China trade structure review

May 2011

Contents
I. Export and import trends II. The processing trade III. Prices IV. Composition of trade V. Direction of trade 4 11 16 21 32
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I: Trade trends
Export growth is trending lower. Export growth rebounded to 31% in 10, but its compound growth from 07 was only 9%. Multiyear trend is now around 10%, down from 20% in 1990-2008. This is still faster than the world average. Chinas share of world exports will continue to rise. It rose to 10% in 10, up sharply from 2% in 1990 and 4% in 2000. Chinas trade share should continue to rise to 15% by 2020, as exports move up the value chain. Import growth trend is higher than exports. Imports grew at 39% yoy in 10, and compound growth from 07 was 13%, close to its longer term trend. Imports will keep growing faster than exports as investment remains strong. Chinas trade surplus will gradually shrink. On a BOP basis, trade surplus dropped to 3.9% of GDP in 10 from 07 peak of 8.7%. By 11 surplus could be 3.1% of GDP. Its contribution to GDP growth will be close to zero, vs 1.6pp in 03-07. Global commodity prices are the main swing factor.
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Monthly merchandise trade

Export and import growth
in USD terms
US$ bn 60 50 40 30 20 10 0 -10 -20 -30 2003 2004 2005 2006 2007 2008 2009 2010 2011 % growth 3mma 60% 50% 40% 30% 20% 10% 0% -10% -20% -30%

Export and import growth has recovered after the global financial crisis. Exports hit a new monthly record of US$156 bn in Apr, and yoy growth accelerated to 30%, up from 26% in Q1. Import growth slowed from 33% yoy in Q1 to 22% in Apr, due to both weak processing imports and falling commodity import volumes. On a seasonally adjusted m-o-m basis, exports rose 12% and imports rose 7% in Apr. As a result, trade balance turned into surplus (US$11 bn) in Apr after a temporary deficit of US$1 bn in Q1.

Trade balance (lhs)

Export growth

Import growth

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Trend growth rates

Trend growth rate of Chinese exports and imports
3-year CAGR of 12-month rolling sum
40% 35% 30% 25% 20% 15% 10% 5% 0% 2003 2004 2005 2006 2007 2008 2009 2010 2011 Imports Exports

Long term trends also show a post-crisis recovery, but to slower growth rates. From 1990 through 2001, Chinas exports grew at an annual pace of around 20%. In the years after WTO entry (2002-08) exports grew at nearly 30% a year. But trend growth in exports and imports has been decelerating for several years. We expect trend export growth to recover to 1214%, while trend import growth will be slightly higher. These trends imply continued global market share gains for Chinese exports, and a gradually shrinking trade surplus. 5
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China vs. the world

Export growth: China vs world ex-China
5-year avg, yoy % change
35% 30% 25% 20% 15% 10% 5% 0% -5%
1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

China export growth has outperformed the rest of world. Since 1980, Chinese exports grew at an average annual rate of 17%, more than double the average of the rest of the world (8%). After China joined WTO in late 01, average annual export growth accelerated from 15% (1980-2001) to 27% (02-08). Cyclically, Chinas export growth follows global trends. It fell sharply in 09 but rebounded smartly in 10. Despite following cyclical trends, outperformance continues: two years after the global crisis, Chinas trend export growth rate continues to be double that of the rest of the world. 6
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China

World ex-China

Share of world exports

China's share of world exports
annual, as % of total
16% 14% 12% 10% 8% 6% 4% 2% 0%

Export growth has driven a rapid gain in global market share since 01. From 1980 to 2000, Chinas share of global exports rose from 0.8% to 3.9%. Market share gains accelerated after China joined WTO in 01, and more than doubled to 10.4% in 10. China surpassed Germany as the worlds biggest exporter in 09. Chinas rising global market share is driven by productivity improvements and increased export quality, trends we expect to continue.

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Trade balance
Trade balance, % of GDP
(balance of payments basis)
10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0%
1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Trade balance as % of GDP has declined. From 1980 to 2004, the average share of trade balance (on a BOP basis) of GDP was 2%.
Trade balance/GDP Trend

Since 04, this figure rose rapidly driven up by the surging trade surplus. It reached the peak of 8.7% in 07. After financial crisis, the nominal trade surplus increased at a slower pace while domestic growth remained strong, resulting in a lower share of GDP.

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Import drivers: construction

Commodity import volume and construction
monthly 3mma, yoy % change
60% 50% 40% 30% 20% 10% 0% -10% -20% Jan/05 Jan/06 Jan/07 Jan/08 Jan/09 Jan/10 Jan/11 Commodity imports Construction

Construction is a key driver of commodity imports. About three-quarters of Chinas imports relate to investment demand: capital goods and raw materials. Raw material purchases, particularly iron ore, correlate well with domestic construction activity. The collapse in commodity prices in 09 helped feed the subsequent import surge. With prices high and rising recently, the import volume has started to decline.

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Import drivers: prices

China's import bill and global commodity prices
monthly, yoy % change
80% 60% 40% 20% 0% -20% -40% -60% 2005 2006 2007 2008 2009 2010 2011 China imports IMF commodity price index

Global commodity prices are an increasingly big driver of headline import growth rates. Chinas imports and global commodity price change correlate closely, as raw materials account for around 30% of the overall import bill. The big swings in nominal import growth in 09-10 were to a large extent the result of commodity price shifts. Import growth slowed in Apr, apparently because high commodity prices restrained Chinese import demand.

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II. The processing trade

The assembly of imported components into finished goods for export is a huge though declining part of Chinas trade structure. Processed exports are now 47% of total exports, down from a peak of 57%. The scale of this industry in China is unique. Because processed exports are always sold for more than the cost of their imports, it ensures a structural trade surplus. Foreign-invested companies dominate the processing trade, and therefore make up around 40% of Chinas trade surplus. Demand swings from the developed markets primarily served by the processing trade are a big influence on the seasonal pattern of Chinas trade.
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Processing trade share

Processing trade
% of total exports/imports
60% 55% 50% 45% Exports 40% 35% 30% 25% 1994 1996 1998 2000 2002 2004 2006 2008 2010 Imports

The processing trade is fading, but slowly. The share of processing exports and imports in total declined to 47% and 30% respectively in 10, down from 55% and 40% in 2000-05. The rising share of ordinary exports was mainly due to rapid growth in exports of heavy industrial products, like machinery and steel. This is evidence that Chinese exporters are climbing up the value chain. The declining share of processing imports suggests exporters are using more domestic materials. 12
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Processing trade balance

Trade balance by type
monthly 3mma, US$bn
50 40 30 20 10 Ordinary 0 -10 -20 2005 2006 2007 2008 2009 2010 2011 Processing

Processing trade surplus: the whole story. The processing trade surplus surged from US$45 bn in 2000 to US$297 bn in 08. After a short dip in 09, it widened to US$323 bn in 10 again. Since 09, the processing trade has accounted for all of Chinas trade surplus (vs three fourths in 05-08), while ordinary trade experienced a deficit due to rapidly increasing imports.

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Trade balance by enterprise type

Trade balance by enterprise ownership type
US$bn
200 150 100 50 0 -50 -100 -150 -200 1998 2000 2002 2004 2006 2008 2010 SOE Private FIE: wholly owned FIE: JV Collectives

FIEs generate most of Chinas surplus, while SOEs are net importers. Foreign-invested enterprises dominate the processing trade, which means they make up nearly 40% of Chinas trade surplus. SOEs, which are concentrated in capitalintensive, resource-hungry oligopoly sectors serving the domestic market, collectively run a large and growing trade deficit.
Trade surplus by enterprise ownership type, US$ bn
2001 Private Foreign Collectives SOE 1.9 7.4 6.2 9.7 2010 197.1 124.3 14.9 (153.2)

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Seasonal factors
Seasonality of trade surplus
2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 -20% 0% 20% Q1 40% Q2 Q3 Q4 60% 80% 100%

Trade surplus is back to its normal pattern. In most years, two-thirds of the surplus comes in H2, thanks to strong sales of consumer goods to US and EU before Christmas. In 09 this trend weakened as exports stayed soft and imports surged in H2 as the result of both volume and price effects. But the historical pattern returned in 10 as exports recovered; the small deficit in Q1 11 is also consistent with this.
% of annual surplus by quarter
Q1 Q2 Q3 Q4 200008 avg 14 22 27 36 09 32 18 20 31 10 8 22 36 34

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III. Prices
Chinas export prices began to rise modestly in 07, almost entirely because of an appreciating currency. Higher labor and material costs are mostly absorbed by manufacturers. In 09, export prices generally fell, except for processed exports from Guangdong which remained stable. Export prices have trended upward again since Q4 09, indicating Chinas manufacturers have gained some pricing power in finished goods. Chinas export prices are not rising faster than exports from other emerging markets, which face similar cost pressures.
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Export prices (1)

Export price indices
PY=100, monthly
112 110 108 106 104 102 100 98 96 94 92 90 2005
Explanation US: Index of import prices from China, compiled by the US Bureau of Labor Statistics. Prices adjusted for changes in quality and composition. HK: Index of re-export prices. Unit values, not adjusted for changes in quality and composition. Biased toward south Chinas light-industrial export basket. China: Index of export prices. Unit values, not adjusted for changes in quality and composition.
HK China reexport price index US China import price index China export price index

Export prices are on an upward march. The most reliable export price index is compiled by US Bureau of Labor Statistics (green line), which fell sharply until Jul 09 but is now trending steadily upward. The HK index of reexports (red line), reflecting mainly processed exports from Guangdong, did not fall as sharply because there was no room for price reductions. It has also risen since H2 09 with the recovery in processing trade. Chinas own export price index rebounded sharply after a steep fall in 09, but high volatility limits the usefulness of this series. 17
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2006

2007

2008

2009

2010

2011

Export prices (2)

EU import unit value index by country
monthly, 2000=100 125 120 115 110 105 100 95 90 85 80 Mexico Turkey India China

But Chinese export prices are not rising faster than those of competitors. Chinese exporters cost advantage is not disappearing, since costs in other countries are rising even faster. The 20% rise in Chinese export prices since 05 is was lower than that for goods from India at 31% and Mexico at 39%, though a little higher than Turkeys 17%.

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

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Exchange rates
Real effective exchange rate index
monthly, 2005=100
130 120 110 100 90 80 70 60 China Thailand India Mexico Korea

The impact of the exchange rate is overstated. Chinas trade-weighted real effective exchange rate (REER) rose 20% in 200509, and rose another 2% by end Mar. But export growth was robust until end 2008 when financial crisis happened. Moreover, Korea, India and Mexicos REER rose less, Thailands the same, and the Philippiness only slightly more. An undervalued exchange rate cannot fully explain Chinas outperformance against other emerging market exporters.

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Import prices
China's import prices and global commodity prices
monthly, yoy % change
60% 40% 20% 0% -20% -40% -60% 2005 2006 2007 2008 2009 2010 2011 IMF commodity price index

Import prices fluctuated with global commodity prices. As nearly one third of Chinas imports are raw materials, its import prices are heavily influenced by global commodity prices. Global commodity price has trended upward since early 09, and its price index was almost close to the peak in Jul 08. Chinese officials likes to blame imported inflation for their problems, but Chinas demand is itself an important driver of global commodity prices.

China import price index

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IV. Composition of trade

Heavy industrys share in exports hit a record of 40% in Q1, up from 38% in 10 and 35% in 09, and its contribution to export growth also picked up to 46% in Q1. Light industrials accounted for 32% of exports in Q1, a little lower than that in 09-10 and from average of 36% in 02-08. The share of electronics exports dropped to 22% in Q1, the lowest level since 03. As a result, it contributed only 15% of export growth in Q1, down sharply from 21% in 10 and 26% in 00-08. On the import side, the share of raw materials jumped to 31% in Q1 due to high commodity prices, up from 27% in 09-10 and avg 20% in 02-08. Capital goods accounted for 47% of imports in Q1, down from 49% in 10. Consumer goods imports are relatively minor.

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Export composition (1)

Composition of exports
US$ bn, 12mma
160 140 120 100 80 60 40 Food 20 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 Heavy industry Light industry Electronics Raw materials

Heavy industry products led exports again. Heavy industry comprised 40% of total exports in Q1, vs 38% in 10 and 35% in 09. Heavy industry drove export growth in 02-08. Its share of exports rose from 29% in 02 to 39% in 08. During the downturn in 09, heavy industrial exports suffered the most; but we are now back to the 02-08 trend. The share of electronics in total exports fell to 22% in Q1, down from average of 25% in 02-10. But it is unclear whether this is due to slowing final demand or a temporary disruption of supply chains from Japans tsunami. 22
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Share of export value, % of total

08 Heavy Light Electronics 39% 32% 24% 09 35% 34% 26% 10 38% 33% 24%

Export composition (2)

Composition of exports
annual, as % of total
60% 50% 40% 30% 20% 10% 0%
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Heavy industry Light industry Electronics Food Raw materials

Exports are becoming more sophisticated. Heavy industry grew at an annual average of 30% in 00-08 vs 19% for light industry. As a result, its share of total exports rose to 39% in 08, up by 10 pp from 2000, while that of light industry fell from 45% to 32%. After a temporary collapse in 09, heavy industry export growth rebounded strongly to 40% yoy in 10, and contributed 45% of total export growth. Electronics share of exports has been stable around 25% since 05.

Contribution to export change, %

Heavy industry Light industry Electronics Raw materials Food 2000-08 41.2 28.9 25.5 2.6 1.8 08-09 (59.3) (20.0) (14.3) (6.2) (0.1)

09-10 44.6 29.1 21.3 2.6 2.3

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Import composition (1)

Composition of imports
US$ bn, 12mma
140 120 100 80 60 40 20 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 Heavy industry Light industry Electronics Raw materials Food

Imports: investment dominates. Capital goods and raw materials make up threequarters of Chinas imports; consumption goods are a small share. Thanks to high commodity prices, raw materials share of total imports rose to 31% in Q1 (the highest level in history), and their contribution to import growth reached 39%. Due to the commodity price collapse, nearly 60% of the import value decline in 09 came from raw materials.

Share of import value, % of total

08 09 10 Heavy industry 48% Raw materials 30% Light industry 12% Electronics 7% Food 2% 52% 26% 12% 8% 2% 49% 29% 13% 7% 2%

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Import composition (2)

Composition of imports
annual, as % of total
70% 60% 50% 40% 30% 20% 10% 0%
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Heavy industry Raw materials Light industry Electronics Food

Commodities share has surged. Heavy industry, which includes most capital goods, is still by far the most important import category by value, making up half of total import bill and contributing 44% of import growth in 10. But raw materials import rose rapidly since 02: average growth was 42% yoy in 03-08, vs 23% in 1993-2000. Therefore, its share in total imports reached 30% in 08, up sharply from around 10% in the 1990s.

Contribution to import change, %

Heavy industry Raw materials Light industry Electronics Food 2000-08 47.5 32.4 11.3 6.6 2.2 08-09 (24.1) (56.0) (13.1) (5.2) (1.6)

09-10 44.0 34.8 13.9 5.1 2.1

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Trade balance composition

Composition of trade balance
US$ bn
400 300 200 100 0 -100 -200 -300 -400 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Light industry Electronics Food Heavy industry Raw materials

Surplus is in light industry and electronics, and deficit mainly in raw materials. The big sources of the increase in Chinas trade surplus since 02 are light industry and electronics. Raw materials are the main deficit item. Thanks to rising prices, the raw material deficit expanded to US$360 bn in 10, up 54% yoy. Heavy industry is a swing factor, mainly because of Chinas huge steel industry. Surging metal exports narrowed the deficit in 0508, but it widened again in 09-10. China is still a net importer of machinery.

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Trade balance: food

Trade balance: food
US$ bn
21 18 15 12 9 6 3 0 -3 -6 -9 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Vegetables& fruits Meat/fish/ dairy Cereals& feed Other Overall

Grain imports soared. China is running an increasing surplus in laborintensive fruits and vegetables, where it has a comparative advantage. Net imports of cereals surged in 10, mainly due to less domestic supply and relatively lower international prices. China could import more grain because of its comparative disadvantage in land-intensive crops. Government food security policies will attempt to prevent major grain imports, though with decreasing success.
Grain trade balances, m tons
Corn Wheat Soybeans 2000 10.5 (0.9) (10.2) 2010 (1.5) (1.2) (54.6)

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Trade balance: raw materials

Trade balance: raw materials
US$ bn
0 -50 -100 -150 -200 -250 -300 -350 -400 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Ores Other

Rising prices helped to drive a larger raw materials deficit in 10. Raw material deficit hit a record of US$361 bn in 10, up 54% yoy and more than ten times of that in 01. Oil imports were US$135 bn in 10 vs US$89 bn in 09; iron ore imports were US$79bn vs US$50 bn, both rising more than 50% yoy. The widening deficit was mainly driven by rapidly rising prices, as oil import volumes rose only 17% yoy in 10, while iron ore import fell -1.5%.
Deficits of raw materials by category, US$ bn
2001 Fuels Ores Other (9) (7) (11) 2010 (162) (130) (69) 28
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Oil/gas/coal

Raw material imports

Commodity import volumes
monthly, '000 tons
700 600 500 400 300 200 100 0 70,000 60,000 50,000 Copper 40,000 30,000 20,000 10,000 0 Aluminium Iron ore (rhs) Coal (rhs)

Import volumes are off their peaks. Raw materials import volume surged 40% in 09, but rose just 1% in 10, and then fell -9% yoy in Apr, vs rising 14% in Q1. Rising global prices led to a sharp decline in coal imports in Mar after the surge in H2 09 and 10. China became a net importer of aluminium in 09 as the price collapsed. But with price hikes in 10, China turned into a net exporter again.
Net imports of major commodities
09 Iron ore, mt 628 Coal, mt 104 Copper, 000 t 3,762 Aluminium, 000 t 611 10 619 143 3,799 (1,705)

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jul-04

Jul-05

Jul-06

Jul-07

Jul-08

Jul-09

Jul-10

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Trade balance: light industry

Trade balance: light industry
US$ bn
400 350 300 250 200 150 100 50 0 -50 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Overall Garments, shoes, textiles Optical/scientific Furniture Other

Light industry: strong across the board. Garments/textiles/shoes account for two-thirds of the light industrial surplus. However growth in other light industrials is far more rapid and hard to disaggregate. Light industry includes some high-tech goods where China is a net importer: optical and scientific instruments.

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Trade balance: heavy industry

Trade balance: heavy industry
US$ bn
90 60 30 0 -30 -60 -90 -120 -150 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Overall Metals Chemicals Machinery

Manic metals. China exports machinery and transport equipment, but at the low end of the market. It remains a net importer of capital goods. China became a steel net exporter in 06. Steel net export volume recovered to 26 mt in 10 after collapsing to 7m tons in 09, but still much lower than the peak of 46m tons in 07. With the price recovering , China became a net aluminium exporter again in 10, after being a net importer in 09.
Metals trade surplus
2004 2006 2008 2009 2010 US$ bn 0.8 33.9 74.4 4.0 23.9

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V. Direction of trade
China is the final assembler for products in a network that draws parts from across Asia but mainly serves final demand in OECD nations. 60% of imports, mostly parts and components, come from Asia, but >60% of exports, mostly manufactured goods, go to developed countries. Europe is still Chinas biggest export market, with a 24% share in 10, vs 22% for North America. Chinas trade deficit with Africa and the Middle East has expanded thanks to higher oil import volumes and prices. Australia and Latin America are also major suppliers of raw materials. Oddly, China exports some goods to itself!
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Total trade by region

Total trade by region 2010 total: US$3,003 bn
Oceania 3.4% TW 5.0%

Asia is most of the story. Half of Chinas trade is with its Asian neighbors. Japans share declined, but China trade with itself increased rapidly. North Americas share declined to 16% in 10, down from 24% in 1999, while that of Europe remained at 21%. Latin America and Africa now account for 10% of Chinas total trade, up from 4% a decade ago. Oceania and Latin Americas contribution to trade growth expanded in 10, mainly thanks to increased commodity imports.

ASEAN 10.1%

Latin America 6.3%

North America 15.5% Asia, 50.0% Europe 20.5%

Korea 7.1% Japan 10.4%

China 6.6% Others 10.9%

Africa 4.3%

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Exports by region
Exports by region 2010 total: US$1,610 bn
Oceania 2.3% ASEAN 9.2% North America 21.6% Asia 41.0% China 5.7% Korea 4.5% Japan 8.5%

Europe: the main market. Europes share of Chinas exports rose from 22% in 1999 to 25% in 10, remaining as Chinas biggest regional market. Japans share dropped from 16% in 1999 to 9% in 10. In the past decade, the share of exports to developing countries in total exports increased from 12% to 21%. Latin America now absorbs 6% of Chinese exports, vs 2% a decade ago. Asean and smaller Asian markets share increased from 15% to 21%.

Latin America 6.0%

TW 2.1%

Others 11.4%

Europe 24.8%

Africa 3.8%

Contribution to export growth/decline, % Asia Europe North America Latin America Africa Oceania 2002-08 40 28 19 6 4 2 2009 (33) (38) (19) (7) (2) (1) 2010 39 26 20 10 3 2

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Imports by region
Imports by region 2010 total: US$1,393 bn
Oceania 4.7% North America 8.4% Latin America 6.5% Europe 15.7% TW 8.3% Asia 59.9% Korea 9.9% Japan 12.7% China 7.7% Others 10.2%

The Asian conveyor belt gets longer. Asias share of Chinas imports has been stable at 60%.
ASEAN 11.1%

Thanks to resources, Latin America and Africa now account for 11% of Chinas imports. The contribution to import growth was back to 02-08 model in 10, except for a rebound in Oceania due to strong commodity imports from Australia.

Africa 4.8%

Contribution to import growth/decline, %

2002-08 Asia 61 Europe 14 North America 8 Latin America 8 Africa 6 Oceania 4 2009 (78) (5) (4) (6) (10) 3 2010 60 14 7 7 6 6

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Trade balance by region

Trade balance by region: 2010 vs 1999
US$ bn

250 200 150 100 50 0 -50 -100

Africa Other Asia ASEAN North America Latin America Oceania Japan Europe Korea TW

Deficits with Asia, surpluses with US/Europe. Chinas biggest regional surplus is still with North America, but Europe is catching up fast.
In 2010 In 1999

Biggest deficits are with regional suppliers Taiwan, Korea and Japan. China saw a surplus with Latin America again in 10 after a temporary deficit in 09 due to large commodity purchases. In general, figures for bilateral trade balances vary enormously depending on data source. Our data are from China Customs, adjusted for HK re-exports.

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Chinas trade with itself

China's imports from itself
14% 12% 10% 8% 6% 4% 2% 0% -2% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 70% 60% 50% 40% 30% 20% 10% 0% -10%

8% of Chinas imports come from China! China is the 7th largest source of imports for China. Producers export goods to Hong Kong or bonded zones in order to capture a VAT rebate on the cost of imported inputs. Once the rebate is collected the goods are brought back into China for final sale. Reduction/elimination of VAT rebates on exports in 06-07 reduced self-imports. Basic industrial products and electronics are the major contributors.
Self-imports composition, %
2000 Heavy ind. Electronics Light ind. 41.6 31.2 26.6 2009 50.1 32.2 17.6

As % of total imports (lhs)

yoy % change (rhs)

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This report was prepared by Dragonomics economist Janet Zhang. jzhang@gavekal.com Data is from Chinas National Bureau of Statistics via the CEIC database, as well as the WTO and UN Comtrade. GaveKal Dragonomics is an independent research and advisory firm specializing in Chinas economy and its influence on Asia and the world. For more information: www.gavekal.com

GaveKal Dragonomics Research Services Ltd. This report has been prepared from sources and data we believe to be reliable, but we make no representation as to accuracy or completeness. This report is published solely for the information of clients of Dragonomics Research & Advisory and is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or derivative. This report is not to be construed as providing investment services in any state, country or jurisdiction where the provision of such services would be illegal. Opinions and estimates expressed herein constitute our judgment as of the date appearing on the report and are subject to change without notice.