ANZ RESEARCH QUICK REACTION CHINA’S DECEMBER PMI ABOVE 50 FOR THIRD CONSECUTIVE MONTH + The official manufacturing PMI remained flat at 50.6 in December, slightly below market consensus. The PMI has stayed above the 50 threshold for the third consecutive month, in line with the modest upturn in real activities since September. + Today's PMI and November's activity data confirm our view that China's ‘economy has rebounded in Q4. We believe GDP will likely reach 8.0% y/y in Q4, with full year GDP growth at 7.8%. * Looking forward, CI faces strong headwinds. Economic and policy uncertainties in the US and the EU suggest that external demand for Chinese exports will remain sluggish, which in turn requires China's own policy implementation and execution to react quickly. In particular, the monetary policy will need to improve its effectiveness by lowering the funding costs of firms in order to support a sustained economic recovery. ADDITIONAL DETAILS + The headline PMI came in at 50.6 in December, unchanged from the previous month, and continued to stay above the benchmark level of 50. + The production index eased to §2.0 from 52.5 previously. + New orders index was flat at 51.2 and the export order index edged down by 0.2pt to 50.0 in December. * Inventories of finished goods rose to 49.4 in December from November's 48.8, while raw materials inventories declined by 0.6pt to 47.3. + Input prices rebounded to 53.3% in December, following a sharp drop to 50.1 in the previous month. CHINA'S PMI BREAKDOWN Jul12_Aug12 Sep 12 Oct 12 _Nov12 Dec 12 Headline PMI 501 49.2 49.8 50.2 50.6 50.6 Output 518 50.9513 521 52.5 52.0 New Orders 2.0 487 49.8 504 512 512 New Export Orders 46.6 46.5 48.8 49.3 50.2 50.0 Backlogs of work 419 45.1465 43.8 45.3 45.9 Finished Goods Inventory 48.0 48.2 47.9 ~~—«48:1~C«B Purchases Quantity 46.8 488 49.8 512 514 52.1 Imports 45.0 47.0 47.7484 BS «49. Input Prices 410 46.1 S10 543 50.1 53.3 Raw Material Inventory 485 45.1 47.0 47.3—«47.9 «73 Employment 5 491 48.9 49.2 48.7 49.0 Supplier Delivery 4.0 50.0 495 S01 49.9 48.8 Sources: NBS, CEIC, ANEANZ RESEARCH IMPLICATIONS FOR MARKETS AND POLICY OUTLOOK + The official PMI suggests that China's economic activities continued to expand at a solid pace, aided by supportive fiscal and monetary policies. Meanwhile, inventory sub-indexes indicate that the destocking process will continue to take place. As inventory levels return to more reasonable levels, gronth momentum will continue to strengthen. * The benchmark interbank 7-day repo rate jumped to over 4% in the last few days, due to year-end funding demand. However, liquidity conditions appear to be quite loose as the PBoC conducted RMB1S3bn of 14-day reverse repo and RMBSbn of 7-day reverse repo on ‘Thursday. The PBoC has injected a total of RMB117bn in the final week of 2012. + This year, the RMB will likely maintain a mild but more volatile appreciation path. As external demand remained soft, a faster appreciation of the RMB will be unlikely. We forecast the RMB to appreciate by 1.5% against the USD in 2013. CNY spot Rate ‘China - PBC 7-day Repo Rate oa un Ayr MI Od an ap al Oct or Y 2 YP Pes —usoycny — trading Band Regards, Li-Gang Liu Chief Economist, Greater China Louis Lam Economist, Greater ChinaANZ RESEARCH IMPORTANT NOTICE: The distribution of this document or streaming of this video broadcast (as applicable, “publication’) may be restricted by aw in certain jurisdictions. 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