Asian Economics 2011 Report-HSBC

Asian
ECONOMICS
Macro Asian Economics First Quarter 2011
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
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
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Summary
Its 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. Dont get us wrong: Asia still looks secure in flight. But, to bring things down safely, officials need to tighten up. Quickly.
Beating again
For anyone watching Asias 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 its no longer just about Asias 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 Asias 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. Thats 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.
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Inflation is on everyones mind. The memories of 2008 evidently still sit deep. We share the concerns and look for higher numbers than most. But its no longer just about fundamentals. Another speculative bubble in oil would be needed to set off such an explosion. This cant 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 Australia New Zealand China Hong Kong India Indonesia Japan Korea Malaysia Pakistan Philippines Singapore Sri Lanka Taiwan Thailand Vietnam Asia. Ex JP Asia. Ex. JP & CN Asia. Ex. JP CN & IN 1.3 -0.6 9.1 -2.7 7.4 4.5 -5.2 0.2 -1.7 4.4 1.1 -1.3 3.5 -1.9 -2.3 5.1 6.1 2.5 0.5 2010f (old) 3.4 1.4 10.0 5.4 8.8 6.1 3.0 6.0 7.3 2.8 5.9 14.8 7.0 7.3 7.9 7.0 8.8 7.3 6.8 2010f 2010f (new) consensus 2.7 1.6 10.0 7.0 9.1 6.0 4.3 6.1 7.1 2.8 6.8 14.8 7.0 9.6 7.9 6.8 9.0 7.8 7.2 2.8 2.0 10.1 6.5 8.5 6.0 3.5 6.0 7.0 2.8 6.8 14.7 7.2 9.4 7.7 6.6 8.9 7.5 7.1 2011f (old) 4.1 2.6 8.9 4.7 8.3 6.4 0.7 4.1 5.2 4.2 4.6 4.7 7.2 4.9 5.3 7.5 7.5 6.0 5.0 2011f 2011f (new) consensus 3.6 2.8 8.9 5.2 8.1 6.4 1.1 4.9 5.1 4.2 5.0 5.2 7.2 4.7 5.3 7.5 7.6 6.1 5.3 3.2 3.3 9.1 4.7 8.4 6.1 1.1 4.2 4.9 3.9 4.9 4.8 6.8 4.1 4.2 7.0 7.6 5.8 4.8 2012f (old) 3.9 3.7 8.6 4.3 8.0 6.4 1.5 4.6 5.0 4.0 5.6 5.8 7.5 3.8 4.1 7.8 7.3 5.9 5.0 2012f (new) 4.1 3.5 8.6 4.6 8.1 6.3 2.0 4.8 4.9 4.0 5.8 5.8 7.5 4.5 4.3 7.8 7.4 6.0 5.2
Source: CEIC, HSBC, Consensus Economics
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Contents
Key forecasts Monetary & fiscal policy assumptions Pumped up Can China cap inflation? GDP Inflation Industrial production & unemployment Consumption & saving Investment Trade Exchange rates & interest rates Country profiles Australia China Hong Kong SAR 4 5 Japan 6 14 22 New Zealand 23 24 25 26 27 28 29 30 32 34
3
India Indonesia
36 38 40 42 44 46 48 50 52 54 56 58 60 62 63
Korea Malaysia
Pakistan Philippines Singapore Sri Lanka Taiwan Thailand Vietnam Disclosure appendix Disclaimer
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Key forecasts
(% y-o-y) Asia average AU 1.3 2.7 3.6 4.1 1.0 2.7 3.2 3.2 -3.2 5.7 5.3 7.3 -4.2 -2.8 -2.5 -3.6 2.0 2.8 3.0 3.1 n.a. n.a. n.a. n.a. 0.76 0.91 0.88 0.85 CH 9.1 10.0 8.9 8.6 8.0 9.5 9.4 9.3 30.5 25.0 21.5 19.0 5.8 4.4 3.9 2.7 -0.7 3.3 3.9 2.9 1.7 2.1 2.3 2.3 6.83 6.67 6.35 6.15 HK -2.8 7.0 5.2 4.6 -0.4 5.8 6.0 4.6 -1.8 6.7 7.5 2.0 7.2 9.6 7.5 9.4 0.5 2.3 4.4 4.2 0.1 0.3 0.5 0.9 7.76 7.80 7.80 7.80 IN 7.4 9.1 8.1 8.1 4.3 6.5 6.1 6.5 7.2 15.5 14.5 12.0 -2.2 -3.8 -4.0 -3.5 10.9 11.8 7.1 6.1 11.5 12.3 13.0 13.5 46.69 44.81 42.00 42.00 ID 4.5 6.0 6.4 6.3 4.9 4.8 5.0 5.0 3.3 8.7 10.0 10.0 2.0 1.0 1.3 1.3 4.8 5.1 6.3 5.2 6.6 7.6 7.3 7.3 9,425 8,800 8,700 8,700 JP -1.2 4.3 1.1 2.0 -0.7 2.2 -0.2 1.0 -3.6 0.6 1.6 1.9 2.8 3.4 3.1 3.6 -1.3 -1.1 -0.7 -0.5 0.3 0.2 0.2 0.2 93 85 95 95 KR 0.2 6.1 4.9 4.8 0.2 4.1 3.6 4.4 -0.2 6.9 3.8 2.8 5.1 3.6 2.7 2.3 2.8 3.0 3.8 3.2 2.8 3.3 4.3 4.8 1,166 1,130 1,070 1,030 MA -1.7 7.1 5.1 4.9 0.7 6.8 6.7 5.7 NZ -1.7 1.4 2.6 3.4 -0.8 2.1 1.5 2.8 PK 4.4 2.8 3.6 4.1 3.9 1.5 3.0 3.0 -2.0 5.0 7.0 7.0 -2.0 -2.5 -1.8 -0.9 20.8 13.6 14.9 11.6 n.a. n.a. n.a. n.a. 85.5 88.0 90.0 92.0 PH 1.1 6.8 5.0 5.8 4.1 4.8 5.3 5.6 -0.4 16.2 6.8 6.5 5.5 5.7 6.1 5.3 3.3 3.8 4.4 4.8 3.9 4.0 4.5 5.2 46.5 41.5 37.5 35.5 SG -1.3 14.8 5.2 5.8 0.4 5.9 5.5 5.8 -3.3 5.4 5.0 7.0 17.8 20.2 22.3 21.5 0.6 2.8 3.2 2.9 0.7 0.5 1.1 1.2 1.41 1.27 1.23 1.19 SL 3.5 7.7 7.2 6.9 -2.9 9.0 9.0 7.0 TW -1.9 9.6 4.7 4.5 1.1 3.8 4.9 4.8 TH -2.3 7.9 5.3 4.3 -1.1 5.0 3.8 3.9 -9.2 9.8 4.8 5.0 8.3 4.4 4.5 4.4 -0.8 3.3 3.8 3.1 1.4 2.3 3.1 3.1 33.3 29.0 25.0 24.0 VN 5.3 6.8 7.5 7.8 3.7 6.0 7.7 7.2 8.7 7.5 7.0 8.0 -8.0 -8.8 -6.9 -5.2 7.1 9.1 9.9 9.4 n.a. n.a. n.a. n.a. 18,200 19,800 20,000 20,000 Real GDP 2009 3.5 2010f 7.3 2011f 5.3 2012f 5.5 Private consumption 2009 3.2 2010f 5.6 2011f 4.7 2012f 5.2 Fixed investment 2009 9.5 2010f 12.4 2011f 10.6 2012f 9.5 Current account balance* (% of GDP) 2009 4.2 2010f 3.5 2011f 3.1 2012f 2.9 CPI (period average) 2009 0.9 2010f 2.6 2011f 2.8 2012f 2.3 Money market interest rate** (%, year-end) 2009 2.9 2010f 3.3 2011f 4.0 2012f 4.3 Exchange rate (vs. USD, year-end) 2009 n.a. 2010f n.a. 2011f n.a. 2012f n.a.
-5.6 -11.4 8.9 1.3 6.5 8.6 5.2 7.7 16.5 12.9 13.2 13.3 0.6 1.8 3.0 2.2 2.2 2.8 6.8 6.8 3.42 3.00 2.88 2.79 -2.8 -1.8 -3.8 -3.2 2.1 2.3 4.0 2.3 n/a n/a n/a n/a 0.72 0.76 0.76 0.72
2.9 -11.0 14.0 22.8 12.0 5.4 12.0 4.0 -0.5 -3.8 -6.5 -7.5 3.5 5.9 7.8 6.2 n.a. n.a. n.a. n.a. 114.4 111.1 111.0 111.0 11.3 8.8 5.3 4.7 -0.9 1.0 2.3 2.0 0.5 0.9 1.4 1.9 32.1 29.5 27.0 27.0
* 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
GDP (% y-o-y)
CPI (% y-o-y)
8 6 4 2 0 -2 -4
Asia ex China, India & Japan av erage
F'cast
8 6 4
10 8 6 Asia ex China, India & Japan av erage 4 2 Asia av erage 0 98 99 00 01 02 03 04 05 06 07 08 09 10f 11f 12f F'cast
Asia av erage
2 0 -2 -4
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10f 11f 12f

Source: CEIC, HSBC
Source: CEIC, HSBC
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Monetary & fiscal policy assumptions

Monetary policy Period end (%) Australia China Hong Kong SAR India Indonesia Japan Korea Malaysia New Zealand Pakistan Philippines Singapore Sri Lanka Taiwan Thailand Vietnam
Source: HSBC, CEIC
3Q10 RBA cash rate 1 year base lending rate Base rate Repo rate SBI 28 day rate Overnight call rate Overnight call rate Overnight rate RBNZ cash rate Repo rate Reverse repo rate 3 months rate Repo rate Rediscount rate 1-day repo rate Policy rate 4.50 5.56 0.50 6.00 6.50 0.10 2.25 2.75 3.00 13.50 4.00 0.51 9.00 1.375 1.75 8.00
4Q10 4.75 5.81 0.50 6.25 6.50 0.05 2.50 2.75 3.00 14.00 4.00 0.50 9.00 1.625 2.00 9.00
1Q11e 4.75 6.06 0.50 6.50 7.00 0.05 2.75 2.75 3.00 14.50 4.00 0.70 9.00 1.750 2.00 9.00
2Q11e 5.00 6.31 0.50 7.00 7.25 0.05 3.00 2.75 3.25 14.50 4.25 0.80 9.25 1.875 2.25 9.00
3Q11e 5.25 6.31 0.50 7.25 7.25 0.05 3.25 3.00 3.50 14.50 4.50 0.90 9.75 2.000 2.75 9.00
4Q11e 5.50 6.31 0.50 7.50 7.25 0.05 3.50 3.25 3.75 14.00 4.50 1.10 10.25 2.125 2.75 9.00
1Q12e 5.75 6.31 0.50 7.50 7.25 0.05 3.75 3.25 4.00 14.00 4.50 1.10 10.50 2.250 2.75 9.00
2Q12e 5.75 6.31 0.50 7.50 7.25 0.05 4.00 3.25 4.25 14.00 4.75 1.10 10.50 2.375 2.75 9.00
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. 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. 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. 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. 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. 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. 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 governments plan looks promising. The government has projected a drop in budget deficit in 2011, to 5.4% from 2010s 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 governments seriousness in putting its fiscal health on a stronger footing over the long term. 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.
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. 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 countrys fiscal outlook. We expect a fiscal deficit of PHP277bn (3% of GDP) in 2011. 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 governments exit strategy and the need to tame inflation pressures in the economy, supplementing the monetary policy efforts in this regard. 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. 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. 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-thanexpected 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 2011allowing government to borrow less and hence government debt to GDP ratio will be rising marginally from 46% in 2009 to 47% in 2011. 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.
Philippines
China
Hong Kong
Singapore
India
Indonesia
Sri Lanka
Japan
Taiwan
Korea
Thailand
Malaysia
New Zealand
Vietnam
Source: HSBC, CEIC
Source: HSBC, CEIC
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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
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, weve 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, its not so much the rebuilding of inventories that is driving shipments but improving end-demand.
Frederic Neumann Economist The Hongkong and Shanghai Banking Corporation Limited +852 2822 4556 fredericneumann@hsbc.com.hk Song-yi Kim Economist The Hongkong and Shanghai Banking Corporation Limited +852 2822 4870 songyikim@hsbc.com.hk
1. Asia ex Japan and Hong Kong: industrial production growth bottomed, Asia Business Index points to strong rebound
8 6 4 2 0 -2 -4 -6 -8 -10 99 00 01 02 03 04 05 06 07 08 09 10 SARS
60.0 55.0 50.0 45.0 40.0 35.0
Asia ex JP, HK IP grow th (% 3m/3m sa)
Asia Business Index (RHS)
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, Germanys 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
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 dont 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. Weve 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 Australia New Zealand China Hong Kong India Indonesia Japan Korea Malaysia Philippines Singapore* Sri Lanka Taiwan Thailand Asia x Japan 4.75 3.00 5.81 0.50 6.25 6.50 0.00 2.50 2.75 4.00 0.50 9.00 1.625 2.00 4.92 2011 neutral rate estimate 4.50 5.30 6.20 4.50 7.20 8.70 0.12 4.00 3.02 7.25 1.90 11.00 2.25 3.10 5.40
15 10 5 0 -5 -10 -15 -20 Jun-03 Apr-05 Feb-07 Dec-08 Oct-10 Ex ports Ax J, % 3m/3m sa ABI new orders minus inv entories (RHS)
Source: CEIC, Markit, HSBC
15 10 5 0 -5 -10 -15
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, its not just about pretty GDP numbers, but sustainability matters just as much. In a recent piece, HSBCs Group Chief Economist, Stephen King, and his colleagues, pointed out that despite upward revisions in growth, trouble remains in the Wests financial engine room and the longterm 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 its by no means just the West where growth risks remain sizeable. Which leads us to our second
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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4. Headline CPI: still moderate, but turning (% 3m/3m sa)
5. Core CPI: accelerating sharply (% 3m/3m sa)
5 4 3 2 1 0 -1 00 01 02 03 04 05 06 07 08 09 NIEs 10 Asia x JP
Source: CEIC, HSBC
2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 00 01 ASEAN 02 03 04 05 06 07 Asia x JP ASEAN 08 09 10 NIEs
Source: CEIC, HSBC
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 well 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 (well 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 Consensus HSBC forecast forecast Australia New Zealand China Hong Kong India* Indonesia Japan Korea Malaysia Philippines Singapore Sri Lanka Taiwan Thailand** Vietnam Asia x J 3.0 4.2 4.0 3.6 6.2 6.1 -0.3 3.2 2.6 4.1 2.6 6.7 1.6 3.2 9.0 3.4 3.1 4.0 3.9 4.4 6.6 6.3 -0.7 3.8 3.0 4.5 3.2 7.8 2.3 3.8 9.9 4.3 Central bank target 2.0-3.0 1.0-3.0 around 4.0 n/a 5.0-6.0 4.0-6.0 around 1.0 2.0-4.0 3.0 3.0-5.0 2.75 n/a 0.9-1.0 0.5-3.0 n/a 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
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7. Actual and forecast annual light vehicle sales (in millions)
8. Consumer confidence in Asia elevated, and stable
35 30 25 20 15 10 5 0 2003 2005 2007 2009 USA 2011e Ax J 2013e
105 100 95 90 85 80 75 70 Jan-00 Apr-02 Jul-04 Oct-06
September 2008
140 120 100 80 60 40 20
Jan-09 US
Western Europe
Source: IHS Global Insight, HSBC
Asia x J (simpl av g, LHS)

Source: CEIC, HSBC
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).
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, its important
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 couldnt resist including our current favourite, a chart which
9. Rebound in corporate employment should help sustain real retail sales growth well into 2011
55 54 53 52 51 50 49 48 47 46 45 02 03 04 05 06 07 08 09 10 -1 0 20 15 10 5 0 -5
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
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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 Asias 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, its 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)
14 12 10 8 6 4 2 0 -2 -4 -6 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)

Source: CEIC, HSBC
Asia x J Priv ate Consumption
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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, weve 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)
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 doesnt 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)
15.0 13.0 11.0 9.0 7.0
6 5.0 Jan-03 Dec-04 Nov -06 Oct-08 Real Wages Sep-10 4 2 0 -2
Nominal w ages
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.
-4 90 92 94 96 98 00 02 04 06 08 10
simple av g
Source: CEIC, HSBC
w eighted av g
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
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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13. Sequential credit growth accelerating across the region, except for the Philippines (% 3m/3m sa)
10.0 8.0 6.0 4.0 2.0 0.0 -2.0 CH HK IN ID SK MY PH Jan-10 latest SG SL TW TH Ax J
Source: CEIC, HSBC
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
190 170 150 130 110 90 70 50 Jan-92 Jan-96 Jan-00 Jan-04 Jan-08 CH
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 (%)
20 15 10 5 0 CH HK ID SK CARs MY PH NPLs SG TW TH
Source: ADB, HSBC; NB: latest available; CARs as % of risk-weighted assets, NPLs as % of commercial loans
Asia x C J simple av g
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. Well concede that in the short term there is little in the data that flags up a sudden financial freeze. But, caution is warranted.
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.
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Tricky, to say the least

Of course, its 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 weve 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 thats more an issue for 2012.
16. HSBC policy rate forecasts (hike denoted in red, cut in grey) Q3 10 Australia New Zealand China Hong Kong* India Indonesia Japan Korea Malaysia Pakistan Philippines Singapore* Sri Lanka Taiwan Thailand Vietnam 4.50 3.00 5.31 0.50 6.00 6.50 0.10 2.25 2.75 13.50 4.00 0.30 9.00 1.500 1.75 8.00 Q4 10 4.75 3.00 5.81 0.50 6.25 6.50 0.0-0.10 2.50 2.75 14.00 4.00 0.40 9.00 1.625 2.00 9.00 Q1 11f 4.75 3.00 6.06 0.50 6.50 7.00 0.0-0.10 2.75 2.75 14.50 4.00 0.70 9.00 1.750 2.00 9.00 Q2 11f 5.00 3.25 6.31 0.50 7.00 7.25 0.0-0.10 3.00 2.75 14.50 4.25 0.80 9.25 1.875 2.25 9.00 Q3 11f 5.25 3.50 6.31 0.50 7.25 7.25 0.0-0.10 3.25 3.00 14.50 4.50 0.90 9.75 2.000 2.75 9.00 Q4 11f 5.50 3.75 6.31 0.50 7.50 7.25 0.0-0.10 3.50 3.25 14.00 4.50 1.10 10.25 2.125 2.75 9.00 Q1 12f 5.75 4.00 6.31 0.50 7.50 7.25 0.0-0.10 3.75 3.25 14.00 4.50 1.10 10.50 2.250 2.75 9.00 Q2 12f 5.75 4.25 6.31 0.50 7.50 7.25 0.0-0.10 4.00 3.25 14.00 4.75 1.10 10.50 2.375 2.75 9.00 Q3 12f 5.75 4.50 6.31 0.50 7.50 7.25 0.0-0.10 4.00 3.25 14.00 5.00 1.20 10.50 2.500 2.75 9.00 Q4 12f 5.75 4.50 6.31 1.00 7.50 7.25 0.0-0.10 4.00 3.25 14.00 5.25 1.20 10.50 2.625 2.75 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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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
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 28month 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
25 20 15 10 5 0 -5 -10
(%yr, 3mma)
(%yr, 3mma)
25 20 15 10 5 0 -5 -10
Qu Hongbin Chief China Economist The Hongkong and Shanghai Banking Corporation Limited +852 2822 2025 hongbinqu@hsbc.com.hk
98 99 00 01 02 03 04 05 06 07 08 09 10 CPI
Source: CEIC, HSBC
Non-food CPI
Food CPI
Against the backdrop of the Feds 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 worlds 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 Chinas imported inflation could actually be made in China.
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Chart 2. Rising commodity prices not helpful
15 10 5 0 -5 -10
(%yr)
500 400 300 200 100 0
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 Peoples 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
99 00 01 02 03 04 05 06 07 08 09 10 11 PPI (Lhs)
Source: Bloomberg, HSBC
CRB index (Rhs)
All these brought into focus the heightened price pressures and prompted Chinas policymakers to make battling inflation their top priority in 2011 (see Inflations 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).
90 80 70 60 50 40
(Index)
(%)
6 4 2 0 -2 -4 -6
01
02
03
04
05
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Itll 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
Source: CEIC, HSBC
Inflation ex pectation (Lhs) Real 1-y r deposit rate (inv erted, Rhs)
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 Octobers 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 countrys 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. Chinas 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
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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 offbalance-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 PBoCs main policy tools for mopping up excess liquidity
from the banking system. Although slowing monetary growth from 19% to 16% by end2011 seems easy enough, capital inflows caused by the Feds 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
25 20 15 10 5 0
(%)
forecast
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
Source: HSBC, CEIC
Chart 5. Credit growth to slow to below 16% in 2011
40 35 30 25 20 15 10 5
(%yr)
(%yr)
40 35 30 25 20
15 Forecast 10 5 99 00 01 02 03 04 05 06 07 08 09 10 11 M1 M2 Loans
Source: HSBC, CEIC
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Rate hikes help, but they cant 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 Beijings determination to tackle inflation and manage inflation expectations. At 2.75% for one-year deposits after the December rate hike, Chinas 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 cant 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

500 (bp) 400 300 200 100 0 -100 05 -200 -300
06
07
08
09
10
1 month
Source: CEIC, HSBC
3 month
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 worlds 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 Chinas 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. Chinas share in global commodities consumption
70 60 50 40 30 20 10 0
(%)
Crude oil
Iron Ore Aluminium Copper 2005 2010e
Steel
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. Chinas 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 Chinas 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 broaderbased shortage in Chinas food supply (refer to From the Horses 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 countrys 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 socalled 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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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 wont 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 endNovember). 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, Chinas 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
Chart 8. Rate hikes are positive for consumer spending
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(RMB trn)
2007
2008
2009 Household debt
2010*
Household sav ings

Source: CEIC, HSBC * As of end November 2010
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
25 20 15 10 5 0
(%yr,3mm a)
30 25 20 15 10 5 0
(%yr)
-5 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 -10 Retail sales

Source: CEIC, HSBC
01 02 03 04 05 Source: CEIC, HSBC Reta il sales

Source: CEIC, HSBC
06
07
08
09
10
Adjusted by CPI
Total w age
20
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21
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GDP
(% y-o-y) China Hong Kong Japan Korea Taiwan North Asia-ex Japan Australia India Indonesia Malaysia New Zealand Pakistan Philippines Singapore Sri Lanka Thailand Vietnam Asia-ex China, India & Japan Asia-ex China & Japan Asia-ex Japan Asia 2003 10.0 3.0 0.3 2.8 3.7 7.2 3.3 8.5 4.8 5.4 4.2 7.4 4.9 4.6 5.9 7.0 7.3 4.2 5.2 7.1 3.6 2004 10.1 8.5 1.4 4.6 6.2 8.3 3.7 7.4 5.0 7.3 4.5 7.7 6.4 9.2 5.5 6.4 7.8 6.0 6.4 7.9 4.7 2005 10.2 7.1 2.7 4.0 4.7 8.1 3.2 9.5 5.7 5.3 3.3 6.2 5.0 7.4 6.2 4.7 8.4 5.1 6.2 7.8 5.5 2006 11.6 7.0 1.9 5.2 5.4 9.4 2.5 9.7 5.5 5.8 0.9 5.7 5.3 8.6 7.7 5.1 8.2 5.7 6.7 8.8 6.0 2007 13.0 6.4 2.0 5.1 6.0 10.6 4.6 9.2 6.3 6.5 2.8 2.0 7.1 8.5 6.8 5.0 8.5 5.8 6.7 9.6 6.8 2008 9.6 2.2 2.4 2.3 0.7 7.6 2.6 6.7 6.0 4.7 -0.2 3.2 3.7 1.8 6.0 2.5 6.2 3.1 4.1 6.9 5.3 2009 9.1 -2.8 -1.2 0.2 -1.9 6.9 1.3 7.4 4.5 -1.7 -1.7 4.4 1.1 -1.3 3.5 -2.3 5.3 0.5 2.5 6.1 3.5 2010f 10.0 7.0 4.3 6.1 9.6 9.4 2.7 9.1 6.0 7.1 1.4 2.8 6.8 14.8 7.7 7.9 6.8 7.2 7.8 9.0 7.3 2011f 8.9 5.2 1.1 4.9 4.7 8.0 3.6 8.1 6.4 5.1 2.6 3.6 5.0 5.2 7.2 5.3 7.5 5.3 6.1 7.6 5.3 2012f 8.6 4.6 2.0 4.8 4.5 7.7 4.1 8.1 6.3 4.9 3.4 4.1 5.8 5.8 6.9 4.3 7.8 5.2 6.0 7.4 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
15 12 9 6 3 0 NZ AU PK JP ID KR VN PH HK MA SL TH IN TW CH SG 2010f 2011f 2012f

Source: HSBC, CEIC
10 8 6 4 2 0 -2
F'cast
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10f 11f 12f Asia Asia-ex Japan Asia-ex China & Japan
Source: HSBC, CEIC
GDP (% y-o-y) Australia China Hong Kong India Indonesia Japan Korea Malaysia New Zealand Philippines Singapore Sri Lanka Taiwan Thailand Vietnam _______________ 2010f _______________ 1Q 2Q 3Q 4Q 2.3 11.9 8.0 8.6 5.7 5.9 8.1 10.1 1.8 7.8 16.9 7.1 13.6 12.0 5.8 3.1 10.3 6.5 8.9 6.2 3.5 7.2 8.9 1.8 8.2 19.5 8.5 12.9 9.2 6.4 2.7 9.6 6.8 8.9 5.8 5.3 4.4 5.3 1.5 6.5 10.6 8.0 9.8 6.7 7.2 2.9 8.9 6.6 10.3 6.5 2.9 5.1 4.6 0.6 5.0 12.4 7.4 3.2 3.8 7.3 ________________2011f ________________ 1Q 2Q 3Q 4Q 3.2 8.2 0.1 8.5 6.1 1.4 4.2 3.1 0.8 4.2 6.0 8.8 1.9 2.5 7.2 3.0 8.8 4.4 8.3 6.3 1.0 4.4 5.9 1.9 4.3 0.0 7.1 0.0 6.0 7.4 4.0 9.0 7.1 7.0 6.4 0.3 5.1 5.9 3.5 6.4 8.6 6.2 7.1 6.5 7.6 4.2 9.3 8.4 8.3 6.8 1.6 5.8 5.3 4.4 5.2 6.3 6.7 9.3 6.2 7.8 ________________ 2012f________________ 1Q 2Q 3Q 4Q 4.1 8.8 3.2 8.6 6.2 2.0 5.3 4.9 4.3 5.3 5.4 6.7 5.7 2.9 7.5 4.1 8.6 3.8 8.3 6.1 2.0 5.2 5.1 3.8 6.0 6.0 6.7 7.7 5.5 7.7 4.0 8.4 5.5 7.9 6.3 2.0 4.5 5.1 3.0 6.6 5.9 6.9 3.9 6.3 7.8 4.0 8.5 5.4 7.9 6.7 1.9 4.3 4.6 2.7 5.3 6.0 7.3 1.5 2.6 8.0
Source: HSBC, CEIC, 2010- Q1 and Q2 are actual numbers
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Inflation
(% y-o-y) China Hong Kong Japan Korea Taiwan North Asia-ex Japan Australia India Indonesia Malaysia New Zealand Pakistan Philippines Singapore Sri Lanka Thailand Vietnam Asia-ex China, India & Japan Asia-ex China & Japan Asia-ex Japan Asia 2003 1.2 -2.6 -0.2 3.5 -0.3 1.4 2.9 3.7 6.8 1.1 1.8 3.1 3.5 0.5 2.6 1.8 3.1 2.3 2.7 2.1 0.9 2004 3.9 -0.4 0.0 3.6 1.6 3.4 2.3 3.9 6.1 1.4 2.3 4.6 6.0 1.7 9.0 2.8 7.8 3.3 3.4 3.6 1.8 2005 1.8 0.9 -0.3 2.8 2.3 2.0 2.6 4.0 10.5 3.0 3.0 9.3 7.7 0.5 11.0 4.5 8.3 4.2 4.1 3.2 1.6 2006 1.5 2.0 0.2 2.2 0.6 1.6 3.5 6.3 13.1 3.6 3.4 7.9 6.3 1.0 10.0 4.6 7.5 4.3 4.8 3.4 2.1 2007 4.8 2.0 0.0 2.5 1.8 4.0 2.4 6.4 6.4 2.0 2.4 7.8 2.8 2.1 15.8 2.2 8.3 3.4 4.2 4.5 2.9 2008 5.9 4.3 1.5 4.7 3.5 5.5 4.3 8.3 10.2 5.4 4.0 12.0 9.3 6.6 22.7 5.5 23.0 7.0 7.4 6.6 4.8 2009 -0.7 0.5 -1.3 2.8 -0.9 -0.2 2.0 10.9 4.8 0.6 2.1 20.8 3.3 0.6 3.5 -0.8 7.1 3.1 5.3 2.1 0.9 2010f 3.3 2.3 -1.1 3.0 1.0 3.1 2.8 11.8 5.1 1.8 2.3 13.6 3.8 2.8 5.9 3.3 9.1 3.8 6.1 4.6 2.6 2011f 3.9 4.4 -0.7 3.8 2.3 3.8 3.0 7.1 6.3 3.0 4.0 14.9 4.4 3.2 7.8 3.8 9.9 4.9 5.5 4.6 2.8 2012f 2.9 4.2 -0.5 3.2 2.0 2.9 3.1 6.1 5.2 2.2 2.3 11.6 4.8 2.9 6.2 3.1 9.4 4.2 4.7 3.7 2.3
CPI (% yr): risk of run away inflation is abated
CPI (% yr): modest inflation pressure to sustain
16 13 10 7 4 1 -2 JP TW MA NZ HK SG AU KR CH TH PH ID SL VN IN PK 2010f
Source: HSBC, CEIC
10 8 6 4 2 0 98 99 00 01 02 03 04 05 06 07 08 09 10f 11f 12f Asia-ex China & Japan

Source: CEIC, HSBC
F'cast
2011f
2012f
Asia-ex Japan
Asia
CPI (% y-o-y) Australia China Hong Kong India Indonesia Japan Korea Malaysia New Zealand Pakistan Philippines Singapore Sri Lanka Taiwan Thailand Vietnam _______________ 2010f _______________ 1Q 2Q 3Q 4Q 2.5 2.2 1.9 15.3 3.7 -1.2 2.7 1.3 2.0 12.9 4.3 0.9 6.6 1.3 3.7 8.0 3.0 2.8 2.6 13.7 4.4 -1.2 2.6 1.6 1.7 12.7 4.2 3.1 5.3 1.1 3.2 9.1 2.9 3.3 2.3 10.3 6.2 -1.1 2.9 1.9 1.5 14.1 3.8 3.4 5.0 0.4 3.3 8.8 2.9 4.2 2.6 8.5 6.2 -0.8 3.7 2.4 4.0 16.5 2.9 3.9 6.8 1.3 3.1 10.3 ________________2011f ________________ 1Q 2Q 3Q 4Qf 2.9 5.0 3.8 6.4 6.4 -0.7 3.7 2.7 4.2 16.3 3.7 3.4 6.2 1.7 3.3 10.6 2.9 4.7 4.2 7.6 6.5 -0.7 4.0 3.1 5.1 17.0 4.6 3.2 7.7 2.0 3.8 9.6 3.1 3.9 4.7 7.2 6.2 -0.7 3.9 3.0 4.5 14.7 4.6 3.2 8.0 2.8 4.0 9.8 3.2 3.0 4.9 7.0 6.0 -0.6 3.5 3.0 2.4 13.6 4.7 3.2 6.7 2.6 3.9 9.8 ________________ 2012f________________ 1Q 2Q 3Q 4Q 3.2 2.2 4.8 6.7 5.5 -0.6 3.3 2.5 2.3 12.0 4.7 3.0 6.5 2.6 3.6 9.7 3.2 2.7 4.2 6.3 5.3 -0.5 3.2 2.3 2.2 11.5 4.7 2.8 6.8 2.3 3.2 9.4 3.1 3.3 4.0 5.9 5.1 -0.4 3.2 2.2 2.3 10.9 4.8 2.8 7.1 1.6 2.9 9.2 3.0 3.2 3.8 5.7 5.0 -0.3 3.1 2.0 2.2 9.8 4.9 2.8 7.4 1.5 2.8 9.2
Source: HSBC, CEIC; Pakistan and New Zealand: end-quarter % y-o-y
23
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Industrial production & unemployment

Industrial production (% y-o-y) China Hong Kong Japan Korea Taiwan North Asia-ex Japan Australia India Indonesia Malaysia New Zealand Pakistan Philippines Singapore Sri Lanka Thailand Vietnam Asia-ex China, India & Japan Asia-ex China & Japan Asia-ex Japan Asia 2003 16.7 -9.2 3.3 5.5 9.1 11.7 0.2 6.6 5.3 8.4 n/a 4.0 4.2 -30.3 5.9 14.0 19.8 4.0 4.6 9.4 6.3 2004 16.3 2.9 5.5 10.4 9.3 13.5 0.5 10.8 6.4 11.3 n/a 13.3 5.0 13.9 5.6 11.7 17.6 9.5 9.8 12.4 9.0 2005 15.9 2.5 1.1 6.3 3.8 11.8 1.9 8.8 4.6 5.2 n/a 17.8 5.3 9.5 6.0 9.1 25.5 6.7 7.2 10.8 6.4 2006 16.2 2.2 4.8 8.4 4.7 12.8 2.1 10.4 4.6 6.7 -5.2 14.9 4.2 11.9 5.7 7.3 16.0 7.2 8.0 11.5 8.8 2007 16.0 -1.5 2.8 6.9 7.8 12.8 3.1 10.4 4.7 2.8 -0.8 10.7 3.3 5.9 7.6 8.2 11.6 6.1 7.2 11.2 8.2 2008 12.9 -6.7 -3.4 3.4 -1.8 9.8 2.6 4.9 3.7 1.4 -2.3 -3.9 4.2 -4.2 5.9 5.3 11.8 1.6 2.5 7.7 3.8 2009 12.9 -8.3 -22.4 -0.8 -8.1 9.2 -1.6 6.6 2.1 -9.0 -10.5 4.5 -4.4 -4.2 3.2 -5.1 7.2 -2.4 0.2 7.0 -3.4 2010f 15.5 3.0 16.2 16.7 24.6 15.8 4.7 11.4 4.8 11.9 0.7 -5.3 12.8 30.9 8.5 18.3 14.1 13.7 13.1 14.4 15.0 2011f 13.2 4.2 1.8 8.1 9.5 12.0 1.4 7.0 6.0 6.3 0.5 4.0 9.2 6.0 7.5 7.8 14.5 7.4 7.3 10.5 7.4 2012f 12.5 3.2 7.6 8.5 10.0 11.5 2.1 8.5 5.0 5.0 3.0 5.0 8.5 10.9 6.6 8.6 15.3 7.6 7.9 10.4 9.4
Industrial production (% yr): Taiwan and Singapore to lead in 2010

32 27 22 17 12 7 2 -3 -8 PK NZ HK AU ID SL IN MA PH VN CH JP KR TH TW SG 2010f 2011f 2012f
Source: HSBC, CEIC
Unemployment rate (%): Highest in Indonesia and the Philippines

9 8 7 6 5 4 3 2 1 0 TH SG MA KR CH HK JN AU TW VN SL NZ PH ID 2010f
Source: HSBC, CEIC
2011f
2012f
Unemployment rate (average) (%) China Hong Kong Japan Korea Taiwan North Asia-ex Japan Australia Indonesia Malaysia New Zealand Pakistan Philippines Singapore Sri Lanka Thailand Vietnam Asia-ex China, India & Japan Asia-ex Japan Asia 2003 4.3 7.9 5.2 3.6 5.0 4.4 5.9 9.3 3.6 4.8 4.0 11.5 4.0 8.4 2.2 5.8 7.6 4.8 5.0 2004 4.2 6.8 4.7 3.7 4.4 4.2 5.4 9.7 3.6 4.1 7.7 11.9 3.4 8.5 2.1 5.6 7.7 4.7 4.7 2005 4.2 5.6 4.4 3.7 4.1 4.1 5.0 10.6 3.6 3.8 7.7 8.0 3.2 7.2 1.9 5.3 7.5 4.6 4.5 2006 4.1 4.8 4.1 3.4 3.9 4.0 4.8 10.8 3.3 3.8 7.5 7.9 2.7 6.5 1.5 4.8 7.2 4.5 4.3 2007 4.0 4.1 3.9 3.2 3.9 3.8 4.4 9.7 3.2 3.7 7.3 7.2 2.1 6.0 1.4 4.6 7.2 4.2 4.1 2008 4.2 3.4 4.0 3.2 4.1 4.0 4.3 8.8 3.3 4.2 7.2 7.5 2.3 5.3 1.4 4.7 7.4 4.3 4.2 2009 4.3 5.2 5.1 3.3 5.9 4.3 5.6 8.1 3.7 6.2 7.4 7.4 3.0 5.7 1.5 5.4 8.3 4.6 4.8 2010f 4.3 4.4 5.1 3.7 5.2 4.3 5.2 7.7 3.3 6.5 8.6 7.3 2.1 5.3 1.1 5.3 8.1 4.5 4.7 2011f 4.3 4.1 5.1 3.3 4.7 4.2 4.6 7.4 3.2 6.4 7.5 7.0 2.1 5.2 1.0 4.9 7.5 4.4 4.7 2012f 4.3 4.0 4.8 3.2 4.5 4.2 4.6 6.9 3.1 6.0 7.1 7.0 2.1 5.1 1.1 4.8 6.9 4.3 4.5
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Consumption & saving

Consumer expenditure (% y-o-y) China Hong Kong Japan Korea Taiwan North Asia-ex Japan Australia India Indonesia Malaysia New Zealand Pakistan Philippines Singapore Sri Lanka Thailand Vietnam Asia-ex China, India & Japan Asia-ex China & Japan Asia-ex Japan Asia 2003 6.5 -1.3 0.4 -0.4 2.9 4.0 3.8 8.2 3.9 6.6 n/a 10.1 5.3 1.6 6.5 6.4 8.0 2.5 3.9 4.9 2.6 2004 7.2 7.0 1.6 0.3 5.2 5.4 5.4 1.3 5.0 10.5 n/a 12.9 5.9 6.1 4.7 6.1 7.1 4.5 3.7 5.1 3.4 2005 8.5 3.0 1.3 4.6 2.9 6.8 3.7 9.0 4.0 9.1 n/a 1.0 4.8 3.6 2.6 4.9 7.3 4.3 5.5 6.7 4.3 2006 8.7 5.9 1.5 4.7 1.5 7.0 3.1 8.2 3.2 6.8 2.2 4.7 5.5 3.1 7.3 3.2 8.3 4.2 5.2 6.7 4.6 2007 9.0 8.5 1.5 5.1 2.1 7.6 5.6 9.8 5.0 10.5 4.1 -1.3 5.8 6.5 7.8 1.8 9.6 4.9 6.3 7.5 5.3 2008 8.9 2.4 1.6 1.3 -0.9 6.9 1.9 6.8 5.3 8.5 -0.3 9.8 4.7 2.7 6.7 2.9 9.3 3.4 4.3 6.6 4.9 2009 8.0 -0.4 -0.7 0.2 1.1 6.3 1.0 4.3 4.9 0.7 -0.8 3.9 4.1 0.4 -2.9 -1.1 3.7 1.5 2.3 5.4 3.2 2010f 9.5 5.8 2.2 4.1 3.8 8.3 2.7 6.5 4.8 6.8 2.1 1.5 4.8 5.9 9.0 5.0 6.0 4.7 5.2 7.5 5.6 2011f 9.4 6.0 -0.2 3.6 4.9 8.3 3.2 6.1 5.0 6.7 1.5 3.0 5.3 5.5 9.0 3.8 7.7 4.8 5.1 7.4 4.7 2012f 9.3 4.6 1.0 4.4 4.8 8.2 3.2 6.5 5.0 5.7 2.8 3.0 5.6 5.8 7.0 3.9 7.2 4.8 5.3 7.4 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
10 9 8 7 6 5 4 3 2 1 0 -1 NZ JP AU TW KR ID PH TH SG HK VN IN MA SL CH 2010f
Source: HSBC, CEIC
55 45 35 25 15 5 -5 NZ PH SL AU JP TW HK VN IN TH KR ID MA CH 2010f
Source: HSBC, CEIC
2011f
2012f
2011f
2012f
Gross saving ratios % of GDP China Hong Kong Japan Korea Taiwan North Asia-ex Japan Australia India Indonesia Malaysia New Zealand Pakistan Philippines Singapore Sri Lanka Thailand Vietnam Asia-ex China, India & Japan Asia-ex China & Japan Asia-ex Japan Asia 2003 43.2 30.4 25.7 33.0 26.9 38.3 21.3 27.0 23.7 42.5 18.1 17.6 19.3 42.7 19.5 32.0 30.6 30.2 29.4 34.9 30.2 2004 45.7 30.2 26.7 35.0 27.4 40.5 21.2 32.5 24.9 44.0 17.6 15.2 21.2 47.0 21.6 31.7 32.0 31.4 31.7 37.4 32.1 2005 48.2 33.3 26.2 33.2 27.1 41.9 22.0 33.8 27.5 43.5 16.5 14.1 21.0 49.4 21.6 30.9 34.6 31.4 32.0 38.7 33.0 2006 50.1 33.3 27.1 31.5 28.8 43.3 22.2 34.8 28.7 43.4 14.9 15.4 20.1 51.0 23.7 32.4 36.5 31.5 32.3 39.9 34.7 2007 51.0 31.0 26.5 30.8 30.1 44.5 23.2 35.6 28.1 46.3 15.8 11.0 20.8 53.4 25.3 34.4 31.8 31.4 32.6 40.9 35.7 2008 51.4 30.1 26.0 35.8 27.3 46.7 24.4 32.6 31.0 49.2 14.3 11.4 19.3 50.2 25.0 32.6 27.9 32.7 32.6 42.1 36.4 2009 50.0 28.0 26.0 35.3 26.3 46.0 23.4 32.2 31.8 44.0 12.0 10.5 9.8 47.7 23.7 31.3 31.6 31.1 31.4 41.4 36.0 2010f 50.5 29.0 25.5 36.7 28.9 46.7 24.7 35.3 42.3 46.9 13.1 9.4 13.2 50.7 23.8 35.8 30.9 34.5 34.8 43.2 37.0 2011f 50.0 28.8 24.5 37.7 29.1 46.5 25.4 36.5 42.6 48.0 14.1 9.1 12.2 50.9 23.5 38.6 32.5 35.2 35.6 43.3 36.7 2012f 50.0 28.9 24.0 38.0 29.3 46.5 25.6 37.7 42.9 48.0 15.1 8.7 11.3 51.3 23.5 38.6 34.1 35.3 36.0 43.5 36.6
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Investment
Total investment (% y-o-y) China Hong Kong Japan Korea Taiwan North Asia-ex Japan Australia India Indonesia Malaysia New Zealand Pakistan Philippines Singapore Sri Lanka Thailand Vietnam Asia-ex China, India & Japan Asia-ex China & Japan Asia-ex Japan Asia 2003 27.7 0.9 -0.5 4.4 -0.1 17.6 9.6 9.7 0.6 2.7 n/a -6.1 3.6 -4.9 10.1 12.1 11.9 2.6 4.3 13.6 6.4 2004 27.6 2.5 1.4 2.1 14.0 19.0 7.1 20.9 14.7 3.1 n/a 13.5 1.3 10.1 17.8 13.2 10.4 7.7 10.9 17.7 9.7 2005 27.2 4.1 3.1 1.9 2.7 17.7 8.8 15.3 10.9 5.0 n/a 19.9 -6.6 0.4 9.8 10.5 9.7 4.7 7.4 15.6 9.9 2006 24.5 7.1 0.5 3.4 0.1 16.8 4.5 14.3 2.6 7.5 -0.9 13.6 3.9 14.6 13.9 3.9 9.9 4.7 7.1 14.6 8.8 2007 25.8 3.4 0.5 4.2 0.6 18.6 10.1 15.2 9.3 9.4 5.5 3.8 10.9 19.9 12.0 1.5 23.0 6.2 8.7 16.4 10.6 2008 26.1 0.8 -1.2 -1.9 -12.4 18.3 7.9 4.0 11.9 0.7 -1.3 -8.4 2.7 13.6 11.0 1.2 3.8 0.8 1.7 13.9 8.6 2009 30.5 -1.8 -3.6 -0.2 -11.0 23.0 -3.2 7.2 3.3 -5.6 -11.4 -2.0 -0.4 -3.3 2.9 -9.2 8.7 -2.1 0.6 16.6 9.5 2010f 25.0 6.7 0.6 6.9 22.8 21.9 5.7 15.5 8.7 8.9 1.3 5.0 16.2 5.4 14.0 9.8 7.5 10.0 11.6 18.8 12.4 2011f 21.5 7.5 1.6 3.8 5.4 17.8 5.3 14.5 10.0 6.5 8.6 7.0 6.8 5.0 12.0 4.8 7.0 6.2 8.6 15.5 10.6 2012f 19.0 2.0 1.9 2.8 4.0 15.4 7.3 12.0 10.0 5.2 7.7 7.0 6.5 7.0 12.0 5.0 8.0 5.4 7.3 13.6 9.5
Investment growth (% yr): China, India & Philippines to lead in 2010
Investment to GDP ratio (%): high in China, room to rise elsewhere
30 25 20 15 10 5 0 -5 JP NZ PK SG AU HK KR VN ID MA TH SL IN PH TW CH 2010f 2011f 2012f

Source: HSBC, HSBC
50 40 30 20 10 0 PH MA
Source: HSBC, CEIC
JP HK TW TH KR 2010f 2010f
SL
ID 2010f
SG
IN
VN CH
Investment to GDP ratios (%) China Hong Kong Japan Korea Taiwan North Asia ex Japan Australia India Indonesia Malaysia New Zealand Pakistan Philippines Singapore Sri Lanka Thailand Vietnam Asia-ex China, India & Japan Asia-ex China & Japan Asia-ex Japan Asia 2003 41.0 21.2 23.6 30.0 19.9 34.9 n/a 27.3 25.6 21.6 n/a n/a 16.7 16.1 21.2 25.0 32.7 23.6 24.5 31.0 27.3 2004 43.2 21.3 23.2 30.4 23.7 37.0 n/a 34.1 24.1 22.7 n/a n/a 16.7 21.7 22.1 26.8 33.5 24.7 27.0 33.6 28.4 2005 42.7 20.9 22.9 30.1 22.7 36.7 n/a 36.1 25.1 19.9 n/a n/a 14.6 20.0 25.0 31.4 35.6 24.7 27.6 33.9 28.9 2006 42.6 21.9 23.2 29.8 22.7 37.0 n/a 37.9 25.4 20.0 n/a n/a 14.5 20.8 28.7 28.3 36.8 24.6 27.9 34.2 29.7 2007 42.2 20.1 22.9 29.4 22.1 37.1 n/a 39.8 24.9 19.8 n/a n/a 15.4 21.2 29.9 26.4 41.6 24.2 28.4 34.6 30.4 2008 43.5 19.9 22.2 25.7 22.4 38.6 n/a 36.6 27.8 19.3 n/a n/a 15.3 29.9 29.9 29.1 41.5 24.0 27.5 35.6 30.9 2009 45.0 20.9 21.6 25.2 17.7 40.0 n/a 35.8 31.0 26.4 n/a n/a 13.9 27.2 30.2 21.2 39.6 23.4 27.0 36.7 31.4 2010f 46.0 21.0 19.5 25.0 22.1 41.0 n/a 39.0 28.1 14.9 n/a n/a 14.2 30.5 28.0 24.6 39.8 23.2 27.7 37.5 31.2 2011f 46.6 21.7 19.6 24.3 20.9 41.4 n/a 40.0 29.1 16.3 n/a n/a 13.9 28.6 28.6 23.9 39.4 22.9 27.9 37.9 31.4 2012f 46.6 22.0 19.6 23.5 21.1 41.3 n/a 41.0 30.2 16.3 n/a n/a 13.3 29.7 29.5 23.9 39.3 23.0 28.2 38.1 31.5
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Trade
Real exports (% y-o-y) China Hong Kong Japan Korea Taiwan North Asia-ex Japan Australia India Indonesia Malaysia New Zealand Pakistan Philippines Singapore Sri Lanka Thailand Asia-ex China, India & Japan Asia-ex China & Japan Asia-ex Japan Asia 2003 32.0 12.8 9.2 14.5 10.2 24.3 -1.6 9.6 5.9 5.7 n/a n/a 4.8 14.2 10.6 7.0 10.2 10.0 18.7 13.9 2004 32.0 15.4 13.9 19.7 15.4 26.5 3.9 17.2 13.5 2.3 n/a n/a 15.0 19.1 17.0 9.6 14.6 15.2 22.0 18.0 2005 29.0 10.6 7.0 7.8 7.8 21.1 2.8 25.9 16.6 8.3 n/a n/a 4.8 12.4 7.4 4.2 8.4 12.8 19.5 13.8 2006 25.0 9.4 9.7 11.4 11.4 20.0 2.3 21.8 9.4 6.6 n/a n/a 13.4 11.2 11.6 9.1 9.8 12.8 18.0 14.6 2007 23.8 8.3 9.7 12.6 9.6 19.8 2.5 5.2 8.5 4.1 n/a n/a 5.5 8.9 17.7 7.8 9.1 8.0 15.1 13.2 2008 11.2 2.5 8.4 6.6 0.9 9.5 4.7 19.3 9.5 1.6 n/a n/a -2.0 4.1 5.2 5.1 4.5 8.7 10.0 9.4 2009 -17.9 -10.1 1.6 -0.8 -8.7 -14.9 2.9 -6.7 -9.7 -10.4 n/a n/a -13.4 -9.0 -5.9 -12.5 -6.8 -6.7 -12.7 -7.7 2010f 29.0 17.4 24.9 13.9 24.9 26.4 5.4 10.0 13.6 11.7 n/a n/a 25.5 18.3 13.2 13.9 15.0 13.6 21.9 22.9 2011f 16.0 12.4 5.8 7.4 6.7 14.2 7.6 10.0 6.9 7.0 n/a n/a 6.9 4.7 17.1 5.6 6.7 7.7 12.1 9.9 2012f 10.0 13.3 8.6 7.8 7.9 9.7 8.0 10.5 8.0 7.9 n/a n/a 9.9 12.0 11.1 6.3 7.9 8.6 9.4 9.1
Real exports (% yr): back to positive growth territory across Asia in 2010
Current account (% GDP): still negative in a number of markets
30 25 20 15 10 5 0 AU IN MA SL ID 2010f KR TH 2011f HK SG 2012f TW JP
25 20 15 10 5 0 -5 -10 VN IN SL PK AU NZ ID JP KR TH CH PH TW HK MA SG 2010f
Source: HSBC, CEIC
2011f
2012f
Source: HSBC, CEIC
Current account balance (% of GDP) China Hong Kong Japan Korea Taiwan North Asia-ex Japan Australia India Indonesia Malaysia New Zealand Pakistan Philippines Singapore Sri Lanka Thailand Vietnam Asia-ex China, India & Japan Asia-ex China & Japan Asia-ex Japan Asia 2003 2.8 9.2 3.2 2.0 9.8 3.8 -5.2 1.5 3.4 12.8 -3.8 1.8 0.9 30.2 -0.7 5.6 -4.9 6.1 5.0 4.1 3.7 2004 3.6 8.9 3.7 4.1 5.8 4.2 -6.0 0.1 0.6 12.1 -5.7 -1.4 1.1 25.3 -3.2 1.7 -2.1 5.1 3.9 3.8 3.7 2005 7.1 12.4 3.7 1.9 4.8 5.9 -5.7 -1.3 0.1 15.0 -7.9 -3.9 2.0 26.0 -2.7 -4.3 -1.1 4.1 2.7 4.5 4.1 2006 9.3 11.4 3.9 0.6 7.0 7.3 -5.3 -1.1 3.0 16.3 -8.3 -4.8 4.5 24.2 -5.0 1.1 -0.3 4.6 3.2 5.8 5.0 2007 10.6 10.8 4.8 0.6 8.9 8.5 -6.2 -0.7 2.4 15.6 -8.1 -8.5 4.8 26.7 -4.0 6.6 -9.8 5.0 3.4 6.7 6.0 2008 9.4 10.2 3.2 -0.6 6.8 7.7 -4.4 -2.6 0.0 17.5 -8.8 -5.7 2.2 18.5 -9.3 0.8 -13.6 3.1 1.5 5.5 4.7 2009 5.8 7.2 2.8 5.1 11.3 6.1 -4.2 -2.2 2.0 16.5 -2.8 -2.0 5.5 17.8 -0.5 8.3 -8.0 6.4 3.9 4.9 4.2 2010f 4.4 9.6 3.4 3.6 8.8 4.8 -2.8 -3.8 1.0 12.9 -1.8 -2.5 5.7 20.2 -3.8 4.4 -8.8 5.2 2.6 3.6 3.5 2011f 3.9 7.5 3.1 2.7 5.3 4.0 -2.5 -4.0 1.3 13.2 -3.8 -1.8 6.1 22.3 -6.5 4.5 -6.9 4.6 2.1 3.1 3.1 2012f 2.7 9.4 3.6 2.3 4.7 3.0 -3.6 -3.5 1.3 13.3 -3.2 -0.9 5.3 21.5 -7.5 4.4 -5.2 4.5 2.2 2.5 2.9
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Exchange rates & interest rates

Exchange rates 2007 (vs. USD, period end) Australia (AUD) China (RMB) Hong Kong (HKD) India (INR) Indonesia (IDR) Japan (JPY) Korea (KRW) Malaysia (MYR) New Zealand (NZD) Pakistan (PKR) Philippines (PHP) Singapore (SGD) Sri Lanka (LKR) Taiwan (TWD) Thailand (THB) Vietnam (VND) 0.89 7.30 7.80 39.4 9,400 112.0 935 3.31 0.76 61.5 41.2 1.44 108.7 32.4 33.7 16,017 0.67 6.82 7.75 48.5 11,325 90.7 1,260 3.45 0.58 79.0 47.4 1.44 113.3 32.8 34.7 17,483 0.91 6.83 7.76 46.7 9,425 93.0 1,166 3.42 0.73 84.2 46.5 1.41 114.4 32.1 33.3 18,200 2008 2009 ______________ 2010 ________________ 1Q 2Q 3Q 4Q 0.90 6.80 7.76 45.1 9,100 93 1,131 3.26 0.71 84.0 45.2 1.40 114.1 31.8 32.4 19,069 0.88 6.80 7.79 46.6 9,074 88 1,222 3.24 0.70 85.5 46.4 1.39 113.6 32.1 32.4 19,070 0.90 6.72 7.76 44.9 8,908 84 1,140 3.09 0.72 86.0 43.9 1.31 112.0 31.2 30.4 19,490 0.98 6.67 7.80 44.8 8,800 85 1,130 3.00 0.76 86.0 41.5 1.27 111.1 29.5 29.0 19,800 ______________ 2011f_________________ 1Q 2Q 3Q 4Q 0.92 6.62 7.80 43.2 8,750 90 1,110 2.97 0.71 87.0 40.5 1.26 111.0 28.5 28.0 19,800 0.85 6.57 7.80 42.8 8,700 95 1,090 2.94 0.69 88.0 39.5 1.25 111.0 28.0 27.0 20,000 0.85 6.46 7.80 42.4 8,700 95 1,080 2.91 0.74 89.0 38.5 1.24 111.0 27.5 26.0 20,000 0.85 6.35 7.80 42.0 8,700 95 1,070 2.88 0.76 90.0 37.5 1.23 111.0 27.0 25.0 20,000
Source: HSBC, CEIC, Bloomberg Note: Thai baht forecasts are for onshore rate.
3-month interest rates 2007 (% pa, period end) Australia China Hong Kong India Indonesia Japan Korea Malaysia New Zealand Philippines Singapore Taiwan Thailand
Source: HSBC, CEIC, Bloomberg
2008 4.11 1.71 0.95 8.45 11.98 0.40 4.68 3.37 5.33 6.12 0.96 1.01 2.95
2009 4.26 1.71 0.14 4.18 6.59 0.28 2.82 2.17 2.91 3.89 0.68 0.53 1.35
______________ 2010 ________________ 1Q 2Q 3Q 4Q n/a 1.71 0.15 4.38 6.56 0.24 2.83 2.35 n/a 3.90 0.65 0.53 1.42 n/a 1.71 0.57 5.28 6.60 0.24 2.45 2.60 n/a 3.93 0.56 0.65 1.42 n/a 1.91 0.33 6.27 6.64 0.20 2.66 2.85 n/a 3.99 0.51 0.65 1.95 n/a 2.11 0.30 7.19 7.60 0.20 3.30 2.85 n/a 3.99 0.50 0.87 2.30
______________ 2011f_________________ 1Q 2Q 3Q 4Q n/a 2.31 0.30 6.15 7.05 0.20 3.55 2.85 n/a 3.99 0.70 0.99 2.30 n/a 2.31 0.30 6.65 7.30 0.20 3.80 2.85 n/a 4.24 0.80 1.12 2.55 n/a 2.31 0.30 6.90 7.30 0.20 4.05 3.10 n/a 4.49 0.90 1.24 3.05 n/a 2.31 0.50 7.05 7.30 0.20 4.30 3.35 n/a 4.49 1.10 1.37 3.05
7.27 3.33 3.45 8.01 7.83 0.55 5.73 3.61 9.05 3.67 2.38 2.16 3.85
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Country profiles
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Australia
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 Banks target band by late 2011, and interest rates to rise by 100bp over the next 15 months. Recent flooding in Queensland provides a shortterm 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, floodrelated crop damage is an upside risk to the outlook for inflation. On net, the flooding does not affect our current outlook for interest rates.
Paul Bloxham Economist HSBC Bank Australia Ltd +612 435 966 522 paulbloxham@hsbc.com.au
3Q10e GDP (% y-o-y) Industrial production (% y-o-y) CPI, end quarter (% y-o-y) PPI, end quarter (% y-o-y) Trade balance (% GDP) Current account (% GDP) Policy rate, end quarter (%) 10yr yield, end quarter (%) USD /AUD, end quarter EUR /AUD, end quarter
Source: HSBC, CEIC
4Q10e 2.9 0.6 2.9 3.5 0.8 -2.5 4.75 5.5 0.98 0.70
1Q11e 3.2 0.0 2.8 3.5 1.3 -2.5 4.75 5.5 0.92 0.66
2Q11e 3.0 1.6 3.0 4.1 2.6 -2.6 5.00 5.6 0.85 0.61
3Q11e 4.0 1.9 3.1 3.5 2.3 -2.5 5.25 5.5 0.85 0.61
4Q11e 4.2 2.0 3.2 3.4 0.8 -2.6 5.50 5.3 0.85 0.61
1Q12e 4.1 2.0 3.2 3.4 1.0 -2.9 5.75 5.2 0.85 0.61
2Q12e 4.1 2.0 3.1 3.3 2.0 -3.3 5.75 5.3 0.85 0.61
3Q12e 4.0 2.1 3.0 3.3 1.4 -3.7 5.75 5.4 0.85 0.61
4Q12e 4.0 2.2 2.9 3.2 -0.5 -4.2 5.75 5.6 0.85 0.61
2.7 5.0 2.8 2.2 2.1 -2.3 4.50 5.0 0.90 0.66
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Australia: Macro framework

2006 Production, demand and employment GDP growth (% y-o-y) Nominal GDP (USDbn) GDP per capita (USD) Private consumption (% y-o-y) Government consumption (% y-o-y) Investment (% y-o-y) Industrial production (% y-o-y) Gross domestic saving (% GDP) Unemployment rate, average (%) Prices & wages CPI, average (% y-o-y) CPI, end-year (% y-o-y) PPI, end-year (% y-o-y) Average monthly earning (% y-o-y) Money, FX & interest rates Central bank money M0, average (% y-o-y) Broad money supply M3, average (% y-o-y) Real private sector credit growth (% y-o-y) Policy rate, end-year (%) 10yr yield, end-year (%) USD /AUD, end-year USD /AUD, average EUR /AUD, end-year EUR /AUD, average External sector Merchandise exports (USDbn) Merchandise imports (USDbn) Trade balance (USDbn) Current account balance (USDbn) Current account balance (% GDP) Net FDI (USDbn) Net FDI (% GDP) Current account balance plus FDI (% GDP) Merchandise Exports (AUD, % y-o-y) Merchandise Imports (AUD, % y-o-y) International FX reserves (USDbn) Import cover (months) Public and external solvency indicators Central government balance (% GDP) Gross external debt (AUDbn) Gross public domestic debt AUDbn) Gross public sector debt (% GDP)
Source: HSBC, CEIC
2007 4.6 937.4 44,487.0 5.6 3.3 10.1 3.1 23.2 4.4 2.4 3.0 2.8 4.0 13.9 18.1 17.2 6.74 6.3 0.89 0.82 0.61 0.60 142.5 160.3 -17.7 -59.1 -6.2 30.0 3.0 -3.2 2.7 7.1 58.5 4.3 1.7 962 58.3 15.6
2008 2.6 1091.5 50,771.4 1.9 3.2 7.9 2.6 24.4 4.5 4.3 3.7 6.4 4.2 5.2 18.6 7.7 4.25 4.0 0.67 0.88 0.47 0.72 188.8 193.0 -4.3 -48.8 -4.4 10.1 1.2 -3.5 32.2 19.6 38.9 2.5 0.4 1,154 60.5 14.2
2009 1.3 951.9 43,338.5 1.0 1.6 -3.2 -1.6 23.4 5.6 2.0 2.1 -1.5 3.6 7.1 10.7 5.2 3.75 5.7 0.91 0.76 0.64 0.67 155.0 159.4 -4.4 -311.6 -4.2 9.9 0.8 -3.5 -12.1 -11.9 49.8 3.6 -4.0 1,142 70.0 17.1
2010e 2.7 1222.9 54,737.1 2.7 3.3 5.7 4.7 24.7 5.0 2.8 2.9 3.5 3.3 n/a n/a n/a 4.75 5.5 0.98 0.91 0.70 0.67 211.7 197.0 14.7 -34.7 -2.8 n/a n/a n/a 16.9 6.6 n/a n/a -3.3 n/a n/a n/a
2.5 781.1 37,738.7 3.1 3.5 4.5 2.1 22.2 4.6 3.5 3.3 3.5 4.2 11.1 11.0 14.3 6.25 5.9 0.77 0.75 0.58 0.60 124.7 134.3 -9.6 -41.6 -5.3 6.0 0.6 -4.6 17.9 13.0 64.3 5.8 1.5 878 59.1 16.1
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China
Inflations 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 Feds 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, theres still room for multiple reserve ratio hikes in the coming quarters, even after 2010s 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 Chinas demand has already made it a price setter in global commodities market.
Qu Hongbin Chief China Economist The Hongkong and Shanghai Banking Corporation Limited +852 2822 2025 hongbinqu@hsbc.com.hk Junwei Sun Economist
3Q10 GDP (% y-o-y) Industrial production* (% y-o-y) CPI, end quarter (% y-o-y) PPI, end quarter (% y-o-y) Trade balance (% GDP) International reserves (USDbn) Policy rate, end quarter (%) 5yr lending rate, end quarter (%) RMB/USD, end quarter RMB/EUR, end quarter 9.6 14.4 3.6 3.9 1.6 2,516 5.56 5.96 6.72 9.21
4Q10e 8.9 13.5 4.7 5.0 1.1 2,562 5.81 6.16 6.67 9.00
1Q11e 8.2 13.0 5.3 5.7 0.8 2,569 6.06 6.36 6.62 8.28
2Q11e 8.8 13.2 4.1 5.1 1.5 2,597 6.31 6.56 6.57 8.54
3Q11e 9.0 13.3 3.7 6.8 1.5 2,641 6.31 6.56 6.46 8.72
4Q11e 9.3 13.8 2.2 4.9 1.0 2,688 6.31 6.56 6.35 8.89
1Q12e 8.8 13.0 2.2 4.6 0.5 2,693 6.31 6.56 6.30 8.82
2Q12e 8.6 12.5 3.2 4.4 0.8 2,712 6.31 6.56 6.25 8.75
3Q12e 8.4 12.2 3.3 4.7 0.9 2,740 6.31 6.56 6.20 8.68
4Q12e 8.5 12.5 3.0 4.3 0.7 2,775 6.31 6.56 6.15 8.61
* Industrial production is the output of companies with annual sales over RMB5m. Source: HSBC, CEIC
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China: Macro framework

2006 Production, demand and employment GDP growth (% y-o-y) Nominal GDP (USDbn) GDP per capita (USD) Nominal retail sales (% y-o-y) Fixed Asset Investment (nominal, % y-o-y) Industrial production (excl. small enterprises % y-o-y) Gross domestic saving (% GDP) Unemployment rate, average (%) Prices & wages CPI, average (% y-o-y) CPI, end-year (% y-o-y) PPI, end-year (% y-o-y) Manufacturing wages, nominal (% y-o-y) Money, FX & interest rates Central bank money M0, average (%) Broad money supply M2, average (%) Policy rate, end-year (%) 5yr yield, end-year (%) RMB /USD, end-year RMB /USD, average RMB /EUR, end-year RMB /EUR, average External sector Merchandise exports (USDbn) Merchandise imports (USDbn) Trade balance (USDbn) Current account balance (USDbn) Current account balance (% GDP) Net FDI (USDbn) Net FDI (% GDP) Current account balance plus FDI (% GDP) Exports (% y-o-y) Imports (% y-o-y) International FX reserves (USDbn) Import cover (months) Public and external solvency indicators Commercial banks FX assets (USDbn) Gross external debt (USDbn) Short term external debt (% of intl reserves) Consolidated government balance (% GDP)
Note: Industrial production is the output of all industrial companies Source: HSBC, CEIC
2007 13.0 3,498 2,661 16.8 25.8 16.0 51.0 4.0 4.8 6.5 5.4 16.2 13.6 17.5 7.47 7.74 7.30 7.60 10.66 10.56 1,219 956.0 262.7 372 10.6 83.5 2.4 13.0 25.8 20.8 1,528 17.7 188.4 373.6 14.4 0.6
2008 9.6 4,524 3,424 21.6 26.1 12.9 51.4 4.2 5.9 1.2 -1.1 15.8 12.4 16.7 5.31 5.76 6.82 6.94 9.48 10.11 1,429 1,133.1 295.5 426 9.4 108.3 2.4 11.8 17.2 18.5 1,946 18.9 180.9 374.7 10.8 -0.4
2009 9.1 4,913 3,699 15.5 30.5 12.9 50.0 4.3 -0.7 1.9 1.7 9.0 12.1 26.5 5.31 5.76 6.83 6.83 9.77 9.54 1,202 1,005.6 196.1 284 5.8 90.0 1.8 7.6 -15.9 -11.3 2,399 27.9 211.6 350.0 6.3 -2.2
2010e 10.0 5,631 4,219 18.5 25.0 15.5 50.5 4.3 3.3 4.6 5.0 13.0 11.0 23.3 5.81 6.16 6.67 6.77 9.00 8.95 1,574 1,398 176.5 250 4.4 86.0 1.5 6.0 31.0 39.0 2,550 22.1 245.4 330.0 4.7 -2.8
2011e 8.9 6,593 4,915 19.0 20.0 13.2 50.0 4.3 3.9 2.2 5.8 13.0 11.0 17.0 6.31 6.56 6.35 6.54 8.89 8.62 1,858 1,677 180.3 260 3.9 98.9 1.5 5.4 18.0 20.0 2,700 20.4 292.1 360.0 4.8 -2.5
2012e 8.6 7,709 5,719 17.0 18.5 12.5 50.0 4.3 2.9 3.0 4.3 12.0 n/a 15.0 6.31 6.56 6.15 6.25 8.61 8.75 2,080 1,946 134.8 210 2.7 108.8 1.4 4.1 12.0 16.0 2,800 19.0 351.4 410.0 5.7 -2.0
11.6 2,716 2,077 13.7 24.5 16.2 50.1 4.1 1.5 2.8 3.1 14.0 13.2 18.1 6.12 6.48 7.81 7.96 10.30 10.01 969.0 791.5 177.5 253 9.3 72.7 2.7 12.0 27.2 19.9 1,066 15.0 200.3 323.0 17.2 -1.0
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Hong Kong SAR

Success at a cost
Hong Kongs 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 Kongs 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 Kongs servicesdriven 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 cant side-step, with consumer prices about to catch up with last years 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 Kongs economy with its more laissez-faire policies stands exposed. Hence the heavier hand with the governments latest measures to cool property prices. This should prevent the economy from going into overdrive in 2011.
Donna Kwok Economist The Hongkong and Shanghai Banking Corporation Limited +852 2996 6621 donnahjkwok@hsbc.com.hk
3Q10 GDP (% y-o-y) Industrial production (% y-o-y) CPI, end quarter (% y-o-y) PPI, end quarter (% y-o-y) Trade balance (% GDP) G&S balance (% GDP) International reserves (USDbn) Policy rate, end quarter (%) 5yr yield, end quarter (%) HKD /USD, end quarter HKD /EUR, end quarter
Source: HSBC, CEIC
4Q10f 6.6 4.0 2.7 6.7 -10.7 14.3 267.0 0.50 1.78 7.80 10.53
1Q11f 0.1 3.0 4.0 6.9 -13.7 9.4 270.1 0.50 2.10 7.80 9.75
2Q11f 4.4 4.3 4.5 6.5 -20.2 5.0 273.2 0.50 2.00 7.80 10.14
3Q11f 7.1 4.0 4.8 6.2 -17.8 8.0 276.3 0.50 1.80 7.80 10.53
4Q11f 8.4 5.5 4.9 5.5 -19.7 7.6 279.4 0.50 1.50 7.80 10.92
1Q12f 3.2 4.0 4.5 5.1 -19.9 12.3 280.0 0.50 1.70 7.80 10.92
2Q12f 3.8 4.2 4.1 5.0 -18.8 6.4 278.0 0.50 1.80 7.80 10.92
3Q12f 5.5 2.8 3.9 4.6 -18.4 10.6 260.0 0.50 1.90 7.80 10.92
4Q12f 5.4 1.6 3.8 4.4 -19.0 8.5 251.4 1.00 2.00 7.80 10.92
6.8 5.4 2.5 6.5 -13.7 12.8 266.1 0.50 1.19 7.76 10.63
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HKSAR: Macro framework

2006 Production, demand and employment GDP growth (% y-o-y) Nominal GDP (USDbn) GDP per capita (USD) Private consumption (% y-o-y) Government consumption (% y-o-y) Investment (% y-o-y) Industrial production (% y-o-y) Gross domestic saving (% GDP) Unemployment rate, end-year (%) Prices & wages CPI, average (% y-o-y) CPI, end-year (% y-o-y) PPI, end-year (% y-o-y) Overall wages, nominal (% y-o-y) Money, FX & interest rates Central bank money M1, average (% y-o-y) Broad money supply M3, average (% y-o-y) Real private sector credit growth (% y-o-y) Policy rate, end-year (%) 5yr yield, end-year (%) HKD /USD, end-year HKD /USD, average HKD /EUR, end-year HKD /EUR, average External sector Merchandise exports (USDbn) Merchandise imports (USDbn) Trade balance (USDbn) G & S balance (USDbn) G & S balance (% GDP) Net FDI (USDbn) Net FDI (% GDP) G & S balance plus FDI (% GDP) Exports (% y-o-y) Imports (% y-o-y) International FX reserves (USDbn) Import cover (months) Public and external solvency indicators Commercial banks FX assets (USDbn) Gross external debt (USDbn) Consolidated government balance (% GDP)
Note: Public debt refers to government debt only Source: HSBC, CEIC
2007 6.4 207.1 29,903 8.5 3.0 3.4 -1.5 31.0 3.4 2.0 3.8 4.4 2.8 17.8 18.4 13.2 5.75 3.10 7.80 7.80 11.39 10.84 346.0 365.7 -19.7 22.4 10.8 -6.7 -3.3 7.6 8.9 10.3 152.7 5.0 789.1 711.1 7.7
2008 2.2 215.3 30,851 2.4 1.8 0.8 -6.7 30.1 4.1 4.3 2.0 3.8 0.9 4.6 7.0 12.2 0.50 1.19 7.75 7.78 10.77 11.33 365.4 388.6 -23.1 21.9 10.2 9.0 4.2 14.4 5.6 6.3 182.5 5.6 867.4 663.4 0.1
2009 -2.8 210.6 30,068 -0.4 2.4 -1.8 -8.3 28.0 5.1 0.5 1.3 -0.3 0.8 29.6 7.1 -2.7 0.50 1.97 7.76 7.75 11.09 10.83 321.9 348.7 -26.9 15.1 7.2 -3.8 -1.8 5.3 -11.9 -10.3 255.8 8.8 791.8 673.0 1.6
2010e 7.0 226.8 32,252 5.8 3.3 6.7 3.0 29.0 4.0 2.3 2.7 6.7 2.5 26.1 5.9 13.7 0.50 1.78 7.80 7.78 10.53 10.29 393.9 433.2 -39.2 21.8 9.6 -1.9 -0.8 8.8 22.4 24.2 267.0 7.4 937.6 720.1 2.5
2011e 5.2 237.0 33,693 6.0 1.0 7.5 4.2 28.8 4.2 4.4 4.9 5.5 4.8 34.5 13.4 15.2 0.50 1.85 7.80 7.80 10.92 10.29 436.6 462.8 -26.1 17.7 7.5 4.8 2.0 9.5 10.8 6.8 279.4 7.2 977.9 784.9 3.1
2012e 4.6 248.0 35,266 4.6 1.8 2.0 3.2 28.9 4.1 4.2 3.8 4.6 4.9 24.2 8.8 6.1 1.00 1.85 7.80 7.80 10.92 10.92 466.3 497.7 -31.3 23.3 9.4 5.3 2.1 11.5 6.8 7.5 251.4 6.1 1,019.9 832.0 3.1
7.0 189.9 27,699 5.9 0.3 7.1 2.2 33.3 4.4 2.0 2.3 1.9 2.2 11.9 12.7 6.9 6.75 3.69 7.77 7.77 10.26 9.76 317.6 331.7 -14.0 21.7 11.4 0.1 0.0 11.4 9.7 11.6 133.2 4.8 603.9 516.4 4.0
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India
Taming inflation
Indias economy is still performing strongly, with Q3 GDP growth of 8.9% y-o-y, matching the 2year 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, HSBCs 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 HSBCs 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. HSBCs 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.
Leif Eskesen Economist The Hongkong and Shanghai Banking Corporation Limited (Singapore) +6562390840 leifeskesen@hsbc.com.sg Prithviraj Srinivas Economics Associate, Bangalore
3Q 10 GDP (% y-o-y) Industrial production (% y-o-y) CPI, end quarter (% y-o-y) WPI, end quarter (% y-o-y) Trade balance (% GDP) Current account (% GDP) International reserves (USDbn) Policy rate, end quarter (%) 5yr yield, end quarter (%) INR /USD, end quarter INR /EUR, end quarter 8.9 8.7 9.8 8.9 -9.6 -4.3 265.2 6.00 7.71 44.9 61.5
4Q 10f 10.3 9.4 7.3 8.4 -9.2 -4.0 289.1 6.25 8.00 44.8 60.5
1Q 11f 8.5 6.0 7.0 6.0 -8.6 -3.8 292.6 6.50 7.60 43.2 54.0
2Q 11f 8.3 6.5 7.5 6.5 -8.5 -3.6 296.8 7.00 7.60 42.8 55.6
3Q 11f 7.0 7.5 7.3 7.0 -9.5 -4.2 298.2 7.25 7.70 42.4 57.2
4Q 11f 8.3 8.0 6.9 6.9 -8.9 -4.6 300.7 7.50 7.70 42.0 58.8
1Q 12f 8.6 8.0 6.6 6.0 -8.7 -4.2 299.3 7.50 7.90 42.0 58.8
2Q 12f 8.3 8.5 6.1 5.5 -7.6 -2.6 306.2 7.50 7.80 42.0 58.8
3Q 12f 7.9 9.0 5.9 5.5 -8.7 -3.4 309.0 7.50 7.60 42.0 58.8
4Q 12f 7.9 8.5 5.7 5.5 -8.5 -4.2 304.9 7.50 7.80 42.0 58.8
Source: HSBC, CEIC Note: Data pertain to fiscal year, e.g. 2005 numbers are for FY05/06 (April 05 March 06)
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India: Macro framework

2006 Production, demand and employment GDP growth (% y-o-y) Nominal GDP (USDbn) GDP per capita (USD) Private consumption (% y-o-y) Government consumption (% y-o-y) Investment (% y-o-y) Industrial production (% y-o-y) Gross domestic saving (% GDP) Prices CPI, average (% y-o-y) CPI, end-year (% y-o-y) WPI, average (% y-o-y) WPI, end-year (% y-o-y) Money, FX & interest rates Central bank money M0, average (% y-o-y) Broad money supply M3, average (% y-o-y) Real private sector credit growth (% y-o-y) Policy rate, end-year (%) 5yr yield, end-year (%) INR /USD, end-year INR /USD, average INR /EUR, end-year INR /EUR, average External sector Merchandise exports (USDbn) Merchandise imports (USDbn) Trade balance (USDbn) Current account balance (USDbn) Current account balance (% GDP) Net FDI (USDbn) Net FDI (% GDP) Current account balance plus FDI (% GDP) Exports (% y-o-y) Imports (% y-o-y) International FX reserves (USDbn) Import cover (months) Public and external solvency indicators Commercial banks FX assets (USDbn) Gross external debt (USDbn) Short term external debt (% of intl reserves) Central government balance (% GDP)
Note: Data pertain to fiscal year, e.g. 2005 numbers are for FY05/06 (April 2005March 2006) Source: Central Statistical Organisation, Reserve Bank of India, Bloomberg, CEIC and HSBC
2007
2008
2009
2010f
2011f
2012f
9.7 872 777 8.2 3.8 14.3 10.4 34.8 6.3 6.7 5.9 7.1 17.3 19.6 18.3 7.75 7.52 44.25 45.22 58.40 56.83 123.8 184.9 -61.2 -9.3 -1.1 6.0 0.7 -0.4 21.1 23.8 170.2 11.0 209.5 19.8 16.5 -3.6
9.2 1,111 976 9.8 9.7 15.2 10.4 35.6 6.4 5.5 5.0 4.0 15.0 21.9 15.6 7.75 7.67 39.42 40.88 57.55 56.82 153.8 231.6 -77.8 -8.1 -0.7 8.2 0.7 0.0 24.3 25.2 266.6 13.8 323.9 20.2 17.2 -2.8
6.7 1,180 1,016 6.8 16.7 4.0 4.9 32.6 8.3 9.7 8.7 6.6 18.9 20.4 14.0 6.50 5.35 48.46 44.58 67.35 64.92 198.6 323.1 -124.5 -31.0 -2.6 22.9 1.9 -0.7 29.1 39.5 246.6 9.2 265.4 19.0 17.6 -6.4
7.4 1,227 1,037 4.3 10.5 7.2 6.6 32.2 10.9 15.0 2.1 6.9 16.1 19.1 6.8 4.75 7.31 46.69 48.39 66.76 67.62 168.1 274.6 -106.5 -27.0 -2.2 20.7 1.7 -0.5 -15.4 -15.0 258.6 11.3 270.0 21.4 20.3 -6.9
9.1 1,533 1,305 6.5 7.0 15.5 11.4 35.3 11.8 7.3 9.4 8.4 21.0 16.0 12.0 6.25 8.00 44.81 45.77 60.49 60.53 217.1 353.6 -136.5 -57.5 -3.8 15.5 1.0 -2.7 29.1 28.8 289.1 9.8 300.0 19.6 22.1 -5.5
8.1 1,874 1,578 6.1 4.0 14.5 7.0 36.5 7.1 6.9 6.7 6.9 16.0 15.0 15.0 7.50 7.70 42.00 42.95 58.80 56.64 246.4 408.3 -162.0 -74.4 -4.0 28.0 1.5 -2.5 13.5 15.5 300.7 8.8 320.0 19.7 24.6 -4.8
8.1 2,178 1,815 6.5 4.0 12.0 8.5 37.7 6.1 5.7 5.5 5.5 16.0 19.0 15.0 7.50 7.80 42.00 42.00 58.80 58.80 281.5 458.2 -176.7 -75.8 -3.5 32.0 1.5 -2.0 14.3 12.2 304.9 8.0 320.0 18.8 26.9 -4.0
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Indonesia
Still awaiting rate hikes
The resilience of Indonesias 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. Its 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, Indonesias 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.
Wellian Wiranto Economist The Hongkong and Shanghai Banking Corporation Limited, (Singapore) +65 6230 2879 wellianwiranto @hsbc.com.sg
3Q10 GDP (% y-o-y) Industrial production (% y-o-y) CPI, end quarter (% y-o-y) PPI, end quarter (% y-o-y) Trade balance (% GDP) Current account (% GDP) International reserves (USDbn) Policy rate, end quarter (%) 5yr yield, end quarter (%) IDR/USD, end quarter IDR/EUR, end quarter
Source: HSBC, CEIC
4Q10e 6.5 7.0 6.6 9.0 5.1 1.1 89.6 6.50 6.83 8,800 11,880
1Q11e 6.1 6.0 6.5 8.0 5.0 1.6 92.5 7.00 6.50 8,750 10,938
2Q11e 6.3 6.0 6.2 7.0 4.6 1.4 95.1 7.25 6.70 8,700 11,310
3Q11e 6.4 6.0 6.0 6.0 4.1 1.0 97.1 7.25 6.80 8,700 11,745
4Q11e 6.8 6.0 5.7 5.0 4.2 1.2 99.4 7.25 6.80 8,700 12,180
1Q12e 6.2 5.0 5.5 5.0 4.7 1.7 102.8 7.25 6.90 8,700 12,180
2Q12e 6.1 5.0 5.3 5.0 4.3 1.4 105.8 7.25 6.90 8,700 12,180
3Q12e 6.3 5.0 5.1 5.0 3.8 1.0 108.1 7.25 7.00 8,700 12,180
4Q12e 6.7 5.0 5.0 5.0 3.9 1.2 110.7 7.25 7.00 8700 12,180
5.8 4.1 5.8 6.9 5.0 0.7 86.6 6.50 7.21 8,908 12,204
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Indonesia: Macro framework

2006 Production, demand and employment GDP growth (% y-o-y) Nominal GDP (USDbn) GDP per capita (USD) Private consumption (% y-o-y) Government consumption (% y-o-y) Investment (% y-o-y) Industrial production (% y-o-y) Gross domestic saving (% GDP) Unemployment rate, end-year (%) Prices & wages CPI, average (% y-o-y) CPI, end-year (% y-o-y) WPI, end-year (% y-o-y) Manufacturing wages, nominal (% y-o-y) Money, FX & interest rates Broad money supply M2, average (% y-o-y) Real private sector credit growth (% y-o-y) Policy rate, end-year (% y-o-y) 5yr yield, end-year (%) IDR /USD, end-year IDR /USD, average IDR /EUR, end-year IDR /EUR, average External sector Merchandise exports (USDbn) Merchandise imports (USDbn) Trade balance (USDbn) Current account balance (USDbn) Current account balance (% GDP) Net FDI (USDbn) Net FDI (% GDP) Current account balance plus FDI (% GDP) Exports (% y-o-y) Imports (% y-o-y) International FX reserves (USDbn) Import cover (months) Public and external solvency indicators Gross external debt (USDbn) Short term external debt (% of intl reserves) Private sector external debt (USDbn) Central government balance (% GDP) Primary balance (% GDP) Gross public domestic debt (IDRtrn) Gross public domestic debt (% GDP) Gross public external debt (USDbn) Gross public external debt (% GDP) Gross public sector debt (% GDP)
Source: HSBC, CEIC
2007 6.3 432.1 1,915 5.0 3.9 9.3 4.7 28.1 9.1 6.4 6.6 21.9 4.9 15.9 15.0 8.00 9.22 9,400 9,143 13,724 12,708 118.0 85.3 32.8 10.5 2.4 2.3 0.5 2.9 14.0 15.4 56.9 8.0 136.6 50.2 56.0 -1.3 0.8 1385.0 34.1 80.6 18.7 52.7
2008 6.0 517.1 2,263 5.3 10.4 11.9 3.7 31.0 8.4 10.2 11.1 9.7 10.0 16.1 19.6 9.25 11.83 11,325 9,575 15,742 13,944 139.6 116.7 22.9 0.1 0.0 3.4 0.7 0.7 18.3 36.9 51.6 5.3 149.1 53.8 62.6 -0.1 1.7 1448.3 24.7 86.6 16.7 41.5
2009 4.5 535.5 2,313 4.9 15.7 3.3 2.1 31.8 7.9 4.8 2.8 4.6 6.0 15.3 9.5 6.50 9.01 9,425 10,482 13,478 14,649 119.5 84.3 35.1 10.7 2.0 1.9 0.4 2.4 -14.4 -27.7 66.1 9.4 172.9 39.3 73.6 -1.6 -0.9 1536.9 30.4 99.3 18.5 49.0
2010e 6.0 703.1 3,417 4.8 -1.5 8.7 4.8 42.3 7.5 5.1 6.6 9.0 8.0 16.0 8.0 6.50 6.83 8,800 9,049 11,880 11,967 149.2 113.1 36.0 7.1 1.0 5.5 0.8 1.8 24.9 34.1 89.6 9.5 161.6 30.1 74.6 -1.6 -0.2 1638.7 26.5 87.0 12.4 38.9
2011e 6.4 821.6 3,937 5.0 8.0 10.0 6.0 42.6 7.2 6.3 5.7 8.0 8.5 15.5 12.0 7.25 6.80 8,700 8,725 12,180 11,506 162.1 125.5 36.6 10.6 1.3 6.5 0.8 2.1 8.7 11.0 99.4 9.5 152.0 29.2 62.0 -1.2 1.1 1724.7 24.1 90.0 11.0 35.1
2012e 6.3 919.3 4,299 5.0 7.0 10.0 5.0 42.9 6.6 5.2 5.0 7.0 8.5 15.0 11.0 7.25 7.00 8,700 8,700 12,180 12,180 180.0 141.8 38.1 12.1 1.3 7.0 0.8 2.1 11.0 13.0 110.7 9.4 151.0 27.1 60.0 -1.2 2.1 1820.7 22.8 91.0 9.9 32.7
5.5 364.4 1,635 3.2 9.6 2.6 4.6 28.7 10.3 13.1 6.6 6.6 6.2 15.5 1.1 9.75 9.43 8,994 9,166 11,871 11,519 103.5 73.9 29.7 10.9 3.0 2.2 0.6 3.6 19.0 6.3 42.6 6.9 128.7 47.0 52.9 -0.9 1.5 1302.2 39.7 75.8 20.8 60.5
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Japan
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 Japans 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.
Seiji Shiraishi Economist HSBC Securities (Japan) Limited +81 3 5203 3802 seiji.shiraishi@hsbc.com.jp
3Q10 GDP (% y-o-y) Industrial production (% y-o-y) CPI, end quarter (% y-o-y) Dom. CGPI, end quarter (% y-o-y) Trade balance (% GDP) Current account (% GDP) International reserves (USDbn) Policy rate, end quarter (%) 10-yr yield, end quarter (%) JPY/USD, end quarter JPY/EUR, end quarter
Source: HSBC, CEIC
4Q10e 2.9 5.9 -0.8 0.9 1.7 3.2 1,100 0.05 1.1 85 115
1Q11e 1.4 4.1 -0.7 0.8 1.1 2.8 1,150 0.05 1.3 90 113
2Q11e 1.0 0.7 -0.7 0.9 0.9 2.6 1,200 0.05 1.4 95 124
3Q11e 0.3 -1.7 -0.7 1.1 1.6 3.3 1,200 0.05 1.3 95 128
4Q11e 1.6 4.0 -0.6 1.7 2.1 3.7 1,250 0.05 1.1 95 133
1Q12e 2.0 6.1 -0.6 1.6 1.7 3.4 1,250 0.05 1.0 95 133
2Q12e 2.0 7.7 -0.5 1.5 1.4 3.1 1,250 0.05 1.1 95 133
3Q12e 2.0 8.2 -0.4 1.4 2.1 3.8 1,300 0.05 1.2 95 133
4Q12e 1.9 8.2 -0.3 1.3 2.5 4.0 1,300 0.05 1.3 95 133
5.3 13.4 -1.1 -0.1 1.4 3.1 1,050 0.10 0.9 84 115
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Japan: Macro framework

2006 Production, demand and employment GDP growth (% y-o-y) Nominal GDP (USDbn) GDP per capita (USD) Private consumption (% y-o-y) Government consumption (% y-o-y) Investment (% y-o-y) Industrial production (% y-o-y) Gross domestic saving (% GDP) Unemployment rate, average (%) Prices & wages CPI, average (% y-o-y) CPI, end-year (% y-o-y) Domestic CGPI, average (% y-o-y) Total wages, nominal (% y-o-y) Money, FX & interest rates Central bank money M0, average (% y-o-y) Broad money supply M2+CDs, average (% y-o-y) Policy rate, end-year (%) 10yr yield, average (%) JPY /USD, end-year JPY /USD, average JPY /EUR, end-year JPY /EUR, average External sector Merchandise exports (USDbn) Merchandise imports (USDbn) Trade balance (USDbn) Current account balance (USDbn) Current account balance (% GDP) Net FDI (USDbn) Net FDI (% GDP) Current account balance plus FDI (% GDP) Exports (% y-o-y) Imports (% y-o-y) International FX reserves (USDbn) Import cover (months) Public and external solvency indicators Commercial banks FX assets (USDbn) Gross external debt (USDbn) Private sector external debt (USDbn) General government balance (% GDP) Primary balance (% GDP) Gross public domestic debt (JPYtrn) Gross public domestic debt (% GDP) Gross public external debt (USDbn) Gross public external debt (% GDP) Gross public sector debt (% GDP)
Note: Public debt refers to government debt only. Source: HSBC, CIEC
2007 2.0 4,387 34,775 1.5 0.4 0.5 2.8 26.5 3.9 0.0 0.4 1.8 -1.0 -7.8 1.6 0.50 1.7 112 118 164 163 713.8 622.1 91.8 213.2 4.8 -53.9 -1.2 3.6 11.5 8.6 952.8 36.8 1,783 1,398 816.1 -1.4 -2.8 990 191.9 582.0 13.3 205.2
2008 2.4 4,910 39,262 1.6 1.5 -1.2 -3.4 26.0 4.0 1.5 1.0 4.6 -0.3 0.1 2.1 0.10 1.3 91 91 126 133 782.0 762.9 19.1 157.3 3.2 -103.6 -2.1 1.1 -3.5 8.0 1,030.6 32.4 1,860 1,628 923.2 -3.5 -2.0 1,034 231.4 704.9 14.4 245.8
2009 -1.2 4,815 36,920 -0.7 0.5 -3.6 -22.4 26.0 5.1 -1.3 -1.7 -5.3 -3.9 5.8 2.7 0.10 1.3 93 95 133 132 580.9 551.9 29.0 142.2 2.8 -63.2 -1.3 1.5 -33.1 -34.8 1,060.0 46.1 1,900 1,612 900.0 -10.5 -8.2 1,105 242.9 711.7 14.8 257.7
2010e 4.3 4,551 35,333 2.2 2.1 0.6 16.2 25.5 5.1 -1.1 -0.8 -0.2 1.0 4.8 2.8 0.05 1.1 85 85 115 112 781.8 699.1 82.7 188.6 3.4 -68.4 -1.5 1.9 25.2 17.8 1,100 37.8 1,950 1,600 900 -9.0 -6.7 1,155 298.6 700.0 15.4 313.9
2011e 1.1 4,587 35,750 -0.2 0.9 1.6 1.8 24.5 5.1 -0.7 -0.6 1.1 0.5 1.0 2.5 0.05 1.3 95 95 133 125 753.8 678.4 75.4 160.8 3.1 -73.7 -1.6 1.5 4.2 4.8 1,150 40.7 2,000 1,600 900 -8.0 -5.7 1,200 275.4 700.0 15.3 290.7
2012e 2.0 4,834 36,000 1.0 0.8 1.9 7.6 24.0 4.8 -0.5 -0.3 1.5 0.5 1.0 2.5 0.05 1.2 95 95 133 133 808.1 707.5 100.6 184.8 3.6 -70.0 -1.4 2.1 8.6 5.7 1,200 40.7 2,050 1,550 900 -7.2 -4.9 1,240 270.0 650.0 13.4 283.5
1.9 4,362 34,686 1.5 0.4 0.5 4.8 27.1 4.1 0.2 0.1 2.2 0.2 -13.3 1.0 0.26 1.8 119 116 157 146 646.8 579.0 67.9 172.6 3.9 -56.8 -1.3 2.6 13.3 18.3 879.7 36.5 1,523 1,253 831.1 -1.0 -2.9 964.8 190.2 422.3 9.7 199.8
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Korea
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 banks target band next summer. Therefore, the governments 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.
Song-Yi Kim Economist The Hongkong and Shanghai Banking Corporation Limited +852 2822 4870 songyikim@hsbc.com.hk
3Q 10 GDP (% y-o-y) Industrial production (% y-o-y) CPI, end quarter (% y-o-y) PPI, end quarter (% y-o-y) Trade balance (% GDP) Current account (% GDP) International reserves (USDbn) Policy rate, end quarter (%) 5yr yield, end quarter (%) KRW /USD, end quarter KRW /EUR, end quarter
Source: HSBC, CEIC
4Q 10f 5.1 11.5 3.5 4.3 6.0 4.5 308.2 2.50 4.08 1,130 1,526
1Q 11f 4.2 15.0 4.4 4.5 4.6 2.4 319.7 2.75 4.40 1,110 1,388
2Q 11f 4.4 7.0 4.3 4.6 5.3 3.4 335.1 3.00 4.30 1,090 1,417
3Q 11f 5.1 7.0 3.6 4.1 4.6 2.8 349.1 3.25 4.20 1,080 1,458
4Q 11f 5.8 4.0 3.4 3.6 3.6 2.1 352.5 3.50 4.00 1,070 1,498
1Q 12f 5.3 6.0 3.2 3.4 5.1 3.0 360.0 3.75 4.10 1,060 1,484
2Q 12f 5.2 7.0 3.2 3.3 4.1 2.1 365.7 4.00 4.30 1,050 1,470
3Q 12f 4.5 10.0 3.2 3.4 4.0 2.1 371.6 4.00 4.40 1,040 1,456
4Q 12f 4.3 11.0 3.0 3.0 3.3 2.0 377.3 4.00 4.50 1030 1,442
4.4 11.9 3.6 4.0 6.6 4.8 289.8 2.25 3.71 1,140 1,562
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Korea: Macro framework

2006 Production, demand and employment GDP growth (% y-o-y) Nominal GDP (USDbn) GDP per capita (USD) Private consumption (% y-o-y) Government consumption (% y-o-y) Investment (% y-o-y) Industrial production (% y-o-y) Gross domestic saving (% GDP) Unemployment rate, end-year (%) Prices & wages CPI, average (% y-o-y) CPI, end-year (% y-o-y) PPI, end-year (% y-o-y) Manufacturing wages, nominal (% y-o-y) Money, FX & interest rates Central bank money M0, average (% y-o-y) Broad money supply M3, average (% y-o-y) Real private sector credit growth (% y-o-y) Policy rate, end-year (%) 5yr yield, end-year (%) KRW /USD, end-year KRW /USD, average KRW /EUR, end-year KRW /EUR, average External sector Merchandise exports (USDbn) Merchandise imports (USDbn) Trade balance (USDbn) Current account balance (USDbn) Current account balance (% GDP) Net FDI (USDbn) Net FDI (% GDP) Current account balance plus FDI (% GDP) Exports (% y-o-y) Imports (% y-o-y) International FX reserves (USDbn) Import cover (months) Public and external solvency indicators Gross external debt (USDbn) Short term external debt (% of intl reserves) Private sector external debt (USDbn) Central government balance (% GDP) Primary balance (% GDP) Gross public domestic debt (KRWbn) Gross public domestic debt (% GDP) Gross public external debt (USDbn) Gross public external debt (% GDP) Gross public sector debt (% GDP)
Source: HSBC, CEIC
2007
2008
2009
2010f
2011f
2012f
5.2 890.1 18,430 4.7 6.6 3.4 8.4 31.5 3.3 2.2 2.1 0.3 5.6 6.4 8.2 11.7 4.50 4.82 930 953 1,228 1,197 331.8 303.9 27.9 5.4 0.6 -4.5 -0.5 0.1 14.8 18.6 239.0 9.4 260.1 47.6 240.2 -2.8 1.9 262,369 30.9 19.9 2.2 32.2
5.1 970.9 20,036 5.1 5.4 4.2 6.9 30.8 3.1 2.5 3.6 3.6 5.9 18.1 10.3 12.4 5.00 5.65 935 928 1,365 1,290 379.0 350.9 28.2 5.9 0.6 -13.8 -1.4 -0.8 14.2 15.4 262.2 9.0 383.2 61.1 329.5 0.5 5.2 278,790 30.9 53.6 5.5 32.1
2.3 945.9 19,461 1.3 4.3 -1.9 3.4 35.8 3.3 4.7 4.1 5.6 3.1 7.5 11.6 9.4 3.00 4.25 1,260 1,085 1,751 1,580 432.9 427.3 5.7 -5.8 -0.6 -15.6 -1.7 -2.3 14.2 21.8 201.2 5.7 377.6 74.5 325.1 -2.0 2.6 288,720 28.1 52.5 5.5 29.0
0.2 842.4 17,287 0.2 5.0 -0.2 -0.8 35.3 4.0 2.8 2.8 1.8 -0.7 17.6 8.2 1.2 2.00 4.92 1,166 1,262 1,667 1,764 373.6 317.5 56.1 42.7 5.1 -9.1 -1.1 4.0 -13.7 -25.7 270.3 10.2 399.8 55.2 332.0 -4.2 -0.2 334,910 31.5 67.8 8.0 32.6
6.1 1,002 20,492 4.1 3.8 6.9 16.7 36.7 3.3 3.0 3.5 4.3 6.0 13.6 9.0 1.0 2.50 4.08 1,130 1,160 1,526 1,535 477.9 421.9 56.1 36.0 3.6 -13.6 -1.4 2.2 27.9 32.9 311.6 8.9 335.0 43.0 266.4 -2.7 1.6 366,547 31.5 68.6 6.9 32.5
4.9 1,154 23,538 3.6 5.1 3.8 8.1 37.7 3.2 3.8 3.4 3.6 6.2 10.0 11.0 2.2 3.50 4.00 1,070 1,095 1,498 1,444 526.9 474.9 52.1 31.0 2.7 -12.0 -1.0 1.6 10.3 12.6 355.9 9.0 330.0 37.1 256.8 -2.0 2.2 391,110 31.0 73.2 6.3 31.9
4.8 1,260 25,619 4.4 4.8 2.8 8.5 38.0 3.1 3.2 3.0 3.0 6.0 9.0 12.0 4.8 4.00 4.50 1,030 1,084 1,442 1,517 583.0 531.0 52.1 28.5 2.3 -8.0 -0.6 1.6 10.6 11.8 380.7 8.6 330.0 34.7 226.4 -1.8 2.3 410,887 30.1 103.6 8.2 31.4
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Malaysia
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.
Wellian Wiranto Economist The Hongkong and Shanghai Banking Corporation Limited, (Singapore) +65 6230 2879 wellianwiranto@hsbc.com.sg Namrata Mittal Associate, Bangalore
3Q 10 GDP (% y-o-y) Industrial production (% y-o-y) CPI, end quarter (% y-o-y) PPI, end quarter (% y-o-y) Trade balance (% GDP) Current account (% GDP) International reserves (USDbn) Policy rate, end quarter (%) 5yr yield, end quarter (%) MYR/USD, end quarter MYR/EUR, end quarter
Source: HSBC, CEIC
4Q 10f 4.6 7.0 2.6 5.5 19.8 14.1 102.8 2.75 3.39 3.00 4.05
1Q 11f 3.1 7.0 2.9 4.5 24.6 17.3 107.8 2.75 3.50 2.97 3.71
2Q 11f 5.9 7.0 3.1 4.0 16.1 9.1 108.4 2.75 3.60 2.94 3.82
3Q 11f 5.9 6.0 3.0 4.0 16.0 12.4 110.2 3.00 3.70 2.91 3.93
4Q 11f 5.3 5.0 2.8 4.0 19.7 14.2 111.4 3.25 3.80 2.88 4.03
1Q 12f 4.9 5.0 2.4 4.0 24.0 16.6 115.3 3.25 3.80 2.85 3.99
2Q 12f 5.1 5.0 2.3 4.0 16.2 9.3 115.8 3.25 3.90 2.82 3.95
3Q 12f 5.1 5.0 2.1 4.0 16.2 12.7 118.8 3.25 3.90 2.79 3.91
4Q 12f 4.6 5.0 2.0 4.0 20.0 14.5 119.6 3.25 3.90 2.79 3.91
5.3 7.5 1.8 4.9 16.0 12.2 100.6 2.75 3.25 3.09 4.23
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Malaysia: Macro framework

2006 Production, demand and employment GDP growth (% y-o-y) Nominal GDP (USDbn) GDP per capita (USD) Private consumption (% y-o-y) Government consumption (% y-o-y) Investment (% y-o-y) Industrial production (% y-o-y) Gross domestic saving (% GDP) Unemployment rate, end-year (%) Prices & wages CPI, average (% y-o-y) CPI, end-year (% y-o-y) PPI, end-year (% y-o-y) Manufacturing wages, nominal (% y-o-y) Money, FX & interest rates Central bank money M0, end-year (% y-o-y) Broad money supply M3, average (% y-o-y) Real private sector credit growth (% y-o-y) Policy rate, end-year (%) 5yr yield, end-year (%) MYR /USD, end-year MYR /USD, average MYR /EUR, end-year MYR /EUR, average External sector Merchandise exports (USDbn) Merchandise imports (USDbn) Trade balance (USDbn) Current account balance (USDbn) Current account balance (% GDP) Net FDI (USDbn) Net FDI (% GDP) Current account balance plus FDI (% GDP) Exports (% y-o-y) Imports (% y-o-y) International FX reserves (USDbn) Import cover (months) Public and external solvency indicators Gross external debt (USDbn) Short term external debt (% of intl reserves) Private sector external debt (USDbn) Central government balance (% GDP) Primary balance (% GDP) Gross public domestic debt (MYR bn) Gross public domestic debt (% GDP) Gross public external debt (USDbn) Gross public external debt (% GDP) Gross public sector debt (% GDP)
Source: HSBC, CEIC
2007 6.5 187.0 6,878 10.5 6.6 9.4 2.8 46.3 3.0 2.0 2.4 10.1 7.3 9.8 12.7 6.1 3.50 3.78 3.31 3.43 4.83 4.77 176.2 138.5 37.7 29.2 15.6 -2.7 -1.5 14.2 2.6 5.1 101.5 8.8 55.8 12.7 37.2 -3.2 -2.2 247.1 38.5 18.6 9.9 48.4
2008 4.7 223.2 8,104 8.5 10.7 0.7 1.4 49.2 3.1 5.4 4.4 -2.6 0.5 7.2 12.5 4.9 3.25 3.00 3.45 3.32 4.80 4.83 200.1 148.7 51.4 39.0 17.5 -7.8 -3.5 14.0 9.8 3.8 120.2 9.7 54.3 13.1 30.3 -4.8 -3.5 286.1 38.6 24.0 10.8 49.4
2009 -1.7 193.3 6,929 0.7 3.1 -5.6 -9.0 44.0 3.5 0.6 1.1 3.6 -5.0 8.0 7.3 7.1 2.00 3.80 3.42 3.52 4.89 4.91 157.6 117.3 40.3 31.9 16.5 -6.5 -3.4 13.1 -16.6 -16.5 96.9 9.9 69.1 24.1 44.2 -7.0 -6.5 348.6 51.3 24.9 12.9 64.2
2010f 7.1 237.4 8,344 6.8 0.5 8.9 11.9 46.9 3.2 1.8 2.6 5.5 2.0 15.0 10.0 6.0 2.75 3.39 3.00 3.20 4.05 4.23 200.7 155.1 45.6 30.6 12.9 -2.2 -0.9 12.0 15.9 20.4 102.8 8.0 63.0 17.5 39.0 -4.5 -3.5 360.0 47.4 24.0 10.1 57.5
2011f 5.1 279.1 9,618 6.7 1.0 6.5 6.3 48.0 3.3 3.0 2.8 4.0 4.0 7.0 10.0 5.0 3.25 3.80 2.88 2.94 4.03 3.88 234.3 181.1 53.2 36.9 13.2 -5.4 -1.9 11.3 7.3 7.3 111.4 7.4 59.0 14.4 37.0 -3.2 -2.0 365.0 44.5 22.0 7.9 52.4
2012f 4.9 311.4 10,521 5.7 1.0 5.2 5.0 48.0 3.1 2.2 2.0 4.0 4.0 7.0 10.0 0.0 3.25 3.90 2.79 2.82 3.91 3.95 263.1 203.9 59.3 41.3 13.3 -5.7 -1.8 11.5 7.9 8.1 119.6 7.0 55.0 11.7 35.0 -2.1 -2.0 370.0 42.1 20.0 6.4 48.5
5.8 156.3 5,541 6.8 5.0 7.5 6.7 43.4 3.0 3.6 3.1 3.4 10.1 10.6 8.6 4.2 3.50 3.76 3.53 3.67 4.66 4.62 160.6 123.2 37.4 25.4 16.3 0.0 0.0 16.3 9.4 10.3 82.3 8.0 56.0 16.2 34.7 -3.3 -1.2 217.2 37.8 21.4 13.7 51.5
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New Zealand
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.
Paul Bloxham Economist HSBC Bank Australia Ltd +612 435 966 522 paulbloxham@hsbc.com.au
3Q10 GDP (% y-o-y) Industrial production (% y-o-y) CPI, end quarter (% y-o-y) PPI, end quarter (% y-o-y) Trade balance (% GDP) Current account (% GDP) Policy rate, end quarter (%) 10yr yield, end quarter (%) USD /NZD, end quarter EUR /NZD, end quarter
Source: HSBC, CEIC
4Q10e 0.6 -2.7 4.0 3.9 2.2 -2.0 3.00 5.47 0.76 0.56
1Q11e 0.8 -3.5 4.2 3.2 2.4 -2.7 3.00 6.00 0.71 0.57
2Q11e 1.9 1.4 5.1 2.4 2.5 -3.5 3.25 6.10 0.69 0.53
3Q11e 3.5 2.0 4.5 2.4 2.7 -4.2 3.50 6.10 0.74 0.55
4Q11e 4.4 2.3 2.4 2.5 2.7 -5.0 3.75 6.20 0.76 0.54
1Q12e 4.3 2.7 2.3 2.6 2.6 -4.0 4.00 6.20 0.73 0.52
2Q12e 3.8 2.9 2.2 2.7 2.6 -3.0 4.25 6.20 0.72 0.51
3Q12e 3.0 3.1 2.3 2.8 2.5 -3.0 4.50 6.20 0.72 0.51
4Q12e 2.7 3.2 2.2 3.0 2.5 -2.9 4.50 6.30 0.72 0.51
1.5 1.7 1.5 3.8 -2.2 -3.7 3.00 5.35 0.72 0.51
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New Zealand: Macro framework

2006 Production, demand and employment GDP growth (% y-o-y) Nominal GDP (USDbn) GDP per capita (USD) Private consumption (% y-o-y) Government consumption (% y-o-y) Investment (% y-o-y) Industrial production (% y-o-y) Gross national saving (% GDP) Unemployment rate, average (%) Prices & wages CPI, average (% y-o-y) CPI, end-year (% y-o-y) PPI, end-year (% y-o-y) Labour cost index, nominal (% y-o-y) Money, FX & interest rates Central bank money M1, average (% y-o-y) Broad money supply M3, average (% y-o-y) Private sector credit growth (% y-o-y) Policy rate, end-year (%) 10yr yield, end-year (%) USD /NZD, end-year USD /NZD, average EUR /NZD, end-year EUR /NZD, average External sector Merchandise exports (USDbn) Merchandise imports (USDbn) Trade balance (USDbn) Current account balance (USDbn) Current account balance (% GDP) Exports (% y-o-y) Imports (% y-o-y) International FX reserves (USDbn) Import cover (months) Public and external solvency indicators Central government balance (% GDP) Gross external debt (NZDbn) Gross public sector debt (NZDm) Gross public sector debt (% GDP)
Source: HSBC, CEIC
2007 2.8 129.0 30,335 4.1 4.0 5.5 -0.8 15.8 3.7 2.4 3.2 4.3 3.3 1.2 10.7 13.4 8.25 6.38 0.77 0.74 0.53 0.54 27.0 30.9 -3.9 -10.8 -8.1 6.0 2.8 29.1 11.3 3.7 216.4 30,405 17.4
2008 -0.2 131.3 30,585 -0.3 5.0 -1.3 -2.3 14.3 4.2 4.0 3.4 9.7 3.5 2.8 7.1 9.7 5.00 4.62 0.57 0.71 0.44 0.48 30.6 34.4 -3.8 -11.3 -8.8 17.8 15.8 33.0 11.5 3.0 249.7 31,627 17.6
2009 -1.7 118.0 27,150 -0.8 0.6 -11.4 -10.5 12.0 6.2 2.1 2.0 -3.2 1.8 0.5 3.9 2.3 2.50 6.10 0.72 0.64 0.51 0.45 25.0 25.6 -0.6 -3.6 -2.8 -7.4 -16.4 29.7 13.9 -1.4 243.3 38,008 20.3
2010e 1.4 138.8 n/a 2.1 2.1 1.3 0.7 13.1 6.5 2.3 4.0 3.9 1.7 1.0 3.0 2.8 3.00 5.60 0.76 0.72 0.56 0.53 25.7 27.7 -2.0 -2.6 -1.8 6.0 3.7 n/a n/a -3.2 n/a 44,168 22.9
2011e 2.6 146.4 n/a 1.5 2.1 8.6 0.5 14.1 6.4 4.0 2.4 2.5 2.5 2.0 5.0 5.0 3.75 6.10 0.76 0.73 0.54 0.55 26.8 29.7 -2.9 -5.7 -3.8 5.3 6.9 n/a n/a -3.0 n/a 50,232 24.9
2012e 3.4 156.1 n/a 2.8 2.8 7.7 3.0 15.1 6.0 2.3 2.2 3.0 3.0 2.0 6.5 6.0 4.50 6.23 0.72 0.72 0.51 0.52 28.6 32.2 -3.6 -5.0 -3.2 5.3 6.9 n/a n/a -2.0 n/a 54,477 25.7
0.9 107.9 25,613 2.2 4.9 -0.9 -5.2 14.9 3.8 3.4 2.6 4.3 3.2 1.1 12.6 10.4 7.25 5.74 0.69 0.66 0.55 0.52 22.8 26.8 -4.1 -9.0 -8.3 12.5 9.3 28.1 12.5 4.6 191.0 28,928 17.7
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Pakistan
Another difficult year
The impact of the 2010 floods continues to weigh on Pakistans 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 consumptiondriven 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.
Liz Martins Economist HSBC Bank Middle East Limited, Dubai +971 4423 6928 liz.martins@hsbc.com
3Q 10 Industrial production (% y-o-y) CPI, end quarter (% y-o-y) WPI, end quarter (% y-o-y) M2 growth (% y-o-y) Trade balance (USDbn) Remittances (USDbn) International reserves (USDbn) Policy rate, end quarter (%) 2 yr yield, end quarter (%) PKR /USD, end quarter PKR /EUR, end quarter -2.9 14.1 22.0 15.2 -3.0 2.8 15.7 13.5 13.3 86.0 117.82
4Q 10f -14.4 16.5 20.0 10.4 -3.3 2.9 15.8 14.0 13.8 86.0 116.10
1Q 11f -19.0 16.3 17.0 15.4 -3.2 3.0 15.8 14.5 13.8 87.0 108.75
2Q 11f -8.3 17.0 16.0 13.2 -3.0 3.0 16.2 14.5 13.8 88.0 114.40
3Q 11f 18.2 14.7 15.0 15.9 -3.2 3.1 16.5 14.5 13.8 89.0 120.15
4Q 11f 25.5 13.6 14.0 14.7 -3.4 3.2 16.6 14.0 13.8 90.0 126.00
1Q 12f 25.5 12.0 14.0 12.5 -3.5 3.3 16.6 14.0 13.8 90.0 126.00
2Q 12f 19.5 11.5 14.0 10.4 -3.7 3.4 17.1 14.0 13.8 90.0 126.00
3Q 12f 13.8 10.9 13.0 9.3 -3.9 3.5 17.3 14.0 13.8 90.0 126.00
4Q 12f 12.7 9.8 13.0 8.2 -4.2 3.5 17.4 14.0 13.8 90.0 126.00
Source: HSBC, CEIC Note: Data pertain to fiscal year, eg. 2005 numbers are for FY05/06 (April 2005March 2006)
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Pakistan: Macro framework

2006 Production, demand and employment GDP growth (% y-o-y) Nominal GDP (USDbn) GDP per capita (USD) Private consumption (% y-o-y) Government consumption (% y-o-y) Investment (% y-o-y) Industrial production (% y-o-y) Gross domestic saving (% GDP) Unemployment rate, end-year (%) Prices CPI, average (% y-o-y) CPI, end-year (% y-o-y) WPI, average (% y-o-y) WPI, end-year (% y-o-y) Money, FX & interest rates Central bank money M1, end (% y-o-y) Broad money supply M2, end (% y-o-y) Real private sector credit growth (% y-o-y) Policy rate, end-year (%) 2 yr yield, end-year (%) PKR /USD, end-year PKR /USD, average PKR /EUR, end-year PKR /EUR, average External sector Merchandise exports (USDbn) Merchandise imports (USDbn) Trade balance (USDbn) Current account balance (USDbn) Current account balance (% GDP) Net FDI (USDbn) Net FDI (% GDP) Current account balance plus FDI (% GDP) Exports (% y-o-y) Imports (% y-o-y) International FX reserves (USDbn) Import cover (months) Public and external solvency indicators Commercial banks FX assets (USDbn) Gross external debt (USDbn) Short term external debt (% of intl reserves) Private sector external debt (USDbn) Consolidated government balance (% GDP) Gross public domestic debt (PKRbn) Gross public domestic debt (% GDP) Gross public external debt (USDbn) Gross public external debt (% GDP) Gross public sector debt (% GDP) 3.0 39.0 0.2 20.0 -5.9 2,610.4 30.1 n/a n/a n/a 3.2 44.5 8.3 26.1 -7.9 3,274.7 32.0 43.1 26.4 n/a 3.8 50.8 7.4 32.1 -5.1 3,860.7 30.3 48.8 30.3 n/a 4.0 58.1 5.7 35.3 -6.5 4,652.7 31.7 52.1 29.9 n/a 4.2 63.8 4.8 38.1 -6.9 5,338.8 32.0 54.8 29.0 n/a 4.4 66.8 4.5 41.9 -6.2 6,462.2 35.0 56.8 29.0 n/a 4.7 69.6 4.4 46.9 -5.3 7,747.0 38.0 62.4 30.0 n/a 17.3 27.0 -9.7 -6.9 -4.8 n.a. n.a. n.a. 4.38 7.98 13.3 5.9 20.4 35.4 -15.0 -13.9 -8.5 n.a. n.a. n.a. 18.23 31.15 8.6 2.9 19.1 31.7 -12.6 -9.3 -5.7 n.a. n.a. n.a. -6.39 -10.31 8.8 3.3 19.6 31.1 -11.4 -3.5 -2.0 n.a. n.a. n.a. 2.67 -2.18 13.0 5.0 20.6 34.8 -14.2 -4.7 -2.5 n.a. n.a. n.a. 12.77 4.27 15.5 5.4 21.9 37.4 -15.5 -3.5 -1.8 n.a. n.a. n.a. 15.82 18.11 17.1 5.5 23.5 40.4 -16.9 -1.8 -0.9 n.a. n.a. n.a. 16.99 21.90 18.0 5.3 20.9 19.0 n.a. 9.50 n.a. 60.5 60.6 79.9 76.2 21.6 15.3 n.a. 12.00 n.a. 68.0 62.8 99.3 87.2 2.5 9.6 n.a. 14.00 n.a. 81.4 79.0 113.2 115.0 11.4 12.5 n.a. 12.50 n.a. 85.5 84.2 122.3 117.6 20.0 13.2 n.a. 14.00 n.a. 88.0 86.8 118.8 114.8 20.0 9.3 n.a. 14.50 n.a. 90.0 89.0 126.0 117.4 15.0 8.2 n.a. 14.00 n.a. 92.0 91.0 128.8 127.4 7.9 8.9 n/a 8.0 7.8 8.8 n/a 12.1 12.0 23.3 n/a 17.6 20.8 10.5 n/a 15.0 13.6 16.5 n/a 20.0 14.9 13.6 n/a 14.0 11.6 9.8 n/a 13.0 5.7 143.0 n/a 4.7 -9.6 13.6 14.9 15.4 7.5 2.0 163.2 n/a -1.3 39.0 3.8 10.7 11.0 7.3 3.2 161.3 n/a 9.8 -31.6 -8.4 -3.9 11.4 7.2 4.4 174.3 n/a 3.9 13.4 -2.0 4.5 10.5 7.4 2.8 188.9 n/a 1.5 10.0 5.0 -5.3 9.4 8.6 3.6 195.7 n/a 3.0 7.5 7.0 4.0 9.1 7.5 4.1 208.0 n/a 3.0 5.0 7.0 5.0 8.7 7.1 2007 2008 2009 2010f 2011f 2012f
Note: Fiscal, external and national accounts data pertain to fiscal year, eg. 2005 numbers are for FY05/06 (July 2005June 2006) Source: Central Statistical Organisation, Reserve Bank of India, Bloomberg, CEIC and HSBC
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Philippines
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--vis 4.3%), thanks to a significant drop in expenditure, the governments 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 countrys 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 BSPs 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).
Sherman Chan Economist The Hongkong and Shanghai Banking Corporation Limited + 852 2996 6975 shermanwkchan@hsbc.com.hk Anuja Kar Economics Associate, Bangalore
3Q10e GDP (% y-o-y) Industrial production (% y-o-y) CPI, end quarter (% y-o-y) PPI, end quarter (% y-o-y) Trade balance (% GDP) Current account (% GDP) International reserves (USDbn) Policy rate, end quarter (%) 10yr yield, end quarter (%) PHP /USD, end quarter PHP /EUR, end quarter
Source: HSBC, CEIC
4Q10e 5.0 10.2 3.0 4.8 -4.3 6.8 55.5 4.00 6.10 41.5 56.0
1Q11e 4.2 10.1 4.5 5.1 -5.7 6.6 56.9 4.00 6.10 40.5 50.6
2Q11e 4.3 9.5 4.6 5.7 -5.9 5.8 58.2 4.25 6.30 39.5 51.4
3Q11e 6.4 9.0 4.6 6.5 -4.0 6.8 60.2 4.50 6.35 38.5 52.0
4Q11e 5.2 8.5 4.7 6.7 -4.5 5.4 62.0 4.50 6.40 37.5 52.5
1Q12e 5.3 8.5 4.7 6.7 -5.9 5.4 63.4 4.50 6.55 36.5 51.1
2Q12e 6.0 8.5 4.7 6.7 -5.7 4.8 64.8 4.75 6.70 35.5 49.7
3Q12e 6.6 8.5 4.8 6.7 -3.7 6.1 67.2 5.00 6.85 35.5 49.7
4Q12e 5.3 8.5 4.9 6.7 -4.3 5.0 69.4 5.25 7.00 35.5 49.7
6.5 9.3 3.5 -7.0 -3.3 5.9 53.6 4.00 6.23 43.9 60.1
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Philippines: Macro framework

2006 Production, demand and employment GDP growth (% y-o-y) Nominal GDP (USDbn) GDP per capita (USD) Private consumption (% y-o-y) Government consumption (% y-o-y) Investment (% y-o-y) Industrial production (% y-o-y) Gross domestic saving (% GDP) Unemployment rate, end-year* (%) Prices & wages CPI, average (% y-o-y) CPI, end-year (% y-o-y) PPI, end-year (% y-o-y) Manufacturing wages, nominal** (% y-o-y) Money, FX & interest rates Central bank money M0, average (% y-o-y) Broad money supply M3, average (% y-o-y) Real private sector credit growth (% y-o-y) Policy rate, end-year (%) 10yr yield, end-year (%) PHP /USD, end-year PHP /USD, average PHP /EUR, end-year PHP /EUR, average External sector Merchandise exports (USDbn) Merchandise imports (USDbn) Trade balance (USDbn) Current account balance (USDbn) Current account balance (% GDP) Net FDI (USDbn) Net FDI (% GDP) Current account balance plus FDI (% GDP) Exports (% y-o-y) Imports (% y-o-y) International FX reserves (USDbn) Import cover (months) Public and external solvency indicators Commercial banks FX assets (USDbn) Gross external debt (USDbn) Short term external debt (% of intl reserves) Private sector external debt (USDbn) Consolidated government balance (% GDP) Central government balance (% GDP) Primary balance (% GDP) Gross public domestic debt (PHPbn) Gross public domestic debt (% GDP) Gross public external debt (USDbn) Gross public external debt (% GDP) Gross public sector debt (% GDP) 5.3 117.6 1,375 5.5 10.4 3.9 4.2 20.1 7.8 6.3 4.3 3.7 7.9 20.7 13.8 -2.3 7.50 6.38 49.0 51.3 64.7 64.4 46.5 53.3 -6.7 5.3 4.5 2.8 2.4 6.9 15.6 10.9 22.8 5.1 14.8 53.9 21.9 20.8 0.2 -1.1 4.1 2,154 35.7 33.1 28.1 63.9 2007 7.1 147.2 1,700 5.8 6.6 10.9 3.3 20.8 7.4 2.8 3.9 -3.0 4.5 35.1 17.1 2.7 5.25 6.37 41.2 45.2 60.2 62.8 49.5 57.9 -8.4 7.1 4.8 -0.6 -0.4 4.4 6.4 8.7 33.6 7.0 15.9 55.5 21.1 22.0 0.3 -0.2 3.8 2,201 33.1 33.5 22.7 55.8 2008 3.7 166.8 1,905 4.7 0.4 2.7 4.2 19.3 7.7 9.3 8.0 7.3 5.3 17.2 14.2 10.0 5.50 7.25 47.4 44.4 65.9 64.7 48.3 61.1 -12.9 3.6 2.2 1.3 0.8 2.9 -2.5 5.6 37.4 7.3 17.7 54.3 18.7 13.7 -0.9 -0.9 2.8 2,414 32.6 40.7 24.4 57.0 2009 1.1 160.8 1,805 4.1 10.9 -0.4 -4.4 9.8 7.5 3.3 4.3 -2.2 3.8 11.0 11.6 9.6 4.00 8.11 46.5 47.8 66.5 66.7 37.6 46.5 -8.9 8.8 5.5 1.6 1.0 6.5 -22.1 -24.0 44.1 11.4 18.2 54.9 14.9 14.0 -3.9 -3.9 -0.3 2,475 32.2 40.9 25.4 57.6 2010e 6.8 189.4 2,088 4.8 5.4 16.2 12.8 13.2 7.6 3.8 3.0 4.8 4.5 7.5 8.6 4.7 4.00 6.10 41.5 44.8 56.0 59.3 49.0 57.7 -8.7 10.9 5.7 0.8 0.4 6.1 30.3 24.1 55.5 11.5 20.3 50.0 10.8 7.1 -3.7 -3.7 -0.2 2,766 32.6 42.9 22.6 55.2 2011e 5.0 237.3 2,545 5.3 3.7 6.8 9.2 12.2 7.1 4.4 4.7 6.7 5.5 7.0 9.0 3.9 4.50 6.40 37.5 39.5 52.5 52.1 52.7 64.5 -11.8 14.5 6.1 0.0 0.0 6.1 7.6 11.9 56.9 10.6 24.4 50.0 10.6 -1.3 -3.0 -3.0 0.3 2,911 31.1 51.3 21.6 52.7 2012e 5.8 290.4 3,000 5.6 5.2 6.5 8.5 11.3 7.3 4.8 4.9 6.7 6.5 -1.3 9.0 3.7 5.25 7.00 35.5 36.0 49.7 50.4 58.7 72.7 -14.0 15.4 5.3 0.0 0.0 5.3 11.4 12.7 58.2 9.6 28.7 50.0 10.3 -8.9 -2.5 -2.5 0.6 3,048 29.2 58.9 20.3 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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Singapore
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.
Leif Eskesen Economist The Hong Kong and Shanghai Banking Corporation Limited (Singapore) +65 6239 0840 leifeskesen@hsbc.com.hk Prithviraj Srinivas Associate, Bangalore
3Q 10 GDP (% y-o-y) Industrial production (% y-o-y) CPI, end quarter (% y-o-y) PPI, end quarter (% y-o-y) Trade balance (% GDP) Current account (% GDP) International reserves (USDbn) 3M interbank rate, end-quarter (%) 5yr yield, end-quarter (%) SGD /USD, end-quarter SGD /EUR, end-quarter
Source: HSBC, CEIC
4Q 10f 12.5 30.0 4.0 4.0 18.4 21.2 240.7 0.50 1.40 1.27 1.71
1Q 11f 6.0 5.0 3.2 3.0 16.1 17.6 247.9 0.70 1.80 1.26 1.58
2Q 11f 0.0 5.0 3.2 3.0 21.9 23.5 259.0 0.80 1.60 1.25 1.63
3Q 11f 8.6 7.0 3.2 3.0 23.3 25.8 273.4 0.90 1.50 1.24 1.67
4Q 11f 6.3 7.0 3.2 3.0 18.7 21.8 286.0 1.10 1.40 1.23 1.72
1Q 12f 5.4 17.0 2.8 3.0 15.4 16.7 294.1 1.10 1.50 1.22 1.71
2Q 12f 6.0 13.0 2.8 3.0 21.4 22.7 306.8 1.10 1.60 1.21 1.69
3Q 12f 5.9 7.0 2.8 3.0 22.9 25.2 323.2 1.20 1.70 1.20 1.68
4Q 12f 6.0 7.0 2.8 3.0 18.1 21.0 337.4 1.20 1.90 1.19 1.67
10.5 14.0 3.7 6.0 24.2 23.4 215.4 0.51 0.88 1.31 1.79
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Singapore: Macro framework

2006 Production, demand and employment GDP growth (% y-o-y) Nominal GDP (USDbn) GDP per capita (USD) Private consumption (% y-o-y) Government consumption (% y-o-y) Investment (% y-o-y) Industrial production (% y-o-y) Gross domestic saving (% GDP) Unemployment rate, end-year (%) Prices & wages CPI, average (% y-o-y) CPI, end-year (% y-o-y) PPI, end-year (% y-o-y) Manufacturing wages, nominal (% y-o-y) Money, FX & interest rates Central bank money M0, average (% y-o-y) Broad money supply M3, average (% y-o-y) Real private sector credit growth (% y-o-y) 3M interbank rate, end-year (%) 5yr yield, end-year (%) SGD /USD, end-year SGD /USD, average SGD /EUR, end-year SGD /EUR, average External sector Merchandise exports (USDbn) Merchandise imports (USDbn) Trade balance (USDbn) Current account balance (USDbn) Current account balance (% GDP) Net FDI (USDbn) Net FDI (% GDP) Current account balance plus FDI (% GDP) Exports (% y-o-y) Imports (% y-o-y) International FX reserves (USDbn) Import cover (months) Public and external solvency indicators Consolidated government balance (% GDP)
Source: HSBC, CEIC
2007
2008
2009
2010e
2011e
2012e
8.6 145.6 33,087 3.1 7.3 14.6 11.9 51.0 2.8 1.0 0.8 -2.9 3.5 6.9 11.9 2.6 3.44 3.03 1.53 1.58 2.03 1.99 276.0 233.2 42.8 35.3 24.2 10.2 7.0 31.2 18.8 19.0 136.2 7.0 0.6
8.5 177.3 38,649 6.5 3.0 19.9 5.9 53.4 1.8 2.1 3.7 6.8 4.1 7.0 20.6 8.1 2.38 2.33 1.44 1.50 2.10 2.09 303.9 257.7 46.1 47.3 26.7 8.2 4.6 31.3 10.1 10.5 162.9 7.6 2.7
1.8 195.5 40,395 2.7 8.4 13.6 -4.2 50.2 2.7 6.6 6.7 -17.5 5.0 12.2 10.9 12.8 0.96 1.40 1.44 1.40 2.00 2.04 346.0 319.1 26.8 36.2 18.5 19.5 10.0 28.5 13.9 23.8 173.9 6.5 1.1
-1.3 182.6 36,619 0.4 8.2 -3.3 -4.2 47.7 2.3 0.6 7.5 7.0 0.3 10.0 10.6 12.8 0.68 1.30 1.41 1.45 2.02 2.03 273.7 243.5 30.2 32.5 17.8 10.9 6.0 23.7 -20.9 -23.7 187.2 9.2 -1.4
14.8 225.4 43,460 5.9 7.9 5.4 30.9 50.7 2.1 2.8 4.0 4.0 7.6 8.6 8.6 8.0 0.50 1.45 1.27 1.36 1.71 1.80 353.8 308.2 45.6 45.5 20.2 19.2 8.5 28.7 29.2 26.6 240.7 9.4 0.5
5.2 266.0 46,681 5.5 3.0 5.0 6.0 50.9 2.1 3.2 3.2 3.0 6.0 6.3 7.3 7.0 1.10 1.40 1.23 1.25 1.72 1.65 406.2 352.8 53.4 59.2 22.3 9.6 3.6 25.9 14.8 14.5 286.0 9.7 0.7
5.8 298.7 50,746 5.8 3.3 7.0 10.9 51.3 2.1 2.9 2.8 3.0 5.0 6.3 9.6 0.0 1.20 1.90 1.19 1.21 1.67 1.69 478.4 420.1 58.3 64.3 21.5 9.9 3.3 24.8 17.8 19.1 337.4 9.6 1.2
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Sri Lanka
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 pullback 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.
Leif Eskesen Economist The HongKong and Shanghai Banking Corporation Limited, (Singapore) +65 6239 0840 leifeskesen@hsbc.com.sg Prithviraj Srinivas Associate, Bangalore
3Q 10 GDP (% y-o-y) Industrial production (% y-o-y) CPI, end quarter (% y-o-y) WPI, end quarter (% y-o-y) Trade balance (% GDP) International reserves (USDbn) Policy rate, end quarter (%) 2-yr yield, end quarter (%) LKR/USD, end quarter LKR/EUR, end quarter
Source: HSBC
4Q 10f 7.4 11.0 6.9 3.5 -12.4 6.6 9.00 7.5 111.1 150.0
1Q 11f 8.8 11.9 7.3 6.1 -12.5 6.5 9.00 8.0 111.0 138.8
2Q 11f 7.1 7.4 9.2 9.1 -11.2 6.5 9.25 8.0 111.0 144.3
3Q 11f 6.2 6.4 8.7 11.5 -11.4 6.5 9.75 9.0 111.0 149.9
4Q 11f 6.7 4.2 6.1 11.4 -14.1 6.4 10.25 9.0 111.0 155.4
1Q 12f 6.7 7.1 5.4 11.4 -13.4 6.3 10.50 9.0 111.0 155.4
2Q 12f 6.7 6.9 6.1 11.4 -12.0 6.2 10.50 9.0 111.0 155.4
3Q 12f 6.9 6.5 6.4 11.4 -11.2 6.1 10.50 9.0 111.0 155.4
4Q 12f 7.3 5.9 6.7 11.4 -13.7 6.0 10.50 9.0 111.0 155.4
8.0 8.2 5.8 5.2 -10.6 6.1 9.00 7.5 112.0 153.4
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Sri Lanka: Macro framework

2005 Production, demand and employment GDP growth (% y-o-y) Nominal GDP (USDbn) GDP per capita (USD) Private consumption (% y-o-y) Government consumption (% y-o-y) Investment (% y-o-y) Industrial production (% y-o-y) Gross domestic saving (% GDP) Unemployment rate, end-year (%) Prices CPI, average (% y-o-y) CPI, end-year (% y-o-y) WPI, end-year (% y-o-y) Minimum wages, nominal (% y-o-y) Money, FX & interest rates Central bank money M0, end (% y-o-y) Broad money supply M2, end (% y-o-y) Real private sector credit growth (% y-o-y) Policy rate, end-year (%) 2yr yield, end-year (%) LKR /USD, end-year LKR /USD, average LKR /EUR, end-year LKR /EUR, average External sector Merchandise exports (USDbn) Merchandise imports (USDbn) Trade balance (USDbn) Current account balance (USDbn) Current account balance (% GDP) Net FDI (USDbn) Net FDI (% GDP) Current account balance plus FDI (% GDP) Exports (% y-o-y) Imports (% y-o-y) International FX reserves (USDbn) Import cover (months) Public and external solvency indicators Gross external debt (USDbn) Short term external debt (% of intl reserves) Budget balance (% GDP) Gross public domestic debt (LKRbn) Gross public domestic debt (% GDP) Gross public external debt (USDbn) Gross public external debt (% GDP) Gross public sector debt (% GDP)
Source: HSBC
2006 6.8 32.4 1,634 7.8 5.5 12.0 7.6 25.3 6.0 15.8 18.7 26.8 39.6 2.7 15.6 9.3 12.0 17.63 108.7 110.7 158.7 153.9 7.6 11.2 -3.5 -1.3 -4.0 0.5 1.7 -2.3 11.0 8.9 2.4 2.6 15.2 45.2 -6.9 15.5 47.9 12.0 37.1 85.0
2007 6.0 40.7 2,014 6.7 6.0 11.0 5.9 25.0 5.3 22.7 14.4 0.7 23.3 4.0 11.7 -11.3 12.0 20.63 113.3 109.2 157.5 159.0 8.1 14.1 -6.0 -3.8 -9.3 0.7 1.7 -7.6 6.0 26.0 2.4 2.0 18.7 61.9 -7.0 19.8 48.5 13.4 32.8 81.4
2008 3.5 42.0 2,053 -2.9 15.8 2.9 3.2 23.7 5.7 3.5 4.8 13.3 9.4 21.4 19.9 -4.6 9.8 10.20 114.4 114.9 163.6 160.6 7.1 10.2 -3.1 -0.2 -0.5 0.6 1.4 0.9 -12.7 -27.6 2.7 3.1 18.9 60.1 -9.8 20.9 49.8 15.3 36.5 86.3
2009f 7.7 47.4 2,296 9.0 14.1 14.0 8.5 23.8 5.3 5.9 6.9 3.5 9.0 28.0 20.0 16.1 9.0 7.50 111.1 112.7 150.0 149.0 8.0 13.8 -5.7 -1.8 -3.8 0.5 1.1 -2.7 13.2 35.0 6.6 5.8 22.1 39.5 -8.0 21.8 46.0 18.0 38.0 84.0
2010f 7.2 56.4 2,703 9.0 9.2 12.0 7.5 23.5 5.2 7.8 6.1 11.4 8.0 24.0 18.0 14.2 10.3 9.00 111.0 111.0 155.4 146.4 9.4 16.5 -7.2 -3.7 -6.5 1.5 2.7 -3.8 17.1 20.2 6.4 4.6 26.2 48.5 -7.1 23.7 42.0 20.3 36.0 78.0
2011ff 6.9 64.8 3,070 7.0 9.9 12.0 6.6 23.5 5.1 6.2 6.7 11.4 8.0 23.0 17.0 11.9 10.5 9.00 111.0 111.0 155.4 155.4 10.4 18.8 -8.3 -4.8 -7.5 1.5 2.3 -5.2 11.1 13.4 6.0 3.8 30.8 70.2 -5.5 25.9 40.0 22.0 34.0 72.0
7.7 28.3 1,421 7.3 6.0 13.9 5.7 23.7 6.5 10.0 13.5 17.3 1.1 12.6 20.7 18.3 11.5 13.35 107.7 103.9 142.1 130.6 6.9 10.3 -3.4 -1.4 -5.0 0.4 1.6 -3.4 8.5 15.6 2.2 2.6 13.3 27.9 -7.0 14.2 50.3 10.6 37.5 87.9
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Taiwan
Still a high beta economy
Taiwans internal growth drivers have started rotating into position, but the economy remains a high beta economy thats 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 Taiwans 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 Taiwans labour market and domestic demand recoveries to consolidate. But to protect itself from any drop in Western demand especially if the close relationship between Taiwans exports and lead indicators such as the US ISM and Taiwan PMI play out domestic growth drivers need to step up. That Taiwans 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 wont 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.
Donna Kwok Economist The Hongkong and Shanghai Banking Corporation Limited + 852 2996 6621 donnahjkwok@hsbc.com.hk
3Q10 GDP (% y-o-y) Industrial production (% y-o-y) CPI, end quarter (% y-o-y) WPI, end quarter (% y-o-y) Trade balance (% GDP) Current account (% GDP) International reserves (USDbn) Policy rate, end-quarter (%) 5yr yield, end-quarter (%) TWD /USD, end-quarter TWD /EUR, end-quarter
Source: HSBC, CEIC
4Q10e 3.2 11.0 1.8 2.1 5.9 6.5 387.5 1.625 1.01 29.5 39.8
1Q10e 1.9 9.0 2.2 8.0 6.4 6.3 396.5 1.750 1.40 28.5 35.6
2Q10e 0.0 7.0 2.5 7.0 8.4 9.2 408.5 1.875 1.20 28.0 36.4
3Q11e 7.1 9.0 3.3 6.0 2.1 1.7 413.1 2.000 1.10 27.5 37.1
4Q11e 9.3 13.0 2.8 5.0 3.7 4.7 421.3 2.125 1.00 27.0 37.8
1Q12e 5.7 11.0 2.4 4.0 3.3 3.7 428.3 2.250 1.20 27.0 37.8
2Q12e 7.7 13.0 2.3 4.0 4.1 5.0 436.7 2.375 1.40 27.0 37.8
3Q12e 3.9 9.0 0.9 3.0 3.3 4.9 444.2 2.500 1.60 27.0 37.8
4Q12e 1.5 7.3 2.0 2.0 5.0 5.1 452.0 2.625 1.80 27.0 37.8
9.8 18.8 0.3 3.8 6.5 8.3 380.5 1.375 0.88 31.2 42.8
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Taiwan: Macro framework

2006 Production, demand and employment GDP growth (% y-o-y) Nominal GDP (USDbn) GDP per capita (USD) Private consumption (% y-o-y) Government consumption (% y-o-y) Investment (% y-o-y) Industrial production (% y-o-y) Gross domestic saving (% GDP) Unemployment rate, ave. (%) Prices & wages CPI, average (% y-o-y) CPI, end-year (% y-o-y) WPI, end-year (% y-o-y) Manufacturing wages, nominal (% y-o-y) Money, FX & interest rates Central bank money M0, average (% y-o-y) Broad money supply M2, average (% y-o-y) Real private sector credit growth (% y-o-y) Policy rate, end-year (%) 5yr yield, end-year (%) TWD /USD, end-year TWD /USD, average TWD /EUR, end-year TWD /EUR, average External sector Merchandise exports (USDbn) Merchandise imports (USDbn) Trade balance (USDbn) Current account balance (USDbn) Current account balance (% GDP) Net FDI (USDbn) Net FDI (% GDP) Current account balance plus FDI (% GDP) Exports (% y-o-y) Imports (% y-o-y) International FX reserves (USDbn) Import cover (months) Public and external solvency indicators Commercial banks FX assets (USDbn) Gross external debt (USDbn) Private sector external debt (USDbn) Central government balance (% GDP) Gross public domestic debt (TWD bn) Gross public domestic debt (% GDP) Gross public external debt (USDbn) Gross public external debt (% GDP) Gross public sector debt (% GDP)
Source: HSBC, CEIC
2007 6.0 393.8 17,223 2.1 2.1 0.6 7.8 30.1 3.9 1.8 3.3 8.6 1.8 2.4 4.3 0.9 3.375 2.49 32.40 32.78 47.30 45.57 246.5 216.1 30.4 35.2 8.9 -3.3 -0.8 8.1 10.1 8.2 270.3 15.0 346.6 94.5 91.1 -0.1 3,190 24.7 3.5 0.9 25.6
2008 0.7 401.9 17,518 -0.9 0.8 -12.4 -1.8 27.3 4.1 3.5 1.3 -9.7 -0.3 7.0 2.7 -1.0 2.000 1.03 32.80 31.40 45.59 45.73 254.9 236.4 18.5 27.5 6.8 -4.9 -1.2 5.6 3.4 9.4 291.7 14.8 411.9 90.4 88.9 -0.8 3,390 26.9 1.5 0.4 27.2
2009 -1.9 380.0 16,509 1.1 3.9 -11.0 -8.1 26.3 5.9 -0.9 -0.2 5.8 -9.2 8.7 7.2 1.9 1.250 1.00 32.10 32.84 45.90 45.89 203.4 172.8 30.6 42.9 11.3 -3.1 -0.8 10.5 -20.2 -26.9 348.2 24.2 443.6 82.0 76.1 -3.4 3,610 28.9 5.9 1.6 30.5
2010e 9.6 430.4 18,572 3.8 0.8 22.8 24.6 28.9 5.2 1.0 1.8 2.1 8.0 7.2 4.4 4.5 1.625 1.01 29.50 31.48 39.83 41.64 267.8 239.9 28.0 38.0 8.8 -4.8 -1.1 7.7 31.7 38.8 387.5 19.4 478.9 99.5 92.0 -2.4 4,361 32.2 7.5 1.7 33.9
2011e 4.7 516.5 22,176 4.9 1.6 5.4 9.5 29.1 4.7 2.3 2.8 5.0 3.8 5.8 4.4 2.7 2.125 1.00 27.00 28.06 37.80 37.01 289.9 264.3 25.6 27.5 5.3 -2.2 -0.4 4.9 8.2 10.2 421.3 19.1 553.3 71.2 64.8 -1.9 4,671 32.2 6.4 1.2 33.5
2012e 4.5 571.8 24,256 4.8 1.5 4.0 10.0 29.3 4.5 2.0 2.0 2.0 2.3 4.6 4.3 4.0 2.625 1.80 27.00 27.00 37.80 37.80 335.5 312.9 22.6 27.0 4.7 -2.3 -0.4 4.3 15.7 18.4 452.0 17.3 586.6 70.1 64.0 -0.2 4,699 30.4 6.1 1.1 31.5
5.4 374.9 16,449 1.5 -0.7 0.1 4.7 28.8 3.9 0.6 0.7 6.4 1.4 5.1 6.2 1.9 2.750 1.93 32.59 32.66 43.02 41.04 223.8 199.6 24.2 26.3 7.0 0.0 0.0 7.0 12.8 11.5 266.1 16.0 336.3 85.8 75.2 0.1 3,046 24.9 10.6 2.8 27.7
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Thailand
The overhang remains
Thailands 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 tradedependent 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.
Wellian Wiranto Economist The Hongkong and Shanghai Banking Corporation Limited, (Singapore) +65 6230 2879 wellianwiranto@hsbc.com.sg Tushar Arora Economics Associate, Bangalore
3Q10 GDP (% y-o-y) Industrial production (% y-o-y) CPI, end quarter (% y-o-y) PPI, end quarter (% y-o-y) Trade balance (% GDP) Current account (% GDP) International reserves (USDbn) Policy rate, end-quarter (%) 5yr yield, end-quarter (%) THB/USD, end-quarter THB/EUR, end-quarter
Source: HSBC, CEIC
4Q10e 3.8 8.0 3.5 8.0 2.6 4.4 170.0 2.00 3.23 29.0 39.2
1Q11e 2.5 6.0 3.8 5.6 3.1 5.9 177.4 2.00 3.60 28.0 35.0
2Q11e 6.0 9.0 4.2 4.6 5.1 3.4 183.0 2.25 3.50 27.0 35.1
3Q11e 6.5 10.0 4.1 4.1 3.9 3.6 189.6 2.75 3.40 26.0 35.1
4Q11e 6.2 12.0 3.8 4.1 3.4 5.1 198.2 2.75 3.30 25.0 35.0
1Q12e 2.9 6.1 3.4 4.0 2.4 5.2 204.4 2.75 3.40 24.5 34.3
2Q12e 5.5 6.0 3.0 4.0 4.4 2.9 207.9 2.75 3.40 24.0 33.6
3Q12e 6.3 6.0 2.8 3.9 3.4 3.5 212.3 2.75 3.50 24.0 33.6
4Q12e 2.6 6.1 2.8 3.8 3.3 5.0 218.5 2.75 3.50 24.0 33.6
6.7 11.5 3.0 9.0 4.2 3.7 163.2 1.75 2.54 30.4 41.6
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Thailand: Macro framework

2006 Production, demand and employment GDP growth (% y-o-y) Nominal GDP (USDbn) GDP per capita (USD) Private consumption (% y-o-y) Government consumption (% y-o-y) Investment (% y-o-y) Industrial production (% y-o-y) Gross domestic saving (% GDP) Unemployment rate, end-year (%) Prices & wages CPI, average (% y-o-y) CPI, end-year (% y-o-y) PPI, end-year (% y-o-y) Manufacturing wages, nominal (% y-o-y) Money, FX & interest rates Central bank money M0, end (% y-o-y) Broad money supply M2, end (% y-o-y) Real private sector credit growth (% y-o-y) Policy rate, end-year (%) 5yr yield, end-year (%) THB /USD, end-year THB /USD, average THB /EUR, end-year THB /EUR, average External sector Merchandise exports (USDbn) Merchandise imports (USDbn) Trade balance (USDbn) Current account balance (USDbn) Current account balance (% GDP) Net FDI (USDbn) Net FDI (% GDP) Current account balance plus FDI (% GDP) Exports (% y-o-y) Imports (% y-o-y) International FX reserves (USDbn) Import cover (months) Public and external solvency indicators Gross external debt (USDbn) Short term external debt (% of intl reserves) Private sector external debt (USDbn) Central government balance (% GDP) Gross public domestic debt (THBbn) Gross public domestic debt (% GDP) Gross public external debt (USDbn) Gross public external debt (% GDP) Gross public sector debt (% GDP)
Source: HSBC, CEIC
2007 5.0 236.8 3,738 1.8 9.8 1.5 8.2 34.4 0.8 2.2 3.2 8.7 3.0 7.9 6.3 3.4 3.25 4.62 33.7 34.58 49.20 48.07 151.3 138.5 12.8 15.7 6.6 8.3 3.5 10.1 18.2 9.1 87.5 7.6 74.4 38.9 59.5 -2.3 3,197 39.0 14.9 6.3 45.3
2008 2.5 272.9 4,105 2.9 3.2 1.2 5.3 32.6 1.4 5.5 0.4 -1.7 10.2 11.3 9.2 15.7 2.75 2.48 34.7 33.28 48.23 48.46 175.2 175.6 -0.4 2.2 0.8 4.4 1.6 2.4 15.9 26.8 111.0 7.6 76.1 30.3 61.3 -1.1 3,434 37.8 14.8 5.4 43.2
2009 -2.3 263.9 3,900 -1.1 7.5 -9.2 -5.1 31.3 0.9 -0.8 3.5 10.0 -2.5 6.1 6.8 4.3 1.25 3.63 33.3 34.26 47.62 47.88 150.7 131.4 19.4 21.9 8.3 2.3 0.9 9.2 -14.0 -25.2 138.4 12.6 75.3 23.9 59.9 -4.4 3,977 44.0 5.5 2.1 46.1
2010e 7.9 319.7 4,691 5.0 6.5 9.8 18.3 35.8 1.0 3.3 3.5 8.0 5.1 8.0 5.0 6.7 2.00 3.23 29.0 31.57 39.15 41.75 188.8 176.4 12.3 14.1 4.4 5.0 1.6 6.0 25.2 34.3 170.0 11.6 63.1 16.2 52.0 -0.5 4,870 48.3 11.1 3.5 51.7
2011e 5.3 408.3 5,950 3.8 5.6 4.8 7.8 38.6 1.0 3.8 3.8 4.1 5.0 8.0 6.0 6.2 2.75 3.30 25.0 27.00 35.00 35.61 206.2 190.3 15.9 18.3 4.5 6.7 1.6 6.1 9.3 7.9 198.2 12.5 64.5 14.6 51.0 -0.8 4,883 44.3 13.5 3.3 47.6
2012e 4.3 462.0 6,619 3.9 5.1 5.0 8.6 38.6 1.1 3.1 2.8 3.8 3.4 8.0 6.0 6.9 2.75 3.50 24.0 24.25 33.60 33.95 225.5 209.0 16.5 20.2 4.4 8.0 1.7 6.1 9.4 9.8 218.5 12.5 66.5 13.7 52.0 -0.3 4,866 43.4 14.5 3.1 46.6
5.1 206.8 3,158 3.2 2.2 3.9 7.3 32.4 1.0 4.6 3.5 2.7 6.2 2.7 6.0 -0.9 5.00 4.87 35.5 37.93 46.79 47.67 127.9 126.9 1.0 2.3 1.1 8.5 4.1 5.2 17.0 7.9 67.0 6.3 70.0 40.7 54.6 1.2 3,187 40.6 15.4 7.4 48.1
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Vietnam
Stay tuned for the Congress
Vietnams 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 Vietnams 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
3Q 10 GDP (% y-o-y) Industrial production (% y-o-y) CPI, end quarter (% y-o-y) Trade balance (% GDP) International reserves (USDbn) Policy rate, end quarter (%) 5-yr yield, end quarter (%) VND/USD, end quarter VND/EUR, end quarter
Source: HSBC, CEIC
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 Vietnams 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.
Sherman Chan Economist The Hongkong and Shanghai Banking Corporation Limited + 852 2996 6975 shermanwkchan@hsbc.com.hk
4Q 10f 7.3 14.7 11.8 -10.7 15.5 9.00 11.00 19,800 26,730
1Q 11f 7.2 13.0 9.5 -15.1 16.0 9.00 11.50 19,800 24,750
2Q 11f 7.4 14.0 9.7 -10.5 16.5 9.00 11.50 20,000 26,000
3Q 11f 7.6 15.0 9.8 -10.4 17.0 9.00 11.50 20,000 27,000
4Q 11f 7.8 16.0 9.8 -7.6 17.5 9.00 11.50 20,000 28,000
1Q 12f 7.5 14.0 9.5 -12.2 18.0 9.00 11.50 20,000 28,000
2Q 12f 7.7 15.0 9.2 -8.5 19.0 9.00 11.50 20,000 28,000
3Q 12f 7.8 16.0 9.2 -7.7 20.0 9.00 11.50 20,000 28,000
4Q 12f 8.0 16.0 9.2 -5.8 21.0 9.00 11.50 20,000 28,000
7.2 14.2 8.9 -8.8 15.0 8.00 10.50 19,490 26,701
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Vietnam: Macro framework

2006 Production, demand and employment GDP growth (% y-o-y) Nominal GDP (USDbn) GDP per capita (USD) Private consumption (% y-o-y) Government consumption (% y-o-y) Investment (% y-o-y) Industrial production (% y-o-y) Gross domestic saving (% GDP) Unemployment rate, end-year (%) Prices CPI, average (% y-o-y) CPI, end-year (% y-o-y) PPI, end-year (% y-o-y) Money, FX & interest rates Broad money supply M2, average (% y-o-y) Real private sector credit growth (% y-o-y) Policy rate, end-year (%) 5yr yield, end-year (%) VND /USD, end-year VND /USD, average VND /EUR, end-year VND /EUR, average External sector Merchandise exports (USDbn) Merchandise imports (USDbn) Trade balance (USDbn) Current account balance (USDbn) Current account balance (% GDP) Net FDI (USDbn) Net FDI (% GDP) Current account balance plus FDI (% GDP) Exports (% y-o-y) Imports (% y-o-y) International FX reserves (USDbn) Import cover (months) Public and external solvency indicators Gross external debt (USDbn) Short term external debt (% of intl reserves) Private sector external debt (USDbn) Consolidated government balance (% GDP) Primary balance (% GDP) Gross public domestic debt (VNDbn) Gross public domestic debt (% GDP) Gross public external debt (USDbn) Gross public external debt (% GDP) Gross public debt (% GDP)
Source: HSBC, CEIC
2007 8.5 71.0 833 9.6 9.0 23.0 11.6 31.8 4.6 8.3 12.6 6.8 43.2 41.7 8.25 8.73 16,017 16,096 23385 22374 48.6 62.7 -14.1 -7.0 -9.8 6.6 9.3 -0.6 22.7 41.2 23.5 4.5 22.9 19.9 3.1 -5.0 -3.4 12.5 17.6 19.9 28.0 45.6
2008 6.2 79.5 921 9.3 7.5 3.8 11.8 27.9 4.7 23.0 19.9 20.0 25.0 4.7 8.50 10.00 17,483 16,759 24301 24259 63.1 80.6 -16.3 -10.8 -13.6 11.5 14.5 0.9 29.9 28.5 24.2 3.6 26.6 18.3 5.3 -5.0 -2.5 13.6 17.1 21.3 26.8 43.9
2009 5.3 92.2 1,054 3.7 7.6 8.7 7.2 31.6 5.4 7.1 6.5 2.0 15.0 17.9 8.00 11.70 18,200 18,317 26026 25672 59.7 68.4 -12.4 -7.4 -8.0 8.5 9.2 1.2 -5.4 -15.1 16.8 2.9 37.5 29.8 9.3 -8.0 -5.0 17.0 18.4 28.2 30.6 49.0
2010f 6.8 101.9 1,153 6.0 6.2 7.5 14.1 30.9 5.3 9.1 11.8 10.0 23.0 15.9 9.00 11.00 19,800 19,357 26730 25610 71.6 84.0 -11.9 -9.0 -8.8 11.0 10.8 2.0 20.0 22.8 15.5 2.2 41.8 32.3 10.2 -5.0 -4.0 20.7 20.3 31.6 31.0 51.3
2011f 7.5 115.2 1,289 7.7 5.3 7.0 14.5 32.5 4.9 9.9 9.8 8.0 18.0 15.1 9.00 11.50 20,000 19,950 28000 26438 77.0 91.0 -12.0 -8.0 -6.9 11.0 9.5 2.6 7.5 8.3 17.5 2.3 47.8 28.6 10.9 -4.8 -3.5 21.9 19.0 36.9 32.0 51.0
2012f 7.8 134.4 1,488 7.2 4.5 8.0 15.3 34.1 4.8 9.4 9.2 8.0 18.0 15.7 9.00 11.50 20,000 20,000 28000 28000 84.0 95.0 -10.9 -7.0 -5.2 12.0 8.9 3.7 9.1 4.4 21.0 2.7 56.5 23.8 12.8 -4.5 -3.2 24.2 18.0 43.7 32.5 50.5
8.2 60.9 724 8.3 8.6 9.9 16.0 36.5 4.8 7.5 6.6 4.2 33.6 23.5 7.75 8.30 16,050 16,006 21164 20307 39.6 44.4 -4.8 -0.2 -0.3 2.4 3.9 3.7 22.1 33.4 13.4 3.6 19.1 18.7 5.2 -5.0 -3.5 11.3 18.6 13.9 22.9 41.5
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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
Important Disclosures
This document has been prepared and is being distributed by the Research Department of HSBC and is intended solely for the clients of HSBC and is not for publication to other persons, whether through the press or by other means. This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other investment products mentioned in it and/or to participate in any trading strategy. Advice in this document is general and should not be construed as personal advice, given it has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to their objectives, financial situation and needs. If necessary, seek professional investment and tax advice. Certain investment products mentioned in this document may not be eligible for sale in some states or countries, and they may not be suitable for all types of investors. Investors should consult with their HSBC representative regarding the suitability of the investment products mentioned in this document and take into account their specific investment objectives, financial situation or particular needs before making a commitment to purchase investment products. The value of and the income produced by the investment products mentioned in this document may fluctuate, so that an investor may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested. Value and income from investment products may be adversely affected by exchange rates, interest rates, or other factors. Past performance of a particular investment product is not indicative of future results. Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues. For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research. HSBC Legal Entities* are listed in the Disclaimer below.
Additional disclosures
1 2 3 This report is dated as at 7 January 2011. All market data included in this report are dated as at close 5 January 2011, unless otherwise indicated in the report. HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBCs analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBCs Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.
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Global Economics Research Team

Global
Stephen King Global Head of Economics +44 20 7991 6700 stephen.king@hsbcib.com Karen Ward Senior Global Economist +44 20 7991 3692 karen.ward@hsbcib.com Madhur Jha +44 20 7991 6755 madhur.jha@hsbcib.com
Emerging Europe, Middle East and Africa

Alexander Morozov +7 495 783 8855 alexander.morozov@hsbc.com Murat Ulgen +90 212 376 4619 Simon Williams +971 4 507 7614 Liz Martins +971 4 423 6928 muratulgen@hsbc.com.tr simon.williams@hsbc.com liz.martins@hsbc.com
Europe
Janet Henry Chief European Economist +44 20 7991 6711 janet.henry@hsbcib.com Astrid Schilo +44 20 7991 6708 Germany Lothar Hessler +49 21 1910 2906 France Mathilde Lemoine +33 1 4070 3266 United Kingdom Stuart Green +44 20 7991 6718 Andrew Grantham +44 20 7991 2170 astrid.schilo@hsbcib.com
Latin America
Argentina Javier Finkman Chief Economist, South America ex-Brazil +54 11 4344 8144 javier.finkman@hsbc.com.ar Ramiro D Blazquez Senior Economist +54 11 4348 5759 Jorge Morgenstern Economist +54 11 4130 9229 Brazil Andre Loes Chief Economist +55 11 3371 8184 Constantin Jancso Senior Economist +55 11 3371 8183 Marcos Fernandes +55 11 6847 9787 Mexico Sergio Martin Chief Economist +52 55 5721 2164 Central America Lorena Dominguez Economist +52 55 5721 2172
ramiro.blazquez@hsbc.com.ar
lothar.hessler@hsbctrinkaus.de
jorge.morgenstern@hsbc.com.ar
mathilde.lemoine@hsbc.fr
stuart1.green@hsbcib.com andrew.grantham@hsbcib.com
andre.a.loes@hsbc.com.br
North America
Kevin Logan +1 212 525 3195 Ryan Wang +1 212 525 3181 Stewart Hall +1 416 868 7523 kevin.r.logan@us.hsbc.com ryan.wang@us.hsbc.com stewart_hall@hsbc.ca
constantin.c.jancso@hsbc.com.br marcos.r.fernandes@hsbc.com.br
sergio.martinm@hsbc.com.mx
Asia Pacific
Qu Hongbin Managing Director, Co-head Asian Economics Research and Chief Economist Greater China +852 2822 2025 hongbinqu@hsbc.com.hk Frederic Neumann Managing Director, Co-head Asian Economics Research +852 2822 4556 fredericneumann@hsbc.com.hk Leif Eskesen Chief Economist, India & ASEAN +65 6239 0840 leifeskesen@hsbc.com.sg Paul Bloxham Chief Economist, Australia and New Zealand +61 2925 52635 paulbloxham@hsbc.com.au Song Yi Kim +852 2822 4870 Donna Kwok +852 2996 6621 Sherman Chan +852 2996 6975 Wellian Wiranto +65 6230 2879 Seiji Shiraishi +81 3 5203 3802 Yukiko Tani +81 3 5203 3827 Sun Junwei Associate Sophia Ma Associate songyikim@hsbc.com.hk donnahjkwok@hsbc.com.hk shermanwkchan@hsbc.com.hk wellianwiranto@hsbc.com.sg seiji.shiraishi@hsbc.co.jp yukiko.tani@hsbc.co.jp
lorena.dominguez@hsbc.com.mx
Main contributors
Frederic Neumann Co-Head of Asian Economic Research The Hongkong and Shanghai Banking Corporation Limited +852 2822 4556 fredericneumann@hsbc.com.hk Frederic Neumann, PhD, is Managing Director and Co-Head of Asian Economic Research, based in Hong Kong. Before joining HSBC, Frederic was an adjunct professor at Johns Hopkins University, the Wharton Business School of the University of Pennsylvania, and the Graduate School of Pacific Studies and International Relations at UC San Diego, teaching courses on Asian sovereign risk analysis, international financial markets, international monetary policy, and Southeast Asian political 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 research associate of the Institute for International Economics in Washington, DC. A former Fulbright scholar, Frederic Neumann holds a PhD in International Economics and Asian Studies.
Qu Hongbin Co-Head of Asian Economic Research, Chief China Economist The Hongkong and Shanghai Banking Corporation Limited +852 2822 2025 hongbinqu@hsbc.com.hk 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 for 17 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 a leading Chinese bank and other Chinese institutions.
Seiji Shiraishi Chief Economist, Japan HSBC Securities (Japan) Limited +813 5203 3802 seiji.shiraishi@hsbc.co.jp 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 years and, 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 poll of economists.
Leif Eskesen Chief Economist, India & ASEAN The Hongkong and Shanghai Banking Corporation Limited (Singapore) +65 6239 0840 leifeskesen@hsbc.com.sg 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 years at the International Monetary Fund's headquarters in Washington, DC, where he was a Senior Economist and a country mission chief. During his time there, he covered a number of Asian and European countries and was engaged in regional work across Asian countries. In addition to macroeconomic and financial sector analysis, his responsibilities included assessing macroeconomic and structural policies and discussing policy priorities with country authorities. Leif has also held positions at Danmarks Nationalbank and one of Denmark's large commercial banks. He has published a number of papers across a wide range of topics, including fiscal policy and labour market issues. He holds a master's degree in economics from the University of Aarhus, Denmark.
Paul Bloxham Chief Economist, Australia & New Zealand HSBC Bank Australia Ltd (Sydney) +612 9255 2635 paulbloxham@hsbc.com.au 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 Reserve Bank of Australia, where he held a range of different roles in the Economic Analysis Department. These included heading up the overseas economies and financial conditions 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.
Song-yi Kim Economist, Asia The Hongkong and Shanghai Banking Corporation Limited +852 2822 4870 songyikim@hsbc.com.hk 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, and writes on broader topics affecting the region. At the IMF Song-yi conducted economic forecasting and general economic analysis from 2002 to 2006. She holds , masters degrees in economics and in public administration and development, including from the Harvard Kennedy School of Government.
Wellian Wiranto Economist, ASEAN The Hongkong and Shanghai Banking Corporation Limited (Singapore) +65 6230 2879 wellianwiranto@hsbc.com.sg Wellian joined HSBC in January 2010, primarily covering the Indonesia and Vietnam economies. Prior to HSBC, he covered the Indonesia economy at the Monetary Authority of Singapore (Singapores 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.
Donna Kwok Economist, Greater China The Hongkong and Shanghai Banking Corporation Limited +852 2996 6621 donnahjkwok@hsbc.com.hk Donna is an economist on HSBCs Greater China economics team. Before joining HSBC in July 2010, she worked as an economist for the Hong Kong-China equities research 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 at Deloitte Consulting (London). Donna holds an MA in International Relations (Economics and China Studies) from the Johns Hopkins University School of Advanced International Studies, and a BA (Hons) in Economics and Management from Oxford University.
Sherman Chan Economist, ASEAN The Hongkong and Shanghai Banking Corporation Limited +852 2996 6975 shermanwkchan@hsbc.com.hk Sherman is a Hong Kong-based economist covering Vietnam and the Philippines. Prior to joining HSBC, she lectured for undergraduate and MBA university programmes in Australia. Sherman also worked as an economist at Moodys 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.

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Asian

Macro Asian Economics First Quarter 2011

Now for the hard part

By Qu Hongbin, Frederic Neumann and Song-yi Kim

Macro Asian Economics First Quarter 2011

Macro Asian Economics First Quarter 2011

Source: CEIC, HSBC, Consensus Economics

Macro Asian Economics First Quarter 2011

Macro Asian Economics First Quarter 2011

Asia ex China, India & Japan av erage

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

Source: CEIC, HSBC

Macro Asian Economics First Quarter 2011

Monetary & fiscal policy assumptions

Fiscal policy assumptions for 2011

Fiscal policy assumptions for 2011

Source: HSBC, CEIC

Source: HSBC, CEIC

Macro Asian Economics First Quarter 2011

with exports especially reviving along with demand in the West

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

60.0 55.0 50.0 45.0 40.0 35.0

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

Asia Business Index (RHS)

Macro Asian Economics First Quarter 2011

Smoke under the hood?

Macro Asian Economics First Quarter 2011

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

5. Core CPI: accelerating sharply (% 3m/3m sa)

Source: CEIC, HSBC

Macro Asian Economics First Quarter 2011

7. Actual and forecast annual light vehicle sales (in millions)

8. Consumer confidence in Asia elevated, and stable

35 30 25 20 15 10 5 0 2003 2005 2007 2009 USA 2011e Ax J 2013e

105 100 95 90 85 80 75 70 Jan-00 Apr-02 Jul-04 Oct-06

140 120 100 80 60 40 20

Asia x J (simpl av g, LHS)

Spending, for now

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)

Macro Asian Economics First Quarter 2011

Asia x J CPI (simple av g)

Asia x J Priv ate Consumption

Macro Asian Economics First Quarter 2011

15.0 13.0 11.0 9.0 7.0

6 5.0 Jan-03 Dec-04 Nov -06 Oct-08 Real Wages Sep-10 4 2 0 -2

Macro Asian Economics First Quarter 2011

Source: CEIC, HSBC

Macro Asian Economics First Quarter 2011

Tricky, to say the least

Macro Asian Economics First Quarter 2011

Can China cap inflation?

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

Inflation to remain high

Chart 1. Food-induced CPI hikes

Macro Asian Economics First Quarter 2011

Chart 2. Rising commodity prices not helpful

500 400 300 200 100 0

CRB index (Rhs)

Itll get worse before it gets better

but Beijing can focus on taming inflation

Macro Asian Economics First Quarter 2011

Quantitative tightening works