PP 7767/09/2010(025354)

Economic Highlights
Global
•
MARKET DATELINE

3 March 2010

1 China’s Hidden Debt Risks 2012 Crisis

2 Euroland’s Inflation Eased In February

3 Japan’s Unemployment Rate Eased And Household

Spending Moderated Yoy

4 Thailand’s Inflation Eased In February

5 Indonesia’s Inflation Rate Accelerated And Exports

Strengthened

6 India’s Exports Bounced Back In January

Tracking The World Economy...

Today’s Highlight

China’s Hidden Debt Risks 2012 Crisis

China’s hidden borrowing may push government debt to 96% of GDP in 2011, according to Professor Victor Shih, a
political economist at Northwestern University in Evanston, Illinois, who spent months researching borrowing transactions
by about 8,000 local-government entities. His forecast for debt-to-GDP is far higher than an International Monetary Fund
(IMF) estimate of 22% for China in 2010, which excludes local-government liabilities. The IMF sees the government debt
of Spain at 69.6% of GDP, the US at 94%, Greece at 115% and Japan at 227% in 2010.

This increases the risk of a financial crisis that may happen in the world’s third-biggest economy in 2012, according to
Professor Shih. Professor Shih is the third person that sent out such a warning prediction, after Professor Kenneth Rogoff
from Harvard University who said on 23 February that a debt-fueled bubble in China may trigger a regional recession
within a decade, while hedge-fund manager James Chanos has predicted a Chinese slump after excessive property
investment.

Surging borrowing by local-government entities, uncounted in official estimates of China’s debt-to-GDP ratio, is the key
reason for Shih’s concern. Estimate of the total debt accumulated by investment vehicles set up by local governments
ranged from RMB6-11trn. About 40% of China’s RMB9.6trn in new loans in 2009 went to local governments, according
to a state media’s report.

Nevertheless, China has begun to take proactive measures to address this issue. It was reported in late February that
the China Banking Regulatory Commission (CBRC) has told commercial lenders to tighten their grip on credit to local
governments in an effort to ward off potential risks of default. The CBRC has ordered banks to inspect their existing
loans to commercial units used by local governments to raise funds, and to stop lending to those projects that are backed
only by expected fiscal revenues. Off-balance-sheet borrowing by cities, counties and provinces helped finance a wave
of public works construction in 2009 that contributed to the nation’s growth. The CBRC’s move followed a decision by
the top economic planning agency to tighten control over bond issuance by such investment vehicles, as worries mount
over a build-up of local government debt.
Peck Boon Soon
(603) 9280 2163
Please read important disclosures at the end of this report.
bspeck@rhb.com.my

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 3 March 2010

The Euroland Economy

Euroland’s Inflation Eased In February

◆ Euroland’s preliminary headline inflation rate eased to 0.9% yoy in February, from +1.0% in
January. This was due partly to a higher base effect and we believe inflation rate will likely inch up in
the months ahead, albeit gradually. A recovery in economic growth, coupled with a sustained increase in
inflation, has prompted the European Central Bank (ECB) to pull back some emergency measures in
November. Nevertheless, the energy-induced increase in the headline inflation may not prompt the ECB
to raise its key policy rate soon, as it continues to expect a moderate inflation in 2010. As a whole,
this suggests that the ECB is likely to hold its key policy rate stable at a record low of 1.0% in
the near term, but would continue to unwind some of its emergency programmes. Indeed, the ECB will
likely stop its quantitative easing policy as well, which started in July 2009, once it hits its target. Thus
far, the ECB has purchased €38.7bn of bonds or 65% of the target as at end-February 2010.

Asian Economies

Japan’s Unemployment Rate Eased And Household Spending Moderated Yoy

◆ Japan’s unemployment rate eased to 4.9% of total labour force in January, from 5.2% in December. This was
the lowest level in 10 months, pointing to an improvement in job market in tandem with a recovery in the global
economic activities. In fact, the economy added 540,000 jobs in January, the most since October 1973 and after a gain
of 60,000 jobs in December. This suggests that a rebound in exports and industrial production have encouraged
businesses to hire. This, in turn, is beginning to trickling down to consumer spending in the country. As a result, Japan’s
real household spending increased for the sixth straight month, though growth eased somewhat to 1.7% yoy
in January, from +2.1% in December. Mom, real household spending fell by 1.3% in January, compared with +0.2% in
December.

Thailand’s Inflation Eased In February

◆ Thailand’s inflation rate eased to 3.7% yoy in February, from a 16-month high of +4.1% in January. This
suggests that price pressure has eased somewhat due to a slowdown in prices of non-food items, which moderated
to 2.9% yoy in February, from +4.7% in January. The moderation was mainly on account of slower increases in the
costs of housing and transport as well as a sharper decline in the costs of recreation & education. These were, however,
offset partially by higher food prices, which rose by 5.1% yoy in February, compared with +3.2% in January. The
moderation in inflation rate will provide more room for the Bank of Thailand to hold its key policy rate stable, though it
has indicated that it will select the right timing to reduce stimulus measures, as the economic recovery has gathered
strength and there is less necessary to keep interest rates low. The central bank left its key policy rate unchanged at
a 5-year low of 1.25%.

Indonesia’s Inflation Rate Accelerated And Exports Strengthened

◆ Indonesia’s inflation rate accelerated to 3.8% yoy in February, from +3.7% in January and +2.8%
in December. This was the fastest rate of increase in nine months, suggesting that price pressure is
building up. In particular, the costs of transport grew by 1.6% yoy in February, a rebound from -1.0%
in January, as the higher base effect wears off. This was, however, mitigated by slower increases in
food and processed food prices, which eased to 4.8% and 8.3% yoy respectively in February, from the
corresponding rates of +4.9% and +8.9% in January. Similarly, a slowdown in prices of clothing also
helped. The costs of housing, healthcare and education, on the other hand, remained stable during the
month. Despite the rise in inflation rate, it was still within Bank Indonesia’s target of 4-6%, suggesting
that it will probably not in a hurry to raise interest rates, after keeping its key policy rate unchanged at
6.5% on in February, the sixth time in a row. Bank Indonesia’s Deputy Governor said on 25 February

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 3 March 2010

that the central bank “has no intention” of raising the overnight reference rate in its review this week.
Still, we believe Bank Indonesia will likely raise its key policy rate in the 2Q.

◆ Indonesia’s exports surged by 59% yoy in January, compared with +50.0% in December. This was
the fourth straight month of picking up, due partly to a lower base effect and partly to an improvement
in global demand for the country’s exports. Stronger growth was reflected in a pick-up in non-oil & gas
exports, which grew by 48.8% yoy in January, compared with +45.6% in December. This was aided by
a pick-up in the exports of oil products and gas, which expanded by 338.8% and 171.0% yoy
respectively in January, compared with the corresponding rates of +207.5% and +80.7% in December.
Similarly, imports grew at a stronger pace of 44.6% yoy in January, compared with +33.0% in
December, pointing to an improvement in domestic demand.

India’s Exports Bounced Back In January

◆ India’s exports bounced back to 11.5% yoy in January, from +9.3% in December. This was the third straight
month of increase due partly to a lower base effect and partly to a recovery in global demand for India’s exports of cars
and jewelry. Faster exports growth will likely boost production and help sustain the country’s economic expansion in 1Q
2010, after recording a slower growth of 6.0% yoy in the 4Q. The slowdown in 4Q’s real GDP was partly affected by a
poor monsoon rainfall that hurt farm output, underscoring the influence of agriculture sector in India’s economic
performance. In a move to promote exports, India’s Finance Minister extended the interest rate subsidy of 2% to more
exporters in the budget presented on 26 February, including handicrafts, carpets and handlooms exporters.

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