Re-flation to take effect from 3Q
The big question on everybody’s lips is about China’s economic growth.
Economists are very much divided in their GDP growth forecasts for 2009. A
survey of economists conducted by The Economic Observer had growth
forecasts ranging from a low of 5% right up to 9% for 2009. Foreign
institutions are generally more bearish than their Chinese counterparts.
Since October, when IP fell below the 10.0% threshold to 8.2% (and to 5.4%
in November) the Chinese government has intensified its efforts to boost
growth. It spent RMB100b to boost the economy in November-December, and
another RMB130b in January, even though the 2009 budget has not yet been
finalized. Results of the stimulation program can be seen in new loan data,
with a record RMB1.62t in news loans granted in January alone (even though
a proportion of these are old loans re-classified as new), and there being only
18 working days that month.
Nevertheless, it is too early to see any turnaround in terms of growth. Despite
February PMI rising to 49, from January’s 45.3, 41.2 in December and 38.8 in
November, most economic statistics do not indicate much room for optimism.
Exports fell by 17.5%, Shanghai IP growth dived 21.4% (national IP growth is
not available), fiscal revenues declined 17.1%, PPI plunged 3.3% and housing
transactions fell 50% y-y in Shanghai.
It is unreasonable to expect the stimulus package to have an instant effect on
the real economy. It takes time. With China’s GDP growth experiencing a hit
at the end of last year (6.8% in 4Q08, the lowest since 2Q98), the slowdown
can be expected to continue in 1Q09 and even into 2Q09. M1 growth slowed
to only 6.7% in January, contrasting sharply with 21.3% growth in outstanding
loans and 18.8% growth in M2 – evidence that new loans have not yet been
utilized to re-flate the real economy.
The problems in the economy are what we expected. The huge debt financing
(RMB950b of new treasury bonds are expected), investment projects being
rolled out one after another and large corporate term deposits should
generate strong demand for building materials, capital goods and labor from
late 2Q08 at the earliest or from 3Q08 onwards.

Contents
Growth outlook, policy analysis and risk scenarios ....................................................... 3
Thematic topics.............................................................................................................. 5
Re-flation to take effect from 3Q 5
Bail out and upgrade 10 industrial sectors 12
Property: Let the market clear .................................................................................... 18
Tracking RMB .............................................................................................................. 25
Capital markets ........................................................................................................... 30
Policy and liquidity rally ends 30
Bond markets: Relating? 33
Macroeconomic monitor .............................................................................................. 35
Appendices .................................................................................................................. 49
1. 12-month major economic indicators 49
2. 12-month major industrial products 51
3. Industrial profitability 52
4. Urban fixed-asset investment growth by sector 53
5. Return on equity of major industries 55
6. Key economic forecasts 56