Morgan Stanley

November 6, 2008

China Economics

October dataset likely to show further deterioration

in economic growth conditions: Following the weaker-than-expected 3Q08 GDP report, we expect to see more deterioration in economic indicators for October, reflecting the deepening impact of the global credit crisis. Weakening trade growth: Although export growth was more resilient than expected in September, the sharp deceleration in import growth in recent months suggests manufacturers destocking ahead of the demanddownturn. We expect both export and import growth to dip below 20% YoY in October. Industrial production to soften further: Industrial production slowed ahead of export shipments in the recent months, indicating significant destocking of industrial inputs, consistent with the October PMI reading (see "China Economics: Worst-ever PM/ Readings," November 3, 2008). Combined with anecdotal evidence of further decline in electricity consumption in the month, we see further softening in

output growth (from 11.4% in Sep). Further ease in inflation: Upstream inflation eased by more-than-expected in September on the back of the noticeable correction in commodity prices, and we see a further dip t0 7.9% for the PPI (+9.1% in Sep) and 12% for the RMPPI (+14% in Sep) in October. Meanwhile, consumer inflation likely continued to ease, t0 4.3% we estimate (+4.6% in Sep), as further ease in food prices more than offset any pickup in non-food inflation. Monetary data - does policy easing help? The cuts in RRR and interest rate and removal ofloan quotas could

give support to loan growth, but deposit growth has been hurt by the deterioration in enterprise working capital amid the squeeze on profitability from high input costs. In October, we believe that loan growth could have edged up further t0 14.7% YoY (+14.5% in Sep), but M2 growth probably remained stable (+15.3%). MORGANSTANLEYRESEARCH ASIA/PACIFIC

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