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Asia Economic and Stock Market Outlook
Leading global growth, even as
OECD momentum ebbs
August 2010
Prasenjit K. Basu, Chief Economist (Asia ex-Japan), Daiwa Capital Markets
Tel: (65) 6321 3069
E-mail: [email protected]
ISM new orders and OECD CLI both suggest Asian exports in 2010 will
expand at their fastest pace in 20 years
OECD CLI recovering, but bigger boost likely from intra-EM demand
50
40
12
72
8
30
20
30
20
62
4
10
US imports from Asia to moderate next year, after double-digit growth in 2010
10
52
0
0
(10)
0
42
(4)
(20)
(8)
(30)
(40)
(12)
Nov -89
Nov -92
Nov -95
Nov -98
Ex ports: Asia-9: YoY%: 3mma (LHS)
Nov -01
Nov -04
Nov -07

(20)
22
(30)
Jan-95
Jan-97
Jan-99
Jan-01
US ISM new orders (6m lag, LHS)
OECD CLI (12 mth rate): 6 m lag (RHS)
Source: CEIC, Thomson Reuters, Daiwa

32
Jan-93
Nov -10
(10)
Jan-03
Jan-05
Jan-07
Jan-09
Jan-11
US imports from Asia-10 (% YoY, 3mma) (RHS)
Source: CEIC, Daiwa
The OECD composite leading indicator has been rising at its fastest pace in 20 years. We
expect intra-emerging-market (EM) demand to provide an additional fillip to demand for Asia’s
exports, ensuring that they rise in 2010 at their fastest pace in two decades.
With ISM new orders expanding sharply in 1H10 (and US inventories low), we forecast Asian
exports to the US to rise by 15-20% YoY through the rest of 2010, before decelerating at the
beginning of 2011. We expect Asian imports to outpace exports this year, boosting intra-Asian
exports and ensuring a powerful acceleration in Asian real GDP this year. Next year, growth
will depend more on domestic demand, with exports propped up mainly by intra-EM demand.
2
Private consumption in EM (Asia10+EM6) is three quarters of that in the
US, but increasing three times as fast
12,000
Aggregate private consumption expenditure
100
90
80
70
60
25
20
10,000
15
8,000
10
6,000
5
4,000
50
40
30
20
10
0
2,000
(5)
0
(10)
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Asia-10+EM6: US$bn (LHS)
US: US$bn (LHS)
Asia-10+EM6: YoY% (RHS)
US: YoY% (RHS)
Asia-10+BRM
Source: CEIC, Thomson Reuters, Daiwa


Aggregate private consumption expenditure
(as a % of US PCE)
Asia-10
Asia-11
Asia-10+EM6
Source: CEIC, Thomson Reuters, Daiwa
Non-Japan Asia-10 plus EM6 (Brazil, Russia, Mexico, South Africa, Argentina and Turkey) have
seen private-consumption expenditure (PCE) increase at more than twice the pace of the US PCE
since 2003 (and nearly three times that for 2008). We believe PCE growth in the Asia-10+EM6
should outpace that of the US considerably over the next five years.
Asia10+EM’s private consumption is about three quarters of that in the US. Even with our
expectation of private consumption in the US remaining weak from 2011-14, we believe there will be
ample consumption growth available in the emerging markets – not replacing the US completely, but
becoming a substantial substitute for it.
3
Asia’s exports less dependent on the OECD markets, and much more
driven by intra-Asia demand
% of total exports to US
1997
2007
2009
% of total exports to Asia exJapan
% of total exports to Japan
1997
2007
2009
1997
2007
2009
% of total exports to EU
1997
2007
2009
% of total exports to
OPEC+BRM
1997
2007
2009
Asia-10
17.9
21.7
18.4
13.4
15.9
18.4
34.9
18.4
24.2
19.0
19.5
19.1
13.7
13.5
10.2
12.3
15.6
17.0
8.8
13.0
12.8
15.1
18.4
11.6
11.3
9.3
10.4
10.9
17.7
6.5
11.6
11.0
13.6
42.2
47.2
17.2
36.6
38.6
48.3
25.8
52.8
40.8
37.3
42.4
38.2
61.1
28.1
46.1
45.5
50.2
46.9
64.9
60.2
41.2
46.7
39.2
64.3
27.5
52.4
48.3
54.5
40.1
66.6
61.7
42.0
47.9
17.4
6.1
5.3
23.4
10.8
12.6
16.6
7.1
9.6
14.8
11.5
8.4
4.5
2.2
20.7
7.1
9.1
14.5
4.8
6.5
12.0
7.8
8.2
4.4
1.8
15.9
6.0
9.8
16.1
4.5
7.1
10.4
7.4
13.0
14.7
23.9
16.5
12.4
14.7
18.0
14.1
14.4
15.7
14.5
20.1
13.5
21.3
11.3
14.8
11.7
17.0
10.7
10.9
14.1
16.0
19.7
12.5
20.3
11.2
12.8
11.3
20.5
9.5
10.4
11.9
15.4
3.9
2.3
10.8
4.1
6.7
2.7
1.0
2.8
NA
3.2
3.9
8.1
2.2
18.1
4.3
10.3
4.3
1.4
2.9
3.1
4.9
6.7
9.4
2.2
23.8
4.0
11.6
5.8
2.1
3.4
3.0
6.2
8.0
Asia-9
19.8
12.5
10.4
42.5
52.0
53.8
10.2
7.4
6.8
14.9
13.4
12.5
3.9
5.8
7.1
China
HK
India
Indonesia
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
Source: CEIC, Daiwa; Asia-9 excludes China
Note: EU = European Union, OPEC = Organization of Petroleum Exporting Countries, BRM = Brazil, Russia and Mexico



Asia is not immune to an OECD recession, but its dependence on OECD markets has
declined, with an increasing share of exports going to emerging economies.
Medium-term weakness in OECD demand will probably hurt Asia, but barely 30% of Asia9’s exports go to OECD markets, while 60.3% goes to Asia (including Japan), and nearly
two-thirds goes to non-OECD emerging economies. China is more dependent on the
OECD, but over half of its exports go to non-OECD economies too.
Given the large current-account surpluses, we think Asia has ample room to boost
domestic demand in 2010 and in subsequent years.
4
Asia: not a consumer market, did you say?
China: automobile sales have risen 7-fold over the past 9 years
India: cellular-phone subscriptions expanded 250-fold in the last decade;
2,000,000
500,000,000
1,500,000
400,000,000
300,000,000
80
200,000,000
60
40
500,000
100,000,000
0
20
0
May -00
May -02
May -04
Automobile sales (unit)
May -06
May -08
May -10
Jun-00
Automobile sales: 12mMA
0
Jun-02
Jun-04
Cellular subscribers: units (LHS)
Source: CEIC, Daiwa

120
100
1,000,000

140
still rising rapidly
Jun-06
Jun-08
Jun-10
Cellular subscribers: YoY% (RHS)
Source: CEIC, Daiwa
In 2009, 13.6m automobiles were sold in China – almost a seven-fold increase on the 2m units sold
in 2000. (Korea recorded a similar surge in sales from 1986-96, although Korea’s per capita GDP in
1986 was similar to China’s in 2007.) China’s savings rate is high – but declining slightly from its lofty
levels – and consumption is thus rising faster than the rapid pace of nominal income growth.
India also has a high savings rate (35%), but consumption is rising rapidly there too: cellular-phone
subscribers have increased 250-fold over the past decade. As China does not export cars (but
imports components), and India produces few handsets, these countries’ strengthening demand for
these products generates imports from the rest of Asia.
5
Risks from the EU-periphery contained until end-2011; moral
hazard reduced through IMF conditionality
14
US: money multiplier still falling sharply
12
120
14
100
12
30
60
8
40
6
0
2
(20)
Money Multiplier (M2x ): LHS
Jun-90
Base Money : YoY%
Jun-00

8
10
(10)
4
(20)
Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10
Jun-10
Money multiplier (x ): LHS
Money supply : M2: YoY%
Source: CEIC, Daiwa

20
6
4
Jun-80
10
0
20
Jun-70
50
40
80
10
Jun-60
EU: M3 declining despite ex panding monetary base
Base money : YoY%
Money supply : M3: YoY%
Source: CEIC, Daiwa
We believe there is little scope for contagion to Asia from the EU periphery via the external
debt route, as seven Asian economies – China, India, Malaysia, Singapore, Hong Kong,
Taiwan, Thailand – are net creditors to the world. Foreign reserves exceed short-term
external debt in the rest of Asia.
ECB purchases of government bonds (QE) should not be inflationary, in our view, given
that M3 growth is negative in the Eurozone: money multipliers have collapsed in both the
EU and US, and core CPI inflation is below 1% YoY, so central banks have ample room to
boost base money. Moral hazard from the massive EU rescue package is reduced via the
involvement of the IMF, and the necessity to meet IMF/EU surveillance targets before
withdrawing ‘rescue’ funds from the pool.
6
The crucial IT sector looks set for a powerful rebound in 2010 after nine
sluggish years
IT new orders growth has peaked, as inventories
(YoY %)
40
Asia's electronics exports to stay robust with strong
begin to rise
IT orders
30
30
20
20
20
10
10
0
(10)
0
(30)
(40)
Jun-96

0
(10)
Jun-98
Jun-00
Jun-02 Jun-04
Jun-06
Jun-08
(20)
(20)
(30)
(30)
(40)
Sep-96 Sep-98 Sep-00 Sep-02 Sep-04 Sep-06 Sep-08 Sep-10
Jun-10
US Inv entories: Computer & Electronic products
US imports from Asia-6, YoY% 3mma (LHS)
US New Orders: Computer & Electronic products
US Electronic NO, Yoy % 3mLag (RHS)
Source: CEIC, Daiwa

10
(10)
(20)
30
Source: US Census Bureau, CEIC, Daiwa
US new orders for IT products (computers and electronic items) are a good leading indicator of US imports from
the six Asia economies that depend on IT exports (Singapore, Taiwan, Malaysia, the Philippines, Thailand and
Korea – the last is the most diversified out of IT). US IT new orders have bottomed out – the actual level of orders
is still 30% lower than that for 2000 – and we expect the strength of new orders to be aided by low inventories.
Increased demand from the US has sparked a recovery in Asian electronics exports in the past two quarters.
Last year, there was a major IT-inventory adjustment, which appears to have been prolonged by the credit crisis.
However, we think the long-awaited turnaround has now begun, and looks likely to be reinforced by a longdelayed replacement cycle in IT hardware.
7
Food-driven inflation a near-term threat; risk of higher asset and
goods inflation from excessive capital inflows in 2010
Broad money supply
Headline inflation (YoY%)
20
30
(YoY%)
25
15
20
10
15
10
5
5
0
0
(5)
Jun-00
Jul-00
Jul-02
Jul-04
China
India
Jul-06
Jul-08
Indonesia
Korea
Source: CEIC, Daiwa


Jun-02
Jun-04
Jun-06
China (M2)
India (M3)
Indonesia (M2)
Jun-08
Jun-10
Jul-10
Korea (M2)
Source: CEIC, Daiwa
China and (especially) India switched quickly from deflation to inflation in 4Q09. The major culprit (as in
2007) was food inflation (6.1% YoY in China for May 2010, 16.5% YoY in India). Smaller Asia
economies (Singapore, Taiwan, Thailand, Malaysia) made the same switch to positive inflation in 1Q10.
Korea and Indonesia avoided deflation altogether, but inflation remains tame except in Chindia.
Rapid monetary growth in China has contributed to the rise in inflation, but monetary aggregates have
been muted elsewhere in Asia. Given its already-high inflation rate, we expect India to raise policy
rates 50bp by end-July. In China, we forecast another 50-basis-point hike in the reserve requirement
and a 54-basis-point rise in the policy rate. We expect other central banks in Asia to tighten in 2H10.
8
Global imbalances: Asia is helping to redress them (a little)
Gross fixed-capital formation: 1996-2008 (% change)
Asia-10's current account surplus shrinks, as does the US's deficit
China (+305.3%)
India (+222.8%)
US (+49.9%)
Singapore (+48.1%)
Eurozone (+41.4%)
OECD (+41.2%)
Indonesia (+24.2%)
Taiwan (+23.9%)
Philippines (+19.9%)
Korea (+13.2%)
HK (+9.6%)
Malaysia (-4.3%)
Japan (-18.0%)
Thailand (-27.4%)
-150
-100
-50
8
4
0
(4)
(8)
Dec-97
0
50
100
150
200
250
300


Dec-99
Dec-01
Asia-10
350
Source: CEIC, Daiwa

(as % of GDP, 4Q rolling sum)
12
Dec-03
Dec-05
ASEAN-4 + Korea
Dec-07
US
Source: CEIC, Daiwa
Asia’s large current-account surplus was arguably a major contributor to the excess-liquidity that led to the global
crisis. The US deficit has shrunk over the past year, as has China’s current-account surplus (which contracted to
6% of GDP for 2009, from 9.8% for 2008).
The rest of Asia’s surplus widened in 2009, so the region as a whole recorded scant reduction in its surplus. As
domestic demand rebounds in 2010, we expect Asia’s surplus to shrink further, to a still-healthy 4.5% of GDP.
Structural surpluses in Southeast Asia are partly a consequence of an investment drought. China’s low cost of
capital (and under-valued Renminbi) has resulted in an investment boom there, and an excessively capitalintensive pattern of economic growth. To address such internal imbalances, we expect China to allow the
Renminbi to appreciate to US$:Rmb6.45 by the end of 2010.
9
Dec-09
Asian REERs broadly stable over time; the argument for Renminbi
appreciation rests mainly on addressing internal imbalances
Asian REERs (Jan96=100): Broadly stable for the past decade
120
200
100
170
80
140
60
110
40
20
Jun-94
80
Jun-96
Jun-98
Jun-00
Jun-02
Jun-04
Jun-06
Jun-08
50
Jul-94
Jun-10
China
India
Indonesia
Korea
Malaysia
Singapore
Taiwan
Thailand
China
Source: CEIC, Thomson Reuters, Daiwa



Asian exchange rates vs US$: 1993 =100
230
140
Jul-96
India
Jul-98
Korea
Jul-00
Jul-02
Malaysia
Jul-04
Singapore
Jul-06
Jul-08
Taiwan
Jul-10
Thailand
Source: CEIC, Thomson Reuters, Daiwa
The currencies in Asia are all stronger against the US dollar than at their trough in 1997-98. However, only the
Singapore dollar is stronger now than in 1993 (and even it has appreciated by less than 1% a year against the US
dollar); the Rupiah, Rupee and Won are the weakest relative to their 1993 levels.
The real effective exchange rates (REERs) of all the currencies in Asia have been broadly stable since 1998;
China and India’s REERs are close to 1993 levels (although they have recorded more real effective appreciation
since 1996 than the other currencies).
The argument for China to appreciate the Renminbi is not that its REER has weakened. However, rapid
productivity growth (relative to the rest of the world), driven by much higher investment spending in China,
requires China’s real exchange rate to appreciate. In our view, the more compelling argument for Renminbi
appreciation is the need to address internal imbalances (over-investment, export-reliance, under-consumption).
10
US and Japan had prolonged bear markets after a five-fold surge in
market cap
16,000
3
Market Capitalisation trajectories (US$bn)
14,000
Market Cap to GDP Ratios
2
12,000
2
10,000
8,000
1
6,000
4,000
1
2,000
0
0
Dec-
Jul-
Feb-
Sep-
Apr-
89
91
93
94
96
US
UK
Nov - Jun97
99
Japan
Jan-
Aug-
Mar-
01
02
04
China+HK
Oct- May - Dec05
India
07
08
Dec-89
Jul10
China (A+B+H)
Source: CEIC, Thomson Reuters, Daiwa



Mar-92
Jun-94
Sep-96
Dec-98
Mar-01
Jun-03
Sep-05
Dec-07
US
UK
Japan
China
Brazil
India
Russia
China+HK
Source: CEIC, Thomson Reuters, Daiwa
US equity-market capitalisation increased more than five-fold in the decade ended August 2000, but only surpassed those levels
again briefly (June-October 2007) before falling back. In effect, the US has been in an eight-year bear market since August 2000
– a lot like Japan, which recorded a similar five-fold surge in the 1979-89 period followed by a decade-long bear market until the
end of 1999.
The key difference between the two economies lies in their approach to monetary policy – the Bank of Japan (BoJ) tightened
policy to deflate the asset bubble entirely, while the Federal Reserve has kept real interest rates low.
Market capitalisation-to-GDP ratios are similar across developed and developing countries, with the ratios for most countries
converging toward one, although there is no reason for this to be true always. Emerging markets see manifold increases in
market cap typically (as Japan did from 1951-80, before the 1980s increase).
11
Mar-10
Non-Japan Asia should narrow its market-capitalisation gap with the
US/Japan over the medium term
Market Capitalization - ASEAN and East Asia
3,000
5,500
5,000
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
(US$bn)
2,500
2,000
1,500
1,000
500
0
Market Capitalization - BRICs
(US$bn)
Jul-92
Jun-92
Jun-95
Singapore
Jun-98
HK
Jun-01
Malay sia
Jun-04
Jun-07
Thailand
Korea
Taiw an

Jul-98
China (A+B+H)
Source: CEIC, Thomson Reuters, Daiwa

Jul-95
Jul-01
Jul-04
Jul-07
Jul-10
Jun-10
Brazil
India
Russia
Source: CEIC, Thomson Reuters, Daiwa
High savings rates (over 50% for China, 35% for India, and 34% on average for the other economies
in Asia) and stable banking systems with robust domestic deposit bases should provide the platform
for strong economic growth over the medium term for Asia’s 10 big economies.
Superior medium-term growth prospects for emerging economies should ensure faster increases in
their market capitalisations, as compared with those of developed economies. The market
capitalisations of the BRIC economies look set to narrow the gap with the US’s market cap over the
medium term – and in fact did so quite sharply in 2009.
12
The rest of Asia has lost US market share to China, but less so over the
past two years
(%)
China has rapidly gained US market share in the past decade, less so recently (12-month
20
mov ing av erages)
(%)
3
S Asia ex ports to the US: trend decline in ASEAN economies' share, India gains from a low
base
3
2
15
2
10
1
1
5
0
May -94
0
May -94
May -96
May -98
May -00
May -02
May -04
May -06
May -08
May -10


May -98
May -00
May -02
May -04
May -06
May -08
Malay sia ex port: mkt share in US
Indonesia ex port: mkt share in US
ASEAN ex ports: mkt share in US
China ex ports: mkt share in US
Philippines ex ports: mkt share in US
Thailand ex ports: mkt share in US
Taiw an ex ports: mkt share in US
S Korea ex ports: mkt share in US
Singapore ex ports: mkt share in US
India ex ports: mkt share in US
May -10
Source: CEIC, Daiwa
Source: CEIC, Daiwa

May -96
China gained market share in the US at the expense of all of Asia (except India, which had a tiny
share) from 1997-05. Since 2006 (and in 2009 in particular), China’s market-share gains have been
at the expense of non-Asia economies, while the rest of Asia held its US market share stable.
China lost market share in 2008 as the Renminbi appreciated, but has resumed gaining market
share with the Renminbi stable since August 2008.
All of Asia (with the exception of India) has large bilateral trade surpluses with China (including Hong
Kong), and we think that mitigated the impact of the loss of market share in the US.
13
‘Stable disequilibrium’: China’s large surplus with the US and deficits
with Asia (ex-India) both declined in 2009, but are set to widen anew
Trade surpluses w ith the US
300,000
China's bilateral trade w ith Asian economies
US$m, 12m rolling sum
250,000
0
200,000
(20,000)
(40,000)
150,000
(60,000)
100,000
(80,000)
50,000
(100,000)
0
Jun-98
May -94
May -98
China+HK
May -02
ASEAN-5
May -06

Jun-00
Jun-02
Jun-04
Jun-06
Jun-08
May -10
ASEAN
Korea+Taiw an+India
Source: CEIC, Daiwa

US$m, 12 month rolling sum
20,000
Taiw an
India
Japan
Korea
Source: CEIC, Daiwa
We believe China’s large deficit with Asia will increase anew now that China’s loan and investment
growth is rebounding after the inventory correction in 4Q08-1Q09. Note, however, that Taiwan,
Korea and Japan are the main net suppliers of capital and intermediate goods to China – and have
large bilateral trade surpluses with China. ASEAN’s surplus reversed in 2009, but is rising slowly
once again, while India has a deficit.
China’s large bilateral surplus with the US shrank in 2009, but looks likely to shrink less in 2010.
However, China’s strong domestic demand should increase its bilateral deficits with Taiwan, Korea
and Japan in 2010.
14
Jun-10
China: global price environment turns unfavourable
Import prices rise much faster than export prices
(YoY %)
25
20
15
10
5
0
(5)
(10)
(15)
(20)
(25)
+ve ToT
(Rmb bn, monthly)
1,000
900
800
700
600
500
400
300
200
100
0
(100)
-ve ToT
Apr-01
Aug-01
Dec-01
Apr-02
Aug-02
Dec-02
Apr-03
Aug-03
Dec-03
Apr-04
Aug-04
Dec-04
Apr-05
Aug-05
Dec-05
Apr-06
Aug-06
Dec-06
Apr-07
Aug-07
Dec-07
Apr-08
Aug-08
Dec-08
Apr-09
Aug-09
Dec-09
Apr-10
Jan-05
Mar-05
May-05
Jul-05
Sep-05
Nov-05
Jan-06
Apr-06
Jun-06
Aug-06
Oct-06
Dec-06
Feb-07
Apr-07
Jun-07
Sep-07
Nov-07
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Dec-08
Feb-09
Apr-09
Jun-09
Aug-09
Oct-09
Dec-09
Mar-10
May-10
-ve ToT
Export price index
Net exports are shrinking
Import price index
Net exports
Gross exports
Source: CEIC, Daiwa



The terms of trade have turned negative again – for March, import prices rose by 17.6%
YoY while export prices increased by just 1.4% YoY.
Gross exports rose by 29% YoY for January-April, but net exports declined by 79% YoY.
Half of the surplus decline was due to the price effect (import price inflation and export
price deflation), and the other half was due to the volume effect (domestic-demand surge
driven by the stimulus).
15
China: industrial margins are under pressure
(YoY %)
8
CPI-PPI
Industrial production
(YoY %)
25
6
20
4
15
2
10
0
5
(4)
0
Apr-99
Oct-99
Apr-00
Oct-00
Apr-01
Oct-01
Apr-02
Oct-02
Apr-03
Oct-03
Apr-04
Oct-04
Apr-05
Oct-05
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
(2)
Apr-99
Oct-99
Apr-00
Oct-00
Apr-01
Oct-01
Apr-02
Oct-02
Apr-03
Oct-03
Apr-04
Oct-04
Apr-05
Oct-05
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
(6)
Light
Heavy
Source: CEIC, Daiwa


The PPI is rising more rapidly than the CPI. It is difficult to pass on price pressure fully to
consumers when supply capacity remains excessive.
Heavy industries react to the PPI, while light industries are sensitive to the CPI-PPI
differentials.
16
Investment demand overshoots
Central vs. local government projects
Growth contribution from FAI
(3MMA, YoY %)
45%
(Percentage point)
12
40%
10
35%
8
30%
6
25%
4
20%
2
0
15%
-2
10%
-4
5%
-6
0%
Central govt projects
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
1Q10
Apr-10
Feb-10
Dec-09
Oct-09
Aug-09
Jun-09
Apr-09
Feb-09
Dec-08
Oct-08
Aug-08
Jun-08
Apr-08
Feb-08
Dec-07
Oct-07
Aug-07
Jun-07
Apr-07
Feb-07
Dec-06
Oct-06
Aug-06
Jun-06
Apr-06
-8
Local govt projects
Final consumption
Fixed asset investment
Net exports
Source: CEIC, Daiwa




FAI still rose by a sharp 25.6% YoY for 1Q10 (from a high base for 1Q09).
Its contribution to GDP growth still reached 6.9 percentage points.
Urban projects by local governments still increased by 27.6% YoY for January-April, while
those by the central government slowed to 10.6% YoY.
Real-estate FAI accelerated to 37.6% YoY for January-April, from 19.9% YoY for 2009.
17
China: we think money and loans are still rising too rapidly
Inflation is a monetary phenomenon
(YoY %)
(Monthly new loans, Rmb bn)
2,000
(YoY %)
45
13
M1
11
CPI
9
Loan growth is still too high
7
40
1,500
35
30
1,000
25
15
1
10
(1)
5
(3)
0
500
0
(500)
Apr-00
Aug-00
Dec-00
Apr-01
Aug-01
Dec-01
Apr-02
Aug-02
Dec-02
Apr-03
Aug-03
Dec-03
Apr-04
Aug-04
Dec-04
Apr-05
Aug-05
Dec-05
Apr-06
Aug-06
Dec-06
Apr-07
Aug-07
Dec-07
Apr-08
Aug-08
Dec-08
Apr-09
Aug-09
Dec-09
Apr-10
20
3
Apr-01
Aug-01
Dec-01
Apr-02
Aug-02
Dec-02
Apr-03
Aug-03
Dec-03
Apr-04
Aug-04
Dec-04
Apr-05
Aug-05
Dec-05
Apr-06
Aug-06
Dec-06
Apr-07
Aug-07
Dec-07
Apr-08
Aug-08
Dec-08
Apr-09
Aug-09
Dec-09
Apr-10
5
Source: CEIC, Daiwa


Money/credit growth tends to overshoot real GDP growth in a reflation cycle, because
China’s monetary policy’s transmission mechanism is relatively weak – a large increase in
money/credit can only have a minor impact on real economic variables.
The need for massive monetary stimulus is now over, as real GDP has picked up
significantly.
18
China: the labour market is tighter than in 2007-08
Labour shortages are serious …
(m)
7
… especially in the coastal provinces
110%
105%
Demand-supply Ratio
5
100%
95%
Overall
98%
98%
97%
85%
86%
88%
94%
97%
104%
4
90%
85%
80%
Eastern
101%
99%
102%
89%
87%
90%
99%
101%
107%
Central
96%
97%
87%
82%
83%
88%
89%
92%
100%
75%
70%
Western
91%
94%
92%
86%
84%
80%
87%
93%
101%
65%
60%
Pearl River Delta
189%
145%
122%
97%
72%
81%
84%
126%
109%
96%
-
-
-
89%
89%
99%
99%
100%
109%
106%
110%
90%
86%
93%
100%
95%
101%
99%
111%
105%
95%
92%
92%
98%
114%
127%
6
3
2
1
Changjiang River Delta
Mar-01
Aug-01
Jan-02
Jun-02
Nov-02
Apr-03
Sep-03
Feb-04
Jul-04
Dec-04
May-05
Oct-05
Mar-06
Aug-06
Jan-07
Jun-07
Nov-07
Apr-08
Sep-08
Feb-09
Jul-09
Dec-09
0
Demand-supply ratio (RHS)
Demand (LHS)
Bohai Rim
Southeastern Fujian
Supply (LHS)
Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10
Source: 103-City Labour Market Survey, CEIC, Daiwa


In our view, the output gap has been completely closed. Exports have risen by more than
50% from the trough in 1Q09. The Rmb4tn stimulus has created millions of extra jobs,
competing directly with the manufacturing sector.
More permanently, the demographic dividend is now dwindling. The surplus of young, rural
labour is no longer in rich supply.
19
Current-account surplus and net capital inflows contribute to the
emergence of a property bubble






In our view, money supply growth has been too high for too long.
Capital is trapped domestically because of the closed capital account.
Mainland citizens have limited access to foreign investments, artificially
increasing the appeal of domestic investments such as property.
Very low or negative real interest rates. The People’s Bank of China
(PBOC) has been holding down interest rates for too long, in our view.
Local governments’ reliance on land sales for income (typically accounting
for up to 50% of revenue).
Infrastructure programmes make it easier for the local governments to
develop properties.
Cultural pressures encourage home ownership, particularly for men
seeking a wife.
20
China: we expect steady Rmb appreciation vs the US dollar; the
stock-market appears inexpensive
Wild swings in terms of trade
+ve ToT
350
-ve ToT
50
40
200
30
150
20
100
-ve ToT
Jan-05
Mar-05
May-05
Jul-05
Sep-05
Nov-05
Jan-06
Apr-06
Jun-06
Aug-06
Oct-06
Dec-06
Feb-07
Apr-07
Jun-07
Sep-07
Nov-07
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Dec-08
Feb-09
Apr-09
Jun-09
Aug-09
Oct-09
Dec-09
Mar-10
May-10

60
250
50
10
0
0
Jul-96
Jul-98
Jul-00
Jul-02
Jul-04
Shanghai Stock Ex change: B-shares index
Jul-06
Jul-08
Jul-10
PE Ratio: B Shares (RHS)
Import price index
Source: CEIC, Daiwa

70
300
Export price index

China: Shanghai B-share index v s trailing PE ratio
400
(YoY %)
25
20
15
10
5
0
(5)
(10)
(15)
(20)
(25)
Source: CEIC, Daiwa
Pegging the Renminbi to the US dollar was problematic for China.
The 2Q10 US-dollar bounce was mostly against the EUR, CHF and GBP. Oil and commodity prices
remain stubbornly high. To mitigate the impact, we believe China will have to allow the Renminbi to
rise against the US dollar to US$:Rmb6.45 by end-2010, a 5% rise from the current level.
The trailing PE-ratio for the stock-market is still close to a decade-low, suggesting that the undervalued market has room to move higher by end-2010.
21
China outlook – post-stimulus slowdown from 2Q10







Inflation pressure should continue to build for the rest of the year, unless
substantial tightening can be frontloaded.
We forecast the RRR to rise by 50 basis points and interest rates to
increase by 54 basis points (compared with a 216-basis-point reduction in
2H08).
The benchmark real deposit rate would still be negative.
We believe real GDP growth peaked in 1Q10, and will begin to slow on the
back of more tightening, waning stimulus support, and cooling external
demand.
Gross exports should do well this year, but net exports should contribute
less to GDP growth. We forecast the current-account surplus to shrink from
6.1% to 2.5% of GDP this year.
Our GDP forecasts: 9.8% YoY for 2010 and 8.6% YoY for 2011.
Our inflation forecasts: 3.5% YoY for 2010 and 2.5% YoY for 2011.
22
India: the global downturn slowed the economy to below-potential
growth, but a strong recovery now is under way
India: real GDP growth,
growth, fivefive- and
andten-year
10-year moving
moving averages
averages
India:
thelast
lasttwtwo
years
is rebounding
India:GDI
GDImoderated
moderated ininthe
o y ears
butbut
is rebounding
10
45
40
8
35
30
6
25
20
4
15
10
2
5
Real GDP
Real GDP, 10-y ear mov ing av g.
2009/10
2006/07
2003/04
2000/01
1997/98
1994/95
1991/92
1988/89
1985/86
1982/83
1979/80
1976/77
1973/74
1970/71
1967/68
1964/65
1961/62
1958/59
0
1955/56
1952/53
(YoY %)
12
10
8
6
4
2
0
(2)
(4)
(6)

1955
1961
1967
1973
1979
GDP: YoY%: 5y rMA(LHS)
Real GDP, fiv e-y ear mov ing av g.
1985
1991
1997
2003
2009
GDI: % of GDP (RHS)
Source: CEIC, Daiwa
Source: CEIC, Daiwa

0
The 9.7% YoY real GDP growth for FY06-07 was India’s strongest ever (apart from one monsooninduced year two decades ago), and the previous year’s 9.2% YoY was the next-fastest for 50 years.
After 9% YoY real GDP growth for FY07-08, the economy slowed sharply to 6.7% for FY08-09, but
rebounded to rise 7.4% YoY in FY09-10. We forecast 9.3% YoY real GDP growth in FY10-11.
We think the five-year moving average of real GDP growth (8.5%) is the new potential growth rate –
and will rise as the gross domestic investment rate has risen to 36% at present (from 25% seven
years ago), with the recent rebound in investment reflected in the continued strength of capital-goods
output and imports over the past five years (the gross domestic savings rate is at 35%).
23
India: services are structurally strong, imports decelerated with
industry, but oil worsened the current account
(YoY % )
20
Industrial production rebounding across the board
(YoY %, 3mma)
50
Cyclical manufacturing rebound gives the economy a fillip
40
15
30
10
20
5
10
0
0
(5)
(10)
(10)
(15)
Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10
Real GDP
Agriculture
Manufacturing

May-00
Consumer Goods
Services
May-02
Basic Goods
May-04
May-06
Capital Goods
May-08
May-10
Intermediate Goods
Source: CEIC, Daiwa
Source: CEIC, Daiwa

(20)
May-98
Services account for half of GDP, and have expanded at an average pace of 9.5% annually for the past 10 years
(10.2% for the past five years). The wider cross-border tradability of services bolsters their growth, as India is still
a price-taker in internationally traded services. After decelerating substantially over the past 15 months, we
expect Services to return to the previous decade’s trend pace. Near-5% average annual growth in agriculture
over the six years before last year’s drought bolstered private consumption, as did higher civil-servant salaries.
NREGA, and the shift in internal terms of trade in favour of agriculture, gave a big boost to rural consumption.
The moderation in manufacturing last year would have reduced the current-account deficit – but rising oil prices
caused the deficit to widen instead (to 2.5% of GDP for the 12 months to March 2009, and high defence imports
partly offset the impact of lower oil prices in FY09/10 – with the stronger-than-expected manufacturing rebound
led by capital goods boosting imports too).
24
India: rising net exports of services boost the current account, which
should also benefit from the rising substitution of net oil imports
Trade deficit w orsened in 4Q-09/10, as imports soared
80
(5,000)
(20,000)
(35,000)
(50,000)
(65,000)
(80,000)
(95,000)
(110,000)
(125,000)
Jun-95
Trade deficit w idened in the past tw o quarters, w eakening the CA balance
5
60
40
0
20
(5)
0
(10)
(20)
(40)
Jun-98
Jun-01
Jun-04
Jun-07
(15)
(20)
Jun-10
Mar-98
Trade Balance, 12m rollsum, US$m (LHS)
Ex ports, % YoY, 3mma (RHS)
Mar-04
Mar-06
Mar-08
Current Account: % of GDP, 4Q MA
Customs trade balance: % of GDP
Source: CEIC, Daiwa

Mar-02
Current Account: % of GDP
Imports, % YoY,3mma (RHS)

Mar-00
Source: CEIC, Daiwa
Rising oil imports were the key factor causing the trade deficit to balloon in 2008. With oil-import values declining,
and sluggish investment spending reining in other imports, the trade deficit has contracted to a two-year low.
Services exports have low import content, so they help bolster the current account directly.
Exports of goods and services (‘invisibles’) have increased 12-fold over 16 years. While the trade deficit was
nearly 8% of GDP, the current-account deficit was likely to have narrowed to 0.1% of GDP for FY09-10. With the
KG-6 gas and Rajasthan oil fields coming on stream, we expect India’s net oil-import bill to decline by nearly
20% for FY10-11, reducing the current-account deficit to 2.2% of GDP even as fixed-investment spending
rebounds this year.
25
Mar-10
India: rising FDI inflows bolster the BoP; lower real lending rates should
ignite an investment-led acceleration in GDP
Strong capital inflow s boost ov erall BoP
25,000
16
US$m, quarterly
20,000
15,000
India: Industrial growth is inversely correlated with real interest rate.
12
10,000
5,000
8
0
(5,000)
4
(10,000)
(15,000)
Mar-00 Mar-01
FDI
Mar-02
Mar-03
Mar-04
Portfolio Inv estment
Mar-05 Mar-06
Ex ternal Assistance
Mar-07
Mar-08
Mar-09 Mar-10
Commercial Bank Flow s

Jun-98
Jun-00
Jun-02
Jun-04
Industrial Production: YoY % , 3mma
Jun-06
Jun-08
Jun-10
Real Prime Lending Rate
Source: CEIC, Daiwa
Source: CEIC, Daiwa

0
Jun-96
Strong FDI inflows (over 3% of GDP for FY07-08 and FY08-09) are bolstering the overall balance of payments (BoP).
FDI is likely to stay strong, but portfolio flows are likely to be volatile. Foreign M&As by India corporates have been
funded offshore – and remain in some difficulty amid global de-leveraging.
Inflation was negative until September 2009, but surging food prices pushed headline WPI inflation to 10.2% YoY by May
2010. However, rising food prices (up more 16.5% YoY) have mitigated the impact on rural incomes from last year’s bad
monsoon. Real PLRs were at a 15-year high in September 2009, but they have declined in response to banks’ excess
liquidity, especially with WPI inflation rising to 10% YoY by March 2010. Lower real PLRs are helping to ignite a strong
investment-led rebound in manufacturing, which we expect to push real GDP growth to 9.3% for FY10-11 (aided also by
a likely improvement in agriculture).
26
India: overvalued equities slumped in 2008, but last year’s rally made them
rich again; near-term rupee weakness to end when inflation recedes
India: end-2009 valuations are mildly expensive, despite robust earnings
20,000
18,000
16,000
55
50
45
14,000
12,000
10,000
8,000
6,000
40
35
30
25
20
4,000
2,000
0
15
10
5
Jun-92
Jun-94
Jun-96
Jun-98
Jun-00
BSE Sensex -30 Index (LHS)
Jun-02
Jun-04
Jun-06
Jun-08

110
100
90
80
70
60
May -96
Jun-10
May -98
May -00
May -02
REER, FY95=100 (basket of six currencies)
PER: BSE Sensex (RHS)
Source: CEIC, Daiwa

The Rupee's REER is well above its central level of the past 15 years
120
May -04
May -06
May -08
NEER, FY95=100 (basket of six currencies)
Source: CEIC, Daiwa
The equity market’s trailing PER is slightly above its 10-year average – despite last year’s rally – as corporate earnings held up
reasonably well during the global downturn and have now begun to rebound sharply. We think the pipeline of disinvestment
proceeds will restrain the upside for equity prices. However, once the 3G-spectrum auction and disinvestment pipeline is
completed, the government’s borrowing requirement for the year ahead will be met comfortably without pushing 10-year bond
yields much above 8%.
We expect WPI inflation to moderate by June, as grain reserves (and the strong rabi harvest) are deployed to dampen food
inflation. We also expect the Rupee to rebound modestly against the US dollar by March 2011, as the current account swings
back to surplus with lower oil prices. However, the recent spurt in inflation has caused the REER to rise to the top of its 15-year
trading range, so near-term Rupee depreciation is likely; the Rupee rally must wait for a clear moderation in inflation to below 8%
YoY.
27
May -10
India: higher interest rates rein in industrial growth; some ‘crowding-in’
of investment as rates fall
India: Fiscal deterioration (of Jul08-Nov09) being reversed since Dec09
10
(INR bn)
8
Revenue Receipts
Tax Revenue
Non-tax Revenue
Capital Receipts*
Total Expenditure
Revenue Expenditure
Capital Expenditure
Revenue Balance
(% of GDP)
Fiscal Balance
(% of GDP)
Primary Balance
(% of GDP)
6
4
2
0
(2)
(4)
May-00
May-02
May-04
Fiscal deficit: 12mma, % GDP
May-06
May-08
May-10
Primary deficit: 12mma, % GDP
Source: CEIC, Daiwa


2008-2009
Actuals
5,403
4,433
969
67
8,840
7,938
902
-2,535
-4.5
-3,370
-6.0
-1,448
-2.6
2009-2010
2009-2010
2010-2011
Budget Estimates Revised Estimates Budget Estimates
6,145
5,773
6,822
4,742
4,651
5,341
1,403
1,122
1,481
53
302
451
10,208
10,215
11,087
8,972
9,064
9,587
1,236
1,152
1,500
-2,827
-3,291
-2,765
-4.8
-5.3
-4.0
-4,010
-4,140
-3,814
-6.8
-6.7
-5.5
-1,755
-1,945
-1,327
-3.0
-3.2
-1.9
Source: Ministry of Finance (India), Daiwa
The fiscal balance deteriorated sharply over the year to November 2009 (the ‘kitchen sink strategy’), but began
moderating in December 2009 as tax revenue began to benefit from the industrial recovery. The 2010 Budget
contained a credible strategy to boost revenue (2p.p. rise in excise duties, MAT raised to 18% from 15%, higher
customs duties on oil/gold/silver) without sacrificing the momentum of consumption spending (by lowering effective
income tax rates across the board). There were also elements of reform, with a GST now genuinely likely by April
2011, oil and fertilizer subsidies to be paid in cash, and oil-product prices up.
With credible disinvestment proceeds, and stronger revenue from the industrial acceleration (and wider service tax
base) we expect the actual fiscal deficit in FY10-11 to be about 5% of GDP. By the second half of the fiscal year, the
moderating borrowing requirement of the government will help crowd in more private investment (even as real PLRs
stabilize) and we forecast real GDP to rise by 9.3% YoY for FY10-11, albeit with higher average WPI inflation of 7.3%.
28
Korea: GDP looks set to stay strong, with inflation still tame
(YoY, %)
20
(%)
30
Leading indicator suggests economy peaked in 2Q10
Gradual rise in inflation prompts the first rate hike
25
15
20
10
15
5
10
0
5
(5)
0
(5)
(10)
Sep-86
Sep-90
Sep-94
Sep-98
Leading Composite Index , YoY %, 1Q lag
Sep-02
Sep-06
Sep-10

Jul-98
Jul-00
CPI: YoY%
Real GDP, YoY %
Source: CEIC, Daiwa

Jul-96
Jul-02
Core CPI: YoY%
Jul-04
Jul-06
Jul-08
Effectiv e ov ernight call rate
Source: CEIC, Daiwa
The leading indicators (both the Leading Composite Index and the shipment-to-inventory ratio)
suggest to us that economic activity is likely to rebound strongly in 2010. We forecast real GDP
growth of 7% YoY for 2010.
CPI inflation has been tame (at 2.7% YoY for May 2010, versus the Bank of Korea’s [BOK] official
target of 2-4%), with core CPI inflation barely edging up to 1.6% YoY. We expect Won appreciation
to bear some of the burden of tightening, but we also expect the policy rate to be raised by 25 basis
points in 3Q10 (with more aggressive action if Won-weakness persists).
29
Jul-10
Korea: fiscal stimulus on the wane, offsetting improved liquidity from the
rebounding trade surplus
Trade surplus near record highs, as ex port and imports soar
Fiscal easing in 1H09 w as follow ed by a gradual remov al of the stimulus in 2H09
50,000
6,000
4,000
20,000
0
10,000
0
(20)
(10,000)
(4,000)
(20,000)
(6,000)
(30,000)
May -04
May -05
May -06
Fiscal balance, 12mMA, (Wbn)
May -07
May -08
May -09
May -10
Jul-90
(40)
(60)
Jul-94
Jul-98
Trade balance, 12m rollsum, US$mn (LHS)
Fiscal balance, 6mMA, (Wbn)
Source: CEIC, Daiwa

20
0
(2,000)

40
30,000
2,000
May -03
60
40,000
Jul-02
Ex ports: %YoY
Jul-06
Jul-10
Imports: %YoY
Source: CEIC, Daiwa
The strong fiscal position in 1H08 allowed President Lee Myung-bak to provide a massive stimulus through lower
corporate, income, inheritance, and property tax rates. Fiscal policy likely to be less accommodative this year.
Improving terms of trade and a highly competitive Won are boosting the trade balance (to a record surplus of
US$41bn for 2009). After a current-account surplus of 5.6% of GDP for 2009, there is ample room for a domestic
demand-led rebound – and we forecast real GDP to expand by 7% as the current-account surplus moderates to
3.8% of GDP in 2010. We think exports will recover strongly as emerging economies crank up their fiscal engines:
Russia/India/Latin America now take more of Korea’s exports than the US, while China (27%) and ASEAN+Japan
(20%) are the biggest markets.
30
Korea: consumption looks set to recover strongly, as do facility
investment and exports
Korea: Facility investment moves with exports, except during the early
quarters of a new president's term
(YoY, %)
80
(YoY, %)
Korea: Consumer sentiment suggests robust priv ate consumption in 3Q10
14
120
115
10
60
40
110
105
6
100
20
0
2
(20)
(40)
95
90
(2)
(60)
Jun-86
(6)
Jun-90
Exports fob, % YoY
Jun-94
Jun-98
Jun-02
Jun-06

80
Sep-00
Jun-10
Facility investment, % YoY
Sep-02
Sep-04
Real priv ate consumption ex p, YoY %
Source: CEIC, Daiwa

85
Sep-06
Sep-08
Sep-10
Consumer ex pectations, 1Q lag (RHS)
Source: CEIC, Daiwa
Facility investment was weak for 2008, affected by the policy uncertainty that usually
accompanies a new president. However, President Lee’s shift of policy focus to
deregulation and economic growth (from ‘distribution’) should result in an investment-led
rebound in domestic demand by 2010, aided by a stable Won and robust export prospects.
Consumer confidence is near a 10-year high. After five years of subdued privateconsumption spending, we expect a powerful rebound in 2010.
31
Indonesia: we look for real GDP growth to rebound, aided by exports,
domestic consumption and FDI
(%)
(YoY %)
Loan growth gradually rising, aided by low interest rates
120
(% of GDP)
100
80
100
6
60
80
60
40
20
0
May -96
May -98
May -00
Loan/deposit ratio (LHS)
May -02
May -04
Comm'l bank deposits (RHS)
May -06
May -08
4
40
2
20
0
0
(2)
(20)
(4)
(40)
(6)
(60)
(8)
May -10
Mar-02
Comm'l bank loans (RHS)

Mar-03
Mar-04
Mar-05
Fiscal balance
Source: CEIC, Daiwa

Indonesia: fiscal stimulus reversed in the past two quarters
8
Mar-06
Mar-07
Mar-08
Mar-09
Fiscal balance, 4qma
Source: CEIC, Daiwa
Private consumption (4.9%) propped up GDP growth in 2009, aided by a 15.7% YoY increase in
government consumption, while fixed investment rose by a more moderate 3.3%. We expect
rebounding fixed investment to boost growth in 2010.
Banks are highly liquid (with a loan-to-deposit ratio of 75.6% at the end of 2009), so there is ample
scope to sustain loan growth. The fiscal deficit remains among the lowest in Asia, so we see little
need for any ‘exit strategy’.
32
Mar-10
Indonesia: robust, diversified exports should ensure the trade surplus,
and FDI rebound from a mild setback in 2009
Realised foreign investment still strong, but domestic capex is anemic
16000
14000
12000
10000
8000
6000
4000
2000
0
1991
1994
1997
2000
Domestic Investment
2003
2006
(3m rolling sum, US$m)
Foreign Investment
Source: CEIC, Daiwa


10,000
(YoY %, 3mma)
80
8,000
60
6,000
40
4,000
20
2,000
0
0
(20)
(2,000)
(40)
(4,000)
(60)
May -92
2009
The trade surplus is now back up to ov er US$2 bn a month
May -95
May -98
May -01
May -04
Trade balance (LHS)
Ex ports (RHS)
Non-oil ex ports (RHS)
Non-oil imports (RHS)
May -07
May -10
Imports (RHS)
Source: CEIC, Daiwa
Although its net exports of oil and gas are shrinking, Indonesia’s diversified export basket enables it
to run a modest monthly trade surplus, which has widened sharply in recent months. Asian demand
should ensure continued strength in non-oil exports this year.
FDI has staged a strong recovery in recent years, climbing to an all-time high in 2008, and boosting
fixed-investment spending. Last year, FDI moderated amid the global downturn, but should rebound
strongly this year and fixed-investment should remain a medium-term spur to real GDP, which we
forecast to expand by 6.5% YoY for 2010 and 6.1% YoY for 2011.
33
Indonesia: overall BoP solidly in surplus, boosting liquidity; equity
valuations still well below the pre-1997 ranges
(US$m)
Capital flight has been abating since 4Q/05
3,500
15,000
Indonesia: Valuations just below the post-crisis peak but not
35
excessively stretched vs pre-1997 PERs
30
3,000
10,000
2,500
5,000
2,000
25
20
15
1,500
0
10
1,000
(5,000)
500
(10,000)
Mar-96
Mar-98
Current account
Mar-00
Mar-02
Trade balance
Mar-04
Mar-06
Mar-08
Mar-10
Jun-94
Ov erall balance
(5)
Jun-98
Jakarta Composite Index (LHS)
Source: CEIC, Daiwa

0
0
Mar-94

5
Jun-02
Jun-06
Jun-10
Jkt Composite Index : PER ratio (RHS)
Source: CEIC, Daiwa
After some severe capital flight in the early stages of the post-Lehman crisis, Indonesia’s overall BoP
position had stabilised by March 2009, and has been robust ever since. With the rising currentaccount surplus, the overall BoP surplus should continue its trend improvement.
Despite the multi-year surge in equity prices since 2004 (and the setback during the global downturn),
the trailing PER (about 15x) is well below its five-year peak, and far below the pre-1997 valuations.
Consequently, portfolio inflows are likely to persist, given improved economic prospects.
34
Indonesia: stable/stronger Rupiah helps restrain inflation
(US$m)
(mths)
100,000
12
(YoY % , 3mma)
120
80,000
10
100
8
80
6
60
4
40
20,000
2
20
0
0
0
Foreign Reserv es gradually rebuilt since Oct05 as capital flight slow s
60,000
40,000
May -01
May -04
International reserv es (LHS)
May -07
(20)
Jun-98
May -10
Reserv e import cov er (RHS)
Source: CEIC, Daiwa


Indonesia: Slower base money growth strengthens IDR
and helps moderate headline inflation
Jun-00
Jun-02
Reserve money
Jun-04
Jun-06
CPI
Jun-08
Jun-10
Source: CEIC, Daiwa
Foreign reserves resumed rising in April 2009, as the pressure of capital flight eased.
A stable/stronger Rupiah helps restrain inflation, and the latter allows interest rates to fall. With base
money contracting, the Rupiah strengthened last year – allowing inflation to moderate as well. CPI
inflation looks likely to begin rising in 1Q10, but we see little need for any monetary tightening before
2H10.
35
Vietnam: A clear construction-led rebound in real GDP in 4Q09 (and 2Q10) came at the
price of sharply wider twin deficits
GDP by industry: disaggregated contibutions (YoY%)
10
Fiscal and current account deficits
5.0
8
6
0.0
4
(5.0)
2
0
(10.0)
(2)
Jun-00
Jun-01
Jun-02
Jun-03
Jun-04
Jun-05
Jun-06
Agriculture
Construction
Serv ices
Gross Domestic Product
Jun-07
Jun-08
Jun-09
(15.0)
Jun-10
1999
Industry


2001
2002
2003
2004
Fiscal balance (% of GDP)
Source: CEIC, Daiwa

2000
2005
2006
2007
2008
CA balance (% of GDP)
Source: CEIC, Daiwa, IMF
Note: 2009 figures are Daiwa estimates
Real GDP rebounded strongly to 7.7% YoY in 4Q09 (versus 3.1% YoY, 4.4% YoY and 5.2% YoY for the first three quarters of
2009). The strong performance in 4Q09 was aided by the 14% YoY surge in Construction (which accounts for a modest 9% of
GDP, but benefitted from the fiscal focus on infrastructure spending). After 5.9% YoY growth in 1Q10, construction again led
the acceleration to 6.3% growth in 2Q10.
The fiscal stimulus (passed piecemeal over the course of 2009) was targeted officially to total 8.7% of GDP, although some of
it (particularly interest subsidies) have spilt over into 2010. We estimate a fiscal deficit of 9% of GDP for 2009 – still a very
substantial stimulus, which has contributed clearly to the overheating.
The large trade deficit in 2H09 and 1H10, and elevated inflation, necessitated a pull-back from stimulative policy – which began
with the Dong’s devaluation (5% in November 2009 and 3.5% in February 2010) and a hike in interest rates.
36
2009
Vietnam: Surging loan growth stretched the banking system, and the fiscal stimulus took
the deficit to 9% of GDP
Loan growth aided by government stimulus measures
300
(% of GDP)
40
35
30
25
20
15
10
5
0
1991
1993
70
60
250
50
200
40
150
30
100
20
50
10
0
0
1993
1997
Loan-deposit ratio, % (LHS)
2001
Loans, %YoY (RHS)
2005
2009

(% of GDP)
0
(2)
(4)
(6)
(8)
(10)
1995
1997
1999
Govt. revenue: % of GDP (LHS)
Fiscal balance: % of GDP (RHS)
Deposits, %YoY (RHS)
Source: CEIC, Daiwa, IMF

Fiscal deficit remains large relative to Asian peers
2001
2003
2005
2007
Govt. expenditure: % of GDP (LHS)
Source: CEIC, Daiwa, MoF. Note: 2009 figures are Daiwa estimates
Overall credit is estimated to have increased by 38% YoY in 2009, much faster than the 27% YoY pace of
deposit growth – thus stretching the banking system even more severely, pushing the loan-to-deposit ratio to
about 150%. Credit decelerated to 10.3% YoY growth in June 2010, but the 2010 target of 25% is too high.
Fiscal austerity in 2H08 was crucial for reining in overheating pressure, but a renewed stimulus ensued in 2009
to counter the global downturn – including a 30% reduction in corporate tax for small-and-medium-sized
enterprises (SMEs), a four percentage-point interest subsidy on some loans (part of which was disbursed in
2010), and increased infrastructure spending. We think the early-March 2010 removal of the interest subsidy
was appropriate (but an outright rise in the policy rate would be more effective, in our view).
37
2009
Vietnam: trade deficit soared for 1H08, improved in 2H08 and 1Q09, but has widened
sharply in Apr09-Jun10 – limiting the improvement in the current account deficit
Trade deficit rising still high, but exports expanding faster than imports now
0
(% of GDP)
5
100
80
(5,000)
0
60
40
(10,000)
(5)
20
(15,000)
0
(20,000)
(20)
(40)
(25,000)
(60)
Jun-02
Jun-04
Jun-06
Trade balance(US$m): 12 mth rollsum (LHS)
Jun-08
Services and transfers reduce the current account deficit
(10)
(15)
(20)
Jun-10
(25)
1999
Ex ports (US$m) YoY% 3mma (RHS)
2000
2001
Imports (US$m) YoY% 3mma (RHS)
Source: CEIC, Daiwa


Source: CEIC, Daiwa, IMF
2002 2003 2004 2005 2006
Current account balance (% of GDP)
Customs trade balance (% of GDP)
2007
2008
2009
Note: 2009 CA figures are Daiwa estimates
The 12-month rolling sum of the trade deficit burgeoned to US$23bn by May 2008 (equal to 32.5% of the previous year’s GDP),
partly because of the strong Dong in the November 2007-February 2008 period. The June-July 2008 policy response (fiscal austerity
and a sharp rise in interest rates) helped lower the full-year trade deficit to US$17.5bn for 2008. After being restrained in 1H09, the
trade deficit deteriorated rapidly in 2H09 and 1Q10, as imports outpaced exports strongly, before stabilizing in 2Q10.
Vietnam’s services and transfers (tourism and remittances) surplus mitigates the trade deficit, but the 2008 current account deficit
expanded to 11.9% of GDP (from 9.8% in 2007), partly because of higher net outflows of income (repatriation of profits by
multinational corporations [MNCs]) but mainly on account of the larger trade deficit (especially in 1H08). We estimate the current
account deficit moderated to 10.3% of GDP for 2009, but improved mainly in 1H09, while the May 2009-March 2010 trend is in our
opinion unsustainable, and has necessitated two large Dong devaluations (November 2009 and February 2010). The Dong’s
depreciation should lower the current-account deficit to 9.8% of GDP in 2010, in our view, but the unwillingness to raise interest rates
faster will limit the degree of improvement in external balances.
38
Vietnam: FDI inflows remain robust, and a crucial source of support to the external balances;
portfolio inflows dried up in 2008-09
Foreign inflows turn positive, as the equity-price index gradually recovered over
the past year
(US$m)
400
1,200
3500
300
1,000
3000
200
800
2500
100
600
2000
0
400
1500
(100)
200
1000
(200)
Jun-02
Jun-03
Jun-04
Jun-05
Jun-06
Jun-07
HCMC: foreign investors: net buying (monthly) (LHS)
Jun-08
Jun-09


16
14
12
10
8
6
4
500
2
0
0
Sep-99 Sep-00 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09
FDI (US$ mn)
FDI: % of GDP
0
Jun-10
HCMC VN Index (RHS)
Source: CEIC, Daiwa

FDI moderated in 1Q09, but recovered in the next two quarters
Source: CEIC, Daiwa
Vietnam remains a darling of MNCs, especially Asian ones, and its attractiveness as a destination for foreign direct investment
(FDI) remains undimmed by other macro-economic woes, in our opinion. FDI inflows rebounded in 2Q-3Q09 to over 10% of
GDP, and we expect them to stabilise at a healthy 8-10% of GDP in the medium-term – an important source of support to the
external balances.
Large net foreign portfolio inflows were a crucial factor in helping to buoy the stock-market index in 2006-2007. Net foreign
portfolio inflows persisted throughout much of 2008, and continued for most of 2009 and 1H10. That left a large basic balance
deficit for 2008-09, although tempered in 2009 by the rebound in FDI inflows.
Since FDI is bundled with technology and market-access, FDI inflows of 8-10% of GDP would boost productivity and restore
annual real GDP growth to 7-8% over the medium term, in our view, once macro stability is restored. Although FDI is sufficient
to finance most of the current account deficit, the latter still undermines confidence – resulting in capital outflows.
39
Vietnam: foreign reserve position looks fragile to us; but the Dong’s depreciation and higher
domestic interest rates should enable external balances to improve
30,000
Foreign reserves fell in 2009, and estimates suggest further deterioration in 1H10
40
25,000
5
20,000
4
15,000
3
24
10,000
2
16
5,000
1
8
0
0
0
Dec-99
Dec-01
Dec-03
Foreign Reserv es: US$ mn
Dec-05
Dec-07
32
Jun-02
Dec-09


Jun-03
Jun-04
Prime interest rate
Reserv es import cov er: mths
Source: CEIC, Daiwa, IMF

Inflation receded in the past 3 months, but can surge w ith accommodativ e monetary policy
48
6
Jun-05
Jun-06
CPI: YoY%
Jun-07
Jun-08
CPI (food): YoY%
Jun-09
Jun-10
Ceiling Rate
Source: CEIC, Daiwa
After inflation rose rapidly to 28.3% YoY in August 2008, the State Bank of Vietnam’s (SBV) aggressive 525-bp hike in the base rate
pushed the ceiling on lending rates to 21%. CPI inflation moderated to 19.9% YoY by December 2008, and sharply to 3.9% YoY for June
2009 (albeit still averaging over 10% YoY for 1H09). With month-on-month inflation moderating, the benchmark rate was cut by 700 bps
to 7% in the October 2008-February 2009 period, helping to offset the impact of the global downturn.
However, inflation began rising sharply again between September 2009 and March 2010 (9.7% YoY), and the SBV raised the
benchmark rate to 8% in December 2009. With CPI inflation at 8.7% YoY in June 2010, and looking likely to resume rising in the wake of
the Dong’s depreciation, we expect the policy rate to rise by a further 100 bps this year (to 9%).
Foreign reserves declined to US$16.8bn in December 2009; we think the absence of timely, credible data prompts risks of speculation.
The US$1bn sovereign bond issue in January 2010 bolstered reserves (but was expensive). Reserves are estimated (by the IMF) to
provide only seven weeks’ import cover currently, but external debt is modest (US$24bn, with only about US$5bn short-term): fragile but
not facing an imminent crisis, in our view.
40
Asia’s demographics: well-endowed until at least 2015
950
850
China
India
Indonesia
Republic of Korea
750
650
550
450
2050E
2045E
2040E
2035E
2030E
2025E
2020E
2015E
2010E
2005
2000
1995
1990
1985
1980
1975
1970
1965
1960
1955
1950
350
Dependency ratio (ratio of population aged 0-14 and 65+ per
thousand population 15-64)
Source: CEIC, Daiwa


We expect non-Japan Asia to continue to benefit from declining dependency ratios until 2020.
Typically, savings rates rise during periods of declining dependency ratios (this began to happen in
Asia from 1965 onwards; in India from 1980). Higher savings should be able to fund higher
investment rates, enhancing the productivity of the increasing workforce.
Technology (embodied in FDI and through imports) should ensure strong total factor productivity
(TFP) growth and a rapid economic catch-up for Asia. We think India has the demographic
advantage for 2020-50.
41
China and Japan: mirror-image demographics
China 2020,
millions of people
80+
75 - 79
70 - 74
65 - 69
60 - 64
55 - 59
50 - 54
45 - 49
40 - 44
35 - 39
30 - 34
25 - 29
20 - 24
15 - 19
10 - 14
5-9
0-4
70 60 50 40 30 20 10 0
Japan 2020,
millions of people
8 7 6 5
0 10 20 30 40 50 60 70
Source: UN, Daiwa

4 3 2 1 0
0 1 2 3 4 5 6 7 8
Note: females on the left, males on the right scale
Note: females on the left, males on the right scale

80+
75 - 79
70 - 74
65 - 69
60 - 64
55 - 59
50 - 54
45 - 49
40 - 44
35 - 39
30 - 34
25 - 29
20 - 24
15 - 19
10 - 14
5-9
0-4
Source: UN, Daiwa
Japan has entered the most daunting phase of its demographic transition, in our opinion. Savings
rates look likely to decline and the old-age dependency ratio looks set to surge between now and
2020. A surge in public debt compounds the problem, but that should improve as growth picks up
and deflation (especially of assets) ends.
This decade, China’s demographics are probably at their most favourable for economic growth. By
2020, the population will have aged a bit more, and its dependency ratio should be past its trough.
However, we think China’s demographics will still look a lot better than Japan’s.
42
India: demography should support steadily stronger growth
India 2000
80+
75 - 79
70 - 74
65 - 69
60 - 64
55 - 59
50 - 54
45 - 49
40 - 44
35 - 39
30 - 34
25 - 29
20 - 24
15 - 19
10 - 14
5-9
0-4
0
60 50 40 30 20 10 0
Source: UN, Daiwa
Note: females on the left; males on the right


India 2020
10 20 30 40 50 60
80+
75 - 79
70 - 74
65 - 69
60 - 64
55 - 59
50 - 54
45 - 49
40 - 44
35 - 39
30 - 34
25 - 29
20 - 24
15 - 19
10 - 14
5-9
0-4
0 10 20 30 40 50 60
60 50 40 30 20 10 0
Source: UN, Daiwa
Note: females on the left; males on the right
The huge number of young people in the population today will reach working age over the
next 15-20 years. By 2020, India is expected to have 270m people (more than today’s total
US population) between the ages of 15 and 35.
Savings rates and productive potential should be at their highest. In our view, the challenge
for India is to develop a more labour-intensive growth model to take full advantage of the
productive potential of the masses.
43
Asia: baseline forecasts
Real GDP YoY%
CPI YoY%
Current account
Exchange rate
( year avg)
(% of GDP)
(vs US$) (year end)
2010
2011
2010
2011
2010
2011
2010
2011
China
9.8
8.6
3.5
2.5
2.5
2.8
6.45
6.20
Hong Kong
3.5
3.8
3.0
2.5
7.4
6.0
7.78
7.80
India
9.3
9.0
7.3
4.2
(2.2)
(1.9)
44.00
41.50
Indonesia
6.5
6.1
4.5
4.8
1.0
0.8
8,700
8,500
Korea
7.0
5.1
3.2
2.9
3.8
3.4
1,100
1,060
Malaysia
6.2
5.6
2.2
2.4
15.4
15.0
3.08
2.97
16.0
6.5
1.9
2.0
18.6
16.0
1.35
1.31
Taiwan
9.4
4.9
1.9
1.6
7.8
7.3
31.3
30.6
Thailand
7.7
4.3
1.9
2.0
4.6
4.0
32.0
31.8
Vietnam
6.4
6.8
9.2
7.4
(9.8)
(8.8)
19,600
20,300
Singapore
Source: Daiwa forecasts
Note: WPI for India
Note: For India, 2010 = FY10E, April 2010 to March 2011
44
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which is resident or located in any state or country or jurisdiction where such publication, distribution or use would be contrary to any statutory legislation, or regulation which would require DAIWA and its affiliates/ group companies to any registration or licensing requirements. The views expressed in the report accurately reflect the analyst’s personal
views about the securities and issuers that are subject of the Report, and that no part of the analyst’s compensation was, is or will be directly or indirectly, related to the recommendations or views expressed in the Report. This report does not recommend to US recipients the use of Daiwa Capital Markets India Private Limited or any of its non – US
affiliates to effect trades in any securities and is not supplied with any understanding that US recipients will direct commission business to Daiwa Capital Markets India Private Limited.
Taiwan
This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd and it may only be distributed in Taiwan to institutional investors or specific investors who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd in accordance with the Operational Regulations Governing Securities Firms Recommending
Trades in Securities to Customers. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd in respect of any matter arising from or in connection with the research.
United Kingdom
This research report is produced by Daiwa Securities Capital Markets Co., Ltd and/or its affiliates and is distributed by Daiwa Capital Markets Europe Limited in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Services Authority (“FSA”) and is a
member of the London Stock Exchange, Chi-X, Eurex and NYSE Liffe. Daiwa Capital Markets Europe Limited and its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such
issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and its affiliates may have positions and effect transactions in such securities or options and
may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.
This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FSA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are
obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.
Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-and-regulatory. Regulatory disclosures of investment banking relationships are available at
http://www.daiwausa.com/.
Germany
This document has been approved by Daiwa Capital Markets Europe Limited and is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany.
Dubai
This document has been distributed by Daiwa Capital Markets Europe Limited, Dubai Branch. Related financial products or services are intended only for professional clients and no other person should act upon it. Daiwa Capital Markets Europe Limited is duly licensed and regulated by the Dubai Financial Services Authority.
United States
This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMA’s views at any time. Neither DCMA nor the
preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses.
Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own inv estment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding
that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws
regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital
Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (telephone 212-612-7000).
Ownership of Securities: For “Ownership of Securities” information please visit BlueMatrix disclosure Link at http://www2.us.daiwacm.com/report_disclosure.html.
Investment Banking Relationships: For “Investment Banking Relationships” please visit BlueMatrix disclosure link at http://www2.us.daiwacm.com/report_disclosure.html.
DCMA Market Making: For “DCMA Market Making” please visit BlueMatrix disclosure link at http://www2.us.daiwacm.com/report_disclosure.html.
DISCLAIMER (Cont’d)
Research Analyst Conflicts: For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at http://www2.us.daiwacm.com/report_disclosure.html. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household)
an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relev ant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.
Research Analyst Certification: For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at http://www2.us.daiwacm.com/report_disclosure.html. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research
analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific
recommendations or views contained in this Research Report.
The following explains the rating system in the report as compared to relevant local indices, based on the beliefs of the author of the report.
"1": the security could outperform the local index by more than 15% over the next six months.
"2": the security is expected to outperform the local index by 5-15% over the next six months.
"3": the security is expected to perform within 5% of the local index (better or worse) over the next six months.
"4": the security is expected to underperform the local index by 5-15% over the next six months.
"5": the security could underperform the local index by more than 15% over the next six months.
Additional information may be available upon request.
Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law
(This Notification is only applicable where report is distributed by Daiwa Securities Capital Markets Co. Ltd.)
If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items.
In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction.
In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.
For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements.
There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or
margin requirements.
There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us.
Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants.
* The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.
When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us.
Corporate Name:
Daiwa Securities Capital Markets Co. Ltd.
Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.109
Memberships:
Japan Securities Dealers Association, Financial Futures Association of Japan