Asia Economics Data Flash July 14,2006 Goldman Sachs Asia Economics Research Group Hong Liang, Helen (Hong) Qiao, Eva Yi +85229781941 GSGLOBALECONOMICWEBSITE Economic Research from the GSInstitutional Portal at Important disclosures appear at the back of this document China Money and Credit: Clear Signs of Moderation in June Exhibit 1: Table of money and credit growth data June May Apr Mar Feb Jan M2 % yoy 18.419.118.918.818.819.2 % qoq (sa, ann) 17.017.916.220.018.221.4 % mom (sa) 220.127.116.11.31.02.3 Total Loans % yoy 14.315.114.814.013.413.1 % qoq (sa, ann) 14.718.118.717.313.513.5 % mom (sa) 0.71.21.61.41.31.3 Source: People’s Bank of China (PBOC), CEIC, Goldman Sachs Research estimates. June M2 and loan growth showed clear signs of moderation, on the back of the tightening measures taken since 2Q. Total loans growth moderated to 14.3% year on year (yoy) in June, down from 15.1% yoy in May. Sequential momentum softened further to 0.7% month on month (mom), down from 1.2% mom. CNY loan growth slowed to 15.2% yoy in June, down from 16.0% yoy in May. Sequential momentum also softened to 0.9% mom, down from 1.4%. In the mean time, M2 slowed to 18.4% yoy in June, down from 19.1% yoy in May. Sequential momentum also decelerated to 1.1% mom, down from 1.4% mom. Year to date CNY new loans reached Rmb2.18 trillion, or 87% of the Rmb2.5 trillion annual target set at the beginning of the year. In our view, the People’s Bank of China is likely to tolerate total new CNY loans to reach somewhere between 3-3.5 trillion for the whole year, instead of pursuing the pre-set target aggressively. This will imply a yoy growth rate of 15.4% to 17.9%, and moderately slower or roughly flat sequential growth rate compared with the current 17% quarter-on-quarter growth. We expect further moderation of money supply and credit growth in the coming months. In our view, the tightening measures adopted so far, which mainly includes intensive “moral suasion,” administrative controls against property market investments, as well as the hikes in the lending rate and reserve requirement ratio, should be able to further slow down M2 and credit growth. Meanwhile, we expect activity growth to be strong in 2Q2006, but start to moderate in 3Q2006. We continue to believe faster CNY appreciation will be critical in tightening the financial conditions, curbing imported inflation and helping rotate growth away from external demand to domestic demand. In the meantime, we believe draining excess liquidity and raising the deposit rate will also be needed to reduce banks’ incentive to lend, and to rein in inflationary expectations. Goldman Sachs Economic Research Asia Economics Data Flash 2 Exhibit 2: M2 growth 5 10 15 20 25 30 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Year-on-year growth Sequential growth % qoq sa, ann % chg M2 Growth Source: PBOC, CEIC, Goldman Sachs Research estimates. Exhibit 3: Total loan growth 5 10 15 20 25 30 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Year-on-year growth Sequential growth % qoq sa, ann % chg Total Loan Growth Source: PBOC, CEIC, Goldman Sachs Research estimates. 3 Global product; distributing entities The Global Investment Research Division of Goldman Sachs produces and distributes research products for clients of Goldman Sachs, and pursuant to certain contractual arrangements, on a global basis. Analysts based in Goldman Sachs offices around the world produce equity research on industries and companies, and research on macroeconomics, currencies, commodities and portfolio strategy. 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