ASIA_EXJAPAN_WEEKLY__22_J_100968655_287660

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Lehman Brothers| Title

22 June 2007 1

Asia Ex-Japan WeeklyEconomic Monitor

OVERVIEW: CHINAS FISCAL LEVERAGE 2-3

Fiscal policy is becoming more active and is critical to the rebalancing of the economy.

ASIA OUTLOOK: HAPPY 10TH ANNIVERSARY 4-5

Ten years after the Asian crisis, the situation is benign. We consider what could go

wrong.

CHINA OUTLOOK: MIXED RESULTS 6

Policies to rebalance the economy have so far achieved only mixed results.

INDIA OUTLOOK: MANAGING THE TRANSITION TO HIGH GROWTH 7

The growth spurt is largely structural in our view, but it is posing new policy challenges.

KOREA OUTLOOK: GROWTH MOMENTUM 8

We have upgraded our growth and inflation outlook, expecting two 25bp hikes this year.

AUSTRALIA OUTLOOK: GROWTH PAINS 9

Overstretched capacity and accelerating economic growth spell higher inflation. We see

potential for two interest rate hikes by early 2008.

DATA PREVIEW 13-15

South Korea's industrial output for May should provide further evidence that economic

activity is strengthening, led by exports and investment. In India, the current account

deficit will likely swing sharply to a surplus in Q1, but rather than fundamental change it

reflects seasonality (the data are not seasonally adjusted). In Taiwan, industrial output

should remain soft in May, due to weakening exports and lacklustre domestic demand.

GLOBAL LETTER: THE FINAL 10% 16

The central bankers jobs are almost done. The challenge will be for them to individually

administer what remains without causing too much collective pain.

Please see analyst certifications and important disc losures on the back cover of t his report.

Global Economics 22 June 2007

CONTACTS

Rob Subbaraman+852 2252 [email protected]

Mingchun Sun+852 2252 6248

[email protected]

Young Sun Kwon+852 2252 [email protected]

Sonal Varma+91 22 4037 [email protected]

Stephen Roberts+612 8259 [email protected]

Extracted from the Global Weekly Economic Monitor.Available on LehmanLive: h ttp: //lehmanlive.com


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Lehman Brothers| Global Weekly Economic Monitor

22 June 2007 3

tool has been used many times before (Figure 3). While there is still no capital gains tax

on securities transactions, we judge that it will be introduced eventually. The government

will likely announce its intentions well ahead of the launch date (say, 9-12 months

ahead) to reduce the potential shock to the market.

Rebalancing the economy

Chinas fiscal policy also plays an active role in rebalancing the economy, which suffers

from over-investment, insufficient consumption and too much reliance on exports.

Reduce the trade surplus.Since September 2006, the government has cut VAT rebates,

imposed new export taxes on certain products and lowered import taxes a few times.

This week, the Ministry of Finance took another big step by cutting VAT rebates on

2,831 products, covering 37% of all the products that China exports. Such a move should

not only help reduce the trade surplus, but also the fiscal burden VAT rebates

amounted to more than 12% of the total tax revenue in 2006 (Figure 4) thereby freeing

up funds that could potentially be spent on social welfare.

Increase consumption. In 2006, the government started to provide tuition waivers to all

rural primary and middle school students in the Western provinces. This year, the waiverwill be expanded nationwide. In addition, the government plans to raise the coverage of

the cooperative medical program to 80% of the rural population in 2007 from 50% in

2006. Such welfare programs, among many others in progress, should help to increase

consumption via reduced compulsory expenses and precautionary savings.

Re-allocate investments. To promote industrial developments in the north-eastern

provinces, the government introduced a VAT waiver scheme for certain investments in

these regions last year. Starting from next week, the scheme will be expanded to 26

industrial cities in mid-China, giving more incentives for eastern industrial firms to

migrate west. To curb overinvestment in construction and industrial projects and

environmental degradation, the government doubled the land-use tax on 1 January 2007.

To reduce the high retained earnings that state-owned enterprises (SOEs) often plough

back into wasteful investments, a so-called capital operation budget system was

initiated in May. This requires SOEs to pay dividends to the government later this year.

The active use of well targeted fiscal policies should ease the burden on interest rate and

exchange rate policies in rebalancing the economy. This is another reason for thinking

that the government will take a gradual approach in both renminbi appreciation and rate

hikes, since the combined effects of all these policies, albeit gradual, could be significant.

Chinas proactive fiscal policy is a key reason for our optimistic economic outlook, even

though we see no major moves on the exchange rate or interest rate fronts. If the economy

encounters shocks, Chinas healthy fiscal position should provide a cushion.

Tax policies have been used

to help reduce the trade

surplus

Welfare programs should

help increase consumption,especially in rural areas

Tax policies are also used to

align investments with

development strategies

The active use of fiscal

policies alleviates the

burden of other policies

Figure 3. A history of changes in Chinas stamp duty forsecurities transactions

Figure 4. Export VAT rebates as % of to tal tax revenue

Before AfterShanghai Stock

ExchangeComposite Index

10 Oct 1991 0.6% 0.3% 180

10 May 1997 0.3% 0.5% 1467

12 Jun 1998 0.5% 0.4% 1383

11 Nov 2001 0.4% 0.2% 1630

23 Jan 2005 0.2% 0.1% 1234

30 May 2007 0.1% 0.3% 4334 0

3

6

9

12

15

1985 1988 1991 1994 1997 2000 2003 2006

%

Source: China Ministry of Finance, Bloomberg and Lehman Brothers. Source: CEIC and Lehman Brothers.


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22 June 2007 4

ASIA EX-JAPAN: ECONOMIC OUTLOOK

Happy 10th anniversary

Ten years after the Asian crisis, the situation is benign. We consider what could go wrong.

It is almost 10 years since the Asian crisis, and the Asia ex-Japan economies are in much

better shape. Balance of payments positions are rock solid, inflation is under control and

we forecast aggregate GDP growth of about 8% this year and next. However, against this

benign backdrop it is worth considering what could go wrong. We see three main risks.

The first is a sharp US economic slowdown that spreads to the euro area and Japan. We do

not share the view that the region has decoupled from global growth. Granted, Chinas

economy is booming and intra-regional trade has risen to nearly two-fifths of total exports.

However, more than two-thirds of this intra-regional trade consists of raw materials and

intermediate goods used in production with China being the main assembly point and

about half of it is driven by demand from outside the region. A sharp downturn in global

demand would have major ripple effects on Asia ex-Japans cross-country supply chain, inour view. Economies that are very open or have weak domestic demand such as

Singapore, Hong Kong, Thailand and Taiwan would seem most vulnerable.

The second risk is a rise in global risk aversion from current very low levels, sparking a

reversal of the strong capital inflows to the region. A possible trigger could be a crash in

Chinas equity market leading to an unwinding of the yen carry trade. Economies with

high-yielding currencies, fixed exchange rates or relatively weak fundamentals such as

Indonesia, India, Hong Kong and the Philippines would seem among the most exposed.

The good news is that Asia ex-Japan has plenty of room for policy responses if either of

these two risks materialise. Government budgets are generally in good shape, leaving

ample room to expand fiscal policy. And with inflation well under control, nearly all Asian

central banks could cut rates. Also, in case of capital flight, most Asian central banks haverecord-high levels of FX reserves to defend their currencies.

The third risk is the mixed blessing of strong, sustained capital inflows, which help

facilitate growth and development but can also place substantial appreciation pressure on

currencies, especially given that the region also has a large current account surplus.

Slowing the pace of currency appreciation through FX intervention is helping keep

exports competitive. However, the danger is that Asian central banks lose some

autonomy in setting interest rates and controlling monetary conditions, with the negative

consequences of the economy overheating, fanning asset price bubbles and/or inflation.

Forecast changes this week:We have revised down our 2007 CPI inflation forecasts for

Hong Kong and Southeast Asia.

The outlook at a glance

Latest* 2006 2007 2008 Latest 2006 2007 2008

China 11.1 10.7 10.2 9.8 3.4 1.5 2.8 2.8

Hong Kong 5.6 6.8 5.5 6.5 1.2 2.0 1.5 2.5

India 9.1 9.6 9.6 9.9 4.3 4.8 5.2 5.0

Indonesia 6.0 5.5 6.0 6.5 6.0 13.1 6.3 6.0

Malaysia 5.3 5.9 5.0 6.0 1.4 3.6 2.0 3.0

Philippines 6.9 5.4 6.0 6.5 2.4 6.2 2.7 3.5

Singapore 6.1 7.9 5.5 6.0 0.6 1.0 1.4 1.5

South Korea 4.0 5.0 4.5 5.1 2.3 2.2 2.4 3.0

Taiwan 4.2 4.6 4.2 5.0 0.0 0.6 1.0 1.5

Thailand 4.3 5.0 3.5 5.5 1.9 4.6 2.4 3.6

Asia ex-Japan 8.4 8.5 8.1 8.2 3.1 3.0 3.1 3.3

* GDP data are for Q1.# CPI data are for May, except for Singapore (which is April).

# CPI data for India are based on the wholesale price index for the week of 9 Jun 2007.

All forecasts are modal (ie, the most likely single outcome). Table last revised on 22 June 2007.

Source: CEIC and Lehman Brothers.

Real GDP (% growth y-o-y) CPI(% y-o-y)

Rob Subbaraman

+852 2252 6249

[email protected]

Mingchun Sun

+852 2252 6248

[email protected]

Young Sun Kwon

+852 2252 1370

[email protected]

Sonal Varma

+ 91 22 4037 4087

[email protected]


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22 June 2007 5

The region : The level o f real GDP (seasonally adjusted, indexed 1Q2002 = 100)

100

110

120

130

140

150

1

Index

100

110

120

130

140

150

Index

China

Korea

Taiwan

MalThailandHK

India

Indonesia

Sing

1Q02 1Q07 1Q02 1Q07

Phil

We expect an export slowdown this year, but the regionhas plenty of room to ease monetary and fiscal policies,rotating the mix of GDP towards domestic demand.

Indexed to 100 in 2002, Chinas GDP (161) is off thechart, but its growth is too dependent on exports andinvestment. Southeast Asia is also starting to shine.

The laggard economies have been Korea and Taiwan.Both have heavily indebted household sectors and arefacing intense competitive pressures.


The region: Consumer price inflation (% y-o-y)

-5

0

5

10

15

20

% y-o-y

-5

0

5

10

15

20

% y-o-y

HK

Sing

Phil

Kor MalThai

TwnCh

Indonesia

May-07May-07Jan-03 Jan-03

After rising sharply on surging oil prices and cuts ingovernment oil price subsidies, inflation has fallensharply in Indonesia and remains benign elsewhere.

We expect oil prices to rise to an average of US$70/bblin 2007, but the impact on the year-on-year CPI inflationshould be modest given a high base year of comparison.

How low inflation goes could be the big surprise. Highproductivity growth, prudent monetary policies andintense competition are keeping inflation low.


The region: Very exposed to oi l price shocks

Net imports of oil

-4

-2

0

2

4

6

8

10

Thai Phil Kor India HK Tw n Ch Jap Indo Sing Mal

% GDP

2004 2005 2006

High oil prices hurt Asia ex-Japans economies muchmore than those of most other regions, with Thailand,Philippines, Korea and India most exposed.

Our Oil team expects oil prices to rise again, and oureconomic forecasts are based on this view. But if oil

prices stay low, it will be a major plus for the region.

If oil prices surprise us on the downside, it could resultin larger current account surpluses, lower CPI inflation,more scope for rate cuts and stronger growth.



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22 June 2007 6

CHINA: ECONOMIC OUTLOOK

Mixed results

Policies to rebalance the economy have so far achieved only mixed results.

We recently raised our 2007 GDP growth forecast for China from 9.8% to 10.2%, based

on stronger-than-expected growth in Q1. We may have to revise up our growth forecast

again, as the growth momentum continued in May: retail sales grew 15.9% y-o-y,

industrial production rose by 18.1%, and fixed-asset investment gained 25.9% (ytd).

There are both welcome and unwelcome signs in recent data. Welcome: the strength in

retail sales growth suggests consumption has picked up. Consumption is low as a share

of GDP and needs to pick up to rebalance growth away from investment and exports.

Unwelcome: the gigantic trade surplus, which surged by 84% y-o-y in the first five

months of this year, leaving growth even more dependent on exports.

The government has implemented a slew of policies and reforms to rebalance theeconomy since 2Q 2006, including three rounds of VAT rebate cuts, new export taxes,

relaxation of restrictions on capital outflow, and administrative measures to curb

investment in certain sectors. But recent economic data suggest that these policies have

so far had only mixed results. It raises the risk that, if the unbalanced growth is

prolonged, the longer-term outlook may become riskier.

The 3.4% CPI inflation in May, caused mainly by surges in food prices, should prove

temporary. Pork prices, one of the main culprits, have already fallen by about 5% in the

first ten days of June. We expect a continued decline in food prices as supply increases

during the summer, while non-food CPI inflation should remain stable at about 1.0%.

Thus CPI inflation should gradually trend down after July, dip sharply in December due

to a base effect, and stay low in 1H 2008. CPI inflation should average 2.8% this year

and next, still within the central banks target of 3.0%. Therefore, we expect no more

rate hikes this year. In addition, the central bank has raised the reserve requirement ratio

five times this year (250bp hike in total), and we expect at least one more 50bp hike this

year as excess liquidity will likely be generated through a massive trade surplus and net

capital inflows.

On the currency side, the recent widening of the daily trading band of CNY against the

USD from +/-0.3% to +/-0.5% allows more flexibility in the exchange rate regime. But

we do not expect the pace of renminbi appreciation to accelerate much. We expect

continued heavy intervention by the central bank to limit the appreciation to 7.50

CNY/USD by year-end, given that the governments priority is to maintain employment

and social stability.


% y-o-y unless otherwise stated 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 2006 2007 2008

Real GDP 10.6 10.4 11.1 10.2 9.8 9.5 9.8 10.0 10.7 10.2 9.8

Retail sales 13.8 14.3 14.9 15.6 15.0 15.0 15.1 14.3 13.7 15.1 14.7Fixed-asset investment (ytd) 27.3 24.0 23.7 25.0 23.0 22.0 23.0 24.0 24.0 22.0 23.0

Industrial production 16.2 14.8 18.2 17.3 16.2 15.3 16.0 16.0 16.2 16.8 16.0Exports 28.7 28.9 27.8 26.4 23.3 20.0 20.0 20.0 27.2 24.0 19.8

Imports 22.1 15.4 18.2 21.5 23.4 24.7 25.0 25.0 19.9 22.1 23.9Trade surplus (US$bn) 48.7 67.7 46.4 57.2 59.7 71.4 45.4 56.9 177 235 242Current account surplus (% of GDP) 9.0 9.6 8.2

Consumer prices 1.3 2.0 2.7 3.4 3.0 2.2 2.4 2.1 1.5 2.8 2.81-yr bank lending rate 6.12 6.12 6.39 6.57 6.57 6.57 6.57 6.57 6.12 6.57 6.841-yr bank deposit rate 2.52 2.52 2.79 3.06 3.06 3.06 3.06 3.06 2.52 3.06 3.33

Reserve requirement ratio 8.50 9.00 10.00 11.50 12.00 12.00 12.50 13.00 9.00 12.00 13.00CNY/USD 7.91 7.81 7.73 7.64 7.57 7.50 7.40 7.30 7.81 7.50 7.10Note: All forecasts are modal (ie, the most likely single outcome). Table last revised on 22 June, 2007.


Mingchun Sun

+852 2252 6248

[email protected]


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22 June 2007 7

INDIA: ECONOMIC OUTLOOK

Managing the transition to high growth

The growth spurt is largely structural in our view, but it is posing new policy challenges.

India is undergoing a remarkable transition: GDP grew by 9.4% in 2006-07, an 18-year

high, and has averaged 8.6% over the past four years. The momentum continues in the

new fiscal year with robust strength in both industrial output and exports in April. This

does not look like a flash in the pan. Indias low-cost economy is reaping the rewards of

market liberalisation; Indian companies in manufacturing and services are seizing the

opportunities presented by a more open economy. A middle class is fast emerging.

We judge that this acceleration has more to do with structural factors than cyclical ones.

Gross domestic investment as a share of GDP jumped from 33.8% in 2005-06 to an

estimated 35% in 2006-07 and looks set to climb further. Robust government revenue is

providing room for infrastructure spending, FDI inflows more than doubled last year,

and savings of the private corporate sector have surged from 4.7% in 2003-04 to 8.1% in2005-06. High corporate savings is a sign of healthy profits, and this has occurred in

spite of accelerating wages, suggesting productivity improvements.

That said, the economy is facing some strains. Food and manufactured inflation has

remained firm and credit is growing fast, suggesting that some of the growth acceleration

could be cyclical. To be sure, the Reserve Bank of India (RBI) has hiked the repo rate

seven times to 7.75%, and in response, the WPI inflation has eased below the RBIs

target of 5.0% and both credit and money supply growth rates have fallen from their

peak. However, high interest rates and strong growth are contributing to surging capital

flows. The RBI has let the rupee appreciate recently, but too much appreciation could

hurt Indias labour-intensive exports, while heavy FX intervention could jeopardise

monetary autonomy. We expect the RBI to take a middle-road approach: managing the

pace of rupee appreciation, while working hard to mop up liquidity by heavily utilizing

the cash reserve ratio and open market operations.

Overheating cannot be ruled out, but far more important, in our view, is the scope for

Indias economy to sustain 9-10% growth in the medium term. Given that Indias GDP

per capita is just US$790, nearly three-fifths of its workforce is still in the countryside

and half its population is under 25 years old, there is still much growth potential to be

unlocked. The key is more supply-side reforms without politics getting in the way.


% y-o-y growth unless otherwise stated 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 2006 2007 2008

Real GDP 10.2 8.7 9.1 9.4 9.9 9.9 10.2 9.9 9.6 9.6 9.9

Agriculture 2.9 1.6 3.8 3.0 3.0 4.0 4.0 4.0 3.2 3.5 4.0

Industry 11.3 10.6 11.2 11.1 11.0 11.5 11.5 11.5 9.9 11.2 11.4

Services 11.8 11.0 9.9 10.8 11.1 11.5 11.5 11.0 10.9 10.8 11.1

Industrial output 11.8 11.2 12.4 11.8 11.0 12.0 11.3 12.0 10.5 11.8 11.8

M3 money supply 19.3 19.0 21.2 20.3 19.3 19.1 18.3 18.2 18.6 20.0 18.2

Non-food credit 32.3 30.5 29.4 28.1 27.0 28.5 26.9 26.7 32.5 28.2 26.6

Wholesale price index 5.1 5.6 6.4 5.4 4.9 4.7 5.0 5.4 4.8 5.4 5.0

Consumer price index (average) 6.5 7.5 8.1 7.1 6.7 5.7 5.5 5.7 6.3 6.9 5.4

Merchandise t rade balance (% GDP) -6.1 -6.7 -6.6 -7.4 -8.2 -8.9 -10.3 -10.7 -6.7 -8.9 -10.8

Current account balance (% GDP) -1.4 -1.2 -0.6 -1.0 -1.4 -1.9 -1.5 -1.8 -1.2 -1.9 -2.4

Fiscal deficit (% GDP) -3.9 -3.4 -3.5 -3.3 -3.3 -3.3 -3.3 -3.2 -3.4 -3.3 -3.0

Repo rate (%) 7.00 7.25 7.50 7.75 7.75 7.75 7.75 7.75 7.25 7.75 7.75

Reverse repo rate (%) 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00

Cash reserve ratio (%) 5.00 5.25 6.00 7.00 7.50 8.00 8.50 8.50 5.25 8.00 9.00

10-year bond yield (%) 7.68 7.61 7.94 8.20 8.15 8.30 8.20 8.10 7.61 8.30 8.00

Exchange rate (INR/USD) 46.0 44.2 43.6 40.4 40.1 40.0 39.6 39.2 44.2 40.0 38.5

Note: Consumer price index is a simple average of indices for industrial workers, non-manuel employees and agricultural labour. Fiscal deficit is for central government.

All forecasts are modal (i e, the most likely single outcome). Tab le last revised on 22 June, 2007. Source: CEIC and Lehman Brothers.

Rob Subbaraman+852 2252 6249

[email protected]

Sonal Varma

+91 22 4037 4087

[email protected]


8/18


22 June 2007 8

SOUTH KOREA: ECONOMIC OUTLOOK

Growth momentum

We have upgraded our growth and inflation outlook, expecting two 25bp hikes this year.

We have revised up our South Korea GDP forecasts for 2007 and 2008 to 4.5% (from

4.3%) and to 5.1% (from 4.8%), respectively. Four reasons account for upgrades. (1) We

are more optimistic on the export outlook, reflecting Korean exporters success in

diversifying into new markets, keeping their prices competitive and enhancing their

product quality. (2) Business investment growth has recovered from 7.6% in 2006 to

12.5% y-o-y in January-April. This is partly a result of a positive base effect for semi-

conductor equipment and a short-lived boost from financial institutions having to replace

ATMs to accommodate new banknotes. But strong exports and healthy balance sheets of

large companies also appear to be buoying investment. (3) We have revised up our

construction investment outlook. This is in response to strong construction orders, which

grew by 26.3% y-o-y in Q1, and the government announcing plans last week to provide105,000 new homes near Seoul, as part of its policy of increasing the supply of housing.

(4) Given soft income growth and high personal debt, we continue to expect the recovery

in consumption to be modest this year. However, we are more bullish about next year:

First, job-intensive construction and the non-IT manufacturing sector should keep

recovering. Second, wealth effects from the strong equity market should materialize.

Apart from the upside growth risks, we expect cost-push inflationary pressure (exchange

rate, oil prices, etc) to intensify. High money supply growth should add to inflationary

pressures in the medium term. All in all, we have revised up our CPI inflation forecasts

for 2007 and 2008 to 2.4% (from 2.3%) and to 3.0% (from 2.6%), respectively.

Given the upward revisions to our forecasts of GDP growth and inflation, plus the Bank

of Koreas (BOK) explicit concerns about excess liquidity, we have decided to changeour interest rate outlook from no change this year to two 25bp rate hikes, one each in Q3

and Q4. We would not be surprised if the BOK hikes as early as next month (12 July).

Despite upgrading our growth and interest rate outlook, we retain our view that the won

will appreciate by less than other Asian currencies. In real trade-weighted terms, the won

has risen by more than most other Asian currencies and the current account is no longer a

support for the currency. However, with strong net capital inflows, we still expect some

won appreciation against the US$.

The outlook at a glance3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 2006 2007 2008

Real GDP 4.8 4.0 4.0 4.5 4.5 4.9 5.3 5.1 5.0 4.5 5.1[sa, % q-o-q] [1.2] [0.9] [0.9] [1.4] [1.2] [1.4] [1.2] [1.2]

Private consumption 4.0 3.7 4.1 4.1 4.3 4.3 4.6 4.6 4.2 4.2 4.6

Business investment 11.1 5.3 10.8 7.0 6.0 6.0 6.5 7.5 7.6 7.4 7.5Construction investment -0.1 3.2 3.9 3.0 2.0 1.0 2.5 2.5 -0.4 2.3 2.5Exports (goods & services) 12.4 10.5 11.0 11.0 10.5 10.0 10.0 9.6 12.6 10.6 9.8Imports (goods & services) 11.3 10.1 11.7 11.5 11.0 11.5 10.3 10.1 10.8 11.1 10.2

Contributions to GDP:

Domestic final sales 3.4 4.1 4.5 4.0 3.8 3.5 4.2 4.3 3.5 3.8 4.3Inventories -0.2 -1.3 -1.2 -0.4 -0.1 1.0 0.2 0.0 -0.1 0.0 0.0Net trade (goods & services) 1.6 1.2 0.8 0.9 0.8 0.4 0.9 0.8 1.6 0.7 0.8

Unemployment rate (sa, %) 3.5 3.4 3.2 3.3 3.4 3.5 3.5 3.5 3.5 3.4 3.5Employment 1.2 1.2 1.2 1.2 1.3 1.4 1.4 1.4 1.3 1.3 1.5Consumer prices 2.5 2.2 2.0 2.4 2.3 2.9 3.3 2.9 2.2 2.4 3.0

Core CPI 2.1 2.0 2.2 2.3 2.3 2.5 2.7 2.7 1.8 2.3 2.8Current account (% of GDP) 0.7 -0.1 -0.6Bank lending 11.0 13.3 14.2 14.3 13.6 12.0 11.1 10.5 11.0 13.5 10.6Residential property prices 1.2 4.5 3.5 0.4 0.8 1.0 1.0 1.0 6.1 9.2 3.8

BOK target call rate (%) 4.50 4.50 4.50 4.50 4.75 5.00 5.00 5.00 4.50 5.00 5.003-year T-bond yield (%) 4.57 4.92 4.76 5.10 5.15 5.15 5.15 5.15 4.92 5.15 5.15

10-year T-bond yield (%) 4.73 5.06 4.93 5.15 5.25 5.25 5.25 5.25 5.06 5.25 5.25Exchange rate (KRW/USD) 945.2 929.8 943.1 920 915 910 910 905 929.8 910 900

Source: Bank of Korea, CEIC, and Lehman Brothers.

% y-o-y growth unless otherwise stated

Note: Interest rates and currency are end of period, other measures are period averages. Residential property prices are quarterly average changes.

Table last revised on 22 June, 2007. All forecasts are modal forecasts (i.e., the single most likely outcome).

Young Sun Kwon

+852 2252 1370

[email protected]


9/18


22 June 2007 9

AUSTRALIA: ECONOMIC OUTLOOK

Growth pains

Overstretched capacity and accelerating economic growth spell higher inflation. We see

potential for two interest rate hikes by early 2008.

Australian economic growth has accelerated sharply since mid-2006 and the growth spurt

looks set to continue. Since end-2003, Australia has enjoyed an exceptionally positive

terms-of-trade shock, driving very strong growth in national income. Output has lagged

income growth in recent years as increasing supply constraints have limited GDP growth. A

substantial rise in business investment spending over the past two years, especially in the

mining sector, has set the scene for big rises in production and exports in 2007.

Housing activity is starting to strengthen, with demand for new housing running well ahead

of the much-diminished supply of recent years, particularly in Australias biggest state,

New South Wales. Another factor that could add substantially to GDP growth from mid-

2007 is the change in the weather. Because of a severe drought, rural output in Q1 2007was down by 21.1% y-o-y but, if wet conditions persist, as suggested by long-range

weather forecasts, rural output could rebound sharply later in 2007.

After 16 years of continuous economic expansion the Australian economy is currently

close to full capacity. The unemployment rate in May, at 4.2%, was at a near 33-year low.

Wages are growing at a 4.1% annual rate, with the most capacity-constrained sectors,

such as mining and construction, showing 7% annual wages growth. Briefly lower petrol

prices may lower annual inflation again in Q2 2007, but by year-end all measures are

likely to show annual inflation rising through the Reserve Banks 2-3% target band. We

expect the Reserve Bank to boost its cash interest rate by 25bp to 6.5% in the second half

of 2007, with another increase likely in the first half of 2008.

The Australian dollar recently pushed up to an 18-year high above USD0.84. Wideinterest rate differential support plus strengthening exports and narrowing trade and

current account deficit positions should support the Australian dollar and make the dips

in periods of high risk aversion relatively shallow.


% saar unless otherw ise stated 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 2006 2007 2008

Real GDP 2.7 2.5 1.9 4.3 6.5 4.0 4.4 4.4 2.7 4.2 4.0

Consumption 4.5 2.8 2.9 5.0 5.4 3.6 3.8 3.8 3.1 3.8 3.7

Government 2.6 7.4 9.8 4.8 -11.7 5.0 3.4 3.4 5.5 4.0 3.0

Investment 1.4 7.6 -6.2 3.8 25.4 3.0 3.2 3.2 5.5 2.8 8.0

Exports 3.1 8.0 0.8 3.8 5.7 6.0 8.0 10.0 3.4 6.0 6.5

Imports 2.7 11.3 -2.2 26.0 8.7 4.0 4.0 4.0 7.6 7.4 4.5

Contributions to GDP:Domestic final sales 3.6 4.8 2.4 4.8 6.4 3.6 3.6 3.6 4.1 4.0 3.5

Inventories -0.5 -1.5 -0.9 4.7 0.9 0.0 0.0 0.0 -0.4 0.0 0.0

Net trade -0.4 -0.8 0.4 -5.2 -0.8 0.4 0.8 0.8 -1.0 0.3 0.5

Unemployment rate, (% labour force) 5.0 4.9 4.8 4.6 4.5 4.2 4.0 3.8 4.6 3.8 3.8

Average monthly employment, ('000) 19.0 34.0 28.0 19.0 10.0 30.0 25.0 25.0 25.0 22.5 22.0

Consumer prices, (% y-o-y) 3.0 4.0 3.9 3.3 2.4 1.6 1.4 2.4 3.6 2.0 3.2

RBA's trimmed mean, (% y-o-y) 2.6 2.8 2.9 2.9 2.7 2.5 2.5 2.8 2.8 2.6 3.2

Fiscal balance, (% of GDP) 1.6 1.1 0.9

Current account balance, (% of GDP) -5.9 -5.2 -4.4

Official cash rate (%) 5.50 5.75 6.00 6.25 6.25 6.25 6.25 6.50 6.25 6.50 6.75

3-year bond yield (%) 5.36 5.78 5.76 6.10 6.20 6.35 6.40 6.50 6.10 6.50 6.80

10-year bond yield (%) 5.41 5.79 5.51 5.89 5.90 6.20 6.40 6.60 5.89 6.60 6.90

AUD/USD 0.72 0.74 0.75 0.79 0.80 0.85 0.83 0.80 0.79 0.80 0.75Notes: Quarterly national accounts figures are % q-o-q changes at a seasonally adjusted annualised rate. Annual figures are %y-o-y changes. Unemployment is% of labour force. Interest rates and currencies are end-of-period. Table last revised 22 June 2007.Source: Australian Bureau of Statistics, Reserve Bank of Australia and GrangeSecurities.

Stephen Roberts

+612 8259 4846

[email protected]


10/18


22 June 2007 10

REST OF ASIA: ECONOMIC OUTLOOK

Hong Kong: The economy is humming along on liquid ity

0

2

4

6

8

10

12

14

16

Mar-80 Sep-85 Mar-91 Sep-96 Mar-02 Sep-07

% y-o-y

0.4

0.5

0.6

0.7

0.8

0.9

1.0

Ratio3-month hibor rate, lhs

US Fed funds rate, rhsLoan-to-deposit ratio, rhs

Chinas booming economy is generating huge demandfor Hong Kongs services and also appears to have alot to do with Hong Kongs surfeit of liquidity.

With large financial and property sectors, ampleliquidity can cause a reinforcing spiral, with asset

prices and domestic demand feeding off each other.

We expect GDP growth of 5.5% in 2007, but thenumber could be substantially higher or lower. HongKong is one of the most exposed to global conditions.


Indonesia: Investment revival could work wonders

0

4

8

12

16

20

Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07

%

6

7

8

9

10

11

12

13

14

%

CPI inf lation, % y-o-y

Policy interest rate

Lehman's

Forecasts

Inflation fell sharply in Q4 2006 and we expect it toremain low, averaging 6.5% in 2007, and to promptfurther rate cuts to 8.25% by the end of 2007.

External vulnerability indicators have improved, butthe economy needs urgently to attract new investment

to realise its full growth potential.

We expect 6.0% GDP growth in 2007 and 6.5% in2008, but we could raise our forecast if reforms toimprove the investment climate are implemented.


Malaysia: Powered by domestic demand

-5

0

5

10

15

Mar-03 Mar-04 Mar-05 Mar-06 Mar-07

% points

Domestic final demand Change in inventories Net exports

Malaysias GDP growth has held up well, underpinnedby robust consumption, which has been supported bylow real interest rates and high household borrowing.

Fiscal policy is also stimulative, including a cut in thecorporate tax rate, the removal of the capital gains taxon property and a hike in civil servant salaries.

We expect GDP growth of 5.0% in 2007, with a mindto revise up. A key risk is Malaysias high exposure toglobal conditions (exports comprise 122% of GDP).

Source: IMF, World Economic Outlook, CEIC and Lehman Brothers.


11/18


22 June 2007 11

The Philippines: Better economic fundamentals and strong overseas worker remittances suppor t economy

-6

-4

-2

0

2

4

6

8

10

Jan-98 Nov-99 Sep-01 Jul-03 May-05 Mar-07

% GDP

-60

-40

-20

0

20

40

60

80

100

% GDP

Central government deficit, lhs

Public sector debt, rhs

Philippine GDP grew by 6.9% in Q1 and there has

been good progress on consolidating fiscal policy andreducing the non-performing loan ratio.

The rolling 12-month sum fiscal deficit has fallen to0.8% of GDP in March 2007, while public debt hasfallen to 72.3%. The fundamentals are improving.

With robust overseas worker remittances, a wideningcurrent account surplus, rising FDI and a recovery in

bank lending, GDP should rise 6.0% in 2007.


Singapore: Successfully re-inventing itself, but highly exposed to global economic cycle

0

2

4

6

8

10

12

14

0 10,000 20,000 30,000 40,000 50,000

Nominal GDP per Capita in 2005 (PPP, US$)

Rea

lGDPgrowth,avg.

2004-06

(%)

HK Sing

Venezuela

China

Argentina

US

Italy

Singapore has risen to the challenge of competition,moving into high-end electronics and new niches(biotech, offshore engineering, wealth management).

These new niche industries are thriving. It is strikingthat Singapore, a developed country, averaged 7.8%growth in 2004-06, with just 1.0% inflation.

The main risk for Singapores economy is that, beingsmall and so open (exports make up 260% of GDP), itis very exposed to a global economic slowdown.

Source: World Bank, CEIC and Lehman Brothers.


12/18


22 June 2007 12

Taiwan: Downside looks limited

Contribution to GDP grow th

-6

-3

0

3

6

9

12


% points

Domestic final demand Change in inventories Net exports

Taiwans growth was lopsided in 2006, driven mostly

by exports. Domestic demand was weak, hurt byprolonged political uncertainty and a credit card crisis.

Domestic demand has recovered a little in the last twoquarters, and could gain momentum next year if

political uncertainty eases after the elections.

Also, given Chinas booming economy and a likelyupswing in the global tech cycle, we expect TaiwanGDP growth to rise from 4.2% in 2007 to 5.0% in 2008.


Thailand: Potentially a strong economic rebound in 2008

20

25

30

35

40

45


% GDP

-5

0

5

10

15

20

25%

Investment-to-GDP ratio, lhs

CPI inflation % y-o-y, rhs

Policy interest rate %, rhs

Political uncertainty and abrupt policy changes havestarted to weigh on the economy. We have lowered our2007 GDP growth forecast from 5.0% to 3.5%.

Still, the fundamentals are healthy: FX reserves arehigh, the fiscal budget is near balance, and debt levelsare low. Also, with inflation easing, rates are being cut.

We are cautious this year, but if the political uncertaintylifts after the election in November or December, wewould expect GDP growth to rebound strongly in 2008.

Source: Bank of Thailand and Lehman Brothers.


13/18


22 June 2007 13

ASIA EX-JAPAN: PREVIEW

The week ahead

South Korea's industrial output for May should provide further evidence that economic

activity is strengthening, led by exports and investment. In India, the current account

deficit will likely swing sharply to a surplus in Q1, but rather than fundamental change it

reflects seasonality (the data are not seasonally adjusted). In Taiwan, industrial output

should remain soft in May, due to weakening exports and lacklustre domestic demand.

SOUTH KOREA

Industrial output(Thursday)

South Koreas industrial output should grow 6.8% y-o-y in May after the above-

consensus 6.7% gain in April (Figure 1). In seasonally adjusted terms, output should

increase by 0.6% m-o-m in May following the 3.1% surge in April. Data already released

show that automobile production (9.9% weight of total manufacturing output) rose

13.7% y-o-y in May after a 15.7% gain in April. Export growth (in value terms)

moderated to 11.4% y-o-y in May from 17.1% in April. However, this is partly due to a

sharp drop in export prices of DRAM and other IT components, suggesting that, in

volume terms, export growth in the IT sector may not have moderated as much as in

value terms. Inventories also remain lean, with the inventory-to-shipment ratio declining

to 93.1 in April from 94.3 in May. In terms of expenditure data, we expect consumer

goods sales growth to pick up to 5.5% y-o-y in May from 4.7% in April. Data already

released show that automobile sales growth picked up to 12.1% y-o-y in May from

10.4% in April, and that sales at the countrys three biggest department stores dropped

Rob Subbaraman

+852 2252 6249

[email protected]

Mingchun Sun

+852 2252 6248

[email protected]

Young Sun Kwon

+852 2252 1370

[email protected]

Sonal Varma

+91 22 4037 4087

[email protected]

Stephen Roberts

+612 8259 4846

[email protected]

Economic events in the week ahead

Period Prev 2 Prev 1 Latest Lehman Consensus

Sometime during the week

India Exports, % y-o-y May 7.9 8.8 23.1 8.1 n.a.

India Trade balance, US$bn May -4.7 -3.8 -7.1 -7.4 n.a.

S. Korea Current account balance, US$bn May 0.4 -1.6 -1.9 1.0 n.a.

S. Korea Business confidence index - manufacturing (BOK) Jul 91 91 91 92 n.a.

Monday 25 June

S. Korea Consumer confidence index (BOK) Q2 96 98 103 106 n.a.

13.00 Singapore Consumer price index, % y-o-y May 0.6 0.7 0.6 0.9 0.8

16.00 Taiwan Export orders, % y-o-y May 8.2 12.4 11.3 10.0 10.1

16.00 Taiwan Industrial production, % y-o-y May -3.4 0.4 2.6 1.0 0.8

Tuesday 26 June

9.00 The Philippines Trade balance, US$m Apr 272.4 27.5 -119.0 -300 n.a.

13.00 Singapore Industrial production, % y-o-y May 1.5 -2.7 18.8 5.0 10.0

16.15 Hong Kong Exports, % y-o-y May 11.6 6.9 12.6 10.0 14.5

16.15 Hong Kong Trade balance, HK$bn May -7.5 -28.3 -20.6 -13.9 n.a.

Wednesday 27 June16.00 Taiwan Leading economic index, % m-o-m May -0.3 1.7 -0.2 0.3 n.a.

Thursday 28 June

9.30 Australia Job vacancies, % q-o-q, sa Q1 0.7 5.6 -2.3 3.5 4.0

12.30 S. Korea Industrial production, % m-o-m, sa May 0.2 -0.3 3.1 0.6 n.a.

12.30 S. Korea Industrial production, % y-o-y May -0.6 3.1 6.7 6.8 n.a.

12.30 S. Korea Consumer goods sales, % y-o-y May 12.1 7.0 4.7 5.5 n.a.

12.30 S. Korea Equipment investment, % y-o-y May 12.8 7.0 15.6 8.0 n.a.

12.30 S. Korea Construction completed, % y-o-y May 8.3 2.0 6.3 6.0 n.a.

Friday 29 June

9.30 Australia Private capital expenture, % m-o-m, sa May 1.4 1.1 1.2 1.3 1.1

9.30 Australia Private capital expenture, % y-o-y May 14.5 14.5 14.5 14.5 n.a.

12.30 S. Korea Service industry output volume, % y-o-y May 6.7 4.9 5.1 5.5 n.a.

India Consumer price index, % y-o-y May 6.7 7.6 6.7 5.8 n.a.

India Current account balance, US$ Q1 -4.1 -4.7 -3.0 6.0 n.a.

14.30 India Wholesale price index, % y-o-y 16-Jun 4.9 4.8 4.3 4.1 n.a.15.30 Thailand Exports, % y-o-y May 18.4 19.0 16.5 14.0 n.a.

15.30 Thailand Trade balance, US$bn May 1.1 2.2 -0.1 -0.4 n.a.

15.30 Thailand Manufacturing production, % y-o-y May 5.2 4.0 6.7 5.3 4.0

Hong Kong Time


14/18


22 June 2007 14

only 0.1% y-o-y in May after falling 2.3% in April. We also expect business investment

growth to moderate to a still-strong 8.0% y-o-y in May from a surge of 15.6% in April.

Meanwhile, we look for construction work completion (in current prices) to grow 6.0%

y-o-y in May after rising 6.3% in April.

Service industry output (Friday)

We expect South Koreas service industry output growth to accelerate to 5.5% y-o-y in

May from 5.1% in April (Figure 2). The recent bullish stock market suggests strong

activity in the financial service industry (18.7% weight of total service output), which

grew 11.1% y-o-y in April. And also, given our forecast of a pickup in consumption

growth in May, we look for wholesale industry output (25.6% weight of total service

output) to strengthen.

INDIA

Current account (Friday)

We expect Indias current account balance to swing from a deficit of US$3.0 in Q4 to a

surplus of US$6.0bn in Q1, largely for seasonal reasons (Figure 3). India's current

account data are not seasonally adjusted, and for the past three years the current accountdeficit has swung to a surplus in Q1 because of the strong positive seasonality in

invisible components, such as software exports and remittances. We expect a similar rise

this year to result in an invisibles surplus of US$20.1bn. Meanwhile, the monthly

merchandise trade data suggest that India posted a smaller deficit of US$14.0bn in Q1

versus US$19.0bn in Q4. Our forecast implies that for the financial year 2006-07 (ending

in March), the current account deficit would equal 0.6% of GDP, which would be

smaller than the deficit of 1.1% of GDP in 2005-06. Meanwhile, underpinned by strong

net capital inflows, the capital account should post a hefty surplus of US$12.9bn in Q1,

resulting in an overall balance of payments surplus of US$18.9bn, which would be

consistent with the rapid accumulation of FX reserves.

Exports (Sometime this week)

We expect Indias export growth to slow sharply to 8.1% y-o-y in May from the

exceptionally strong 23.1% in April, largely because of a weak base year of comparison.

Seeing through the monthly volatility, India's export growth has softened to 13.7% y-o-y

in Jan-Apr from 24.4% in 2006, probably partly because of the stronger currency. The

rupee has appreciated by a cumulative 9.4% against the US dollar since January 2006

and around 4.3% on a real effective exchange rate basis. This is likely eating into export

competitiveness of some low value-added industries, such as textiles and food products,

though an important offset is strong foreign demand. Meanwhile, a stronger rupee and

rising investment are boosting demand for capital goods imports used in infrastructure

South Koreas service

industry output growth

should pick up in May

Indias current account

likely turned to surplus in

Q1 for seasonal reasons

Figure 1. South Koreas industrial output Figure 2. South Koreas service industry output

90

100

110

120

130

140

150

160

Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07-10

-5

0

5

10

15

20

25

Industrial output index (sa), lhs

Industrial output grow th (nsa), rhs

%y-o-y2000=100

100

105

110

115

120

125

130

135

140

Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07

-2

0

2

4

6

8

10

12

14

Service output index (sa), lhs

Service output grow th (nsa), rhs

2000=100 %y-o-y

Source: CEIC and Lehman Brothers. Source: CEIC and Lehman Brothers.

while export growth

should slow sharply in May,

largely due to base effect


15/18


22 June 2007 15

and industrial capacity expansion. We expect imports to grow by a solid 28.0% y-o-y in

May, albeit down from the 40.7% pace in April. As a result, we expect the trade deficit

to increase to a new record of US$7.4bn from US$7.1bn in April.

Consumer prices (Friday)

We expect the industrial workers measure of consumer prices to soften to a 13-month

low of 5.8% y-o-y in May from 6.7% in April because of softer food prices. In recent

months, CPI inflation has remained above wholesale price (WPI) inflation due to rising

food prices and the higher weight of food in the CPI basket. However, recent weekly

WPI data suggest that primary article prices eased from 11.9% in April to 9.9% in May

on account of abating fruit and vegetable price inflation. This has led to a sharp fall in

WPI inflation from 6.1% in April to 5.2% in May, and given the higher weight of food in

the CPI basket, it should have a bigger impact on CPI inflation. Meanwhile, we expect

the other components of CPI inflation, including housing, clothing and fuel & light, to

remain benign with inflation rates of less than 4.0% y-o-y.

TAIWAN

Export orders and Industrial output (Monday)We expect Taiwans export orders to grow 10.0% y-o-y in May after rising 11.3% in

April, still decent growth, but a large share of these orders are met by Taiwanese-owned

factories in China (Figure 4). Taiwans exports are weak, growing 3.5% y-o-y in May.

This, coupled with lacklustre domestic demand, suggests that Taiwans industrial activity

likely remained sluggish in May. We expect industrial output growth to slow to 1.0% y-

o-y in May from 2.6% in April.

AUSTRALIA

Job Vacancies (Thursday)

We forecast that job vacancies rose by 3.5% (sa) q-o-q in Q1 reflecting a pronounced

acceleration in economic growth in Q1. All business surveys are pointing to difficulty

obtaining suitably skilled labour and private sector job vacancy surveys have all shown asharp lift in job vacancies over recent months.

Private Sector Credit (Friday)

Credit extended by financial institutions to the private sector is forecast to have increased

by 1.3% (sa) m-o-m in May keeping annual growth in credit running at a rapid 14.5% y-

o-y. Credit extended to business is growing particularly quickly and is likely to have

been up 17.0% y-o-y in May. Fast credit growth is likely to be on the Reserve Banks

watch-list of factors influencing monetary policy setting.

Indian CPI inflation likely

moderated in May

Taiwans export orders and

industrial output growth

should slow further in May

Australias job market

should remain tight in Q1

Figure 3. Indias current account Figure 4. Taiwans export orders and industrial output

-6

-2

2

6

Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07

US$bn

-30

-20

-10

0

10

20

30

40

Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07

Export orders

Industrial production

% y-o-y (3mma)

Source: CEIC and Lehman Brothers. Source: CEIC and Lehman Brothers.

and personal debt should

rise in May


16/18


22 June 2007 16

GLOBAL LETTER

The final 10%

The central bankers jobs are almost done. The challenge will be for them to individuallyadminister what remains without causing too much collective pain.

When 250 officials from more than 100 central banks gather in Basel next week for the

annual general meeting of the Bank for International Settlements the central banks

central bank there will be several questions on their minds. How significant is the

recent adjustment in bond markets? Are global inflation pressures really picking up?

And, perhaps most important of all, how much further monetary policy tightening is

warranted at the global level?

Of course, the days of a formally coordinated global monetary policy to the extent that

there ever was one are long gone. The best contribution that each central bank can

make to global stability, so the modern central banking mantra goes, is to deliver stability

at home. But the recent sell-off across the worlds bond markets is a reminder that, evenif central bankers continue to set policy based on domestic conditions, financial markets

are globally integrated, and increasingly so.

For this reason, it could be that central bankers should be placing more weight on monetary

conditions at the global level. Figure 1 shows the 10 most important official interest rates

when ranked by their corresponding economies levels of gross national income. Together,

this group of countries our G10 accounts for more than 80% of the world economy. On

our forecasts, half of these central banks will raise rates again before the end of the year

while four of them will keep rates steady. Only the Bank of Mexico is expected to ease

policy. Asian central banks are uniquely expected to hike rates next year.

To assess the impact of these changes on the world interest rate, it is necessary to employ

some method of averaging or aggregation. Figure 2 illustrates the importance of usingappropriate weights. Taking a simple average of the G3 economies the US, euro area

and Japan overweights Bank of Japan policy, while a simple average of all of the G10

overweights policy in the emerging markets. In between is our preferred measure of

world interest rates weighted by economic size. From a low of 1.9% in 2003 it has risen

to 4.4% today. We expect it to rise further to a peak of 4.7% towards the end of next year

ie, the tightening is now 90% complete. The challenge for the central bankers gathering

in Basel next week will be to individually administer what remains without causing too

much collective pain.

Michael Hume+44 20 7102 4191

[email protected]

Figure 1. G10 off icial interest rates Figure 2. Measures of wor ld offi cial interest rates

Econ om y % o f wor ld * L ates t En d-07** End -08**

US 29% 5.25 5.25 5.25

Euro area 22% 4.00 4.25 4.25

Japan 11% 0.50 0.75 1.50

China 5% 6.57 6.57 6.84

UK 5% 5.50 6.00 6.00

Canada 2% 4.25 4.75 4.00

India 2% 7.75 7.75 7.75

South Korea 2% 4.50 5.00 5.00

Mexico 2% 7.00 6.50 5.50

Australia 1% 6.25 6.50 6.75

Mean - 5.16 5.33 5.28

Median - 5.38 5.63 5.38

GNI-weighted - 4.42 4.57 4.65

* Based on 2005 GNI at World Bank Atlas exchange rates.** Lehman Brothers forecast.

0

2

4

6

8

10

12

14

16

Jan-94 Jan-97 Jan-00 Jan-03 Jan-06

%

G3 (mean) G10 (mean) G10 (GNI-w eighted)

Source: Lehman Brothers Global Economics. Source: Lehman Brothers Global Economics.


17/18


22 June 2007 17

ASIA EX-JAPAN ARTICLES

RECENT ARTICLES

Date Article Title

15-Jun-07 India: The rupee and export competitiveness

8-Jun-07 South Korea: Upgrading our outlook

1-Jun-07 Chinas FX foray

1-Jun-07 Equity markets and the real economy

1-Jun-07 News from China

25-May-07 India: The credit cycle is turning down

18-May-07 Australia: A growing concern

11-May-07 Taiwan: downside looks limited

4-May-07 The mixed blessing of capital inflows

4-May-07 India: New challenges for the RBI27-Apr-07 South Koreas rising short-term external debt

27-Apr-07 PBC intervention in the FX market

20-Apr-07 Chinas problematic reserve accumulation

20-Apr-07 Indias policy dilemma

20-Apr-07 Chinas crawling peg

20-Apr-07 South Koreas exaggerated capex gain

13-Apr-07 Chinas volatile trade surplus

5-Apr-07 Protectionist flicker

5-Apr-07 South Koreas FTA with the US

30-Mar-07 South Korea: Export-led growth30-Mar-07 South Korea: Power of the GDP deflator

23-Mar-07 China: The PBCs next moves

16-Mar-07 Taming the dragon

16-Mar-07 Export leading index flashing amber

16-Mar-07 China: More tightening likely

16-Mar-07 South Korea: Sluggish job creation

9-Mar-07 India: The hot-potato called inflation

2-Mar-07 Hong Kong: The high beta economy

2-Mar-07 Chinas stock market plunge

23-Feb-07 South Korea: Adapting to a strong won

23-Feb-07 Currency decoupling: yen and won

16-Feb-07 The impossible trinity

16-Feb-07 The Chinese New Year effect

9-Feb-07 Chinas gasoline pricing reform

9-Feb-07 China: the 2007 inflation curve

2-Feb-07 South Koreas housing market

26-Jan-07 India: Growing pains

19-Jan-07 China: New policies and reforms

19-Jan-07 Chinas official benchmark interest rates

12-Jan-07 South Korea: BOK set to stay on hold this year

5-Jan-07 Catching up on the data


18/18

Lehman Brothers|Asia Ex-Japan Weekly Economic Monitor

22 June 2007 18

Anal y s t Ce r t i f i cat i on The views expressed in this report accurately reflect the personal views of Rob Subbaraman, Mingchun Sun, Young Sun Kwon,Stephen Robertsand Sonal Varma, the primary analyst responsible for this report, about the subject securities or issuers referred to herein, and no part of suchanalyst's compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed herein.

Impor tan t D isc losu res Lehman Brothers Inc. and/or an affiliate thereof (the "firm") regularly trades, generally deals as principal and generally provides liquidity (asmarket maker or otherwise) in the debt securities that are the subject of this research report (and related derivatives thereof). The firm'sproprietary trading accounts may have either a long and / or short position in such securities and / or derivative instruments, which may pose aconflict with the interests of investing customers.Where permitted and subject to appropriate information barrier restrictions, the firm's fixed income research analysts regularly interact with itstrading desk personnel to determine current prices of fixed income securities.The firm's fixed income research analyst(s) receive compensation based on various factors including, but not limited to, the quality of their work,the overall performance of the firm (including the profitability of the investment banking department), the profitability and revenues of the FixedIncome Division and the outstanding principal amount and trading value of, the profitability of, and the potential interest of the firms investingclients in research with respect to, the asset class covered by the analyst.

Lehman Brothers generally does and seeks to do investment banking and other business with the companies discussed in its research reports.As a result, investors should be aware that the firm may have a conflict of interest.To the extent that any historical pricing information was obtained from Lehman Brothers' trading desks, the firm makes no representation that itis accurate or complete. All levels, prices and spreads are historical and do not represent current market levels, prices or spreads, some or all ofwhich may have changed since the publication of this document.Lehman Brothers' global policy for managing conflicts of interest in connection with investment research is available atwww.lehman.com/researchconflictspolicy.To obtain copies of fixed income research reports published by Lehman Brothers please contact Valerie Monchi ([email protected]; 212-526-3173) or clients may go to https://l ive.lehman.com.

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