CChhiinnaa IInndduussttrryy MMoonniittoorr (2013 First Half Issue)

1st April 2013

【OVERVIEW】Industrial economy is recovering. Structural reform for mid-long term stable growth will be the main concern.

China’s real GDP growth dipped below 8.0% in 2012 at 7.8% YoY, revealing an apparent slowdown. However, economy started to re-accelerate at a moderate pace in H2, with start-up of investments mainly in the infrastructure sector, and bottoming out of export growth rate which had been sluggish.

Performance of assembly manufacturing industries in 2012 varied by sectors. Partially supported by FAI, which has been recovering from the bottom at the beginning of 2012, demand for construction machines and machine tools bottomed out but their production is still far from true recovery. On the other had, automobile production was stable thanks to broadening customer base. Production of tablets and smart phones also continued to increase amid robust demand growth in the world.

Supply-demand situation of materials is not in a good balance as the market continued to be in overcapacity despite recovering demand in downstream sectors. Profit margin of a number of materials remained thin. Only a few manufacturers managed to improve their performance in 2012.

On the other hand, individual consumption sectors remained healthy with continuous income growth and rapid growth of retail sales volumes at more than 10.0% YoY. Recent figures also showed property price rebound across the country.

Looking forward, industrial economy in China is expected to improve moderately with the support of modest acceleration of domestic demand mainly in individual consumption sectors, and recovering exports. However, economy may loose its momentum in H2 as large scale economic measures are unlikely in worries of re-occurrence of inflation. In fact, instead of short-term growth, the new Chinese government has shown its stance of focusing on structural reform for stable growth in the mid-long term. Thus, we remain cautious on coming economic measures in 2013, which should lead the Chinese economy to a mid-long term stable growth.

1

Table of Contents

Industry Indicator Latest Data Page

Automobile 1. Automobile Production Feb 2013

2. Machine Tool ： Metal Cutting Machines Production Dec 2012

2

Machinery 3. Construction Machinery： Hydraulic Excavator Production Dec 2012

Precision Machinery 4. Photocopying and offset printing equipments Feb 2013

3

5. PC Production Dec 2012 Electronics

6. Mobile Phone Production Dec 2012 4

7. Home Appliance: Washing Machine and Air Conditioner Production Feb 2013

Home Appliance 8. Color Television Production Feb 2013

5

Electricity 9. Power Generation Feb 2013

Oil 10. Crude Oil Production / Net Import Jan 2013 6

Petrochemistry 11. Synthetic Resin & Ethylene Production Jan 2013

Steel 12. Steel Prodction Feb 2013 7

Nonferrous Metals 13. Copper / Aluminium Production / Net Import Dec 2012

Food & Beverages

14. Food Manufacturing Sales, Beer Production, Soft Drink Sales Volumes Dec 2012

8

Apparel 15. Apparel Production and Exports Production : Dec 2012 Exports : Jan 2013

Retail 16. Retail Sales Volumes of Consumer Goods Dec 2012 9

Construction 17. Fixed Asset Investments and Floor Space Started Feb 2013

18. Property Price（Beijing / Shanghai / Guangzhou / Shenzhen） Nov 2012

10

Real Estate 19. Office Rent（Beijing / Shanghai / Guangzhou / Shenzhen） 4Q 2012 11

Appendix Macroeconomic Indicators 12

Note: The “FORECAST” period added in this edition is a short-term outlook (about 6 months to 1 year).

This bulletin is issued semi-annually.

2

1. Automobile Production Forecast: Maintain stable mid-to-high single digit

growth

0

20

40

60

80

100

120

140

160

180

200

2007 2008 2009 2010 2011 2012 2013 2014-60%

-30%

0%

30%

60%

90%

120%

150%

180%

210%

240%

Commercial Vehicle (CV) Production: 24.2 (Feb)Passenger Vehicle (PV) Production: 110.5 (Feb)YoY Grow th (CV Production): ▲30.3 (Feb)YoY Grow th (PV Production) : ▲12.4 (Feb)

(10th units)

Source: China Association of Automobile Manufacturers

Automobile production grew 4.6% YoY to 19.27 million units in 2012. PV production grew steadily by 7.0% YoY to 15.52 million units despite impacts from decelerating economy, further purchase restrictions and significant production decline of Japanese automakers under unfavorable Sino-Japan relations. On the other hand, CV production declined by ▲4.4% YoY to 3.75 million units. It was mainly due to sluggish demand in the main truck segment which is largely subject to trend in the public work industry. There were not enough public projects to drive demand for new trucks, although the number of projects has been improving gradually. Automobile exports increased significantly by 19.0% YoY to 1.01 million units thanks to steady demand from emerging countries in Asia.

Outlook: PV sales are expected to be stable under support of broadening customer base due to continuous income growth. CV demand will likely increase with recovering infrastructure investments. Besides, rising demand from emerging countries may further push up automobile export. Overall automobile production is forecasted to maintain a steady mid-to-high single digit growth in 2013. Nevertheless, we remain cautious on some Chinese automakers as implementation of new fuel-consumption regulations may reduce their product variety.

2. Machine Tool ： Metal Cutting Machines Production Forecast: Recover at a modest pace

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

20072008 2009201020112012 20132014-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

Production: 68,000 (Dec)NC Machine Production: 18,000 (Dec)YoY Production Growth: 4.6 (Dec)YoY NC Machine Production Growth: 5.9 (Dec)(units)

Source: CEIC Data Co., Ltd.

Metal cutting machine production declined ▲6.3% YoY to 796 thousand units in 2012. However, production showed signs of bottoming out in H2 with increasing new orders of advanced machine centers and NC machines, which are promoted by scheduled mass production of new smart phone and tablet models. Japanese machine tool manufacturers underwent an unfavorable year because their price competitiveness was hurt under strong yen in H1 and demand from Japanese automakers was low as they cut investments facing China’s boycott against Japanese vehicles in H2.

Outlook: For machine tool, recent figure of new orders showed negative impacts from sluggish sales growth of some smart phone models and slow sales recovery in construction machine industry. Launch of new smart phone models could help improve the number of new orders in H2. However, significant improvement is unlikely because component manufacturers may be reluctant to conduct large scale investments on facilities given the decline in smart phone prices due to higher penetration. Overall metal cutting machine production is expected to increase at a modest pace in 2013, mainly being supported by replacement demand. Japanese machine tool manufacturers may increase their production in China in order to reduce cost and avoid currency risk.

3

3. Construction Machinery： Hydraulic Excavator Production Forecast: True recovery is unlikely in H1

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2007 2008 2009 2010 2011 2012 2013 2014-100%

-50%

0%

50%

100%

150%

200%

250%

Production: 9,775 (Dec)YoY Growth: ▲18.4 (Dec)(Units)

Source: CEIC Data Co., Ltd.

Hydraulic excavator production largely declined from the year ago level by ▲24.7% YoY to 146 thousand units in 2012. Utilization rate of construction machines improved in H1, benefiting from ease of monetary policy by the government and starting up of approved infrastructure investments including railway construction. However, such improvement did not lead to overall production growth because of the accumulated retail inventory of new and second-hand machines. Japanese and other foreign manufacturers are loosing market share amid price competition from Chinese manufacturers.

Outlook: Supported by improving number of construction and engineering projects, year on year sales growth of bulldozer and some other construction machines turned positive. Besides, decline rate of excavator sales is also decreasing. Retail inventory is expected to decrease to a considerably favorable level as a result. Nevertheless, utilization rate of construction machines, although is improving, is still lower than previous year’s level. Rental of construction machines is also low. Given the above factors, a true recovery of excavator production unlikely in H1 2013. Under unfavorable market condition, Japanese manufacturers should continue to improve price competitiveness by means such as increasing the use of made-in-China components.

4. Photocopying and offset printing equipments Forecast: Maintain previous year’s level

0

100

200

300

400

500

600

700

800

900

1,000

2007 2008 2009 2010 2011 2012 2013 2014-75%

-50%

-25%

0%

25%

50%

75%

100%

125%

150%

175%

Production: 440 (Feb)

YoY Growth: ▲3.7 (Feb)(th units)

Note: Data before 2008/Dec- Copy Machines Note: Data since 2009/Jan- Photocopying and offset printing Note: equipments Source: CEIC Data Co., Ltd.

Production of photocopying and offset printing equipments decreased ▲6.7% YoY to 6.75 million units in 2012, mainly because export, which accounts for 80~90% of total production, was dampened by gloomy economy in Europe. Export of high-end models is particularly impacted. Sharp decline recorded in the end of 2012 was a temporary one as production in the same period in 2011 was high due to flood in Thailand. As for domestic market, demand for the main low-end segment grew steadily in 2012.

Outlook: In 2013, domestic demand for low-end models is expected to remain stable. Demand for upgrades to color-printing and compact size models is also expected to increase. On the export side, export demand will gain some support from stable demand growth in emerging countries and better prospect of the global economy. However, considering the anticipated sluggish demand in Europe and the trend of replacing printed handouts by tablets in developed countries, overall export demand is likely to be soft. Accordingly, production of photocopying and offset printing equipments is forecasted to maintain previous year’s level in 2013.

4

5. PC Production (including tablets) Forecast: Grow at around 10% YoY

(mn units)

137 182 246 320 354

13.2% 33.3% 35.1% 30.2% 10.5%

28 32 60 81 109

25.2% 14.2% 87.7% 147% 26.0%

109 150 186 239 245

25.2% 38.2% 23.8% 78.6% 2.6%

2010 2011 2012

Laptop PC

(YoY Growth)

2008 2009

PC Production

(YoY Growth)

Desktop PC

(YoY Growth)

Note: PC production in China includes production volume of tablets.

Source: Ministry of Industry and Information Technology of the Source: People’s Republic of China

PC production (including tablets) increased just 10.5% YoY to 350 million units. It was a sharp slowdown in comparison to over 30%’s year on year growth in 2009-2011. Tablet segment remained healthy driven by favorable sales of new model (iPad mini) by leading brand. However, traditional PC segment underwent strict market condition amid slow demand for new OS PCs (Windows8) and persistently weak demand in European market.

Outlook: Demand for traditional PCs will continue to be sluggish amid competition from the tablet segment. As a result, although there are positive factors such as start of production of new models installed with new CPU (Haswell), traditional PC production is expected to see marginal growth at best. On the other hand, production of tablets will remain high with leading brands actively launching new models. Considering tablets’ cannibalization effect on laptop PCs and the already high demand level, future growth in tablet demand may not help push up overall production growth of PCs. Consequently, PC production is expected to grow at around 10% YoY in 2013.

6. Mobile Phone Production Forecast: Register mid-to-high single digit growth

(mn units)

Production 560 619 998 1,133 1,182(YoY) 2.0% 10.7% 61.2% 13.5% 4.3%

Export 533 583 758 875 1,014(YoY) 10.2% 9.4% 30.0% 15.5% 15.9%

2008 2012201120102009

0

200

400

600

800

1,000

1,200

1,400

2007 2008 2009 2010 2011 2012 2013 20140

5

10

15

20

25

30

35Mobile Phone Subscribers(LHS): 1,122 (Jan)Subscriber increased fromlast month (RHS): 10.0 (Jan)

(mn people) (mn people)

Source: Ministry of Industry and Information Technology of the Source: People’s Republic of China

Mobile phone production grew just 4.3% YoY to 1.18 billion units in 2012 because of deceleration in both domestic and export demand. While export to Asia and other emerging countries was stable, overall export was dragged down by decline in Europe and US markets. Domestic market, which is the largest in the world, also decelerated in H2 with consumers halting purchase of mobile phones until the launch of new smart phone model (iPhone5, launched in Dec 2012).

Outlook: Traditional mobile phones will unavoidably see decline in production. Recent figures showed slow growth in production of certain smart phone models. However, launch of new models by leading brands (GalaxyS4 in April and new iPhone5 in middle of 2013) should help prompt smart phone demand. Besides, Chinese brands are also aggressively increasing their production. Given the above factors, demand for smart phone in 2013 is likely to grow at a faster pace than 2012. Export may increase at mid single digit level supported by demand growth in emerging countries. Export to Europe, which has declined for 2 consecutive years, may also improve with increasing replacement demand. As for domestic market, new models by leading brands will boost demand to a double digit growth. Overall mobile phone production is forecasted to register mid-to-high single digit growth in 2013.

5

7. Home Appliance: Washing Machine and Air Conditioner Production Forecast: Post stable growth

＜Washing Machine Production＞

0100200300400500600700800

2007 2008 2009 2010 2011 2012 2013 2014-40%-20%0%20%40%60%80%100%120%

Production: 374.7 (Dec)YoY Growth: ▲26.9 (Feb)

(10th units)

＜Air Conditioner Production＞

0

500

1,000

1,500

2,000

2007 2008 2009 2010 2011 2012 2013 2014-60%-30%0%30%60%90%120%150%180%

Production: 769 (Feb)YoY Growth: ▲30.6 (Feb)

(10th units)

Source: CEIC Data Co., Ltd.

Home appliance production was sluggish in 2012, with washing machine growing marginally by 0.4% YoY to 67.07 million units and air conditioner plunging ▲8.5% YoY to 133.86 million units. It was mainly the result of persistently unfavorable domestic sales, which are dampened by low residential sales under property purchase restrictions; and soft demand in 2012 as a number of consumers has already made their purchases before the end of subsidy programs in rural area in 2011. On the export side, while export of washing machine was supported by South-east Asian markets at 8.3% YoY, export of air conditioner declined by ▲2.1% YoY due to gloomy economic condition in the main European market.

Outlook: With purchase restrictions in effect, rapid growth of residential sales, hence rapid increase of home appliance demand, are unlikely. However, supported by stable residential demand and smaller impacts from the end of subsidy program on sales in 2013, domestic demand for washing machine and air conditioner may grow steadily. Export will also be driven by South-east Asian markets and post faster growth compared with 2012. The above factors will drive home appliance production to a faster growth in 2013. Manufacturers who failed to adopt eco-friendly technology may loose their market as the new subsidy program effective from June 2012 is only applicable for eco-friendly models.

8. Color Television Production Forecast: Maintain positive year on year growth

0

300

600

900

1,200

1,500

1,800

2007 2008 2009 2010 2011 2012 2013 2014-50%

0%

50%

100%

150%

200%

250%

Production: 693 (Feb)YoY Growth: ▲9.5 (Feb)(10th units)

Source: CEIC Data Co., Ltd.

Color television production increased 12.0% YoY to 138 million units in 2012. Domestic and export markets, which respectively accounts for around 50% of the total (estimated), performed differently. Domestic demand was the main growth driver, growing significantly under the support of favorable online sales and high replacement demand in rural areas from CRT TVs to LCD TVs. On the other hand, export declined by ▲5.9% YoY amid deceleration of global economy.

Outlook: While export demand from developed countries will remain low, that from emerging countries is likely to be stable. Domestic demand is expected to maintain double digit year on year growth supported by persistently high replacement demand for LCD TVs in rural areas. Given the above, overall color television production may post faster growth in 2013. TV sales are forecasted to rise rapidly in rural areas but be sluggish in cities. Online sales are expected to increase. While the Chinese manufacturers are expanding their market share by cutting product prices, Japanese and other foreign manufacturers should alter their sales strategies such as target markets, sales networks and etc.

6

9. Power Generation Forecast : Tight electric supply to persist

<Power Generation>

050

100150200250300350400450

2007 2008 2009 2010 2011 2012 2013 2014-20%-10%0%10%20%30%40%50%60%70%

Nuclear Power: 6.6 (Feb)Thermal Power: 271.5 (Feb)Hydaulic Power: 36.6 (Feb)YoY Power Generation Growth: ▲12.7 (Feb)

(bil kWh)

<Price>

50

51

52

53

54

2007 2008 2009 2010 2011 2012 2013 201460

65

70

75

80(RMB/100kWh) (RMB/100kWh)

Residential (LHS)Industrial (RHS)

Source: CEIC Data Co., Ltd.

Total power generation grew 5.2% YoY to 5 trillion kWh in 2012. Power consumption growth of energy-consuming industries, although recovered slightly in H2, was sluggish amid economic deceleration. By sources, hydraulic grew rapidly at 29.3% YoY due to the drought effect in 2011. Clean energy power generation including nuclear and wind power also posted significant growth. However, overall power generation capacity reported slow growth at 7.8% YoY as thermal power investment continued to decline. As for profit of power companies, performance improved compared with 2011 as coal price kept declining. However, their profit margin was still thin as the government was reluctant to allow power price to increase.

Outlook: Domestic demand is expected to recover in line with improving economic environment. Supply-demand condition could remain tight as a result. On the other hand, although the government has announced the pricing scheme reform of the sector, profit margin of the sector may remain thin with minor improvement as the government still has the final say on the price. While power generation sector is believed to be one of the causes of heavy air pollution in China, power companies might have to invest in facility upgrades to reduce release of air pollutants.

10. Crude Oil Production / Net Import Forecast: Demand recovery to push up import

<Import・Production・Consumption>

05

1015202530354045

2007 2008 2009 2010 2011 2012 2013 2014

(mn tons)

-10%-5%0%5%10%15%20%25%30%35%

Net Imports (3-months MA): 23.9 (Jan)Production (3-months MA): 17.4 (Jan)YoY Apparent Consumption Growth: 4.9% (Jan)

<Price>

406080

100120140

2007 2008 2009 2010 2011 2012 2013 2014

Import PriceDubai Price

(USD/Barrel)

Apparent consumption of crude oil grew 4.9% YoY to 480 million tons but domestic production only increased 1.9% YoY, with 210 million tons’ output. Net imports of crude oil grew 7.3% YoY and China’s dependence on imports further rose to 56.4%. The transportation and residential sectors account for over 50% of total crude oil demand in China. As the result of growth of aviation industry and increasing total vehicle fleets, stable demand growth in the above sectors pushed up overall consumption growth. On the other hand, demand from industrial sector, which shares over 20% of the total, decelerated due to economic slowdown. Meanwhile, global crude oil prices remained high as the result of political risks in the Middle East. Outlook: Overall crude oil demand is likely to grow as demand from transportation and residential sectors is expected to rise and that from industrial sector will likely recover. However, such growth would be a moderate one amid modest economic growth. Crude oil import will keep growing as domestic production has little chance to increase. Crude oil price is likely to remain high considering the improving economy of developed countries and unstable supply due to persistent political risks in the Middle East.

7

11. Synthetic Resin & Ethylene Production Forecast: Production to accelerate in H2

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2007 2008 2009 2010 2011 2012 2013 2014-20%

-10%

0%

10%

20%

30%

40%

50%

Synthetic Resin Import: 2,200 (Jan)Synthetic Resin Production: 4,371 (Jan)YoY Apparent Consumption Growth (Synthetic Resin): 17.4 (Jan)

(th tons)

0

500

1,000

1,500

2007 2008 2009 2010 2011 2012 2013 2014

Ethylene Output: 1,390(Jan)(th tons)

Source: CEIC Data Co., Ltd.

Apparent consumption of synthetic resins grew 8.6% YoY to 76 million tons in 2012. Demand growth was relatively stable in H1 but showed significant deceleration in H2. By sectors, demand from home appliance and automobile sectors were stable while that from construction sector stagnated. It was because despite recovery in infrastructure investments, building material production failed to improve amid high inventory level. On the supply side, imports grew just 2.9% YoY as domestic production rose 11.4% YoY as the result of capacity expansion. Manufacturers’ profit margin was hurt by the softening synthetic resin prices and persistently high crude oil price.

Outlook: Growth in demand for synthetic resins is expected to remain sluggish in H1 but re-accelerate in H2. Demand growth from consumer goods sectors including food and beverages, as well as automobile sector are expected to be stable; but that from construction and export sector will remain weak. Despite that, domestic production is expected to grow at a faster pace than import growth. Although prices may improve with the end of inventory adjustment, manufacturers are likely to keep facing pressure of thin profit margin and unfavorable market condition as crude oil price will remain high.

12.Steel Production Forecast: Moderate demand recovery

<Production・Inventory>

0102030405060708090

2007 2008 2009 2010 2011 2012 2013 2014-20%-10%0%10%20%30%40%50%60%70%

Output of Steel Products: 77 (Feb)Steel Products Inventory: 11 (Feb)YoY Growth of Steel Output: 7.6 (Feb)

(mn tons)

<Price>

3,000

4,000

5,000

6,000

7,000

2007 2008 2009 2010 2011 2012 2013 20144006008001,0001,2001,400

RMB/Ton RMB/TonRMB/Ton(RMB/ton) (RMB/ton)

Source: CEIC Data Co., Ltd.

Steel production grew 7.7% YoY to 950 million tons in 2012. Growth slowed in comparison to 2011 but was still kept at a high level. On the supply side, the industry continued to be in pressure of oversupply amid slow demand growth in major downstream sectors such as infrastructure investments. Steel product export to Asian countries was raised in order to sustain a better supply-demand balance. Manufacturers continued to face fierce competition and thin profit margin but they could benefit from the continuous drop of coal price in 2012 and post better performance. Outlook: Demand for steel products is expected to show modest growth in 2013 driven by increasing FAI mainly in infrastructure sector. On supply side, we do not expect retirement of decrepit facilities and industry reform to take a big progress in the short term. However, capacity growth is expected to slow down and steel producers may be asked to reduce production in worries over air pollution, leading to slight ease in oversupply. Manufacturers’ performance is expected to remain thin with marginal improvement as demand recovery may loose its momentum in H2. Meanwhile, current rise in steel product and iron ore prices are mainly supported by better market sentiment, which may not be enough to sustain further price growth.

8

13. Copper / Aluminium Production / Net Import Forecast: Slower growth amid inventory adjustment

<Copper>

0

200

400

600

800

1,000

2007 2008 2009 2010 2011 2012 2013

(th tons)

0

20

40

60

80

100

LME 3M Settlement Price (RHS)Shanghai Future Exchange 3M Settlement Price (RHS)

Production

Net Import

(RMB th/ ton)

<Aluminium>

-500

0

500

1,000

1,500

2,000

2007 2008 2009 2010 2011 2012 2013

(th tons)

0

5

10

15

20

25(RMB th/ton)

Production

Net Import

Net Export

Source: CEIC Data Co., Ltd.

<Copper> China is the world’s largest copper consuming and importing country. Net imports rose 17.0% YoY driven by copper restocking in H1 after the stock clearance during price hike in 2011. Apparent consumption grew 12.2% YoY to 8.9 million tons supported by demand which improved in line with economic recovery in H2.

Outlook: Infrastructure investments, the consumption driver, will post strong growth and support copper consumption in 2013. However, apparent consumption growth is expected to be slow given the anticipated sales of accumulated inventory and high consumption in 2012.

<Aluminum> China is the world’s largest aluminium production and consumption country. Demand growth in 2012 decelerated amid slower FAI growth. Domestic production grew 10.9% YoY to 19.7 million tons.

Outlook: Industrial output and FAI growth may improve gradually but production and consumption growth of aluminium is expected to slow down in 2013 due to clearance of accumulated inventory.

<Price> In expectation of re-acceleration of Chinese economy, prices of non-ferrous metals has started to improve in H2 2012 and this trend is likely to continue in the short term. However, price rise will be moderate as fast growth of the Chinese economy is not sustainable and producers may clear their inventory given the high metal price.

14. Food Manufacturing Sales / Beer Production / Soft Drink Sales Volumes Forecast: Continue steady growth

2009 2010 2011 2012

Food Sales Value 886.5 1113.4 1387.6 1568.2

(RMB bil) YoY Growth 18.6% 25.6% 24.6% 13.0%

Beer Production 43.3 45.1 48.9 48.9

(bil ℓ) YoY Growth 5.9% 4.1% 8.4% -0.1%

Soft Drinks Sales Vol. 79.8 97.9 116.2 128.4

(mil tons) YoY Growth 26.4% 22.7% 18.7% 10.4%Source: CEIC Data Co., Ltd., National Bureau of Statistics China

Amid economic slowdown, revenue growth of food manufacturers decelerated to 13.0% YoY in 2012. Beer production in 2012 was merely maintained at previous year’s level due to weak demand, reflecting a worsening market condition. Consumers’ rising disposable income and increasing sophistication led to change in taste. Health-oriented soft drinks and food registered dynamic development in 2012, whereas soft drinks with a less healthy image, such as carbonates, witnessed sharp deceleration in sales volume at 10.4% YoY. Amid slower sales and production growth, competitions among manufacturers intensified and leading players tended to expand market share through M&A activities.

Outlook: Processed food sales growth will remain buoyant in the future as consumers’ purchase power is increasing. In particular, innovative food categories with the concept of healthy ingredients will post strong growth benefiting from increasing health awareness amongst Chinese consumers. Although packaged food in some developed cities in China is close to maturity, quality products could still see market expansion in the future. Industry consolidation would further improve and bring positive impact on leading manufacturers’ profit margin.

9

15. Apparel Production and Exports Forecast: Unavoidable slowdown in production growth

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

2007 2008 2009 2010 2011 2012 2013 2014

Apparel YoY Production Growth: 5.2 (Dec)YoY Growth of Apparel Export Value: 13.8 (Jan)

Source: CEIC Data Co., Ltd., National Bureau of Statistics China

Apparel production grew 1.3% YoY in 2012 despite economic deceleration. The marginal growth was resulted by relatively stable individual consumption and low apparel production after March 2011. Export registered a considerably high growth at 3.5% YoY, driven by some high value added products. Nevertheless, such growth was partially the result of export price hike due to higher labor cost; hence, does not represent an optimistic outlook of the industry.

Outlook: Amid anticipated moderate re-acceleration of the Chinese economy, individual consumption, in particular, is expected to post stable growth. Increasing purchase power and changes in lifestyle will push up demand for high value added products and children’s wear. Nevertheless, considering the relatively favorable production in 2012 and possible stagnation in exports under fierce competition from manufacturers in other countries, apparel production growth will unavoidably post slower year on year growth. Small-and-medium sized manufacturers continue to be under pressure of closure under rising operating costs and labor shortage.

16. Retail Sales Volumes of Consumer Goods Forecast: Post faster year on year growth

0

500

1,000

1,500

2,000

2,500

2007 2008 2009 2010 2011 2012 2013 20140%

5%

10%

15%

20%

25%

Retail Sales: 2,033 (Dec)YoY Growth: 15.2 (Dec)Adjusted YoY Growth: 11.5 (Dec)(RMB bn)

Note: Adjusted year-on-year comparison: growth adjusted for price change

Figures of Jan and Feb 2012 were the average of the two as only cumulative data was available.

Source: CEIC Data Co., Ltd., National Bureau of Statistics China

Along with softened economic growth, retail sales growth slowed down in the first half of 2012. However, after sliding to the lowest level in July last year, growth momentum picked up and overall retail sales in 2012 were able to record solid growth at 14.5% YoY (RMB20.7 trillion). Consumer sentiment recovered in H2 and the sales of gold, silver and jewelry grew strongly. Overall CPI in 2012 grew steadily at 2.6% from 2011, well below the target of 4.0% growth set by the government.

Outlook: The Chinese economy is expected to re-accelerate at a moderate pace in 2013. Besides, China has made domestic demand and consumer spending expansion a mid-long term strategy to maintain a sustainable economic growth. Given government’s efforts, social retail sales in 2013 are likely to expand faster than in 2012. In particular, online shopping will post favorable growth with its high popularity amongst consumers in China. Consumption related to property sector, such as home appliances, furniture and building materials, however, might remain soft as government maintains stringent controls on the property market.

10

17. Fixed Asset Investments and Floor Space Started Forecast: Growth expected to be moderate

-20%-10%

0%10%20%30%40%50%60%

2007 2008 2009 2010 2011 2012 2013

YoY FAI Grow th (3-months MA): 19.8% (Feb)YoY Construction FAI (3-months MA): ▲31.3% (Feb)YoY Real-Estate FAI Grow th (3-months MA): ▲31.7% (Feb)YoY Infrastructure FAI Grow th (3-months MA): 48.6% (Feb)

-40%0%

40%

80%120%

2007 2008 2009 2010 2011 2012 2013

YoY Growth of Commodity Bldg Floor Space Started(3-months MA): ▲24.9% (Feb)

Note: Infrastructure related figures are the total of utilities, transport and environment Source: CEIC Data Co., Ltd.

Overall FAI growth remained high but decelerated from 25.1% YoY in 2011 to 20.8 % YoY in 2012, due to low FAI in the year beginning. Sectors performed differently in 2012. Manufacturing FAI growth rate dipped as manufacturing enterprises faced pressure of profits contraction under intensifying competition, and relatively high funding costs. As for property sector, although developers remained cautious on new projects due to accumulated unsold houses, residential construction started to recover in H2 and property FAI growth is in fact on a rising trend. Infrastructure related FAI recovered in 2012 as government speeded up new project approvals to boost economic growth through public investment. Outlook: Looking ahead to 2013, overall FAI growth is likely to remain moderate but faster than that in 2012. Urbanization is a major policy initiative for the new government, which is likely to boost infrastructure investments especially on subway in cities and railway construction. In the manufacturing sector, enterprises are still facing pressure of overcapacity, declining profit margin and rising debt, which might lead to softened growth in manufacturing FAI. Property FAI will remain slow, with rigorous cooling policies in effect.

18. Property Price (Beijing / Shanghai / Guangzhou / Shenzhen) Forecast: Moderate upward trend expected

50

75

100

125

150

2007 2008 2009 2010 2011 2012 2013 2014

Beijing: 137 (Nov) Shanghai: 117 (Nov)Guangzhou: 127 (Nov) Shenzhen: 131 (Nov)

(Dec 2007 = 100)

Source: CREIS

In 2012, residential prices in major cities dropped at year beginning but rebounded in the second half. The upward trend continued into early 2013. Housing demand still grew steadily despite measures to restrain property market speculation. Price increased in a number of cities in H2, with developers increasing supply, narrowing discounts and raising selling prices. To cope with the rebounding residential prices, government carried out further cooling policies in 1Q 2013. Measures include a 20% tax on profits from home sales as well as rising down-payment and mortgage rates for second-home buyers in some cities.

Outlook: The latest government measure aims to prevent sharp increase in residential prices, especially in China’s first tier cities. Sales volume will get hurt once the new regulations are in place. However, in the short term, the regulation might drive up demand for first-hand residential properties as well as prices. Nevertheless, price growth will be minimal in the long term as government remains a firm stance on bringing housing prices into an affordable level. Overall residential price growth is expected to be moderate in 2013.

11

19. Office Rent (Beijing / Shanghai / Guangzhou / Shenzhen) Forecast: Marginal growth in 2013

80

100

120

140

160

180

200

220

2008 2009 2010 2011 2012 2013

Beijing: 207.1 (12/4Q)Shanghai: 104.1 (12/4Q)Guangzhou: 121.5 (12/4Q)Shenzhen: 141.3 (12/4Q)

(Q4 2007=100)

Source: CBRE

After skyrocketing over the past few years, office rental growth decelerated in 2012 to a modest one. In response to the slowdown of domestic economy and uncertainties in the global economy, many companies suspended expansion plans last year. In 2012, the demand for office space across China continued to decrease, with net absorption declining from previous year’s level. On the back of slowing demand in various cities, some landlords began to offer lower rents and increase incentives to attract tenants. In addition, many offices scheduled for completion in 2012 delayed their openings, resulting in a decline in supply compared with that in 2011.

Outlook: Rental growth in the future one year is expected to be marginal as elevated rent levels have largely decreased tenants' affordability. In 2013, economic climate is turning around mildly, driving up demand gradually. However, rents will still be under pressure, especially for offices located in newly developed areas. Overall office vacancy rates in major cities are likely to rise in 2013, given that new office supply will remain abundant this year. Thanks to the central government's Go-west policies, cities in western China might see a better condition in demand.

Appendix: Macroeconomic Indicators (Annual & Quarterly Basis)

09 10 11 12 12/1Q 12/2Q 12/3Q 12/4Q

8.1 7.6 7.4 7.9

8.1 7.8 7.7 7.8

11.0 15.7 13.9 10.0 11.6 10.5 10.0 10.0

30.5 24.5 23.8 20.6 20.9 20.4 20.5 20.6

15.5 18.4 17.1 14.3 14.8 13.9 13.5 14.9

16.2 15.1 11.7 11.6 10.9 11.0 11.6 12.8

52.9 33.3 5.5 6.9 ▲1.8 16.6 6.7 7.4

6.3 13.8 11.9 5.2 6.5 1.3 2.1 7.4

0.9 9.3 8.0 ▲0.7 4.3 1.4 ▲7.2 ▲1.1

▲0.7 3.3 5.4 2.7 3.8 2.9 1.9 2.1

1,957 1,827 1,549 2,311 2.4 683 792 834

Export Growth (％) ▲16.0 31.3 20.3 7.9 7.6 10.4 4.4 9.4

Import Growth (％) ▲11.2 38.7 25.0 4.3 6.9 6.4 1.4 2.8

23,442 27,406 27,712 24,925 5,379 11,705 18,025 24,925

Growth (％) ▲14.9 16.9 1.117 ▲10.1 ▲9.4 ▲13.1 ▲11.7 ▲10.1

941 1,057 1,160 1,117 295 591 834 1,117

Growth (％) ▲13.2 12.4 9.7 ▲3.7 ▲2.8 ▲3.0 ▲3.8 ▲3.7

1,275 1,762 1,859 1,579 447 872 1,279 1,579

Growth (％) ▲11.3 38.2 5.5 ▲15.1 ▲1.1 ▲3.8 ▲7.3 ▲15.1

41 41 63 74 20 41 56 74

Growth (％) 12.4 ▲0.5 55.0 16.1 12.5 16.7 16.9 16.1

23,992 28,473 31,812 33,116 33,050 32,400 32,851 33,116

27.7 19.7 13.6 13.8 13.4 13.6 14.8 13.8

95,943 74,950 74,715 82,035 24,602 23,948 18,667 14,817

3,437 2,940 2,304 2,376 2,370 2,330 2,185 2,376

6.832 6.768 6.463 6.310 6.310 6.327 6.353 6.251

13.70 12.96 12.33 12.65 12.57 12.66 12.38 12.99

7.89.2 10.4 9.3

Consumer Price Index (％)

Fixed Assets Investment (Urban Area)(％)Retail Sales of Consumer Goods (%)Retail Sales of Consumer Goods (Real, %)Sales Volumes of Passenger Cars (%)

Power Generation (%)

Exchange Rate (RMB/USD)

Exchange Rage(JPY/RMB)

Stock Market (SSE A)

M2 (%)

Growth in RMB Loans

FDI from Japan (USD'00 mil)

Foreign Reserve (USD'00 mil)

FDI from Japan(No. of Contract)

Trade Balance (USD'00 mil)

Foreign Direct Investment(No. of Contract)

Foreign Direct Investment (USD'00 mil)

Railway Cargo Traffic (%)

Real GDP (%)(Upper:Figure of each quater, Lower:Year-to-date Figure)Industrial Value-added Output (％)

Note: % means a year-on-year growth rate. The number of direct investments is counted on contract base while direct investments are counted by utilized amount. The quarterly figures of tined area are cumulative total of the year while the others are figures of the quarter. Foreign exchange reserves and stock value are figures at term-end. Exchange rate is the average rate of the given period. Source: CEIC Data Co., Ltd., National Bureau of Statistics of China, General Administration of Customs of the PRC, MOFTEC,

Bloomberg, Corporate Research Division of BTMU

Appendix: Macroeconomic Indicators (Monthly Basis)

PMI Industrial FAI Retail Passenger Power Railway CPI Exports Imports Trade M2 Growth

Value-added Sales of Car Generation Cargo Growth Balance in

Output Consumer Sales Traffic RMB Loans

Goods Units

(YoY, %) (YoY, %) (YoY, %) (YoY, %) (YoY, %) (YoY, %) (%) (YoY, %) (YoY, %) (USD bil) (YoY, %) (RMB bil)

2010 Jan 55.8 n/a 26.6 14.0 113.2 39.5 21.8 1.5 21.0 85.6 14,168 26.1 1,393

Feb 52.0 12.8 26.6 22.1 55.3 10.1 15.1 2.7 45.7 44.7 7,612 25.5 700

Mar 55.1 18.1 26.4 18.0 63.2 18.9 15.5 2.4 24.2 66.4 ▲7,236 22.5 511

Apr 55.7 17.8 26.1 18.5 33.2 22.2 8.5 2.8 30.4 50.1 1,681 21.5 774

May 53.9 16.5 25.9 18.7 25.8 19.9 8.0 3.1 48.4 48.9 19,530 21.0 639

Jun 52.1 13.7 25.5 18.3 19.4 11.8 9.0 2.9 43.9 34.6 20,022 18.5 603

Jul 51.2 13.4 24.9 17.9 13.6 12.9 8.1 3.3 38.0 23.2 28,730 17.6 533

Aug 51.7 13.9 24.8 18.4 18.7 13.4 6.3 3.5 34.3 35.5 20,036 19.2 545

Sep 53.8 13.3 24.5 18.8 19.3 8.8 5.6 3.6 25.1 24.4 16,875 19.0 596

Oct 54.7 13.1 24.4 18.6 27.1 6.7 6.3 4.4 22.8 25.4 27,148 19.3 588

Nov 55.2 13.3 24.9 18.7 29.3 6.8 7.6 5.1 34.9 37.9 22,890 19.5 564

Dec 53.9 13.5 24.5 19.1 18.6 5.1 2.7 4.6 17.9 25.6 13,080 19.7 481

2011 Jan 52.9 n/a 24.9 19.9 16.2 8.2 6.7 4.9 37.7 51.4 6,461 17.2 1,040

Feb 52.2 14.9 24.9 11.6 2.6 15.0 6.9 4.9 2.3 19.7 ▲7,306 15.7 536

Mar 53.4 14.8 25.0 17.4 6.5 13.7 6.8 5.4 35.8 27.4 139 16.6 664

Apr 52.9 13.4 25.4 17.1 2.8 10.5 9.5 5.3 29.8 22.0 11,421 15.3 740

May 52.0 13.3 25.8 16.9 ▲0.1 10.9 8.9 5.5 19.3 28.4 13,047 15.1 552

Jun 50.9 15.1 25.6 17.7 6.2 14.5 9.5 6.4 17.9 19.0 22,273 15.9 634

Jul 50.7 14.0 25.4 17.2 6.7 12.6 6.8 6.5 20.3 23.0 31,484 14.7 493

Aug 50.9 13.5 25.0 17.0 7.3 9.1 6.8 6.2 24.4 30.4 17,759 13.6 549

Sep 51.2 13.8 24.9 17.7 8.8 10.7 8.9 6.1 17.0 21.1 14,514 13.0 470

Oct 50.4 13.2 24.9 17.2 1.4 9.4 8.8 5.5 15.8 29.1 17,033 12.9 587

Nov 49.0 12.4 24.5 17.3 0.3 7.5 6.8 4.2 13.8 22.6 14,528 12.7 562

Dec 50.3 12.8 23.8 18.1 4.6 9.8 9.1 4.1 13.3 12.1 16,521 13.6 641

2012 Jan 50.5 n/a 21.5 n/a ▲23.8 ▲5.1 3.7 4.5 ▲0.5 ▲15.0 27,278 12.4 738

Feb 51.0 21.3 21.5 n/a 26.5 19.4 5.9 3.2 18.3 40.3 ▲31,483 13.0 711

Mar 53.1 11.9 20.9 15.2 4.5 7.3 3.6 3.6 8.8 5.4 5,347 13.4 1,011

Apr 53.3 9.3 20.2 14.1 12.5 1.5 4.8 3.4 4.9 0.4 18,427 12.8 682

May 50.4 9.6 20.1 13.8 22.6 3.3 3.4 3.0 15.3 12.7 18,699 13.2 793

Jun 50.2 9.5 20.4 13.7 15.8 ▲0.9 ▲3.9 2.2 11.3 6.3 31,722 13.6 920

Jul 50.1 9.2 20.4 13.1 10.7 2.4 ▲8.0 1.8 1.0 5.7 25,147 13.9 540

Aug 49.2 8.9 20.2 13.2 11.3 2.6 ▲8.0 2.0 2.7 ▲2.7 26,661 13.5 704

Sep 49.8 9.2 20.5 14.2 ▲0.3 1.2 ▲5.9 1.9 9.8 2.3 27,669 14.8 623

Oct 50.2 9.6 20.7 14.5 6.4 7.1 ▲4.8 1.7 11.5 2.2 32,047 14.1 505

Nov 50.6 10.1 20.7 14.9 8.8 8.0 0.7 2.0 2.8 ▲0.1 19,633 13.9 522

Dec 50.6 10.3 20.6 15.2 6.9 7.2 0.6 2.5 14.0 6.0 31,618 13.8 454

2013 Jan 50.4 n/a 21.2 n/a 48.7 24.5 1.6 2.0 25.0 29.0 29,146 15.9 1,070

Feb 50.1 n/a 21.2 n/a ▲8.3 ▲12.7 ▲1.8 3.2 21.7 ▲15.0 15,251 15.2 620

Source: CEIC Data Co., Ltd. , Corporate Research Division of BTMU

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