 35.3Asia-ex China & Japan 29.4 31.7 32.0 32.3 32.6 32.6 31.4 34.8 35.6 36.0Asia-ex Japan 34.9 37.4 38.7 39.9 40.9 42.1 41.4 43.2 43.3 43.5Asia 30.2 32.1 33.0 34.7 35.7 36.4 36.0 37.0 36.7 36.6


Consumption & saving

26


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Total investment

(% y-o-y) 2003 2004 2005 2006 2007 2008 2009 2010f 2011f 2012f

China 27.7 27.6 27.2 24.5 25.8 26.1 30.5 25.0 21.5 19.0Hong Kong 0.9 2.5 4.1 7.1 3.4 0.8 -1.8 6.7 7.5 2.0Japan -0.5 1.4 3.1 0.5 0.5 -1.2 -3.6 0.6 1.6 1.9Korea 4.4 2.1 1.9 3.4 4.2 -1.9 -0.2 6.9 3.8 2.8Taiwan -0.1 14.0 2.7 0.1 0.6 -12.4 -11.0 22.8 5.4 4.0North Asia-ex Japan 17.6 19.0 17.7 16.8 18.6 18.3 23.0 21.9 17.8 15.4Australia 9.6 7.1 8.8 4.5 10.1 7.9 -3.2 5.7 5.3 7.3India 9.7 20.9 15.3 14.3 15.2 4.0 7.2 15.5 14.5 12.0Indonesia 0.6 14.7 10.9 2.6 9.3 11.9 3.3 8.7 10.0 10.0Malaysia 2.7 3.1 5.0 7.5 9.4 0.7 -5.6 8.9 6.5 5.2New Zealand n/a n/a n/a -0.9 5.5 -1.3 -11.4 1.3 8.6 7.7Pakistan -6.1 13.5 19.9 13.6 3.8 -8.4 -2.0 5.0 7.0 7.0Philippines 3.6 1.3 -6.6 3.9 10.9 2.7 -0.4 16.2 6.8 6.5Singapore -4.9 10.1 0.4 14.6 19.9 13.6 -3.3 5.4 5.0 7.0Sri Lanka 10.1 17.8 9.8 13.9 12.0 11.0 2.9 14.0 12.0 12.0Thailand 12.1 13.2 10.5 3.9 1.5 1.2 -9.2 9.8 4.8 5.0Vietnam 11.9 10.4 9.7 9.9 23.0 3.8 8.7 7.5 7.0 8.0Asia-ex China, India & Japan 2.6 7.7 4.7 4.7 6.2 0.8 -2.1 10.0 6.2 5.4Asia-ex China & Japan 4.3 10.9 7.4 7.1 8.7 1.7 0.6 11.6 8.6 7.3Asia-ex Japan 13.6 17.7 15.6 14.6 16.4 13.9 16.6 18.8 15.5 13.6Asia 6.4 9.7 9.9 8.8 10.6 8.6 9.5 12.4 10.6 9.5


Investment growth (% yr): China, India & Philippines to lead in 2010 Investment to GDP ratio (%): high in China, room to rise elsewhere

-50

51015202530

JP NZ PK SG AU HK KR VN ID MA TH SL IN PH TW CH

2010f 2011f 2012f

0

10

20

30

40

50

PH MA JP HK TW TH KR SL ID SG IN VN CH

2010f 2010f 2010f

Source: HSBC, HSBC Source: HSBC, CEIC

Investment to GDP ratios

(%) 2003 2004 2005 2006 2007 2008 2009 2010f 2011f 2012f

China 41.0 43.2 42.7 42.6 42.2 43.5 45.0 46.0 46.6 46.6Hong Kong 21.2 21.3 20.9 21.9 20.1 19.9 20.9 21.0 21.7 22.0Japan 23.6 23.2 22.9 23.2 22.9 22.2 21.6 19.5 19.6 19.6Korea 30.0 30.4 30.1 29.8 29.4 25.7 25.2 25.0 24.3 23.5Taiwan 19.9 23.7 22.7 22.7 22.1 22.4 17.7 22.1 20.9 21.1North Asia –ex Japan 34.9 37.0 36.7 37.0 37.1 38.6 40.0 41.0 41.4 41.3Australia n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aIndia 27.3 34.1 36.1 37.9 39.8 36.6 35.8 39.0 40.0 41.0Indonesia 25.6 24.1 25.1 25.4 24.9 27.8 31.0 28.1 29.1 30.2Malaysia 21.6 22.7 19.9 20.0 19.8 19.3 26.4 14.9 16.3 16.3New Zealand n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aPakistan n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aPhilippines 16.7 16.7 14.6 14.5 15.4 15.3 13.9 14.2 13.9 13.3Singapore 16.1 21.7 20.0 20.8 21.2 29.9 27.2 30.5 28.6 29.7Sri Lanka 21.2 22.1 25.0 28.7 29.9 29.9 30.2 28.0 28.6 29.5Thailand 25.0 26.8 31.4 28.3 26.4 29.1 21.2 24.6 23.9 23.9Vietnam 32.7 33.5 35.6 36.8 41.6 41.5 39.6 39.8 39.4 39.3Asia-ex China, India & Japan 23.6 24.7 24.7 24.6 24.2 24.0 23.4 23.2 22.9 23.0Asia-ex China & Japan 24.5 27.0 27.6 27.9 28.4 27.5 27.0 27.7 27.9 28.2Asia-ex Japan 31.0 33.6 33.9 34.2 34.6 35.6 36.7 37.5 37.9 38.1Asia 27.3 28.4 28.9 29.7 30.4 30.9 31.4 31.2 31.4 31.5


Investment

27


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Real exports

(% y-o-y) 2003 2004 2005 2006 2007 2008 2009 2010f 2011f 2012f

China 32.0 32.0 29.0 25.0 23.8 11.2 -17.9 29.0 16.0 10.0Hong Kong 12.8 15.4 10.6 9.4 8.3 2.5 -10.1 17.4 12.4 13.3Japan 9.2 13.9 7.0 9.7 9.7 8.4 1.6 24.9 5.8 8.6Korea 14.5 19.7 7.8 11.4 12.6 6.6 -0.8 13.9 7.4 7.8Taiwan 10.2 15.4 7.8 11.4 9.6 0.9 -8.7 24.9 6.7 7.9North Asia-ex Japan 24.3 26.5 21.1 20.0 19.8 9.5 -14.9 26.4 14.2 9.7Australia -1.6 3.9 2.8 2.3 2.5 4.7 2.9 5.4 7.6 8.0India 9.6 17.2 25.9 21.8 5.2 19.3 -6.7 10.0 10.0 10.5Indonesia 5.9 13.5 16.6 9.4 8.5 9.5 -9.7 13.6 6.9 8.0Malaysia 5.7 2.3 8.3 6.6 4.1 1.6 -10.4 11.7 7.0 7.9New Zealand n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aPakistan n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aPhilippines 4.8 15.0 4.8 13.4 5.5 -2.0 -13.4 25.5 6.9 9.9Singapore 14.2 19.1 12.4 11.2 8.9 4.1 -9.0 18.3 4.7 12.0Sri Lanka 10.6 17.0 7.4 11.6 17.7 5.2 -5.9 13.2 17.1 11.1Thailand 7.0 9.6 4.2 9.1 7.8 5.1 -12.5 13.9 5.6 6.3Asia-ex China, India & Japan 10.2 14.6 8.4 9.8 9.1 4.5 -6.8 15.0 6.7 7.9Asia-ex China & Japan 10.0 15.2 12.8 12.8 8.0 8.7 -6.7 13.6 7.7 8.6Asia-ex Japan 18.7 22.0 19.5 18.0 15.1 10.0 -12.7 21.9 12.1 9.4Asia 13.9 18.0 13.8 14.6 13.2 9.4 -7.7 22.9 9.9 9.1


Real exports (% yr): back to positive growth territory across Asia in 2010 Current account (% GDP): still negative in a number of markets

0

5

10

15

20

25

30

AU IN MA SL ID KR TH HK SG TW JP

2010f 2011f 2012f

-10-505

10152025

VN IN SL PK AU NZ ID JP KR TH CH PH TW HK MA SG

2010f 2011f 2012f

Source: HSBC, CEIC Source: HSBC, CEIC Current account balance

(% of GDP) 2003 2004 2005 2006 2007 2008 2009 2010f 2011f 2012f

China 2.8 3.6 7.1 9.3 10.6 9.4 5.8 4.4 3.9 2.7Hong Kong 9.2 8.9 12.4 11.4 10.8 10.2 7.2 9.6 7.5 9.4Japan 3.2 3.7 3.7 3.9 4.8 3.2 2.8 3.4 3.1 3.6Korea 2.0 4.1 1.9 0.6 0.6 -0.6 5.1 3.6 2.7 2.3Taiwan 9.8 5.8 4.8 7.0 8.9 6.8 11.3 8.8 5.3 4.7North Asia-ex Japan 3.8 4.2 5.9 7.3 8.5 7.7 6.1 4.8 4.0 3.0Australia -5.2 -6.0 -5.7 -5.3 -6.2 -4.4 -4.2 -2.8 -2.5 -3.6India 1.5 0.1 -1.3 -1.1 -0.7 -2.6 -2.2 -3.8 -4.0 -3.5Indonesia 3.4 0.6 0.1 3.0 2.4 0.0 2.0 1.0 1.3 1.3Malaysia 12.8 12.1 15.0 16.3 15.6 17.5 16.5 12.9 13.2 13.3New Zealand -3.8 -5.7 -7.9 -8.3 -8.1 -8.8 -2.8 -1.8 -3.8 -3.2Pakistan 1.8 -1.4 -3.9 -4.8 -8.5 -5.7 -2.0 -2.5 -1.8 -0.9Philippines 0.9 1.1 2.0 4.5 4.8 2.2 5.5 5.7 6.1 5.3Singapore 30.2 25.3 26.0 24.2 26.7 18.5 17.8 20.2 22.3 21.5Sri Lanka -0.7 -3.2 -2.7 -5.0 -4.0 -9.3 -0.5 -3.8 -6.5 -7.5Thailand 5.6 1.7 -4.3 1.1 6.6 0.8 8.3 4.4 4.5 4.4Vietnam -4.9 -2.1 -1.1 -0.3 -9.8 -13.6 -8.0 -8.8 -6.9 -5.2Asia-ex China, India & Japan 6.1 5.1 4.1 4.6 5.0 3.1 6.4 5.2 4.6 4.5Asia-ex China & Japan 5.0 3.9 2.7 3.2 3.4 1.5 3.9 2.6 2.1 2.2Asia-ex Japan 4.1 3.8 4.5 5.8 6.7 5.5 4.9 3.6 3.1 2.5Asia 3.7 3.7 4.1 5.0 6.0 4.7 4.2 3.5 3.1 2.9


Trade

28


abc

Exchange rates

2007 2008 2009 ______________ 2010 ________________ ______________ 2011f_________________(vs. USD, period end) 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Australia (AUD) 0.89 0.67 0.91 0.90 0.88 0.90 0.98 0.92 0.85 0.85 0.85China (RMB) 7.30 6.82 6.83 6.80 6.80 6.72 6.67 6.62 6.57 6.46 6.35Hong Kong (HKD) 7.80 7.75 7.76 7.76 7.79 7.76 7.80 7.80 7.80 7.80 7.80India (INR) 39.4 48.5 46.7 45.1 46.6 44.9 44.8 43.2 42.8 42.4 42.0Indonesia (IDR) 9,400 11,325 9,425 9,100 9,074 8,908 8,800 8,750 8,700 8,700 8,700Japan (JPY) 112.0 90.7 93.0 93 88 84 85 90 95 95 95Korea (KRW) 935 1,260 1,166 1,131 1,222 1,140 1,130 1,110 1,090 1,080 1,070Malaysia (MYR) 3.31 3.45 3.42 3.26 3.24 3.09 3.00 2.97 2.94 2.91 2.88New Zealand (NZD) 0.76 0.58 0.73 0.71 0.70 0.72 0.76 0.71 0.69 0.74 0.76Pakistan (PKR) 61.5 79.0 84.2 84.0 85.5 86.0 86.0 87.0 88.0 89.0 90.0Philippines (PHP) 41.2 47.4 46.5 45.2 46.4 43.9 41.5 40.5 39.5 38.5 37.5Singapore (SGD) 1.44 1.44 1.41 1.40 1.39 1.31 1.27 1.26 1.25 1.24 1.23Sri Lanka (LKR) 108.7 113.3 114.4 114.1 113.6 112.0 111.1 111.0 111.0 111.0 111.0Taiwan (TWD) 32.4 32.8 32.1 31.8 32.1 31.2 29.5 28.5 28.0 27.5 27.0Thailand (THB) 33.7 34.7 33.3 32.4 32.4 30.4 29.0 28.0 27.0 26.0 25.0Vietnam (VND) 16,017 17,483 18,200 19,069 19,070 19,490 19,800 19,800 20,000 20,000 20,000

Source: HSBC, CEIC, Bloomberg Note: Thai baht forecasts are for onshore rate. 3-month interest rates

2007 2008 2009 ______________ 2010 ________________ ______________ 2011f_________________(% pa, period end) 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Australia 7.27 4.11 4.26 n/a n/a n/a n/a n/a n/a n/a n/aChina 3.33 1.71 1.71 1.71 1.71 1.91 2.11 2.31 2.31 2.31 2.31Hong Kong 3.45 0.95 0.14 0.15 0.57 0.33 0.30 0.30 0.30 0.30 0.50India 8.01 8.45 4.18 4.38 5.28 6.27 7.19 6.15 6.65 6.90 7.05Indonesia 7.83 11.98 6.59 6.56 6.60 6.64 7.60 7.05 7.30 7.30 7.30Japan 0.55 0.40 0.28 0.24 0.24 0.20 0.20 0.20 0.20 0.20 0.20Korea 5.73 4.68 2.82 2.83 2.45 2.66 3.30 3.55 3.80 4.05 4.30Malaysia 3.61 3.37 2.17 2.35 2.60 2.85 2.85 2.85 2.85 3.10 3.35New Zealand 9.05 5.33 2.91 n/a n/a n/a n/a n/a n/a n/a n/aPhilippines 3.67 6.12 3.89 3.90 3.93 3.99 3.99 3.99 4.24 4.49 4.49Singapore 2.38 0.96 0.68 0.65 0.56 0.51 0.50 0.70 0.80 0.90 1.10Taiwan 2.16 1.01 0.53 0.53 0.65 0.65 0.87 0.99 1.12 1.24 1.37Thailand 3.85 2.95 1.35 1.42 1.42 1.95 2.30 2.30 2.55 3.05 3.05

Source: HSBC, CEIC, Bloomberg

Exchange rates & interest rates

29


abc

Country profiles

30


abc

Still upbeat Despite some softer household spending

indicators recently, we remain bullish on the

Australian economy. This is because the main

game for Australia is not what is happening in

household activity, but the effect that the large

rise in commodity prices is having on investment

in the resources sector. This game is largely being

played in the outback, where massive projects to

extract and export high-priced commodities to an

insatiable emerging Asia are under construction.

Recent data confirm that the next phase of the

mining boom has already begun and – as a result

of the rising terms of trade – nominal income

growth in the economy has also been strong, at

around 10% over the past year. Employment has

been growing strongly, and at 5.2%,

unemployment is almost back at its natural rate.

Over the next couple of years, we expect that the

business investment share of GDP will rise

substantially as a result of a boost to the resources

sector and, to allow this to happen, household

spending needs to grow at only a modest pace.

The elevated level of the exchange rate will help

to facilitate this structural transition as it slows

some parts of the economy, but interest rates will

also need to rise to keep demand and inflation in

check. We forecast inflation to be a little above

the Reserve Bank’s target band by late 2011, and

interest rates to rise by 100bp over the next 15

months.

Recent flooding in Queensland provides a short-

term downside risk to GDP growth, but an upside

risk in the medium-term – probably as early as

from Q2 2011 onwards. At the same time, flood-

related crop damage is an upside risk to the

outlook for inflation. On net, the flooding does

not affect our current outlook for interest rates.

Australia

Paul Bloxham Economist HSBC Bank Australia Ltd +612 435 966 522 [email protected]

3Q10e 4Q10e 1Q11e 2Q11e 3Q11e 4Q11e 1Q12e 2Q12e 3Q12e 4Q12e

GDP (% y-o-y) 2.7 2.9 3.2 3.0 4.0 4.2 4.1 4.1 4.0 4.0Industrial production (% y-o-y) 5.0 0.6 0.0 1.6 1.9 2.0 2.0 2.0 2.1 2.2CPI, end quarter (% y-o-y) 2.8 2.9 2.8 3.0 3.1 3.2 3.2 3.1 3.0 2.9PPI, end quarter (% y-o-y) 2.2 3.5 3.5 4.1 3.5 3.4 3.4 3.3 3.3 3.2Trade balance (% GDP) 2.1 0.8 1.3 2.6 2.3 0.8 1.0 2.0 1.4 -0.5Current account (% GDP) -2.3 -2.5 -2.5 -2.6 -2.5 -2.6 -2.9 -3.3 -3.7 -4.2Policy rate, end quarter (%) 4.50 4.75 4.75 5.00 5.25 5.50 5.75 5.75 5.75 5.7510yr yield, end quarter (%) 5.0 5.5 5.5 5.6 5.5 5.3 5.2 5.3 5.4 5.6USD /AUD, end quarter 0.90 0.98 0.92 0.85 0.85 0.85 0.85 0.85 0.85 0.85EUR /AUD, end quarter 0.66 0.70 0.66 0.61 0.61 0.61 0.61 0.61 0.61 0.61

Source: HSBC, CEIC

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Australia: Macro framework 2006 2007 2008 2009 2010e 2011e 2012e

Production, demand and employment GDP growth (% y-o-y) 2.5 4.6 2.6 1.3 2.7 3.6 4.1Nominal GDP (USDbn) 781.1 937.4 1091.5 951.9 1222.9 1278.2 1308.1GDP per capita (USD) 37,738.7 44,487.0 50,771.4 43,338.5 54,737.1 57,209.9 58,548.3Private consumption (% y-o-y) 3.1 5.6 1.9 1.0 2.7 3.2 3.2Government consumption (% y-o-y) 3.5 3.3 3.2 1.6 3.3 2.2 1.8Investment (% y-o-y) 4.5 10.1 7.9 -3.2 5.7 5.3 7.3Industrial production (% y-o-y) 2.1 3.1 2.6 -1.6 4.7 1.4 2.1Gross domestic saving (% GDP) 22.2 23.2 24.4 23.4 24.7 25.4 25.6Unemployment rate, average (%) 4.6 4.4 4.5 5.6 5.0 4.5 4.6Prices & wages CPI, average (% y-o-y) 3.5 2.4 4.3 2.0 2.8 3.0 3.1CPI, end-year (% y-o-y) 3.3 3.0 3.7 2.1 2.9 3.2 2.9PPI, end-year (% y-o-y) 3.5 2.8 6.4 -1.5 3.5 3.4 3.2Average monthly earning (% y-o-y) 4.2 4.0 4.2 3.6 3.3 4.1 3.9Money, FX & interest rates Central bank money M0, average (% y-o-y) 11.1 13.9 5.2 7.1 n/a n/a n/aBroad money supply M3, average (% y-o-y) 11.0 18.1 18.6 10.7 n/a n/a n/aReal private sector credit growth (% y-o-y) 14.3 17.2 7.7 5.2 n/a n/a n/aPolicy rate, end-year (%) 6.25 6.74 4.25 3.75 4.75 5.50 5.7510yr yield, end-year (%) 5.9 6.3 4.0 5.7 5.5 5.3 5.6USD /AUD, end-year 0.77 0.89 0.67 0.91 0.98 0.85 0.85USD /AUD, average 0.75 0.82 0.88 0.76 0.91 0.88 0.85EUR /AUD, end-year 0.58 0.61 0.47 0.64 0.70 0.61 0.61EUR /AUD, average 0.60 0.60 0.72 0.67 0.67 0.63 0.61External sector Merchandise exports (USDbn) 124.7 142.5 188.8 155.0 211.7 225.7 233.6Merchandise imports (USDbn) 134.3 160.3 193.0 159.4 197.0 203.7 221.1Trade balance (USDbn) -9.6 -17.7 -4.3 -4.4 14.7 21.9 12.5Current account balance (USDbn) -41.6 -59.1 -48.8 -311.6 -34.7 -31.9 -46.6Current account balance (% GDP) -5.3 -6.2 -4.4 -4.2 -2.8 -2.5 -3.6Net FDI (USDbn) 6.0 30.0 10.1 9.9 n/a n/a n/aNet FDI (% GDP) 0.6 3.0 1.2 0.8 n/a n/a n/aCurrent account balance plus FDI (% GDP) -4.6 -3.2 -3.5 -3.5 n/a n/a n/aMerchandise Exports (AUD, % y-o-y) 17.9 2.7 32.2 -12.1 16.9 13.1 5.5Merchandise Imports (AUD, % y-o-y) 13.0 7.1 19.6 -11.9 6.6 9.8 10.6International FX reserves (USDbn) 64.3 58.5 38.9 49.8 n/a n/a n/aImport cover (months) 5.8 4.3 2.5 3.6 n/a n/a n/aPublic and external solvency indicators Central government balance (% GDP) 1.5 1.7 0.4 -4.0 -3.3 -3.0 -0.8Gross external debt (AUDbn) 878 962 1,154 1,142 n/a n/a n/aGross public domestic debt AUDbn) 59.1 58.3 60.5 70.0 n/a n/a n/aGross public sector debt (% GDP) 16.1 15.6 14.2 17.1 n/a n/a n/a

Source: HSBC, CEIC

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Inflation’s the word

Beijing has for a while been trying to strike a balance

between inflation and growth. But times have changed

with both inflation and growth figures surprising to the

upside. Beijing now can fight inflation single-mindedly.

Indeed, both CPI and PPI accelerated in November,

beating consensus forecasts by a wide margin. At 5.1%

y-o-y in November, CPI hit the highest level in 28

months. The producer price index (PPI) also rebounded

further to an above-consensus 6.1% y-o-y in November,

printing the highest reading in five months.

The breakdown suggests acceleration in producer

goods prices and a notable pick-up in consumer goods

prices which is consistent with the rise in the input

prices components of the HSBC China manufacturing

PMI readings. These in turn reflect the recent rally in

international commodities prices that can partly be

attributed to Fed’s QE2. Meanwhile, industrial

production, exports and fixed-asset investment have

posted upside surprises, too, underlining the strength

of both domestic and external growth momentum. All

this has led us to raise our 2011 CPI forecast to 3.9%

y-o-y, from the previous 3.4% y-o-y.

We expect quantitative tightening to remain the

primary and most effective toolkit for checking

inflation and countering inflows attributed to QE2.

Beijing is likely to slow credit growth to below 16%

and money supply growth to around 16% for next

year (from the current over 19%). Moreover, there’s

still room for multiple reserve ratio hikes in the

coming quarters, even after 2010’s sixth reserve ratio

hike took the ratio to an all-time high.

We also expect Beijing to raise interest rates 75bp in

the next six months to anchor inflation expectations.

But exchange rate appreciation is unlikely to be used

as a main policy tool to check inflation, not least

because China’s demand has already made it a price

setter in global commodities market.

China

Qu Hongbin Chief China Economist The Hongkong and Shanghai Banking Corporation Limited +852 2822 2025 [email protected]

Junwei SunEconomist

3Q10 4Q10e 1Q11e 2Q11e 3Q11e 4Q11e 1Q12e 2Q12e 3Q12e 4Q12e

GDP (% y-o-y) 9.6 8.9 8.2 8.8 9.0 9.3 8.8 8.6 8.4 8.5Industrial production* (% y-o-y) 14.4 13.5 13.0 13.2 13.3 13.8 13.0 12.5 12.2 12.5CPI, end quarter (% y-o-y) 3.6 4.7 5.3 4.1 3.7 2.2 2.2 3.2 3.3 3.0PPI, end quarter (% y-o-y) 3.9 5.0 5.7 5.1 6.8 4.9 4.6 4.4 4.7 4.3Trade balance (% GDP) 1.6 1.1 0.8 1.5 1.5 1.0 0.5 0.8 0.9 0.7International reserves (USDbn) 2,516 2,562 2,569 2,597 2,641 2,688 2,693 2,712 2,740 2,775Policy rate, end quarter (%) 5.56 5.81 6.06 6.31 6.31 6.31 6.31 6.31 6.31 6.315yr lending rate, end quarter (%) 5.96 6.16 6.36 6.56 6.56 6.56 6.56 6.56 6.56 6.56RMB/USD, end quarter 6.72 6.67 6.62 6.57 6.46 6.35 6.30 6.25 6.20 6.15RMB/EUR, end quarter 9.21 9.00 8.28 8.54 8.72 8.89 8.82 8.75 8.68 8.61

* Industrial production is the output of companies with annual sales over RMB5m. Source: HSBC, CEIC

mailto:[email protected]

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China: Macro framework 2006 2007 2008 2009 2010e 2011e 2012e

Production, demand and employment GDP growth (% y-o-y) 11.6 13.0 9.6 9.1 10.0 8.9 8.6Nominal GDP (USDbn) 2,716 3,498 4,524 4,913 5,631 6,593 7,709GDP per capita (USD) 2,077 2,661 3,424 3,699 4,219 4,915 5,719Nominal retail sales (% y-o-y) 13.7 16.8 21.6 15.5 18.5 19.0 17.0Fixed Asset Investment (nominal, % y-o-y) 24.5 25.8 26.1 30.5 25.0 20.0 18.5Industrial production (excl. small enterprises % y-o-y) 16.2 16.0 12.9 12.9 15.5 13.2 12.5Gross domestic saving (% GDP) 50.1 51.0 51.4 50.0 50.5 50.0 50.0Unemployment rate, average (%) 4.1 4.0 4.2 4.3 4.3 4.3 4.3Prices & wages CPI, average (% y-o-y) 1.5 4.8 5.9 -0.7 3.3 3.9 2.9CPI, end-year (% y-o-y) 2.8 6.5 1.2 1.9 4.6 2.2 3.0PPI, end-year (% y-o-y) 3.1 5.4 -1.1 1.7 5.0 5.8 4.3Manufacturing wages, nominal (% y-o-y) 14.0 16.2 15.8 9.0 13.0 13.0 12.0Money, FX & interest rates Central bank money M0, average (%) 13.2 13.6 12.4 12.1 11.0 11.0 n/aBroad money supply M2, average (%) 18.1 17.5 16.7 26.5 23.3 17.0 15.0Policy rate, end-year (%) 6.12 7.47 5.31 5.31 5.81 6.31 6.315yr yield, end-year (%) 6.48 7.74 5.76 5.76 6.16 6.56 6.56RMB /USD, end-year 7.81 7.30 6.82 6.83 6.67 6.35 6.15RMB /USD, average 7.96 7.60 6.94 6.83 6.77 6.54 6.25RMB /EUR, end-year 10.30 10.66 9.48 9.77 9.00 8.89 8.61RMB /EUR, average 10.01 10.56 10.11 9.54 8.95 8.62 8.75External sector Merchandise exports (USDbn) 969.0 1,219 1,429 1,202 1,574 1,858 2,080Merchandise imports (USDbn) 791.5 956.0 1,133.1 1,005.6 1,398 1,677 1,946Trade balance (USDbn) 177.5 262.7 295.5 196.1 176.5 180.3 134.8Current account balance (USDbn) 253 372 426 284 250 260 210Current account balance (% GDP) 9.3 10.6 9.4 5.8 4.4 3.9 2.7Net FDI (USDbn) 72.7 83.5 108.3 90.0 86.0 98.9 108.8Net FDI (% GDP) 2.7 2.4 2.4 1.8 1.5 1.5 1.4Current account balance plus FDI (% GDP) 12.0 13.0 11.8 7.6 6.0 5.4 4.1Exports (% y-o-y) 27.2 25.8 17.2 -15.9 31.0 18.0 12.0Imports (% y-o-y) 19.9 20.8 18.5 -11.3 39.0 20.0 16.0International FX reserves (USDbn) 1,066 1,528 1,946 2,399 2,550 2,700 2,800Import cover (months) 15.0 17.7 18.9 27.9 22.1 20.4 19.0Public and external solvency indicators Commercial banks’ FX assets (USDbn) 200.3 188.4 180.9 211.6 245.4 292.1 351.4Gross external debt (USDbn) 323.0 373.6 374.7 350.0 330.0 360.0 410.0Short term external debt (% of int’l reserves) 17.2 14.4 10.8 6.3 4.7 4.8 5.7Consolidated government balance (% GDP) -1.0 0.6 -0.4 -2.2 -2.8 -2.5 -2.0

Note: Industrial production is the output of all industrial companies Source: HSBC, CEIC

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Success at a cost

Hong Kong’s economic recovery has been helped by

loose monetary conditions in the US and by Chinese

tourists, investors and businesses. So strong were

these sources of support that GDP growth enjoyed a

second wind, accelerating again in Q3. A third wind

is highly unlikely, however, given a shifting base

effect and slowing Chinese growth. We expect Hong

Kong’s growth to gravitate gradually back towards

trend from Q4 onwards.

Hong Kong remains vulnerable to a renewed

US/EU-led global slowdown or major global

financial market disruptions. Global restocking

jump-started a recovery in Hong Kong’s services-

driven economy and domestic businesses and

households proved hardy during a turbulent 2010,

allowing domestic demand to put down its own

roots, enough to sustain job creation and positive

real wage growth. With Chinese growth

moderating but still healthy and with US interest

rates likely to remain low for at least another year,

2011 should be a smoother ride. But growth

comes at the cost of inflation. Hong Kong policy

makers face a problem they can’t side-step, with

consumer prices about to catch up with last year’s

asset-price jump, another wave of inflationary

foreign capital set to ride in, US dollar weakness,

low interest rates and higher global food prices.

Inflationary pressures created by QE1 are only

just starting to trickle through, and now QE2 has

already fired up asset prices again.

With other Asian central banks erecting barricades to

deflect the impending tide of foreign capital, Hong

Kong’s economy – with its more laissez-faire

policies – stands exposed. Hence the heavier hand

with the government’s latest measures to cool

property prices. This should prevent the economy

from going into overdrive in 2011.

Hong Kong SAR

Donna Kwok Economist The Hongkong and Shanghai Banking Corporation Limited +852 2996 6621 [email protected]

3Q10 4Q10f 1Q11f 2Q11f 3Q11f 4Q11f 1Q12f 2Q12f 3Q12f 4Q12f

GDP (% y-o-y) 6.8 6.6 0.1 4.4 7.1 8.4 3.2 3.8 5.5 5.4Industrial production (% y-o-y) 5.4 4.0 3.0 4.3 4.0 5.5 4.0 4.2 2.8 1.6CPI, end quarter (% y-o-y) 2.5 2.7 4.0 4.5 4.8 4.9 4.5 4.1 3.9 3.8PPI, end quarter (% y-o-y) 6.5 6.7 6.9 6.5 6.2 5.5 5.1 5.0 4.6 4.4Trade balance (% GDP) -13.7 -10.7 -13.7 -20.2 -17.8 -19.7 -19.9 -18.8 -18.4 -19.0G&S balance (% GDP) 12.8 14.3 9.4 5.0 8.0 7.6 12.3 6.4 10.6 8.5International reserves (USDbn) 266.1 267.0 270.1 273.2 276.3 279.4 280.0 278.0 260.0 251.4Policy rate, end quarter (%) 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 1.005yr yield, end quarter (%) 1.19 1.78 2.10 2.00 1.80 1.50 1.70 1.80 1.90 2.00HKD /USD, end quarter 7.76 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80HKD /EUR, end quarter 10.63 10.53 9.75 10.14 10.53 10.92 10.92 10.92 10.92 10.92

Source: HSBC, CEIC

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HKSAR: Macro framework 2006 2007 2008 2009 2010e 2011e 2012e

Production, demand and employment GDP growth (% y-o-y) 7.0 6.4 2.2 -2.8 7.0 5.2 4.6Nominal GDP (USDbn) 189.9 207.1 215.3 210.6 226.8 237.0 248.0GDP per capita (USD) 27,699 29,903 30,851 30,068 32,252 33,693 35,266Private consumption (% y-o-y) 5.9 8.5 2.4 -0.4 5.8 6.0 4.6Government consumption (% y-o-y) 0.3 3.0 1.8 2.4 3.3 1.0 1.8Investment (% y-o-y) 7.1 3.4 0.8 -1.8 6.7 7.5 2.0Industrial production (% y-o-y) 2.2 -1.5 -6.7 -8.3 3.0 4.2 3.2Gross domestic saving (% GDP) 33.3 31.0 30.1 28.0 29.0 28.8 28.9Unemployment rate, end-year (%) 4.4 3.4 4.1 5.1 4.0 4.2 4.1Prices & wages CPI, average (% y-o-y) 2.0 2.0 4.3 0.5 2.3 4.4 4.2CPI, end-year (% y-o-y) 2.3 3.8 2.0 1.3 2.7 4.9 3.8PPI, end-year (% y-o-y) 1.9 4.4 3.8 -0.3 6.7 5.5 4.6Overall wages, nominal (% y-o-y) 2.2 2.8 0.9 0.8 2.5 4.8 4.9Money, FX & interest rates Central bank money M1, average (% y-o-y) 11.9 17.8 4.6 29.6 26.1 34.5 24.2Broad money supply M3, average (% y-o-y) 12.7 18.4 7.0 7.1 5.9 13.4 8.8Real private sector credit growth (% y-o-y) 6.9 13.2 12.2 -2.7 13.7 15.2 6.1Policy rate, end-year (%) 6.75 5.75 0.50 0.50 0.50 0.50 1.005yr yield, end-year (%) 3.69 3.10 1.19 1.97 1.78 1.85 1.85HKD /USD, end-year 7.77 7.80 7.75 7.76 7.80 7.80 7.80HKD /USD, average 7.77 7.80 7.78 7.75 7.78 7.80 7.80HKD /EUR, end-year 10.26 11.39 10.77 11.09 10.53 10.92 10.92HKD /EUR, average 9.76 10.84 11.33 10.83 10.29 10.29 10.92External sector Merchandise exports (USDbn) 317.6 346.0 365.4 321.9 393.9 436.6 466.3Merchandise imports (USDbn) 331.7 365.7 388.6 348.7 433.2 462.8 497.7Trade balance (USDbn) -14.0 -19.7 -23.1 -26.9 -39.2 -26.1 -31.3G & S balance (USDbn) 21.7 22.4 21.9 15.1 21.8 17.7 23.3G & S balance (% GDP) 11.4 10.8 10.2 7.2 9.6 7.5 9.4Net FDI (USDbn) 0.1 -6.7 9.0 -3.8 -1.9 4.8 5.3Net FDI (% GDP) 0.0 -3.3 4.2 -1.8 -0.8 2.0 2.1G & S balance plus FDI (% GDP) 11.4 7.6 14.4 5.3 8.8 9.5 11.5Exports (% y-o-y) 9.7 8.9 5.6 -11.9 22.4 10.8 6.8Imports (% y-o-y) 11.6 10.3 6.3 -10.3 24.2 6.8 7.5International FX reserves (USDbn) 133.2 152.7 182.5 255.8 267.0 279.4 251.4Import cover (months) 4.8 5.0 5.6 8.8 7.4 7.2 6.1Public and external solvency indicators Commercial banks’ FX assets (USDbn) 603.9 789.1 867.4 791.8 937.6 977.9 1,019.9Gross external debt (USDbn) 516.4 711.1 663.4 673.0 720.1 784.9 832.0Consolidated government balance (% GDP) 4.0 7.7 0.1 1.6 2.5 3.1 3.1

Note: Public debt refers to government debt only Source: HSBC, CEIC

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Taming inflation India’s economy is still performing strongly, with

Q3 GDP growth of 8.9% y-o-y, matching the 2½-

year high set in the previous quarter. Growth was

led by private consumption (9.3% y-o-y), propped

up by favourable labour market conditions, and

exports also turned in a strong if slightly lower

number (9.7% y-o-y). Investment growth held up

well (11.1% y-o-y), but slowed after the steep rise

in the previous quarter (19% y-o-y).

High-frequency indicators point to solid growth

during the remainder of the fiscal year. Industrial

production grew a strong 10.8% y-o-y in October

and picked up pace on a sequential basis. Moreover,

HSBC’s PMI indices for manufacturing and services

suggest strong growth in the quarters ahead. We

have, therefore, raised our growth forecast to 9.1%

y-o-y for 2010/11 from 8.8% y-o-y previously.

The cyclical recovery is now entering a more mature

stage as the economy has reached its potential, leading

to the imposition of a natural speed limit. Moreover,

the continued withdrawal of macroeconomic stimuli

means less impetus from this front. Growth is,

consequently, expected to decelerate to a downwardly

revised 8.1% y-o-y in 2011/12.

However, the rapid return to potential and the still

robust growth expected in the quarters ahead will add

to demand-led price pressures, and rising inflation is a

risk to the outlook. These pressures are already

reflected in the sticky WPI inflation readings,

including the high level of core inflation, and the

uptrend in HSBC’s PMI sub-indices for input prices.

Moreover, a growing number of companies are

reporting that they are operating above optimal levels

and are having difficulty finding skilled labour.

HSBC’s PMI sub-indices for the backlog of works

also reflect tight capacity constraints.

While the gradual withdrawal of fiscal stimulus will

continue next year, monetary policy remains highly

accommodative and more rate hikes will,

consequently, be needed to tame inflation. The

Reserve Bank of India is not agnostic about the

inflation risks and is expected to resume tightening

early next year after its self-imposed pause. We

expect another 125bp of rate hikes in 2011, starting

with 25bp in the first quarter.

India

3Q 10 4Q 10f 1Q 11f 2Q 11f 3Q 11f 4Q 11f 1Q 12f 2Q 12f 3Q 12f 4Q 12f

GDP (% y-o-y) 8.9 10.3 8.5 8.3 7.0 8.3 8.6 8.3 7.9 7.9Industrial production (% y-o-y) 8.7 9.4 6.0 6.5 7.5 8.0 8.0 8.5 9.0 8.5CPI, end quarter (% y-o-y) 9.8 7.3 7.0 7.5 7.3 6.9 6.6 6.1 5.9 5.7WPI, end quarter (% y-o-y) 8.9 8.4 6.0 6.5 7.0 6.9 6.0 5.5 5.5 5.5Trade balance (% GDP) -9.6 -9.2 -8.6 -8.5 -9.5 -8.9 -8.7 -7.6 -8.7 -8.5Current account (% GDP) -4.3 -4.0 -3.8 -3.6 -4.2 -4.6 -4.2 -2.6 -3.4 -4.2International reserves (USDbn) 265.2 289.1 292.6 296.8 298.2 300.7 299.3 306.2 309.0 304.9Policy rate, end quarter (%) 6.00 6.25 6.50 7.00 7.25 7.50 7.50 7.50 7.50 7.505yr yield, end quarter (%) 7.71 8.00 7.60 7.60 7.70 7.70 7.90 7.80 7.60 7.80INR /USD, end quarter 44.9 44.8 43.2 42.8 42.4 42.0 42.0 42.0 42.0 42.0INR /EUR, end quarter 61.5 60.5 54.0 55.6 57.2 58.8 58.8 58.8 58.8 58.8

Source: HSBC, CEIC Note: Data pertain to fiscal year, e.g. 2005 numbers are for FY05/06 (April 05 – March 06)

Leif Eskesen Economist The Hongkong and Shanghai Banking Corporation Limited (Singapore) +6562390840 [email protected]

Prithviraj Srinivas Economics Associate, Bangalore

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India: Macro framework 2006 2007 2008 2009 2010f 2011f 2012f

Production, demand and employment

GDP growth (% y-o-y) 9.7 9.2 6.7 7.4 9.1 8.1 8.1Nominal GDP (USDbn) 872 1,111 1,180 1,227 1,533 1,874 2,178GDP per capita (USD) 777 976 1,016 1,037 1,305 1,578 1,815Private consumption (% y-o-y) 8.2 9.8 6.8 4.3 6.5 6.1 6.5Government consumption (% y-o-y) 3.8 9.7 16.7 10.5 7.0 4.0 4.0Investment (% y-o-y) 14.3 15.2 4.0 7.2 15.5 14.5 12.0Industrial production (% y-o-y) 10.4 10.4 4.9 6.6 11.4 7.0 8.5Gross domestic saving (% GDP) 34.8 35.6 32.6 32.2 35.3 36.5 37.7

Prices

CPI, average (% y-o-y) 6.3 6.4 8.3 10.9 11.8 7.1 6.1CPI, end-year (% y-o-y) 6.7 5.5 9.7 15.0 7.3 6.9 5.7WPI, average (% y-o-y) 5.9 5.0 8.7 2.1 9.4 6.7 5.5WPI, end-year (% y-o-y) 7.1 4.0 6.6 6.9 8.4 6.9 5.5

Money, FX & interest rates

Central bank money M0, average (% y-o-y) 17.3 15.0 18.9 16.1 21.0 16.0 16.0Broad money supply M3, average (% y-o-y) 19.6 21.9 20.4 19.1 16.0 15.0 19.0Real private sector credit growth (% y-o-y) 18.3 15.6 14.0 6.8 12.0 15.0 15.0Policy rate, end-year (%) 7.75 7.75 6.50 4.75 6.25 7.50 7.505yr yield, end-year (%) 7.52 7.67 5.35 7.31 8.00 7.70 7.80INR /USD, end-year 44.25 39.42 48.46 46.69 44.81 42.00 42.00INR /USD, average 45.22 40.88 44.58 48.39 45.77 42.95 42.00INR /EUR, end-year 58.40 57.55 67.35 66.76 60.49 58.80 58.80INR /EUR, average 56.83 56.82 64.92 67.62 60.53 56.64 58.80

External sector

Merchandise exports (USDbn) 123.8 153.8 198.6 168.1 217.1 246.4 281.5Merchandise imports (USDbn) 184.9 231.6 323.1 274.6 353.6 408.3 458.2Trade balance (USDbn) -61.2 -77.8 -124.5 -106.5 -136.5 -162.0 -176.7Current account balance (USDbn) -9.3 -8.1 -31.0 -27.0 -57.5 -74.4 -75.8Current account balance (% GDP) -1.1 -0.7 -2.6 -2.2 -3.8 -4.0 -3.5Net FDI (USDbn) 6.0 8.2 22.9 20.7 15.5 28.0 32.0Net FDI (% GDP) 0.7 0.7 1.9 1.7 1.0 1.5 1.5Current account balance plus FDI (% GDP) -0.4 0.0 -0.7 -0.5 -2.7 -2.5 -2.0Exports (% y-o-y) 21.1 24.3 29.1 -15.4 29.1 13.5 14.3Imports (% y-o-y) 23.8 25.2 39.5 -15.0 28.8 15.5 12.2International FX reserves (USDbn) 170.2 266.6 246.6 258.6 289.1 300.7 304.9Import cover (months) 11.0 13.8 9.2 11.3 9.8 8.8 8.0

Public and external solvency indicators

Commercial banks’ FX assets (USDbn) 209.5 323.9 265.4 270.0 300.0 320.0 320.0Gross external debt (USDbn) 19.8 20.2 19.0 21.4 19.6 19.7 18.8Short term external debt (% of int’l reserves) 16.5 17.2 17.6 20.3 22.1 24.6 26.9Central government balance (% GDP) -3.6 -2.8 -6.4 -6.9 -5.5 -4.8 -4.0

Note: Data pertain to fiscal year, e.g. 2005 numbers are for FY05/06 (April 2005–March 2006) Source: Central Statistical Organisation, Reserve Bank of India, Bloomberg, CEIC and HSBC

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Still awaiting rate hikes The resilience of Indonesia’s economy during the

financial crisis rested primarily on the private

consumption of its 240 million people. We see

little indication that key pillar of support will fail

any time soon, partly because employment

prospects remain favourable.

Another engine of growth comes from investment.

Foreign direct investment during the first nine

months of 2010 surpassed that in all of 2009, for

example. It’s true the country poses significant

challenges, ranging from poor infrastructure to red

tape and rigid labour laws. But it appears that its

relatively cheap labour force, market size and

abundant natural resources are being appreciated

more keenly. Still, to capture and sustain these

inflows, the government will have to show both its

readiness and capacity to deliver on its promises.

On the monetary policy front, we expect Bank

Indonesia (BI) to start tightening its policy rate in

February 2011, after deciding to stand pat in its

first meeting of the year in January. It may have

doggedly kept it unchanged for the whole of 2010,

but prudence in the form of monetary tightening

would be the best way to shepherd Indonesia into

the big league.

With growth comfortably robust, it is a matter of

time before demand-pull price pressures start to

set in more visibly. Moreover, as the sudden spike

in food prices in the middle and last months of

2010 remind us, Indonesia’s inflation trajectory

remains beholden to unexpected factors such as

natural disasters and weather anomalies. Changes

to administrative prices would not help, either.

BI is facing the dilemma of how to best counter

rising domestic inflationary pressures, while

feeling that its main policy tool of setting interest

rate has been hijacked by the fear of inviting more

capital inflows. While raising reserve requirement

ratios may soothe some of the price pressures,

ultimately, BI would have to bite the bullet and

raise policy rate – particularly if it hopes to anchor

inflation expectations.

Indonesia


GDP (% y-o-y) 5.8 6.5 6.1 6.3 6.4 6.8 6.2 6.1 6.3 6.7Industrial production (% y-o-y) 4.1 7.0 6.0 6.0 6.0 6.0 5.0 5.0 5.0 5.0CPI, end quarter (% y-o-y) 5.8 6.6 6.5 6.2 6.0 5.7 5.5 5.3 5.1 5.0PPI, end quarter (% y-o-y) 6.9 9.0 8.0 7.0 6.0 5.0 5.0 5.0 5.0 5.0Trade balance (% GDP) 5.0 5.1 5.0 4.6 4.1 4.2 4.7 4.3 3.8 3.9Current account (% GDP) 0.7 1.1 1.6 1.4 1.0 1.2 1.7 1.4 1.0 1.2International reserves (USDbn) 86.6 89.6 92.5 95.1 97.1 99.4 102.8 105.8 108.1 110.7Policy rate, end quarter (%) 6.50 6.50 7.00 7.25 7.25 7.25 7.25 7.25 7.25 7.255yr yield, end quarter (%) 7.21 6.83 6.50 6.70 6.80 6.80 6.90 6.90 7.00 7.00IDR/USD, end quarter 8,908 8,800 8,750 8,700 8,700 8,700 8,700 8,700 8,700 8700IDR/EUR, end quarter 12,204 11,880 10,938 11,310 11,745 12,180 12,180 12,180 12,180 12,180

Source: HSBC, CEIC

Wellian Wiranto Economist The Hongkong and Shanghai Banking Corporation Limited, (Singapore) +65 6230 2879 wellianwiranto @hsbc.com.sg

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Indonesia: Macro framework 2006 2007 2008 2009 2010e 2011e 2012e

Production, demand and employment GDP growth (% y-o-y) 5.5 6.3 6.0 4.5 6.0 6.4 6.3Nominal GDP (USDbn) 364.4 432.1 517.1 535.5 703.1 821.6 919.3GDP per capita (USD) 1,635 1,915 2,263 2,313 3,417 3,937 4,299Private consumption (% y-o-y) 3.2 5.0 5.3 4.9 4.8 5.0 5.0Government consumption (% y-o-y) 9.6 3.9 10.4 15.7 -1.5 8.0 7.0Investment (% y-o-y) 2.6 9.3 11.9 3.3 8.7 10.0 10.0Industrial production (% y-o-y) 4.6 4.7 3.7 2.1 4.8 6.0 5.0Gross domestic saving (% GDP) 28.7 28.1 31.0 31.8 42.3 42.6 42.9Unemployment rate, end-year (%) 10.3 9.1 8.4 7.9 7.5 7.2 6.6Prices & wages CPI, average (% y-o-y) 13.1 6.4 10.2 4.8 5.1 6.3 5.2CPI, end-year (% y-o-y) 6.6 6.6 11.1 2.8 6.6 5.7 5.0WPI, end-year (% y-o-y) 6.6 21.9 9.7 4.6 9.0 8.0 7.0Manufacturing wages, nominal (% y-o-y) 6.2 4.9 10.0 6.0 8.0 8.5 8.5Money, FX & interest rates Broad money supply M2, average (% y-o-y) 15.5 15.9 16.1 15.3 16.0 15.5 15.0Real private sector credit growth (% y-o-y) 1.1 15.0 19.6 9.5 8.0 12.0 11.0Policy rate, end-year (% y-o-y) 9.75 8.00 9.25 6.50 6.50 7.25 7.255yr yield, end-year (%) 9.43 9.22 11.83 9.01 6.83 6.80 7.00IDR /USD, end-year 8,994 9,400 11,325 9,425 8,800 8,700 8,700IDR /USD, average 9,166 9,143 9,575 10,482 9,049 8,725 8,700IDR /EUR, end-year 11,871 13,724 15,742 13,478 11,880 12,180 12,180IDR /EUR, average 11,519 12,708 13,944 14,649 11,967 11,506 12,180External sector Merchandise exports (USDbn) 103.5 118.0 139.6 119.5 149.2 162.1 180.0Merchandise imports (USDbn) 73.9 85.3 116.7 84.3 113.1 125.5 141.8Trade balance (USDbn) 29.7 32.8 22.9 35.1 36.0 36.6 38.1Current account balance (USDbn) 10.9 10.5 0.1 10.7 7.1 10.6 12.1Current account balance (% GDP) 3.0 2.4 0.0 2.0 1.0 1.3 1.3Net FDI (USDbn) 2.2 2.3 3.4 1.9 5.5 6.5 7.0Net FDI (% GDP) 0.6 0.5 0.7 0.4 0.8 0.8 0.8Current account balance plus FDI (% GDP) 3.6 2.9 0.7 2.4 1.8 2.1 2.1Exports (% y-o-y) 19.0 14.0 18.3 -14.4 24.9 8.7 11.0Imports (% y-o-y) 6.3 15.4 36.9 -27.7 34.1 11.0 13.0International FX reserves (USDbn) 42.6 56.9 51.6 66.1 89.6 99.4 110.7Import cover (months) 6.9 8.0 5.3 9.4 9.5 9.5 9.4Public and external solvency indicators Gross external debt (USDbn) 128.7 136.6 149.1 172.9 161.6 152.0 151.0Short term external debt (% of int’l reserves) 47.0 50.2 53.8 39.3 30.1 29.2 27.1Private sector external debt (USDbn) 52.9 56.0 62.6 73.6 74.6 62.0 60.0Central government balance (% GDP) -0.9 -1.3 -0.1 -1.6 -1.6 -1.2 -1.2Primary balance (% GDP) 1.5 0.8 1.7 -0.9 -0.2 1.1 2.1Gross public domestic debt (IDRtrn) 1302.2 1385.0 1448.3 1536.9 1638.7 1724.7 1820.7Gross public domestic debt (% GDP) 39.7 34.1 24.7 30.4 26.5 24.1 22.8Gross public external debt (USDbn) 75.8 80.6 86.6 99.3 87.0 90.0 91.0Gross public external debt (% GDP) 20.8 18.7 16.7 18.5 12.4 11.0 9.9Gross public sector debt (% GDP) 60.5 52.7 41.5 49.0 38.9 35.1 32.7

Source: HSBC, CEIC

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Upgrading growth forecasts

We have raised our real GDP growth forecast for

2010 to 4.3% from 3.0% and for 2011 to 1.1%

from 0.7%. This upward revision is partly a

statistical issue. Latest data show that in 2009

Japanese GDP fell by more (revised to -6.3%

from -5.2%) and therefore returning to a more

‘normal’ level of activity has seen a bigger

bounce. It also reflects a better outlook for Japan’s

trading partners and a more stimulatory fiscal

budget for FY2010.

However, we still expect a sizable negative q-o-q

growth for Q4 2010 and sluggish growth in Q1

2011. This is payback after government subsidies

on ecological cars and home appliances, which

fuelled a significant surge in demand in the first

three quarters of the year. But external conditions

are expected to turn positive for Japan, as

indicated by the recent pick-ups of PMIs in many

countries and by the new fiscal packages in the

U.S. So we now expect acceleration in exports

from Q2 2011 onwards.

Still, the pace of increase in capex is expected to

remain moderate through the forecasting period,

and unemployment looks set to stay around 5% in

2010 and to decline only slightly in 2011. Thus,

private domestic demand will not drive growth,

which will, instead, be supported by exports.

The continued negative output gap will be a

persistent source of downward pressure on prices.

And the base year change in CPI from 2005 to

2010, scheduled in summer 2011, should depress

CPI by a further 0.5ppts. We expect core CPI will

fall by 1.1% in 2010 and by 0.7% in 2011, and

that the Bank of Japan will not hike base rates

through 2012.

Japan

Seiji Shiraishi Economist HSBC Securities (Japan) Limited +81 3 5203 3802 [email protected]


GDP (% y-o-y) 5.3 2.9 1.4 1.0 0.3 1.6 2.0 2.0 2.0 1.9Industrial production (% y-o-y) 13.4 5.9 4.1 0.7 -1.7 4.0 6.1 7.7 8.2 8.2CPI, end quarter (% y-o-y) -1.1 -0.8 -0.7 -0.7 -0.7 -0.6 -0.6 -0.5 -0.4 -0.3Dom. CGPI, end quarter (% y-o-y) -0.1 0.9 0.8 0.9 1.1 1.7 1.6 1.5 1.4 1.3Trade balance (% GDP) 1.4 1.7 1.1 0.9 1.6 2.1 1.7 1.4 2.1 2.5Current account (% GDP) 3.1 3.2 2.8 2.6 3.3 3.7 3.4 3.1 3.8 4.0International reserves (USDbn) 1,050 1,100 1,150 1,200 1,200 1,250 1,250 1,250 1,300 1,300Policy rate, end quarter (%) 0.10 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.0510-yr yield, end quarter (%) 0.9 1.1 1.3 1.4 1.3 1.1 1.0 1.1 1.2 1.3JPY/USD, end quarter 84 85 90 95 95 95 95 95 95 95JPY/EUR, end quarter 115 115 113 124 128 133 133 133 133 133

Source: HSBC, CEIC

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Japan: Macro framework 2006 2007 2008 2009 2010e 2011e 2012e

Production, demand and employment GDP growth (% y-o-y) 1.9 2.0 2.4 -1.2 4.3 1.1 2.0Nominal GDP (USDbn) 4,362 4,387 4,910 4,815 4,551 4,587 4,834GDP per capita (USD) 34,686 34,775 39,262 36,920 35,333 35,750 36,000Private consumption (% y-o-y) 1.5 1.5 1.6 -0.7 2.2 -0.2 1.0Government consumption (% y-o-y) 0.4 0.4 1.5 0.5 2.1 0.9 0.8Investment (% y-o-y) 0.5 0.5 -1.2 -3.6 0.6 1.6 1.9Industrial production (% y-o-y) 4.8 2.8 -3.4 -22.4 16.2 1.8 7.6Gross domestic saving (% GDP) 27.1 26.5 26.0 26.0 25.5 24.5 24.0Unemployment rate, average (%) 4.1 3.9 4.0 5.1 5.1 5.1 4.8Prices & wages CPI, average (% y-o-y) 0.2 0.0 1.5 -1.3 -1.1 -0.7 -0.5CPI, end-year (% y-o-y) 0.1 0.4 1.0 -1.7 -0.8 -0.6 -0.3Domestic CGPI, average (% y-o-y) 2.2 1.8 4.6 -5.3 -0.2 1.1 1.5Total wages, nominal (% y-o-y) 0.2 -1.0 -0.3 -3.9 1.0 0.5 0.5Money, FX & interest rates Central bank money M0, average (% y-o-y) -13.3 -7.8 0.1 5.8 4.8 1.0 1.0Broad money supply M2+CDs, average (% y-o-y) 1.0 1.6 2.1 2.7 2.8 2.5 2.5Policy rate, end-year (%) 0.26 0.50 0.10 0.10 0.05 0.05 0.0510yr yield, average (%) 1.8 1.7 1.3 1.3 1.1 1.3 1.2JPY /USD, end-year 119 112 91 93 85 95 95JPY /USD, average 116 118 91 95 85 95 95JPY /EUR, end-year 157 164 126 133 115 133 133JPY /EUR, average 146 163 133 132 112 125 133External sector Merchandise exports (USDbn) 646.8 713.8 782.0 580.9 781.8 753.8 808.1Merchandise imports (USDbn) 579.0 622.1 762.9 551.9 699.1 678.4 707.5Trade balance (USDbn) 67.9 91.8 19.1 29.0 82.7 75.4 100.6Current account balance (USDbn) 172.6 213.2 157.3 142.2 188.6 160.8 184.8Current account balance (% GDP) 3.9 4.8 3.2 2.8 3.4 3.1 3.6Net FDI (USDbn) -56.8 -53.9 -103.6 -63.2 -68.4 -73.7 -70.0Net FDI (% GDP) -1.3 -1.2 -2.1 -1.3 -1.5 -1.6 -1.4Current account balance plus FDI (% GDP) 2.6 3.6 1.1 1.5 1.9 1.5 2.1Exports (% y-o-y) 13.3 11.5 -3.5 -33.1 25.2 4.2 8.6Imports (% y-o-y) 18.3 8.6 8.0 -34.8 17.8 4.8 5.7International FX reserves (USDbn) 879.7 952.8 1,030.6 1,060.0 1,100 1,150 1,200Import cover (months) 36.5 36.8 32.4 46.1 37.8 40.7 40.7Public and external solvency indicators Commercial banks’ FX assets (USDbn) 1,523 1,783 1,860 1,900 1,950 2,000 2,050Gross external debt (USDbn) 1,253 1,398 1,628 1,612 1,600 1,600 1,550Private sector external debt (USDbn) 831.1 816.1 923.2 900.0 900 900 900General government balance (% GDP) -1.0 -1.4 -3.5 -10.5 -9.0 -8.0 -7.2Primary balance (% GDP) -2.9 -2.8 -2.0 -8.2 -6.7 -5.7 -4.9Gross public domestic debt (JPYtrn) 964.8 990 1,034 1,105 1,155 1,200 1,240Gross public domestic debt (% GDP) 190.2 191.9 231.4 242.9 298.6 275.4 270.0Gross public external debt (USDbn) 422.3 582.0 704.9 711.7 700.0 700.0 650.0Gross public external debt (% GDP) 9.7 13.3 14.4 14.8 15.4 15.3 13.4Gross public sector debt (% GDP) 199.8 205.2 245.8 257.7 313.9 290.7 283.5

Note: Public debt refers to government debt only. Source: HSBC, CIEC

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Growth still strong, rates up The Korean economy has proven resilient to

external shocks throughout 2010. The growth rate

rebounded in early 2009 and has been maintained.

The exports-led recovery has spread to domestic

demand. All of this points to above-trend growth

for the next two years, and we forecast growth rates

of 4.9% and 4.8% for 2011 and 2012, respectively,

after an estimated 6.1% expansion in 2010.

The global recession has been relatively kind to

Korean exporters, who, boosted by a cheap

currency, managed to increase market share. With

weak Western demand amid the financial crisis,

emerging markets such as China, Southeast Asia

and Latin America have become more important to

Korean shipments. The global market share of

leading companies has been increasing for autos

and IT hardware. But the real surprise in Korea is

not the rebound in exports. Rather, domestic

demand, especially household consumption, has

remained buoyant with wages picking up and

consumer confidence hovering near a multi-year

high. Job growth remains robust enough to

alleviate worries about job security. Meanwhile,

record-high capacity utilisation rates will also help

sustain investment spending.

The economy is running almost at full capacity. A

further sharp increase in either internal or external

demand could raise inflationary pressures. Headline

inflation is already forecast to be above the central

bank’s target band next summer. Therefore, the

government’s policy goal for next year is to contain

inflationary pressures while maintaining growth. To

control prices, the Bank of Korea is poised for

further tightening. For 2011, we continue to pencil in

a total of 100bp in rate hikes and another 50bp hike

over 2012, partly reflecting the unease among

officials about keeping interest rates at a record low.

Korea

Song-Yi Kim Economist The Hongkong and Shanghai Banking Corporation Limited +852 2822 4870 [email protected]


GDP (% y-o-y) 4.4 5.1 4.2 4.4 5.1 5.8 5.3 5.2 4.5 4.3Industrial production (% y-o-y) 11.9 11.5 15.0 7.0 7.0 4.0 6.0 7.0 10.0 11.0CPI, end quarter (% y-o-y) 3.6 3.5 4.4 4.3 3.6 3.4 3.2 3.2 3.2 3.0PPI, end quarter (% y-o-y) 4.0 4.3 4.5 4.6 4.1 3.6 3.4 3.3 3.4 3.0Trade balance (% GDP) 6.6 6.0 4.6 5.3 4.6 3.6 5.1 4.1 4.0 3.3Current account (% GDP) 4.8 4.5 2.4 3.4 2.8 2.1 3.0 2.1 2.1 2.0International reserves (USDbn) 289.8 308.2 319.7 335.1 349.1 352.5 360.0 365.7 371.6 377.3Policy rate, end quarter (%) 2.25 2.50 2.75 3.00 3.25 3.50 3.75 4.00 4.00 4.005yr yield, end quarter (%) 3.71 4.08 4.40 4.30 4.20 4.00 4.10 4.30 4.40 4.50KRW /USD, end quarter 1,140 1,130 1,110 1,090 1,080 1,070 1,060 1,050 1,040 1030KRW /EUR, end quarter 1,562 1,526 1,388 1,417 1,458 1,498 1,484 1,470 1,456 1,442

Source: HSBC, CEIC

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Korea: Macro framework 2006 2007 2008 2009 2010f 2011f 2012f


GDP growth (% y-o-y) 5.2 5.1 2.3 0.2 6.1 4.9 4.8Nominal GDP (USDbn) 890.1 970.9 945.9 842.4 1,002 1,154 1,260GDP per capita (USD) 18,430 20,036 19,461 17,287 20,492 23,538 25,619Private consumption (% y-o-y) 4.7 5.1 1.3 0.2 4.1 3.6 4.4Government consumption (% y-o-y) 6.6 5.4 4.3 5.0 3.8 5.1 4.8Investment (% y-o-y) 3.4 4.2 -1.9 -0.2 6.9 3.8 2.8Industrial production (% y-o-y) 8.4 6.9 3.4 -0.8 16.7 8.1 8.5Gross domestic saving (% GDP) 31.5 30.8 35.8 35.3 36.7 37.7 38.0Unemployment rate, end-year (%) 3.3 3.1 3.3 4.0 3.3 3.2 3.1

Prices & wages

CPI, average (% y-o-y) 2.2 2.5 4.7 2.8 3.0 3.8 3.2CPI, end-year (% y-o-y) 2.1 3.6 4.1 2.8 3.5 3.4 3.0PPI, end-year (% y-o-y) 0.3 3.6 5.6 1.8 4.3 3.6 3.0Manufacturing wages, nominal (% y-o-y) 5.6 5.9 3.1 -0.7 6.0 6.2 6.0


Central bank money M0, average (% y-o-y) 6.4 18.1 7.5 17.6 13.6 10.0 9.0Broad money supply M3, average (% y-o-y) 8.2 10.3 11.6 8.2 9.0 11.0 12.0Real private sector credit growth (% y-o-y) 11.7 12.4 9.4 1.2 1.0 2.2 4.8Policy rate, end-year (%) 4.50 5.00 3.00 2.00 2.50 3.50 4.005yr yield, end-year (%) 4.82 5.65 4.25 4.92 4.08 4.00 4.50KRW /USD, end-year 930 935 1,260 1,166 1,130 1,070 1,030KRW /USD, average 953 928 1,085 1,262 1,160 1,095 1,084KRW /EUR, end-year 1,228 1,365 1,751 1,667 1,526 1,498 1,442KRW /EUR, average 1,197 1,290 1,580 1,764 1,535 1,444 1,517

External sector

Merchandise exports (USDbn) 331.8 379.0 432.9 373.6 477.9 526.9 583.0Merchandise imports (USDbn) 303.9 350.9 427.3 317.5 421.9 474.9 531.0Trade balance (USDbn) 27.9 28.2 5.7 56.1 56.1 52.1 52.1Current account balance (USDbn) 5.4 5.9 -5.8 42.7 36.0 31.0 28.5Current account balance (% GDP) 0.6 0.6 -0.6 5.1 3.6 2.7 2.3Net FDI (USDbn) -4.5 -13.8 -15.6 -9.1 -13.6 -12.0 -8.0Net FDI (% GDP) -0.5 -1.4 -1.7 -1.1 -1.4 -1.0 -0.6Current account balance plus FDI (% GDP) 0.1 -0.8 -2.3 4.0 2.2 1.6 1.6Exports (% y-o-y) 14.8 14.2 14.2 -13.7 27.9 10.3 10.6Imports (% y-o-y) 18.6 15.4 21.8 -25.7 32.9 12.6 11.8International FX reserves (USDbn) 239.0 262.2 201.2 270.3 311.6 355.9 380.7Import cover (months) 9.4 9.0 5.7 10.2 8.9 9.0 8.6


Gross external debt (USDbn) 260.1 383.2 377.6 399.8 335.0 330.0 330.0Short term external debt (% of int’l reserves) 47.6 61.1 74.5 55.2 43.0 37.1 34.7Private sector external debt (USDbn) 240.2 329.5 325.1 332.0 266.4 256.8 226.4Central government balance (% GDP) -2.8 0.5 -2.0 -4.2 -2.7 -2.0 -1.8Primary balance (% GDP) 1.9 5.2 2.6 -0.2 1.6 2.2 2.3Gross public domestic debt (KRWbn) 262,369 278,790 288,720 334,910 366,547 391,110 410,887Gross public domestic debt (% GDP) 30.9 30.9 28.1 31.5 31.5 31.0 30.1Gross public external debt (USDbn) 19.9 53.6 52.5 67.8 68.6 73.2 103.6Gross public external debt (% GDP) 2.2 5.5 5.5 8.0 6.9 6.3 8.2Gross public sector debt (% GDP) 32.2 32.1 29.0 32.6 32.5 31.9 31.4

Source: HSBC, CEIC

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Resting easy for now Malaysia has recovered well. Exports staged a

quick rebound, helped by inventory restocking and

the increasing importance of intra-Asian trade.

While lingering global uncertainties make it

unlikely we will see further bumper growth rates,

we do not expect any severe slump.

The domestic-oriented parts of the economy have

performed rather well too. Private consumption

continued to support growth, adding a nice

complement to exports.

Government spending, in general, has also played

a smoothing role. Unexpectedly low spending in

the third quarter of 2010 turned out to be the

primary culprit behind the downside surprise, but

we do not expect the drag to persist for too long. In

fact, the budget for 2011 remains broadly

expansionary.

On the other hand, while investment activities are

moving along quite nicely, they are not yet

expanding as much as the government would like to

see, although that is definitely not for lack of effort.

On the monetary policy front, Bank Negara

Malaysia (BNM) stands out as one of the few Asian

central banks not only to tighten, but to do so early

on during the up-cycle. Starting in March 2010, its

normalization drive had nudged up the policy rate

from the record-low 2.0% to 2.75% by July.

Since then, the central bank has been able to pause

fairly comfortably. Inflation remains tame in the

country. The space BNM has created for itself with

its normalization drive should allow the central bank

to pause during the first half of 2011, before

resuming its normalization drive. Essentially, having

moved early to nip any potential inflationary

pressures in the bud, BNM can focus more readily

on risks to growth over the near term.

Malaysia

Wellian Wiranto Economist The Hongkong and Shanghai Banking Corporation Limited, (Singapore) +65 6230 2879 [email protected]

Namrata Mittal Associate, Bangalore


GDP (% y-o-y) 5.3 4.6 3.1 5.9 5.9 5.3 4.9 5.1 5.1 4.6Industrial production (% y-o-y) 7.5 7.0 7.0 7.0 6.0 5.0 5.0 5.0 5.0 5.0CPI, end quarter (% y-o-y) 1.8 2.6 2.9 3.1 3.0 2.8 2.4 2.3 2.1 2.0PPI, end quarter (% y-o-y) 4.9 5.5 4.5 4.0 4.0 4.0 4.0 4.0 4.0 4.0Trade balance (% GDP) 16.0 19.8 24.6 16.1 16.0 19.7 24.0 16.2 16.2 20.0Current account (% GDP) 12.2 14.1 17.3 9.1 12.4 14.2 16.6 9.3 12.7 14.5International reserves (USDbn) 100.6 102.8 107.8 108.4 110.2 111.4 115.3 115.8 118.8 119.6Policy rate, end quarter (%) 2.75 2.75 2.75 2.75 3.00 3.25 3.25 3.25 3.25 3.255yr yield, end quarter (%) 3.25 3.39 3.50 3.60 3.70 3.80 3.80 3.90 3.90 3.90MYR/USD, end quarter 3.09 3.00 2.97 2.94 2.91 2.88 2.85 2.82 2.79 2.79MYR/EUR, end quarter 4.23 4.05 3.71 3.82 3.93 4.03 3.99 3.95 3.91 3.91

Source: HSBC, CEIC

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Malaysia: Macro framework 2006 2007 2008 2009 2010f 2011f 2012f

Production, demand and employment GDP growth (% y-o-y) 5.8 6.5 4.7 -1.7 7.1 5.1 4.9Nominal GDP (USDbn) 156.3 187.0 223.2 193.3 237.4 279.1 311.4GDP per capita (USD) 5,541 6,878 8,104 6,929 8,344 9,618 10,521Private consumption (% y-o-y) 6.8 10.5 8.5 0.7 6.8 6.7 5.7Government consumption (% y-o-y) 5.0 6.6 10.7 3.1 0.5 1.0 1.0Investment (% y-o-y) 7.5 9.4 0.7 -5.6 8.9 6.5 5.2Industrial production (% y-o-y) 6.7 2.8 1.4 -9.0 11.9 6.3 5.0Gross domestic saving (% GDP) 43.4 46.3 49.2 44.0 46.9 48.0 48.0Unemployment rate, end-year (%) 3.0 3.0 3.1 3.5 3.2 3.3 3.1Prices & wages CPI, average (% y-o-y) 3.6 2.0 5.4 0.6 1.8 3.0 2.2CPI, end-year (% y-o-y) 3.1 2.4 4.4 1.1 2.6 2.8 2.0PPI, end-year (% y-o-y) 3.4 10.1 -2.6 3.6 5.5 4.0 4.0Manufacturing wages, nominal (% y-o-y) 10.1 7.3 0.5 -5.0 2.0 4.0 4.0Money, FX & interest rates Central bank money M0, end-year (% y-o-y) 10.6 9.8 7.2 8.0 15.0 7.0 7.0Broad money supply M3, average (% y-o-y) 8.6 12.7 12.5 7.3 10.0 10.0 10.0Real private sector credit growth (% y-o-y) 4.2 6.1 4.9 7.1 6.0 5.0 0.0Policy rate, end-year (%) 3.50 3.50 3.25 2.00 2.75 3.25 3.255yr yield, end-year (%) 3.76 3.78 3.00 3.80 3.39 3.80 3.90MYR /USD, end-year 3.53 3.31 3.45 3.42 3.00 2.88 2.79MYR /USD, average 3.67 3.43 3.32 3.52 3.20 2.94 2.82MYR /EUR, end-year 4.66 4.83 4.80 4.89 4.05 4.03 3.91MYR /EUR, average 4.62 4.77 4.83 4.91 4.23 3.88 3.95External sector Merchandise exports (USDbn) 160.6 176.2 200.1 157.6 200.7 234.3 263.1Merchandise imports (USDbn) 123.2 138.5 148.7 117.3 155.1 181.1 203.9Trade balance (USDbn) 37.4 37.7 51.4 40.3 45.6 53.2 59.3Current account balance (USDbn) 25.4 29.2 39.0 31.9 30.6 36.9 41.3Current account balance (% GDP) 16.3 15.6 17.5 16.5 12.9 13.2 13.3Net FDI (USDbn) 0.0 -2.7 -7.8 -6.5 -2.2 -5.4 -5.7Net FDI (% GDP) 0.0 -1.5 -3.5 -3.4 -0.9 -1.9 -1.8Current account balance plus FDI (% GDP) 16.3 14.2 14.0 13.1 12.0 11.3 11.5Exports (% y-o-y) 9.4 2.6 9.8 -16.6 15.9 7.3 7.9Imports (% y-o-y) 10.3 5.1 3.8 -16.5 20.4 7.3 8.1International FX reserves (USDbn) 82.3 101.5 120.2 96.9 102.8 111.4 119.6Import cover (months) 8.0 8.8 9.7 9.9 8.0 7.4 7.0Public and external solvency indicators Gross external debt (USDbn) 56.0 55.8 54.3 69.1 63.0 59.0 55.0Short term external debt (% of int’l reserves) 16.2 12.7 13.1 24.1 17.5 14.4 11.7Private sector external debt (USDbn) 34.7 37.2 30.3 44.2 39.0 37.0 35.0Central government balance (% GDP) -3.3 -3.2 -4.8 -7.0 -4.5 -3.2 -2.1Primary balance (% GDP) -1.2 -2.2 -3.5 -6.5 -3.5 -2.0 -2.0Gross public domestic debt (MYR bn) 217.2 247.1 286.1 348.6 360.0 365.0 370.0Gross public domestic debt (% GDP) 37.8 38.5 38.6 51.3 47.4 44.5 42.1Gross public external debt (USDbn) 21.4 18.6 24.0 24.9 24.0 22.0 20.0Gross public external debt (% GDP) 13.7 9.9 10.8 12.9 10.1 7.9 6.4Gross public sector debt (% GDP) 51.5 48.4 49.4 64.2 57.5 52.4 48.5

Source: HSBC, CEIC

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Slow recovery Demand has remained weak in New Zealand, but

the economy is still expected to pick up solidly

next year.

Weak growth partly reflects the effect of the

earthquake, but demand was already weaker than

expected. Households and businesses remain

cautious in their spending, in part reflecting the

disappointingly modest improvement in the labour

market. In addition, the strong New Zealand

dollar is constraining growth in the economy and

weakening business sentiment.

Nonetheless, the outlook remains positive. Rising

dairy and meat prices have driven up the terms of

trade, and that is expected to feed through into

incomes. Rebuilding after the earthquake is also

expected to be substantial and is expected to boost

investment significantly in 2011.

Headline inflation will rise substantially in Q4 of

2010 as a result of the recent increase in the GST.

However, that is expected to have little impact on

inflation expectations due to weak domestic

demand, with the high exchange rate also

containing inflationary pressures.

We continue to expect the RBNZ to resume its

tightening cycle in Q2 2011 and to raise rates at a

modest pace over the rest of the forecast horizon

as growth recovers.

New Zealand

Paul Bloxham Economist HSBC Bank Australia Ltd +612 435 966 522 [email protected]


GDP (% y-o-y) 1.5 0.6 0.8 1.9 3.5 4.4 4.3 3.8 3.0 2.7Industrial production (% y-o-y) 1.7 -2.7 -3.5 1.4 2.0 2.3 2.7 2.9 3.1 3.2CPI, end quarter (% y-o-y) 1.5 4.0 4.2 5.1 4.5 2.4 2.3 2.2 2.3 2.2PPI, end quarter (% y-o-y) 3.8 3.9 3.2 2.4 2.4 2.5 2.6 2.7 2.8 3.0Trade balance (% GDP) -2.2 2.2 2.4 2.5 2.7 2.7 2.6 2.6 2.5 2.5Current account (% GDP) -3.7 -2.0 -2.7 -3.5 -4.2 -5.0 -4.0 -3.0 -3.0 -2.9Policy rate, end quarter (%) 3.00 3.00 3.00 3.25 3.50 3.75 4.00 4.25 4.50 4.5010yr yield, end quarter (%) 5.35 5.47 6.00 6.10 6.10 6.20 6.20 6.20 6.20 6.30USD /NZD, end quarter 0.72 0.76 0.71 0.69 0.74 0.76 0.73 0.72 0.72 0.72EUR /NZD, end quarter 0.51 0.56 0.57 0.53 0.55 0.54 0.52 0.51 0.51 0.51

Source: HSBC, CEIC

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New Zealand: Macro framework 2006 2007 2008 2009 2010e 2011e 2012e

Production, demand and employment GDP growth (% y-o-y) 0.9 2.8 -0.2 -1.7 1.4 2.6 3.4Nominal GDP (USDbn) 107.9 129.0 131.3 118.0 138.8 146.4 156.1GDP per capita (USD) 25,613 30,335 30,585 27,150 n/a n/a n/aPrivate consumption (% y-o-y) 2.2 4.1 -0.3 -0.8 2.1 1.5 2.8Government consumption (% y-o-y) 4.9 4.0 5.0 0.6 2.1 2.1 2.8Investment (% y-o-y) -0.9 5.5 -1.3 -11.4 1.3 8.6 7.7Industrial production (% y-o-y) -5.2 -0.8 -2.3 -10.5 0.7 0.5 3.0Gross national saving (% GDP) 14.9 15.8 14.3 12.0 13.1 14.1 15.1Unemployment rate, average (%) 3.8 3.7 4.2 6.2 6.5 6.4 6.0Prices & wages CPI, average (% y-o-y) 3.4 2.4 4.0 2.1 2.3 4.0 2.3CPI, end-year (% y-o-y) 2.6 3.2 3.4 2.0 4.0 2.4 2.2PPI, end-year (% y-o-y) 4.3 4.3 9.7 -3.2 3.9 2.5 3.0Labour cost index, nominal (% y-o-y) 3.2 3.3 3.5 1.8 1.7 2.5 3.0Money, FX & interest rates Central bank money M1, average (% y-o-y) 1.1 1.2 2.8 0.5 1.0 2.0 2.0Broad money supply M3, average (% y-o-y) 12.6 10.7 7.1 3.9 3.0 5.0 6.5Private sector credit growth (% y-o-y) 10.4 13.4 9.7 2.3 2.8 5.0 6.0Policy rate, end-year (%) 7.25 8.25 5.00 2.50 3.00 3.75 4.5010yr yield, end-year (%) 5.74 6.38 4.62 6.10 5.60 6.10 6.23USD /NZD, end-year 0.69 0.77 0.57 0.72 0.76 0.76 0.72USD /NZD, average 0.66 0.74 0.71 0.64 0.72 0.73 0.72EUR /NZD, end-year 0.55 0.53 0.44 0.51 0.56 0.54 0.51EUR /NZD, average 0.52 0.54 0.48 0.45 0.53 0.55 0.52External sector Merchandise exports (USDbn) 22.8 27.0 30.6 25.0 25.7 26.8 28.6Merchandise imports (USDbn) 26.8 30.9 34.4 25.6 27.7 29.7 32.2Trade balance (USDbn) -4.1 -3.9 -3.8 -0.6 -2.0 -2.9 -3.6Current account balance (USDbn) -9.0 -10.8 -11.3 -3.6 -2.6 -5.7 -5.0Current account balance (% GDP) -8.3 -8.1 -8.8 -2.8 -1.8 -3.8 -3.2Exports (% y-o-y) 12.5 6.0 17.8 -7.4 6.0 5.3 5.3Imports (% y-o-y) 9.3 2.8 15.8 -16.4 3.7 6.9 6.9International FX reserves (USDbn) 28.1 29.1 33.0 29.7 n/a n/a n/aImport cover (months) 12.5 11.3 11.5 13.9 n/a n/a n/aPublic and external solvency indicators Central government balance (% GDP) 4.6 3.7 3.0 -1.4 -3.2 -3.0 -2.0Gross external debt (NZDbn) 191.0 216.4 249.7 243.3 n/a n/a n/aGross public sector debt (NZDm) 28,928 30,405 31,627 38,008 44,168 50,232 54,477 Gross public sector debt (% GDP) 17.7 17.4 17.6 20.3 22.9 24.9 25.7

Source: HSBC, CEIC

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Another difficult year The impact of the 2010 floods continues to weigh on

Pakistan’s economic outlook via job losses, inflation,

agricultural damage, and wealth destruction.

All these factors will constrain growth in this

consumption-dominated economy.

There is some good news: At USD10bn, the final

cost of the flood damages is now believed to be

just a quarter of the initial estimates. Foreign-aid

funded reconstruction work will mitigate the

GFCF contraction from H210 and boost growth

actively from H211. Pakistan is also benefiting

from the global recovery. Remittances rose 25%

y-o-y to more than USD900m in November 2010

alone and will prevent an outright contraction in

consumption. Exports are also something of a

bright spot, having risen more than 20% y-o-y in

the first 10 months of the year.

However, absolute levels remain well below their

2008 peak, and exports accounted for just 13% of

GDP in 2009/10. Pakistan is a consumption-

driven economy, and here we are less optimistic.

The ILO estimates that 5.3m jobs were lost or

affected by the floods. Inflation stood at 15%

y-o-y in November, and real private sector credit

growth remains negative. A series of rate hikes

amounting to 150bp in four months (and counting)

will not help, either.

Meanwhile, the government is about to make its

case to the IMF to receive the sixth tranche of its

standby loan agreement. Under the terms of the

deal, the government will be required to limit the

deficit to 4.7% of GDP (from 6.0% in 2009/10).

Against this backdrop, medium-term growth in

public spending will be constrained.

There are structural strengths that will boost

investment over the long term: strong consumer

demographics, the low base for growth, the IMF

policy anchor and healthy remittance inflows are

all supportive. The currency looks broadly stable

in spite of inflation and political risk, with only a

small amount of nominal depreciation pencilled in

for the next couple of years. However, confidence

in the long-term outlook will return only slowly,

and Pakistan will continue to underperform its

neighbours in the short to medium term.

Pakistan

Liz Martins Economist HSBC Bank Middle East Limited, Dubai +971 4423 6928 [email protected]


Industrial production (% y-o-y) -2.9 -14.4 -19.0 -8.3 18.2 25.5 25.5 19.5 13.8 12.7CPI, end quarter (% y-o-y) 14.1 16.5 16.3 17.0 14.7 13.6 12.0 11.5 10.9 9.8WPI, end quarter (% y-o-y) 22.0 20.0 17.0 16.0 15.0 14.0 14.0 14.0 13.0 13.0M2 growth (% y-o-y) 15.2 10.4 15.4 13.2 15.9 14.7 12.5 10.4 9.3 8.2Trade balance (USDbn) -3.0 -3.3 -3.2 -3.0 -3.2 -3.4 -3.5 -3.7 -3.9 -4.2Remittances (USDbn) 2.8 2.9 3.0 3.0 3.1 3.2 3.3 3.4 3.5 3.5International reserves (USDbn) 15.7 15.8 15.8 16.2 16.5 16.6 16.6 17.1 17.3 17.4Policy rate, end quarter (%) 13.5 14.0 14.5 14.5 14.5 14.0 14.0 14.0 14.0 14.02 yr yield, end quarter (%) 13.3 13.8 13.8 13.8 13.8 13.8 13.8 13.8 13.8 13.8PKR /USD, end quarter 86.0 86.0 87.0 88.0 89.0 90.0 90.0 90.0 90.0 90.0PKR /EUR, end quarter 117.82 116.10 108.75 114.40 120.15 126.00 126.00 126.00 126.00 126.00

Source: HSBC, CEIC Note: Data pertain to fiscal year, eg. 2005 numbers are for FY05/06 (April 2005–March 2006)

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Pakistan: Macro framework 2006 2007 2008 2009 2010f 2011f 2012f


GDP growth (% y-o-y) 5.7 2.0 3.2 4.4 2.8 3.6 4.1Nominal GDP (USDbn) 143.0 163.2 161.3 174.3 188.9 195.7 208.0GDP per capita (USD) n/a n/a n/a n/a n/a n/a n/aPrivate consumption (% y-o-y) 4.7 -1.3 9.8 3.9 1.5 3.0 3.0Government consumption (% y-o-y) -9.6 39.0 -31.6 13.4 10.0 7.5 5.0Investment (% y-o-y) 13.6 3.8 -8.4 -2.0 5.0 7.0 7.0Industrial production (% y-o-y) 14.9 10.7 -3.9 4.5 -5.3 4.0 5.0Gross domestic saving (% GDP) 15.4 11.0 11.4 10.5 9.4 9.1 8.7Unemployment rate, end-year (%) 7.5 7.3 7.2 7.4 8.6 7.5 7.1

Prices

CPI, average (% y-o-y) 7.9 7.8 12.0 20.8 13.6 14.9 11.6CPI, end-year (% y-o-y) 8.9 8.8 23.3 10.5 16.5 13.6 9.8WPI, average (% y-o-y) n/a n/a n/a n/a n/a n/a n/aWPI, end-year (% y-o-y) 8.0 12.1 17.6 15.0 20.0 14.0 13.0


Central bank money M1, end (% y-o-y) 20.9 21.6 2.5 11.4 20.0 20.0 15.0Broad money supply M2, end (% y-o-y) 19.0 15.3 9.6 12.5 13.2 9.3 8.2Real private sector credit growth (% y-o-y) n.a. n.a. n.a. n.a. n.a. n.a. n.a.Policy rate, end-year (%) 9.50 12.00 14.00 12.50 14.00 14.50 14.002 yr yield, end-year (%) n.a. n.a. n.a. n.a. n.a. n.a. n.a.PKR /USD, end-year 60.5 68.0 81.4 85.5 88.0 90.0 92.0PKR /USD, average 60.6 62.8 79.0 84.2 86.8 89.0 91.0PKR /EUR, end-year 79.9 99.3 113.2 122.3 118.8 126.0 128.8PKR /EUR, average 76.2 87.2 115.0 117.6 114.8 117.4 127.4

External sector

Merchandise exports (USDbn) 17.3 20.4 19.1 19.6 20.6 21.9 23.5Merchandise imports (USDbn) 27.0 35.4 31.7 31.1 34.8 37.4 40.4Trade balance (USDbn) -9.7 -15.0 -12.6 -11.4 -14.2 -15.5 -16.9Current account balance (USDbn) -6.9 -13.9 -9.3 -3.5 -4.7 -3.5 -1.8Current account balance (% GDP) -4.8 -8.5 -5.7 -2.0 -2.5 -1.8 -0.9Net FDI (USDbn) n.a. n.a. n.a. n.a. n.a. n.a. n.a.Net FDI (% GDP) n.a. n.a. n.a. n.a. n.a. n.a. n.a.Current account balance plus FDI (% GDP) n.a. n.a. n.a. n.a. n.a. n.a. n.a.Exports (% y-o-y) 4.38 18.23 -6.39 2.67 12.77 15.82 16.99Imports (% y-o-y) 7.98 31.15 -10.31 -2.18 4.27 18.11 21.90International FX reserves (USDbn) 13.3 8.6 8.8 13.0 15.5 17.1 18.0Import cover (months) 5.9 2.9 3.3 5.0 5.4 5.5 5.3


Commercial banks’ FX assets (USDbn) 3.0 3.2 3.8 4.0 4.2 4.4 4.7Gross external debt (USDbn) 39.0 44.5 50.8 58.1 63.8 66.8 69.6Short term external debt (% of int’l reserves) 0.2 8.3 7.4 5.7 4.8 4.5 4.4Private sector external debt (USDbn) 20.0 26.1 32.1 35.3 38.1 41.9 46.9Consolidated government balance (% GDP) -5.9 -7.9 -5.1 -6.5 -6.9 -6.2 -5.3Gross public domestic debt (PKRbn) 2,610.4 3,274.7 3,860.7 4,652.7 5,338.8 6,462.2 7,747.0Gross public domestic debt (% GDP) 30.1 32.0 30.3 31.7 32.0 35.0 38.0Gross public external debt (USDbn) n/a 43.1 48.8 52.1 54.8 56.8 62.4Gross public external debt (% GDP) n/a 26.4 30.3 29.9 29.0 29.0 30.0Gross public sector debt (% GDP) n/a n/a n/a n/a n/a n/a n/a

Note: Fiscal, external and national accounts data pertain to fiscal year, eg. 2005 numbers are for FY05/06 (July 2005–June 2006) Source: Central Statistical Organisation, Reserve Bank of India, Bloomberg, CEIC and HSBC

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A smooth ride A broad-based recovery is under way in the

Philippines, with private demand resilient and

exports rising at a record pace. Although the

economy cooled in Q3 after a sharp cutback in

public spending (and sizeable statistical

discrepancy), underlying fundamentals remain solid.

Steady remittance flows, booming business process

outsourcing and a gradual structural improvement in

the domestic labour market are expected to sustain

private consumption, while public-private

partnership (PPP) projects and loose monetary

conditions are likely to boost investment.

Meanwhile, the government is making progress

on its plan to consolidate public finances. Taking

into account the fiscal performance during the

first three quarters, we look for a smaller fiscal

deficit than previously expected (3.7% of GDP in

2010 vis-à-vis 4.3%), thanks to a significant drop

in expenditure, the government’s efforts to

strengthen tax collections, and the cyclical gain in

revenues. Moreover, with strong growth and an

appreciating currency, national debt is projected

to decline to 55.6% of GDP by the end of 2010

(vs. 57.6% in 2009). The positive fiscal trend

should continue through 2011, with the fiscal

deficit projected to narrow further to 3% of GDP.

Another bright spot: the country’s external

position remains on a firm footing, buoyed by

rising reserves and steady growth in equity flows.

That said, the economy remains vulnerable to

rising capital inflows and ensuing appreciation

pressures on the peso. The former may fuel asset

inflation; the latter could hurt export

competitiveness. These are strong enough reasons

for the central bank to keep the policy rate

unchanged until Q2, especially with inflation

expected to stay within the BSP’s target band.

It should be a broadly smooth ride for the country

in the near term, given the wide range of support

factors. We have upwardly revised our 2010 GDP

growth forecast to 6.8% (vs 5.9% previously),

while 2011 growth is now projected at 5% (vs

4.7% previously).

Philippines

Sherman Chan Economist The Hongkong and Shanghai Banking Corporation Limited + 852 2996 6975 [email protected]

Anuja Kar Economics Associate, Bangalore

3Q10e 4Q10e 1Q11e 2Q11e 3Q11e 4Q11e 1Q12e 2Q12e 3Q12e 4Q12e

GDP (% y-o-y) 6.5 5.0 4.2 4.3 6.4 5.2 5.3 6.0 6.6 5.3Industrial production (% y-o-y) 9.3 10.2 10.1 9.5 9.0 8.5 8.5 8.5 8.5 8.5CPI, end quarter (% y-o-y) 3.5 3.0 4.5 4.6 4.6 4.7 4.7 4.7 4.8 4.9PPI, end quarter (% y-o-y) -7.0 4.8 5.1 5.7 6.5 6.7 6.7 6.7 6.7 6.7Trade balance (% GDP) -3.3 -4.3 -5.7 -5.9 -4.0 -4.5 -5.9 -5.7 -3.7 -4.3Current account (% GDP) 5.9 6.8 6.6 5.8 6.8 5.4 5.4 4.8 6.1 5.0International reserves (USDbn) 53.6 55.5 56.9 58.2 60.2 62.0 63.4 64.8 67.2 69.4Policy rate, end quarter (%) 4.00 4.00 4.00 4.25 4.50 4.50 4.50 4.75 5.00 5.2510yr yield, end quarter (%) 6.23 6.10 6.10 6.30 6.35 6.40 6.55 6.70 6.85 7.00PHP /USD, end quarter 43.9 41.5 40.5 39.5 38.5 37.5 36.5 35.5 35.5 35.5PHP /EUR, end quarter 60.1 56.0 50.6 51.4 52.0 52.5 51.1 49.7 49.7 49.7

Source: HSBC, CEIC

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Philippines: Macro framework 2006 2007 2008 2009 2010e 2011e 2012e

Production, demand and employment GDP growth (% y-o-y) 5.3 7.1 3.7 1.1 6.8 5.0 5.8Nominal GDP (USDbn) 117.6 147.2 166.8 160.8 189.4 237.3 290.4GDP per capita (USD) 1,375 1,700 1,905 1,805 2,088 2,545 3,000 Private consumption (% y-o-y) 5.5 5.8 4.7 4.1 4.8 5.3 5.6Government consumption (% y-o-y) 10.4 6.6 0.4 10.9 5.4 3.7 5.2Investment (% y-o-y) 3.9 10.9 2.7 -0.4 16.2 6.8 6.5Industrial production (% y-o-y) 4.2 3.3 4.2 -4.4 12.8 9.2 8.5Gross domestic saving (% GDP) 20.1 20.8 19.3 9.8 13.2 12.2 11.3Unemployment rate, end-year* (%) 7.8 7.4 7.7 7.5 7.6 7.1 7.3Prices & wages CPI, average (% y-o-y) 6.3 2.8 9.3 3.3 3.8 4.4 4.8CPI, end-year (% y-o-y) 4.3 3.9 8.0 4.3 3.0 4.7 4.9PPI, end-year (% y-o-y) 3.7 -3.0 7.3 -2.2 4.8 6.7 6.7Manufacturing wages, nominal** (% y-o-y) 7.9 4.5 5.3 3.8 4.5 5.5 6.5Money, FX & interest rates Central bank money M0, average (% y-o-y) 20.7 35.1 17.2 11.0 7.5 7.0 -1.3Broad money supply M3, average (% y-o-y) 13.8 17.1 14.2 11.6 8.6 9.0 9.0Real private sector credit growth (% y-o-y) -2.3 2.7 10.0 9.6 4.7 3.9 3.7Policy rate, end-year (%) 7.50 5.25 5.50 4.00 4.00 4.50 5.2510yr yield, end-year (%) 6.38 6.37 7.25 8.11 6.10 6.40 7.00PHP /USD, end-year 49.0 41.2 47.4 46.5 41.5 37.5 35.5PHP /USD, average 51.3 45.2 44.4 47.8 44.8 39.5 36.0PHP /EUR, end-year 64.7 60.2 65.9 66.5 56.0 52.5 49.7PHP /EUR, average 64.4 62.8 64.7 66.7 59.3 52.1 50.4External sector Merchandise exports (USDbn) 46.5 49.5 48.3 37.6 49.0 52.7 58.7Merchandise imports (USDbn) 53.3 57.9 61.1 46.5 57.7 64.5 72.7Trade balance (USDbn) -6.7 -8.4 -12.9 -8.9 -8.7 -11.8 -14.0Current account balance (USDbn) 5.3 7.1 3.6 8.8 10.9 14.5 15.4Current account balance (% GDP) 4.5 4.8 2.2 5.5 5.7 6.1 5.3Net FDI (USDbn) 2.8 -0.6 1.3 1.6 0.8 0.0 0.0Net FDI (% GDP) 2.4 -0.4 0.8 1.0 0.4 0.0 0.0Current account balance plus FDI (% GDP) 6.9 4.4 2.9 6.5 6.1 6.1 5.3Exports (% y-o-y) 15.6 6.4 -2.5 -22.1 30.3 7.6 11.4Imports (% y-o-y) 10.9 8.7 5.6 -24.0 24.1 11.9 12.7International FX reserves (USDbn) 22.8 33.6 37.4 44.1 55.5 56.9 58.2Import cover (months) 5.1 7.0 7.3 11.4 11.5 10.6 9.6Public and external solvency indicators Commercial banks’ FX assets (USDbn) 14.8 15.9 17.7 18.2 20.3 24.4 28.7Gross external debt (USDbn) 53.9 55.5 54.3 54.9 50.0 50.0 50.0Short term external debt (% of int’l reserves) 21.9 21.1 18.7 14.9 10.8 10.6 10.3Private sector external debt (USDbn) 20.8 22.0 13.7 14.0 7.1 -1.3 -8.9Consolidated government balance (% GDP) 0.2 0.3 -0.9 -3.9 -3.7 -3.0 -2.5Central government balance (% GDP) -1.1 -0.2 -0.9 -3.9 -3.7 -3.0 -2.5Primary balance (% GDP) 4.1 3.8 2.8 -0.3 -0.2 0.3 0.6Gross public domestic debt (PHPbn) 2,154 2,201 2,414 2,475 2,766 2,911 3,048Gross public domestic debt (% GDP) 35.7 33.1 32.6 32.2 32.6 31.1 29.2Gross public external debt (USDbn) 33.1 33.5 40.7 40.9 42.9 51.3 58.9Gross public external debt (% GDP) 28.1 22.7 24.4 25.4 22.6 21.6 20.3Gross public sector debt (% GDP) 63.9 55.8 57.0 57.6 55.2 52.7 49.4

Note: * Sep 2005, the ILO definition of unemployment has been adopted by official sources; **refers to minimum wage index Source: HSBC, CEIC

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Staying within the speed limit Since the business cycle trough in the first quarter

of 2009, the economy has bounced back,

delivering impressive sequential growth rates

averaging slightly above 20% q-o-q (SAAR) until

the second quarter of 2010. However, the pace

slowed somewhat in third quarter, when GDP

growth slipped to 18.9% q-o-q SAAR, reflecting a

base effect, the lull in global trade during the

summer, and scheduled production shutdowns in

the pharmaceutical sector owing to changes in the

product mix.

Growth is expected to return to positive territory

in the quarters ahead, but the expansion will occur

at a more sustainable speed. Flash estimates for

the fourth quarter of 2010 showed that sequential

growth returned to positive territory as exports

recovered from the summer lull and more

pharmaceutical production facilities came back on

stream. The final numbers are expected to show

full-year growth of 14.8% y-o-y for 2010. Next

year, growth is projected to slow to 5.2% (raised

from our previous estimate of 4.7%) y-o-y, mostly

owing to the smaller contribution from net exports

and a drawdown in inventories as the global

restocking cycle is coming to an end. These

factors are expected to reverse in 2012 with the

recovery in global growth. This will also lift

private domestic demand and raise GDP growth to

an estimated 5.8% in 2012.

Despite the expected decline in the growth rate, the

Monetary Authority of Singapore cannot take its foot

off the brake. Inflation has been creeping up and is

expected to remain high for the next few months

since capacity should stay tight even as growth

slows to a more sustainable pace. The continued

withdrawal of fiscal stimulus should help.

Capital inflows will continue to complicate policy

making, but Singapore does not belong to the

camp of countries likely to slap on orthodox

capital controls. While the macro-prudential

measures have helped cool property markets,

more measures may be needed to ward off the

threat of a bubble.

Singapore

Leif Eskesen Economist The Hong Kong and Shanghai Banking Corporation Limited (Singapore) +65 6239 0840 [email protected]

Prithviraj Srinivas Associate, Bangalore


GDP (% y-o-y) 10.5 12.5 6.0 0.0 8.6 6.3 5.4 6.0 5.9 6.0Industrial production (% y-o-y) 14.0 30.0 5.0 5.0 7.0 7.0 17.0 13.0 7.0 7.0CPI, end quarter (% y-o-y) 3.7 4.0 3.2 3.2 3.2 3.2 2.8 2.8 2.8 2.8PPI, end quarter (% y-o-y) 6.0 4.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0Trade balance (% GDP) 24.2 18.4 16.1 21.9 23.3 18.7 15.4 21.4 22.9 18.1Current account (% GDP) 23.4 21.2 17.6 23.5 25.8 21.8 16.7 22.7 25.2 21.0International reserves (USDbn) 215.4 240.7 247.9 259.0 273.4 286.0 294.1 306.8 323.2 337.43M interbank rate, end-quarter (%) 0.51 0.50 0.70 0.80 0.90 1.10 1.10 1.10 1.20 1.205yr yield, end-quarter (%) 0.88 1.40 1.80 1.60 1.50 1.40 1.50 1.60 1.70 1.90SGD /USD, end-quarter 1.31 1.27 1.26 1.25 1.24 1.23 1.22 1.21 1.20 1.19SGD /EUR, end-quarter 1.79 1.71 1.58 1.63 1.67 1.72 1.71 1.69 1.68 1.67

Source: HSBC, CEIC

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Singapore: Macro framework 2006 2007 2008 2009 2010e 2011e 2012e


GDP growth (% y-o-y) 8.6 8.5 1.8 -1.3 14.8 5.2 5.8Nominal GDP (USDbn) 145.6 177.3 195.5 182.6 225.4 266.0 298.7GDP per capita (USD) 33,087 38,649 40,395 36,619 43,460 46,681 50,746Private consumption (% y-o-y) 3.1 6.5 2.7 0.4 5.9 5.5 5.8Government consumption (% y-o-y) 7.3 3.0 8.4 8.2 7.9 3.0 3.3Investment (% y-o-y) 14.6 19.9 13.6 -3.3 5.4 5.0 7.0Industrial production (% y-o-y) 11.9 5.9 -4.2 -4.2 30.9 6.0 10.9Gross domestic saving (% GDP) 51.0 53.4 50.2 47.7 50.7 50.9 51.3Unemployment rate, end-year (%) 2.8 1.8 2.7 2.3 2.1 2.1 2.1

Prices & wages

CPI, average (% y-o-y) 1.0 2.1 6.6 0.6 2.8 3.2 2.9CPI, end-year (% y-o-y) 0.8 3.7 6.7 7.5 4.0 3.2 2.8PPI, end-year (% y-o-y) -2.9 6.8 -17.5 7.0 4.0 3.0 3.0Manufacturing wages, nominal (% y-o-y) 3.5 4.1 5.0 0.3 7.6 6.0 5.0


Central bank money M0, average (% y-o-y) 6.9 7.0 12.2 10.0 8.6 6.3 6.3Broad money supply M3, average (% y-o-y) 11.9 20.6 10.9 10.6 8.6 7.3 9.6Real private sector credit growth (% y-o-y) 2.6 8.1 12.8 12.8 8.0 7.0 0.03M interbank rate, end-year (%) 3.44 2.38 0.96 0.68 0.50 1.10 1.205yr yield, end-year (%) 3.03 2.33 1.40 1.30 1.45 1.40 1.90SGD /USD, end-year 1.53 1.44 1.44 1.41 1.27 1.23 1.19SGD /USD, average 1.58 1.50 1.40 1.45 1.36 1.25 1.21SGD /EUR, end-year 2.03 2.10 2.00 2.02 1.71 1.72 1.67SGD /EUR, average 1.99 2.09 2.04 2.03 1.80 1.65 1.69

External sector

Merchandise exports (USDbn) 276.0 303.9 346.0 273.7 353.8 406.2 478.4Merchandise imports (USDbn) 233.2 257.7 319.1 243.5 308.2 352.8 420.1Trade balance (USDbn) 42.8 46.1 26.8 30.2 45.6 53.4 58.3Current account balance (USDbn) 35.3 47.3 36.2 32.5 45.5 59.2 64.3Current account balance (% GDP) 24.2 26.7 18.5 17.8 20.2 22.3 21.5Net FDI (USDbn) 10.2 8.2 19.5 10.9 19.2 9.6 9.9Net FDI (% GDP) 7.0 4.6 10.0 6.0 8.5 3.6 3.3Current account balance plus FDI (% GDP) 31.2 31.3 28.5 23.7 28.7 25.9 24.8Exports (% y-o-y) 18.8 10.1 13.9 -20.9 29.2 14.8 17.8Imports (% y-o-y) 19.0 10.5 23.8 -23.7 26.6 14.5 19.1International FX reserves (USDbn) 136.2 162.9 173.9 187.2 240.7 286.0 337.4Import cover (months) 7.0 7.6 6.5 9.2 9.4 9.7 9.6

Public and external solvency indicators Consolidated government balance (% GDP) 0.6 2.7 1.1 -1.4 0.5 0.7 1.2

Source: HSBC, CEIC

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On a roll GDP growth held up well in the third quarter at

8% y-o-y, slightly down from the 8.5% posted in

previous quarter but above consensus of 7.5%.

Agriculture, forestry, and fisheries continued to

post stronger growth rates, partly due to the

increased output from previous conflict areas.

Industry and service sector output is also holding

up well supported by exports and strong domestic

demand. For 2010, GDP growth is expected to

increase to 7.7% y-o-y, an upward revision from

our previous forecast of 7%.

Owing to the peace dividend, the economy is

firing on all engines. Moreover, both monetary

and fiscal policies remain supportive. However,

growth is expected to decelerate in 2011 to 7.2%

y-o-y due to the base effect following the rapid

recovery last year and in response to some pull-

back in macroeconomic stimulus. With growth

primarily led by domestic demand, the current

account deficit is expected to widen further.

To achieve the budgeted shrinkage in the fiscal

deficit from 8% of GDP in 2010 to 6.8% in 2011,

the government is relying on a combination of tax

broadening measures and Reagan-style tax cuts to

boost growth. However, the hoped-for impact of

the tax cuts on growth may prove difficult to

achieve, making it challenging for the government

to meet the deficit target.

CPI inflation has been relatively well behaved in

2010, although it ticked up during the second half

of 2010 led by higher food prices. However, with

growth expected to remain strong going into

2011, demand-led price pressures are likely to

take hold and increasingly become the driving

force of inflation. Rising international commodity

prices could also add to price pressures. As a

result, we have revised-up our 2011 CPI inflation

forecast from 7.2% to 7.8%.

The central bank has become increasingly aware

of the inflation risks and was in its latest policy

statement approaching a hawkish tone, suggesting

that monetary tightening could begin earlier than

initially anticipated. In fact, we now expect that

policy rates will be hiked already in the second

quarter of this year by 25bp, followed by an

additional 100 bp during the remainder of 2011.

Sri Lanka

Leif Eskesen Economist The HongKong and Shanghai Banking Corporation Limited, (Singapore) +65 6239 0840 [email protected]

Prithviraj Srinivas Associate, Bangalore


GDP (% y-o-y) 8.0 7.4 8.8 7.1 6.2 6.7 6.7 6.7 6.9 7.3Industrial production (% y-o-y) 8.2 11.0 11.9 7.4 6.4 4.2 7.1 6.9 6.5 5.9CPI, end quarter (% y-o-y) 5.8 6.9 7.3 9.2 8.7 6.1 5.4 6.1 6.4 6.7WPI, end quarter (% y-o-y) 5.2 3.5 6.1 9.1 11.5 11.4 11.4 11.4 11.4 11.4Trade balance (% GDP) -10.6 -12.4 -12.5 -11.2 -11.4 -14.1 -13.4 -12.0 -11.2 -13.7International reserves (USDbn) 6.1 6.6 6.5 6.5 6.5 6.4 6.3 6.2 6.1 6.0Policy rate, end quarter (%) 9.00 9.00 9.00 9.25 9.75 10.25 10.50 10.50 10.50 10.502-yr yield, end quarter (%) 7.5 7.5 8.0 8.0 9.0 9.0 9.0 9.0 9.0 9.0LKR/USD, end quarter 112.0 111.1 111.0 111.0 111.0 111.0 111.0 111.0 111.0 111.0LKR/EUR, end quarter 153.4 150.0 138.8 144.3 149.9 155.4 155.4 155.4 155.4 155.4

Source: HSBC

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Sri Lanka: Macro framework 2005 2006 2007 2008 2009f 2010f 2011ff

Production, demand and employment GDP growth (% y-o-y) 7.7 6.8 6.0 3.5 7.7 7.2 6.9Nominal GDP (USDbn) 28.3 32.4 40.7 42.0 47.4 56.4 64.8GDP per capita (USD) 1,421 1,634 2,014 2,053 2,296 2,703 3,070 Private consumption (% y-o-y) 7.3 7.8 6.7 -2.9 9.0 9.0 7.0Government consumption (% y-o-y) 6.0 5.5 6.0 15.8 14.1 9.2 9.9Investment (% y-o-y) 13.9 12.0 11.0 2.9 14.0 12.0 12.0Industrial production (% y-o-y) 5.7 7.6 5.9 3.2 8.5 7.5 6.6Gross domestic saving (% GDP) 23.7 25.3 25.0 23.7 23.8 23.5 23.5Unemployment rate, end-year (%) 6.5 6.0 5.3 5.7 5.3 5.2 5.1Prices CPI, average (% y-o-y) 10.0 15.8 22.7 3.5 5.9 7.8 6.2CPI, end-year (% y-o-y) 13.5 18.7 14.4 4.8 6.9 6.1 6.7WPI, end-year (% y-o-y) 17.3 26.8 0.7 13.3 3.5 11.4 11.4Minimum wages, nominal (% y-o-y) 1.1 39.6 23.3 9.4 9.0 8.0 8.0Money, FX & interest rates Central bank money M0, end (% y-o-y) 12.6 2.7 4.0 21.4 28.0 24.0 23.0Broad money supply M2, end (% y-o-y) 20.7 15.6 11.7 19.9 20.0 18.0 17.0Real private sector credit growth (% y-o-y) 18.3 9.3 -11.3 -4.6 16.1 14.2 11.9Policy rate, end-year (%) 11.5 12.0 12.0 9.8 9.0 10.3 10.52yr yield, end-year (%) 13.35 17.63 20.63 10.20 7.50 9.00 9.00LKR /USD, end-year 107.7 108.7 113.3 114.4 111.1 111.0 111.0LKR /USD, average 103.9 110.7 109.2 114.9 112.7 111.0 111.0LKR /EUR, end-year 142.1 158.7 157.5 163.6 150.0 155.4 155.4LKR /EUR, average 130.6 153.9 159.0 160.6 149.0 146.4 155.4External sector Merchandise exports (USDbn) 6.9 7.6 8.1 7.1 8.0 9.4 10.4Merchandise imports (USDbn) 10.3 11.2 14.1 10.2 13.8 16.5 18.8Trade balance (USDbn) -3.4 -3.5 -6.0 -3.1 -5.7 -7.2 -8.3Current account balance (USDbn) -1.4 -1.3 -3.8 -0.2 -1.8 -3.7 -4.8Current account balance (% GDP) -5.0 -4.0 -9.3 -0.5 -3.8 -6.5 -7.5Net FDI (USDbn) 0.4 0.5 0.7 0.6 0.5 1.5 1.5Net FDI (% GDP) 1.6 1.7 1.7 1.4 1.1 2.7 2.3Current account balance plus FDI (% GDP) -3.4 -2.3 -7.6 0.9 -2.7 -3.8 -5.2Exports (% y-o-y) 8.5 11.0 6.0 -12.7 13.2 17.1 11.1Imports (% y-o-y) 15.6 8.9 26.0 -27.6 35.0 20.2 13.4International FX reserves (USDbn) 2.2 2.4 2.4 2.7 6.6 6.4 6.0Import cover (months) 2.6 2.6 2.0 3.1 5.8 4.6 3.8Public and external solvency indicators Gross external debt (USDbn) 13.3 15.2 18.7 18.9 22.1 26.2 30.8Short term external debt (% of int’l reserves) 27.9 45.2 61.9 60.1 39.5 48.5 70.2Budget balance (% GDP) -7.0 -6.9 -7.0 -9.8 -8.0 -7.1 -5.5Gross public domestic debt (LKRbn) 14.2 15.5 19.8 20.9 21.8 23.7 25.9Gross public domestic debt (% GDP) 50.3 47.9 48.5 49.8 46.0 42.0 40.0Gross public external debt (USDbn) 10.6 12.0 13.4 15.3 18.0 20.3 22.0Gross public external debt (% GDP) 37.5 37.1 32.8 36.5 38.0 36.0 34.0Gross public sector debt (% GDP) 87.9 85.0 81.4 86.3 84.0 78.0 72.0

Source: HSBC

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Still a high beta economy Taiwan’s internal growth drivers have started

rotating into position, but the economy remains a

high beta economy that’s heavily exposed to the

global tech cycle.

Western manufacturers have recovered from their

summer lull, but new problems in Europe are

likely to linger, making 2011 uncertain for

Taiwan’s exporters. US growth should become

more supportive, with shipments across the

Pacific holding up well so far. With China still

growing at 8% to 9%, we expect Taiwan to

expand by an above-consensus 4.7% in 2011.

A stronger-than-expected fourth quarter of exports

growth bought more time for Taiwan’s labour

market and domestic demand recoveries to

consolidate. But to protect itself from any drop in

Western demand – especially if the close

relationship between Taiwan’s exports and lead

indicators such as the US ISM and Taiwan PMI play

out – domestic growth drivers need to step up.

That Taiwan’s labour market is recovering is certain.

Since peaking last year, unemployment has declined

to a near two-year low. Real wage growth has risen

since February, helping to keep local commercial

sales growth in the black. But much of the recovery

to date has depended on global manufacturer

restocking, which won’t last forever.

The Taipei authorities know this, hence their

preference for a weak currency; something which

should buy their exporters and the economy more

time and cushioning. With CPI pressures still too

low to merit policy attention, property prices now

seemingly under control, and more foreign capital

headed towards Asia after QE2, we do not expect

monetary conditions to be tightened in a hurry.

Taiwan

Donna Kwok Economist The Hongkong and Shanghai Banking Corporation Limited + 852 2996 6621 [email protected]


GDP (% y-o-y) 9.8 3.2 1.9 0.0 7.1 9.3 5.7 7.7 3.9 1.5Industrial production (% y-o-y) 18.8 11.0 9.0 7.0 9.0 13.0 11.0 13.0 9.0 7.3CPI, end quarter (% y-o-y) 0.3 1.8 2.2 2.5 3.3 2.8 2.4 2.3 0.9 2.0WPI, end quarter (% y-o-y) 3.8 2.1 8.0 7.0 6.0 5.0 4.0 4.0 3.0 2.0Trade balance (% GDP) 6.5 5.9 6.4 8.4 2.1 3.7 3.3 4.1 3.3 5.0Current account (% GDP) 8.3 6.5 6.3 9.2 1.7 4.7 3.7 5.0 4.9 5.1International reserves (USDbn) 380.5 387.5 396.5 408.5 413.1 421.3 428.3 436.7 444.2 452.0Policy rate, end-quarter (%) 1.375 1.625 1.750 1.875 2.000 2.125 2.250 2.375 2.500 2.6255yr yield, end-quarter (%) 0.88 1.01 1.40 1.20 1.10 1.00 1.20 1.40 1.60 1.80TWD /USD, end-quarter 31.2 29.5 28.5 28.0 27.5 27.0 27.0 27.0 27.0 27.0TWD /EUR, end-quarter 42.8 39.8 35.6 36.4 37.1 37.8 37.8 37.8 37.8 37.8

Source: HSBC, CEIC

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Taiwan: Macro framework 2006 2007 2008 2009 2010e 2011e 2012e

Production, demand and employment GDP growth (% y-o-y) 5.4 6.0 0.7 -1.9 9.6 4.7 4.5Nominal GDP (USDbn) 374.9 393.8 401.9 380.0 430.4 516.5 571.8GDP per capita (USD) 16,449 17,223 17,518 16,509 18,572 22,176 24,256Private consumption (% y-o-y) 1.5 2.1 -0.9 1.1 3.8 4.9 4.8Government consumption (% y-o-y) -0.7 2.1 0.8 3.9 0.8 1.6 1.5Investment (% y-o-y) 0.1 0.6 -12.4 -11.0 22.8 5.4 4.0Industrial production (% y-o-y) 4.7 7.8 -1.8 -8.1 24.6 9.5 10.0Gross domestic saving (% GDP) 28.8 30.1 27.3 26.3 28.9 29.1 29.3Unemployment rate, ave. (%) 3.9 3.9 4.1 5.9 5.2 4.7 4.5Prices & wages CPI, average (% y-o-y) 0.6 1.8 3.5 -0.9 1.0 2.3 2.0CPI, end-year (% y-o-y) 0.7 3.3 1.3 -0.2 1.8 2.8 2.0WPI, end-year (% y-o-y) 6.4 8.6 -9.7 5.8 2.1 5.0 2.0Manufacturing wages, nominal (% y-o-y) 1.4 1.8 -0.3 -9.2 8.0 3.8 2.3Money, FX & interest rates Central bank money M0, average (% y-o-y) 5.1 2.4 7.0 8.7 7.2 5.8 4.6Broad money supply M2, average (% y-o-y) 6.2 4.3 2.7 7.2 4.4 4.4 4.3Real private sector credit growth (% y-o-y) 1.9 0.9 -1.0 1.9 4.5 2.7 4.0Policy rate, end-year (%) 2.750 3.375 2.000 1.250 1.625 2.125 2.6255yr yield, end-year (%) 1.93 2.49 1.03 1.00 1.01 1.00 1.80TWD /USD, end-year 32.59 32.40 32.80 32.10 29.50 27.00 27.00TWD /USD, average 32.66 32.78 31.40 32.84 31.48 28.06 27.00TWD /EUR, end-year 43.02 47.30 45.59 45.90 39.83 37.80 37.80TWD /EUR, average 41.04 45.57 45.73 45.89 41.64 37.01 37.80External sector Merchandise exports (USDbn) 223.8 246.5 254.9 203.4 267.8 289.9 335.5Merchandise imports (USDbn) 199.6 216.1 236.4 172.8 239.9 264.3 312.9Trade balance (USDbn) 24.2 30.4 18.5 30.6 28.0 25.6 22.6Current account balance (USDbn) 26.3 35.2 27.5 42.9 38.0 27.5 27.0Current account balance (% GDP) 7.0 8.9 6.8 11.3 8.8 5.3 4.7Net FDI (USDbn) 0.0 -3.3 -4.9 -3.1 -4.8 -2.2 -2.3Net FDI (% GDP) 0.0 -0.8 -1.2 -0.8 -1.1 -0.4 -0.4Current account balance plus FDI (% GDP) 7.0 8.1 5.6 10.5 7.7 4.9 4.3Exports (% y-o-y) 12.8 10.1 3.4 -20.2 31.7 8.2 15.7Imports (% y-o-y) 11.5 8.2 9.4 -26.9 38.8 10.2 18.4International FX reserves (USDbn) 266.1 270.3 291.7 348.2 387.5 421.3 452.0Import cover (months) 16.0 15.0 14.8 24.2 19.4 19.1 17.3Public and external solvency indicators Commercial banks’ FX assets (USDbn) 336.3 346.6 411.9 443.6 478.9 553.3 586.6Gross external debt (USDbn) 85.8 94.5 90.4 82.0 99.5 71.2 70.1Private sector external debt (USDbn) 75.2 91.1 88.9 76.1 92.0 64.8 64.0Central government balance (% GDP) 0.1 -0.1 -0.8 -3.4 -2.4 -1.9 -0.2Gross public domestic debt (TWD bn) 3,046 3,190 3,390 3,610 4,361 4,671 4,699Gross public domestic debt (% GDP) 24.9 24.7 26.9 28.9 32.2 32.2 30.4Gross public external debt (USDbn) 10.6 3.5 1.5 5.9 7.5 6.4 6.1Gross public external debt (% GDP) 2.8 0.9 0.4 1.6 1.7 1.2 1.1Gross public sector debt (% GDP) 27.7 25.6 27.2 30.5 33.9 33.5 31.5

Source: HSBC, CEIC

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The overhang remains Thailand’s domestic political risk reappeared in

April and May 2010, a reminder the issue will

remain a burden for some time to come. However,

the economy proved immune to the April-May

fallout. In particular, private consumption did not

suffer much. Consumer confidence rebounded,

helped by robust employment and subdued prices.

Foreign direct investors did not make a rush for the

exits. In fact, more recent news indicates investors

are more inclined to expand their facilities than to

pull out. That is particularly so in the auto industry,

where Thailand can pride itself on such merits as

good infrastructure and reliable supply chain.

Overall, we are not too concerned about the

economic performance. Nonetheless, as a trade-

dependent economy, Thailand can still be affected

by the global gyrations. Judging by the

description of the central bank governor, the

outlook is both complex and dynamic, influenced

by a multitude of factors that can change quickly.

In addition, the immunity the economy has shown so

far to political unrest cannot be taken for granted.

With the ruling party due to call an election in 2011

and no fundamental solution to the underlying

tensions, politics will remain a wildcard.

Against that backdrop, the Bank of Thailand may

increasingly lean towards the side of caution. It

may now take a wait-and-see position to give

itself time to see how the situation unfolds both on

the global and domestic fronts. We expect it will

stay put until mid 2011, but may then need to

resume tightening to keep inflation in check.

Thailand

Wellian Wiranto Economist The Hongkong and Shanghai Banking Corporation Limited, (Singapore) +65 6230 2879 [email protected]

Tushar Arora Economics Associate, Bangalore


GDP (% y-o-y) 6.7 3.8 2.5 6.0 6.5 6.2 2.9 5.5 6.3 2.6Industrial production (% y-o-y) 11.5 8.0 6.0 9.0 10.0 12.0 6.1 6.0 6.0 6.1CPI, end quarter (% y-o-y) 3.0 3.5 3.8 4.2 4.1 3.8 3.4 3.0 2.8 2.8PPI, end quarter (% y-o-y) 9.0 8.0 5.6 4.6 4.1 4.1 4.0 4.0 3.9 3.8Trade balance (% GDP) 4.2 2.6 3.1 5.1 3.9 3.4 2.4 4.4 3.4 3.3Current account (% GDP) 3.7 4.4 5.9 3.4 3.6 5.1 5.2 2.9 3.5 5.0International reserves (USDbn) 163.2 170.0 177.4 183.0 189.6 198.2 204.4 207.9 212.3 218.5Policy rate, end-quarter (%) 1.75 2.00 2.00 2.25 2.75 2.75 2.75 2.75 2.75 2.755yr yield, end-quarter (%) 2.54 3.23 3.60 3.50 3.40 3.30 3.40 3.40 3.50 3.50THB/USD, end-quarter 30.4 29.0 28.0 27.0 26.0 25.0 24.5 24.0 24.0 24.0THB/EUR, end-quarter 41.6 39.2 35.0 35.1 35.1 35.0 34.3 33.6 33.6 33.6

Source: HSBC, CEIC

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Thailand: Macro framework 2006 2007 2008 2009 2010e 2011e 2012e

Production, demand and employment GDP growth (% y-o-y) 5.1 5.0 2.5 -2.3 7.9 5.3 4.3Nominal GDP (USDbn) 206.8 236.8 272.9 263.9 319.7 408.3 462.0GDP per capita (USD) 3,158 3,738 4,105 3,900 4,691 5,950 6,619Private consumption (% y-o-y) 3.2 1.8 2.9 -1.1 5.0 3.8 3.9Government consumption (% y-o-y) 2.2 9.8 3.2 7.5 6.5 5.6 5.1Investment (% y-o-y) 3.9 1.5 1.2 -9.2 9.8 4.8 5.0Industrial production (% y-o-y) 7.3 8.2 5.3 -5.1 18.3 7.8 8.6Gross domestic saving (% GDP) 32.4 34.4 32.6 31.3 35.8 38.6 38.6Unemployment rate, end-year (%) 1.0 0.8 1.4 0.9 1.0 1.0 1.1Prices & wages CPI, average (% y-o-y) 4.6 2.2 5.5 -0.8 3.3 3.8 3.1CPI, end-year (% y-o-y) 3.5 3.2 0.4 3.5 3.5 3.8 2.8PPI, end-year (% y-o-y) 2.7 8.7 -1.7 10.0 8.0 4.1 3.8Manufacturing wages, nominal (% y-o-y) 6.2 3.0 10.2 -2.5 5.1 5.0 3.4Money, FX & interest rates Central bank money M0, end (% y-o-y) 2.7 7.9 11.3 6.1 8.0 8.0 8.0Broad money supply M2, end (% y-o-y) 6.0 6.3 9.2 6.8 5.0 6.0 6.0Real private sector credit growth (% y-o-y) -0.9 3.4 15.7 4.3 6.7 6.2 6.9Policy rate, end-year (%) 5.00 3.25 2.75 1.25 2.00 2.75 2.755yr yield, end-year (%) 4.87 4.62 2.48 3.63 3.23 3.30 3.50THB /USD, end-year 35.5 33.7 34.7 33.3 29.0 25.0 24.0THB /USD, average 37.93 34.58 33.28 34.26 31.57 27.00 24.25THB /EUR, end-year 46.79 49.20 48.23 47.62 39.15 35.00 33.60THB /EUR, average 47.67 48.07 48.46 47.88 41.75 35.61 33.95External sector Merchandise exports (USDbn) 127.9 151.3 175.2 150.7 188.8 206.2 225.5Merchandise imports (USDbn) 126.9 138.5 175.6 131.4 176.4 190.3 209.0Trade balance (USDbn) 1.0 12.8 -0.4 19.4 12.3 15.9 16.5Current account balance (USDbn) 2.3 15.7 2.2 21.9 14.1 18.3 20.2Current account balance (% GDP) 1.1 6.6 0.8 8.3 4.4 4.5 4.4Net FDI (USDbn) 8.5 8.3 4.4 2.3 5.0 6.7 8.0Net FDI (% GDP) 4.1 3.5 1.6 0.9 1.6 1.6 1.7Current account balance plus FDI (% GDP) 5.2 10.1 2.4 9.2 6.0 6.1 6.1Exports (% y-o-y) 17.0 18.2 15.9 -14.0 25.2 9.3 9.4Imports (% y-o-y) 7.9 9.1 26.8 -25.2 34.3 7.9 9.8International FX reserves (USDbn) 67.0 87.5 111.0 138.4 170.0 198.2 218.5Import cover (months) 6.3 7.6 7.6 12.6 11.6 12.5 12.5Public and external solvency indicators Gross external debt (USDbn) 70.0 74.4 76.1 75.3 63.1 64.5 66.5Short term external debt (% of int’l reserves) 40.7 38.9 30.3 23.9 16.2 14.6 13.7Private sector external debt (USDbn) 54.6 59.5 61.3 59.9 52.0 51.0 52.0Central government balance (% GDP) 1.2 -2.3 -1.1 -4.4 -0.5 -0.8 -0.3Gross public domestic debt (THBbn) 3,187 3,197 3,434 3,977 4,870 4,883 4,866 Gross public domestic debt (% GDP) 40.6 39.0 37.8 44.0 48.3 44.3 43.4Gross public external debt (USDbn) 15.4 14.9 14.8 5.5 11.1 13.5 14.5Gross public external debt (% GDP) 7.4 6.3 5.4 2.1 3.5 3.3 3.1Gross public sector debt (% GDP) 48.1 45.3 43.2 46.1 51.7 47.6 46.6

Source: HSBC, CEIC

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Stay tuned for the Congress Vietnam’s outlook remains positive, despite some

long-standing economic concerns. We expect

GDP growth to accelerate from 6.8% for 2010 to

7.5% for 2011. We believe the industrial and

service sectors will remain the key growth

engines, while the agricultural sector will continue

to expand at a modest pace.

Domestic demand will play the lead role in 2011,

as export growth is set to moderate after a stellar

performance in 2010. With import demand likely

to stay firm, the trade gap is unlikely to be closed

in 2011. In particular, the trade deficit with China

may even widen in coming months, thereby

cooling demand for Vietnam’s exports.

Solid domestic demand coupled with strong

tourist arrivals should keep retail sales buoyant at

home, providing much-needed support to both

manufacturing and service sectors. However,

inflationary pressures may also intensify through

2011. With global commodity prices set to pick

up and food price inflation already strong, CPI

growth is forecast to stay high. That said, if the

government proactively strives to maintain

economic stability, a slight easing of inflation

towards the end of 2011 cannot be ruled out,

though the official target of 7% would still seem

far from reach.

Recent policy changes have sent mixed signals to

the market. The 100bp rate hike in early

November was a step in the right direction

towards controlling inflation and import demand,

but the authorities are again holding back from

further policy tightening. After the five-yearly

National Congress, which will be held in January,

we should have more visibility on Vietnam’s

policy outlook. But until then, the somewhat

unclear fiscal and monetary policy stance will

continue to keep cautious investors on the

sidelines. Similarly, the domestic currency, which

has been under depreciation pressures, is unlikely

to rebound until existing economic challenges are

ironed out and confidence is restored.

Vietnam

Sherman Chan Economist The Hongkong and Shanghai Banking Corporation Limited + 852 2996 6975 [email protected]


GDP (% y-o-y) 7.2 7.3 7.2 7.4 7.6 7.8 7.5 7.7 7.8 8.0Industrial production (% y-o-y) 14.2 14.7 13.0 14.0 15.0 16.0 14.0 15.0 16.0 16.0CPI, end quarter (% y-o-y) 8.9 11.8 9.5 9.7 9.8 9.8 9.5 9.2 9.2 9.2Trade balance (% GDP) -8.8 -10.7 -15.1 -10.5 -10.4 -7.6 -12.2 -8.5 -7.7 -5.8International reserves (USDbn) 15.0 15.5 16.0 16.5 17.0 17.5 18.0 19.0 20.0 21.0Policy rate, end quarter (%) 8.00 9.00 9.00 9.00 9.00 9.00 9.00 9.00 9.00 9.005-yr yield, end quarter (%) 10.50 11.00 11.50 11.50 11.50 11.50 11.50 11.50 11.50 11.50VND/USD, end quarter 19,490 19,800 19,800 20,000 20,000 20,000 20,000 20,000 20,000 20,000 VND/EUR, end quarter 26,701 26,730 24,750 26,000 27,000 28,000 28,000 28,000 28,000 28,000

Source: HSBC, CEIC

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Vietnam: Macro framework 2006 2007 2008 2009 2010f 2011f 2012f

Production, demand and employment GDP growth (% y-o-y) 8.2 8.5 6.2 5.3 6.8 7.5 7.8Nominal GDP (USDbn) 60.9 71.0 79.5 92.2 101.9 115.2 134.4GDP per capita (USD) 724 833 921 1,054 1,153 1,289 1,488Private consumption (% y-o-y) 8.3 9.6 9.3 3.7 6.0 7.7 7.2Government consumption (% y-o-y) 8.6 9.0 7.5 7.6 6.2 5.3 4.5Investment (% y-o-y) 9.9 23.0 3.8 8.7 7.5 7.0 8.0Industrial production (% y-o-y) 16.0 11.6 11.8 7.2 14.1 14.5 15.3Gross domestic saving (% GDP) 36.5 31.8 27.9 31.6 30.9 32.5 34.1Unemployment rate, end-year (%) 4.8 4.6 4.7 5.4 5.3 4.9 4.8Prices CPI, average (% y-o-y) 7.5 8.3 23.0 7.1 9.1 9.9 9.4CPI, end-year (% y-o-y) 6.6 12.6 19.9 6.5 11.8 9.8 9.2PPI, end-year (% y-o-y) 4.2 6.8 20.0 2.0 10.0 8.0 8.0Money, FX & interest rates Broad money supply M2, average (% y-o-y) 33.6 43.2 25.0 15.0 23.0 18.0 18.0Real private sector credit growth (% y-o-y) 23.5 41.7 4.7 17.9 15.9 15.1 15.7Policy rate, end-year (%) 7.75 8.25 8.50 8.00 9.00 9.00 9.005yr yield, end-year (%) 8.30 8.73 10.00 11.70 11.00 11.50 11.50VND /USD, end-year 16,050 16,017 17,483 18,200 19,800 20,000 20,000VND /USD, average 16,006 16,096 16,759 18,317 19,357 19,950 20,000VND /EUR, end-year 21164 23385 24301 26026 26730 28000 28000VND /EUR, average 20307 22374 24259 25672 25610 26438 28000External sector Merchandise exports (USDbn) 39.6 48.6 63.1 59.7 71.6 77.0 84.0Merchandise imports (USDbn) 44.4 62.7 80.6 68.4 84.0 91.0 95.0Trade balance (USDbn) -4.8 -14.1 -16.3 -12.4 -11.9 -12.0 -10.9Current account balance (USDbn) -0.2 -7.0 -10.8 -7.4 -9.0 -8.0 -7.0Current account balance (% GDP) -0.3 -9.8 -13.6 -8.0 -8.8 -6.9 -5.2Net FDI (USDbn) 2.4 6.6 11.5 8.5 11.0 11.0 12.0Net FDI (% GDP) 3.9 9.3 14.5 9.2 10.8 9.5 8.9Current account balance plus FDI (% GDP) 3.7 -0.6 0.9 1.2 2.0 2.6 3.7Exports (% y-o-y) 22.1 22.7 29.9 -5.4 20.0 7.5 9.1Imports (% y-o-y) 33.4 41.2 28.5 -15.1 22.8 8.3 4.4International FX reserves (USDbn) 13.4 23.5 24.2 16.8 15.5 17.5 21.0Import cover (months) 3.6 4.5 3.6 2.9 2.2 2.3 2.7Public and external solvency indicators Gross external debt (USDbn) 19.1 22.9 26.6 37.5 41.8 47.8 56.5Short term external debt (% of int’l reserves) 18.7 19.9 18.3 29.8 32.3 28.6 23.8Private sector external debt (USDbn) 5.2 3.1 5.3 9.3 10.2 10.9 12.8Consolidated government balance (% GDP) -5.0 -5.0 -5.0 -8.0 -5.0 -4.8 -4.5Primary balance (% GDP) -3.5 -3.4 -2.5 -5.0 -4.0 -3.5 -3.2Gross public domestic debt (VNDbn) 11.3 12.5 13.6 17.0 20.7 21.9 24.2Gross public domestic debt (% GDP) 18.6 17.6 17.1 18.4 20.3 19.0 18.0Gross public external debt (USDbn) 13.9 19.9 21.3 28.2 31.6 36.9 43.7Gross public external debt (% GDP) 22.9 28.0 26.8 30.6 31.0 32.0 32.5Gross public debt (% GDP) 41.5 45.6 43.9 49.0 51.3 51.0 50.5

Source: HSBC, CEIC

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Disclosure appendix Analyst Certification The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Hongbin Qu, Frederic Neumann, Song-yi Kim, Wellian Wiranto, Donna Kwok, Sherman Chan, Paul Bloxham, Seiji Shiraishi and Leif Eskesen

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Global

Stephen King Global Head of Economics +44 20 7991 6700 [email protected]

Karen Ward Senior Global Economist +44 20 7991 3692 [email protected]

Madhur Jha +44 20 7991 6755 [email protected]

Europe

Janet Henry Chief European Economist +44 20 7991 6711 [email protected]

Astrid Schilo +44 20 7991 6708 [email protected]

Germany Lothar Hessler +49 21 1910 2906 [email protected]

France Mathilde Lemoine +33 1 4070 3266 [email protected]

United Kingdom Stuart Green +44 20 7991 6718 [email protected]

Andrew Grantham +44 20 7991 2170 [email protected]

North America

Kevin Logan +1 212 525 3195 [email protected]

Ryan Wang +1 212 525 3181 [email protected]

Stewart Hall +1 416 868 7523 [email protected]

Asia Pacific

Qu Hongbin Managing Director, Co-head Asian Economics Research and Chief Economist Greater China +852 2822 2025 [email protected]

Frederic Neumann Managing Director, Co-head Asian Economics Research +852 2822 4556 [email protected]

Leif Eskesen Chief Economist, India & ASEAN +65 6239 0840 [email protected]

Paul Bloxham Chief Economist, Australia and New Zealand +61 2925 52635 [email protected]

Song Yi Kim +852 2822 4870 [email protected]

Donna Kwok +852 2996 6621 [email protected]

Sherman Chan +852 2996 6975 [email protected]

Wellian Wiranto +65 6230 2879 [email protected]

Seiji Shiraishi +81 3 5203 3802 [email protected]

Yukiko Tani +81 3 5203 3827 [email protected]

Sun Junwei Associate

Sophia Ma Associate

Emerging Europe, Middle East and Africa

Alexander Morozov +7 495 783 8855 [email protected]

Murat Ulgen +90 212 376 4619 [email protected]

Simon Williams +971 4 507 7614 [email protected]

Liz Martins +971 4 423 6928 [email protected]

Latin America

Argentina Javier Finkman Chief Economist, South America ex-Brazil +54 11 4344 8144 [email protected]

Ramiro D Blazquez Senior Economist +54 11 4348 5759 [email protected]

Jorge Morgenstern Economist +54 11 4130 9229 [email protected]

Brazil Andre Loes Chief Economist +55 11 3371 8184 [email protected]

Constantin Jancso Senior Economist +55 11 3371 8183 [email protected]

Marcos Fernandes +55 11 6847 9787 [email protected]

Mexico Sergio Martin Chief Economist +52 55 5721 2164 [email protected]

Central America Lorena Dominguez Economist +52 55 5721 2172 [email protected]

Global Economics Research Team








Main contributors

Macro

Asian Economics

First Quarter 2011

Disclosures and Disclaimer This report must be read with the disclosures and analyst

certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

Qu HongbinCo-Head of Asian Economic Research, Chief China EconomistThe Hongkong and Shanghai Banking Corporation Limited+852 2822 [email protected]

Qu Hongbin is Managing Director, Co-Head of Asian Economic Research, and Chief Economist for Greater China. He has been an economist in financial markets for17 years, the past eight at HSBC. Hongbin is also a deputy director of research at the China Banking Association. He previously worked as a senior manager at aleading Chinese bank and other Chinese institutions.

Song-yi KimEconomist, AsiaThe Hongkong and Shanghai Banking Corporation Limited+852 2822 4870 [email protected]

Song-yi Kim joined HSBC in September 2008, having previously worked at the International Monetary Fund both in Washington, DC, and in Seoul. At HSBC, she covers the regional economy, with a prime focus on Korea. Song-yi is further responsible for quantitative modelling within the regional economics team, andwrites on broader topics affecting the region. At the IMF, Song-yi conducted economic forecasting and general economic analysis from 2002 to 2006. She holdsmaster’s degrees in economics and in public administration and development, including from the Harvard Kennedy School of Government.

Wellian WirantoEconomist, ASEANThe Hongkong and Shanghai Banking Corporation Limited (Singapore)+65 6230 [email protected]

Wellian joined HSBC in January 2010, primarily covering the Indonesia and Vietnam economies. Prior to HSBC, he covered the Indonesia economy at the MonetaryAuthority of Singapore (Singapore’s central bank). Wellian has also worked at the International Monetary Fund in Washington DC and a brokerage house in Indonesia.He holds an MSc in Applied Economics from Cornell University and a BA in Economics from the University of Chicago.

Paul BloxhamChief Economist, Australia & New ZealandHSBC Bank Australia Ltd (Sydney) +612 9255 [email protected]

Paul joined HSBC in late 2010 as Chief Economist for Australia and New Zealand. Prior to this, he spent almost 12 years working as an economist at the ReserveBank of Australia, where he held a range of different roles in the Economic Analysis Department. These included heading up the overseas economies and financialconditions sections, and working in the domestic forecasting and prices areas. Paul has published a number of papers, including on housing and household finances,as well as on asset prices and monetary policy. Paul holds a Masters degree in public financial policy from the London School of Economics.

Frederic NeumannCo-Head of Asian Economic ResearchThe Hongkong and Shanghai Banking Corporation Limited+852 2822 [email protected]

Frederic Neumann, PhD, is Managing Director and Co-Head of Asian Economic Research, based in Hong Kong. Before joining HSBC, Frederic was an adjunctprofessor at Johns Hopkins University, the Wharton Business School of the University of Pennsylvania, and the Graduate School of Pacific Studies and InternationalRelations at UC San Diego, teaching courses on Asian sovereign risk analysis, international financial markets, international monetary policy, and Southeast Asianpolitical culture. He also served as a consultant on Asian economic and political affairs to the World Bank and the Canadian and US governments, and as a researchassociate of the Institute for International Economics in Washington, DC. A former Fulbright scholar, Frederic Neumann holds a PhD in International Economics andAsian Studies.

Now for the hard part

With the thrust of a massive monetary stimulus,

Asia has pulled off the recovery with ease

The challenge now is to strike a better balance,

normalizing policy before gravity sets in

As inflation draws closer, central bankers

will have to act fast to end their stunt with poise

By Qu Hongbin, Frederic Neumann and Song-yi Kim

ECONOMICSAsian

Seiji ShiraishiChief Economist, JapanHSBC Securities (Japan) Limited+813 5203 [email protected]

Seiji Shiraishi joined HSBC in April 2007 as Chief Economist for Japan. He had previously served as an economist at a Japanese securities company for nine yearsand, before that, spent nine years with Chuo Trust & Banking Ltd. In early 2007, he was ranked number six in the Nikkei Bonds and Financial Weekly pollof economists.

Donna KwokEconomist, Greater ChinaThe Hongkong and Shanghai Banking Corporation Limited+852 2996 [email protected]

Donna is an economist on HSBC’s Greater China economics team. Before joining HSBC in July 2010, she worked as an economist for the Hong Kong-China equitiesresearch arm of a global financial services provider. Prior to that, she served as East Asia analyst at Strategic Forecasting Inc. (US) and as a strategy consultant atDeloitte Consulting (London). Donna holds an MA in International Relations (Economics and China Studies) from the Johns Hopkins University School of AdvancedInternational Studies, and a BA (Hons) in Economics and Management from Oxford University.

Sherman ChanEconomist, ASEANThe Hongkong and Shanghai Banking Corporation Limited+852 2996 [email protected]

Sherman is a Hong Kong-based economist covering Vietnam and the Philippines. Prior to joining HSBC, she lectured for undergraduate and MBA universityprogrammes in Australia. Sherman also worked as an economist at Moody’s Analytics in Sydney and as an analyst at the Australian Prudential Regulation Authority,where she specialised in banking and superannuation supervision. Sherman holds a Bachelor of Commerce with honours in Economics from the University of New South Wales.

Leif EskesenChief Economist, India & ASEANThe Hongkong and Shanghai Banking Corporation Limited (Singapore)+65 6239 [email protected]

Leif Eskesen joined HSBC in October 2010 as Chief Economist for India and ASEAN and is based in Singapore. Before joining HSBC, Leif worked for close to 10 yearsat the International Monetary Fund's headquarters in Washington, DC, where he was a Senior Economist and a country mission chief. During his time there, hecovered a number of Asian and European countries and was engaged in regional work across Asian countries. In addition to macroeconomic and financial sectoranalysis, his responsibilities included assessing macroeconomic and structural policies and discussing policy priorities with country authorities. Leif has also heldpositions at Danmarks Nationalbank and one of Denmark's large commercial banks. He has published a number of papers across a wide range of topics, includingfiscal policy and labour market issues. He holds a master's degree in economics from the University of Aarhus, Denmark.

Asian Economics 2011 Report-HSBC

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