China Investment Strategies · grains, chemicals, oil, coal, uranium, and pulp & paper products. • The second part, “Key Macro Trends,” covers major macroeconomic data such

September 29, 2014

China Investment Strategies

Published by CNC Asset Management Ltd. Exclusively distributed by Scotia Capital Inc. For important disclosures, please see Appendix A.

Na Liu 刘纳, CNC Asset Management Ltd.

Email: [email protected] Phone: 647-298-1411 www.cncam.ca (or www.chinaupdate.net)

US$1=RMB6.15

FEATURE ARTICLES

• In the first Feature Article of this report, we discuss the discrepancy for China’s gold demand as reported by different organizations and we share our view on the issue.

• The rest of the Feature Articles are reprints of our China Express reports between September 16 and September 25, in which we discussed China’s gold, nickel, and coking coal markets as well as macro issues such as PBOC’s latest liquidity injection and the HSBC Flash PMI for September.

ALSO IN THIS REPORT

• The chart section of this report is divided into three parts. The first part, “Commodities Markets,” offers price, supply, and demand data for a wide range of commodities including base metals, steel & iron ore, grains, chemicals, oil, coal, uranium, and pulp & paper products.

• The second part, “Key Macro Trends,” covers major macroeconomic data such as key growth drivers, growth rates, growth indicators, inflation and monetary data, and data from China’s property and auto markets.

• The third part, “Financial Markets,” illustrates key developments in China’s equity, currency, and bond markets. It also presents the absolute and relative performance of the 16 industrial sectors on China’s domestic equity markets.

CNC China Investment Strategies

2

IMPORTANT NOTICE AND DISCLAIMER

This publication has been prepared by an entity that is independent of and unaffiliated with The Bank of Nova Scotia and its subsidiaries and affiliates (individually or collectively, “Scotiabank”). For the time being, Scotia Capital Inc. is authorized by CNC to distribute this report on an exclusive basis. As such, unauthorized reproduction, distribution, transmission or publication without the prior written consent of Scotia Capital Inc. is strictly prohibited.

This publication is intended for general information purposes only and should not be construed as an offer to sell, a solicitation for or an offer to buy, any products or services referenced herein. The information, opinions, estimates, and projections contained herein are subject to change without notice. Scotiabank has not independently verified and does not make any representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions which may be contained herein or accept any liability whatsoever for any loss arising from any use of or reliance on the information, opinions, estimates, projections and other materials contained herein whether relied upon by the recipient or user or any other third party (including, without limitation, any customer of the recipient or user).

Securities laws and regulations and the policies of Scotiabank that are applicable to Research Analysts may not be applicable to this publication and its author. The opinions and views expressed in this publication may differ from those of Scotiabank and any or all of its divisions and departments, including Research Departments. Information may be available to Scotiabank that is not reflected herein and it may engage in transactions in a manner inconsistent with the views discussed herein. Scotiabank may have positions, or be in the process of acquiring or disposing of positions, referred to in this publication. Scotiabank and any of its officers, directors and employees, may from time to time act as managers, co-managers or underwriters of a public offering or act as principals or agents, deal in, own or act as market-makers or advisors, brokers or commercial and/or investment bankers in relation to the securities, contracts or financial instruments discussed herein. Neither Scotiabank nor any of its officers, directors, partners, or employees accepts any liability for any direct or consequential loss arising from this publication or its contents. Any securities, contracts or financial instruments discussed herein may be unsuitable for some investors. Investors should independently evaluate any issuer, security, contract or financial instrument that may be discussed in this publication and consult with an investment professional prior to making an investment decision.

To European Economic Area (EEA) Residents: In the EEA this document is distributed by Scotiabank Europe plc which is authorized by the Prudential Regulation Authority (PRA) and regulated by the Financial Conduct Authority (FCA) and the PRA. The contents hereof are not intended for the use of and should not be issued or passed on to retail clients as defined by the PRA and FCA and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

For U.S. Investors: Any transactions by U.S. Institutional Investors in connection with a security referenced herein must be executed with a U.S. broker-dealer, including Scotia Capital (USA) Inc., an affiliate of Scotia Capital Inc.

™Trademark of The Bank of Nova Scotia. Used under license, where applicable. Scotiabank, together with “Global Banking and Markets”, is a marketing name for the global corporate and investment banking and capital markets businesses of The Bank of Nova Scotia and some of its subsidiaries, including Scotia Capital Inc., Scotia Capital (USA) Inc., Scotiabanc Inc., Citadel Hill Advisors LLC, The Bank of Nova Scotia Trust Company of New York, Scotiabank Europe plc, Scotia Capital (Europe) Limited, Scotiabank (Ireland) Limited, Scotiabank Inverlat, S.A., Institucion de Banca, Multiple, Grupo Financiero Scotiabank Inverlat, Scotia Inverlat Casa de Bolsa, S.A. de C.V., and Scotia Inverlat Derivados, S.A. de C.V. – all members of Scotiabank and authorized users of the mark. The Bank of Nova Scotia is incorporated in Canada with limited liability. Scotia Capital Inc. is a member of CIPF. Scotia Capital (USA) Inc. is a registered broker-dealer with the SEC and is a member of FINRA and SIPC. The Bank of Nova Scotia is authorized and regulated by the Office of the Superintendent of Financial Institutions Canada. The Bank of Nova Scotia and Scotiabank Europe plc are authorized by the PRA. The Bank of Nova Scotia is subject to regulation by the FCA and limited regulation by the PRA. Scotiabank Europe plc is regulated by the FCA and PRA. Details about the extent of The Bank of Nova Scotia’s regulation by the PRA are available from us on request. Scotiabank Inverlat, S.A., Scotia Inverlat Casa de Bolsa, S.A. de C.V., and Scotia Derivados, S.A. de C.V., are each authorized and regulated by the Mexican financial authorities.


3

Feature Article

The Mystery of China’s Gold Demand

• Over the years, we, like most investors, track China’s gold demand by following the estimates made by the China Gold Association (CGA) and the World Gold Council (WGC). For instance, the China Gold Association said China’s total gold demand in 2013 was 1,176.4 tonnes and the World Gold Council said China’s total “consumer demand” was 1,065.8 tonnes. So, in 2013, China’s gold demand was slightly over 1,000 tonnes, we initially concluded.

• This is why we were shocked by what the Shanghai Gold Exchange (SGE) told us earlier this year. Back in May, we participated in a Canadian institutional investors’ trip to China organized by Scotiabank. The Canadian delegation visited the Shanghai Gold Exchange and met with President of the SGE Transaction Department and other senior officials. The delegation was told by our Chinese host that China’s gold demand was about 2,200 tonnes in 2013, judged by the withdrawal amount from the SGE vaults.

• Apparently, the SGE’s estimate of Chinese demand is much higher than the estimates made by CGA and WGC. If China’s actual gold demand is over 2,000 tonnes rather than slightly over 1,000 tonnes, then the gold market could be a lot tighter than thought. As such we asked a lot of questions to the SGE executives in the meeting and when we were back, we carefully reviewed the trading mechanism of the SGE in the past few months.

• After all our work, as we wrote on September 25 (see the next Feature Article), we are now of the view that to understand China’s real physical gold demand, investors should simply look at the weekly withdrawals from Shanghai Gold Exchange vaults (Exhibit 1). The weekly withdrawal figures provide a much more accurate data series that reflects China’s aggregate wholesale demand in a timely way. This is because for tax purposes all gold imported into China and all gold produced within China must pass through the vaults once, and only once, before reaching jewellery makers, investors, industrial users, and consumers.

• We hesitated over the past few months in publishing our findings from our May meeting with the SGE as these findings are non-mainstream. Now, as we are becoming more convinced, we want to share the following comments made by the SGE executives to the Canadian delegation.

• First, the withdrawal data reflects the actual gold wholesales in China. In 2013, the total gold withdrawal from the SGE vaults amounted to 2,196.96 tonnes. The President of SGE Transaction Department (The President) said: “This 2,200 tonnes of gold, after leaving our vaults, they entered thousands of Chinese households in the form of jewellery and investment purchases.”

Exhibit 1: Weekly Withdrawals From Shanghai Gold Exchange Vaults (kg)

-

20,000

40,000

60,000

80,000

2009-1

2009-11

2009-21

2009-31

2009-41

2010-01

2010-11

2010-21

2010-31

2010-41

2011-01

2011-11

2011-21

2011-31

2011-41

2012-01

2012-11

2012-21

2012-31

2012-41

2013-01

2013-11

2013-21

2013-31

2013-41

2014-01

2014-11

2014-21

2014-31

Source: Shanghai Gold Exchange, CNC.


4

• Second, none of the 2,200 tonnes of gold was bought by the Chinese central bank. The President said: “The PBOC does not buy gold through the SGE.”

• Third, the financing deals do not exaggerate SGE’s assessment of China’s gold demand. This is because “the financing deals do not take place after the gold leaves the vaults.”

• Fourth, in response to our question about the source of the 2,200 tonnes, he replied: “About 1,500 tonnes from imports, some 400 tonnes from domestic mine output, and the rest is recycled gold.”

• And last, when we asked why the China Gold Association’s number is so low, the President said: “They mainly cover the gold sales through the gold shops. This is their main source of information. And their number is quite useful in that way. However, our system has broader coverage.”

• So here is our current conclusion after several months of deliberation. We think the SGE withdrawal data is a fair representation of China’s wholesale gold demand. Again, this is because for tax purposes all gold imported into China and all gold produced within China must pass through the vaults once, and only once, before reaching jewellery makers, investors, industrial users, and consumers.

• Lastly, we do note that in recent weeks, the withdrawal number is getting bigger (Exhibit 1). This might indicate the de-stocking process is coming to an end. We maintain our relatively cautious “market weight” call for the gold sector from a China perspective for the time being. In the meantime, we will closely monitor the weekly withdrawal data to decide whether we should turn more positive.


5

Feature Article

Measuring China’s Gold Demand

• This article is a reprint of our China Express dated September 25, 2014.

• Overnight data shows that China’s net gold imports from Hong Kong remained low at 27.477 tonnes in August (Exhibit 1). This data point supports our view that China is still in a destocking stage for gold and our relatively cautious “market weight” call on gold from a China perspective.

• However, we do caution that investors should no longer regard China’s net imports from Hong Kong as an accurate proxy for China’s gold import demand. This is because gold is increasingly flowing into the Chinese market through Shanghai and even Beijing.

• To understand China’s real physical gold demand, investors should simply look at the weekly withdrawals from Shanghai Gold Exchange vaults (Exhibit 2). We visited the Shanghai Gold Exchange (SGE) in May and talked to the senior executives of the exchange. After reviewing the exchange’s trading mechanism, we are of the view that the weekly withdrawal figures provide a much more accurate data series that reflects China’s aggregate wholesale demand in a timely way. This is because for tax purposes all gold imported into China and all gold produced within China must pass through the vaults once, and only once, before reaching jewellery makers, investors, industrial users, and consumers.

• Exhibit 2 presents the weekly withdrawals from SGE vaults by numbered week (each calendar year has 50 trading weeks). As the exhibit shows, in recent weeks China’s wholesale gold demand has actually picked up slightly. This is in contrast to the Hong Kong import data. Overall, by mid-September, China’s cumulative wholesale demand in 2014 was down 16.2% YOY. This decline is much milder than the Hong Kong import number implies.

Exhibit 1: Net Gold Imports from Hong Kong (Tonnes)

0

20

40

60

80

100

120

140

Aug-08

Dec-08

Apr-09

Aug-09

Dec-09

Apr-10

Aug-10

Dec-10

Apr-11

Aug-11

Dec-11

Apr-12

Aug-12

Dec-12

Apr-13

Aug-13

Dec-13

Apr-14

Aug-14

Source: Census and Statistics Department, HKSAR.

Exhibit 2: Weekly Withdrawals From Shanghai Gold Exchange Vaults (kg)

-

20,000

40,000

60,000

80,000

2009-1

2009-11

2009-21

2009-31

2009-41

2010-01

2010-11

2010-21

2010-31

2010-41

2011-01

2011-11

2011-21

2011-31

2011-41

2012-01

2012-11

2012-21

2012-31

2012-41

2013-01

2013-11

2013-21

2013-31

2013-41

2014-01

2014-11

2014-21

2014-31



6

Feature Article

August Methanol Data


• In August, China’s methanol output reached a record high of 3.58 million tonnes, up 46.4% YOY (red bars in Exhibit 1). This makes methanol a rare commodity among the commodities we follow that registered extremely robust output growth last month. In the first eight months of this year, total Chinese output reached 24.4 million tonnes, up 29.4% YOY.

• On the trade side, China imported 463,500 tonnes of methanol last month, down 26.8% YOY, while exports remained low at 37,100 tonnes. The blue bars in Exhibit 1 show China’s net imports of methanol.

• We expect China’s domestic methanol output to remain high and gradually replace import demand. Beginning in January 2015, China will restrict the production, consumption, and import of coal with high impurity levels in a bid to fight smog. In a statement issued on September 15, the National Development and Reform Commission announced three new quality thresholds that will restrict the use of low-quality coal, with the most stringent requirement banning the use of coal with more than 16% ash and 1% sulphur content in key population centres such as Beijing, the Pearl River Delta, and the Yangtze River Delta. Although the new policy mainly targets thermal coal, it impacts the entire coal industry, including anthracite coal. Our study of the documents leads us to believe that the impact of the new policy might not be significant for China’s coal imports, but it should put more pressure on domestic coal producers to push toward downstream integration into chemical production.

Exhibit 1: Methanol Apparent Consumption

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

Aug-10

Dec-10

Apr-11

Aug-11

Dec-11

Apr-12

Aug-12

Dec-12

Apr-13

Aug-13

Dec-13

Apr-14

Aug-14

Met

hano

l App

aren

t Con

sum

ptio

n (to

nne)

Net Imports Output Apparent Consumption

Source: GACC, NBS, CNC.


7

Feature Article

HSBC Flash PMI


• The HSBC Flash PMI came in at 50.5 for September, higher than August’s 50.2 and economist consensus of 50.0. On the surface, this number should help mitigate the prevailing bearish sentiment toward the Chinese economy. However, for China-sensitive raw materials sectors, we do not regard this data point as bullish.

• Yesterday, Chinese Finance Minister Lou Jiwei was quoted as saying that China will not dramatically alter its economic policy because of a single economic indicator. So, if the poor August macro indicators were not enough to trigger any significant policy stimulus, a sequential improvement in the PMI in September would likely only further delay it. For investors seeking more accommodative measures from the Chinese government, this small improvement in PMI survey does not help.

• The same argument goes for other small improvements in macro data. Given how poor the August macro data were, we would not be surprised to see some improvements in the September data. If these improvements are not significant enough, then they would simply imply that economic growth in China is settling into and stabilizing at a lower level – there is no reason for the Chinese government to panic but there is equally no reason for commodity bulls to cheer. At the end of the day, at the current growth level, steel and iron ore prices are setting lows not seen since 2009 (Exhibit 1).

• As such, we would become more positive on China-sensitive raw materials sectors only when at least one of the following three conditions is met: (1) China’s housing market shows concrete improvement; (2) solid evidence of higher activity level is apparent at the fall construction sites; or (3) global raw materials sectors continue to drop to a level that begins to price in long-term distressed commodity prices. When we say long-term distressed commodity prices, we mean that these prices have to be assumed as staying at depressed levels long enough to permanently destroy high-cost supplies.

• To date in September, we have not seen evidence that the first two conditions have been met. Weekly home sales are stable but not robust, while demand for steel, cement, diesel, and heavy machinery remains lukewarm. As for the third condition, we leave it to investors to make sector-specific judgment calls. For the time being, we maintain our relatively cautious market weight call for the global raw materials and energy sectors from a China perspective, a call that we have steadfastly maintained since the summer months.

Exhibit 1: Average Weighted Steel Spot Price

3200

3600

4000

4400

4800

5200

06/10/11

09/18/11

12/27/11

04/05/12

07/14/12

10/22/12

01/30/13

05/10/13

08/18/13

11/26/13

03/06/14

06/14/14

09/22/14

Stee

l Pric

es, Y

uan/

tonn

e

Note: 50% Rebar, 30% HRC, 20% CRC. Source: Antaike, CNC.


8

Feature Article

Nickel and Coking Coal


• Overnight, China published detailed commodity trade data for August. We draw investors’ attention to data related to nickel and coking coal.

• First, China’s nickel trade data still do not support the bullish case. Refined nickel and alloy imports dropped 32.9% YOY last month to a mere 9,595 tonnes, while exports surged 227.4% YOY to 17,910 tonnes. This left China as a net exporter of refined nickel again – the second time in history (Exhibit 1). On the ore side, China imported 5.42 million tonnes of nickel ore, actually up 3.7% YOY, thanks to an 87.4% YOY surge in imports from the Philippines (Exhibit 2). We have been sceptical about the upside for nickel before year-end, mainly because of hidden inventories in China, and we remain cautious in the near term.

• Second, China’s coking coal imports dropped 39.0% YOY to only 3,835,359 tonnes last month (Exhibit 3). This trade pattern is disturbing because import demand is not responding to lower commodity prices. We remain cautious on the coking coal sector from a China perspective.

• With the iron ore price dropping below US$80/tonne yesterday, a level not seen since mid-2009, the lure of bottom-fishing is getting stronger. However, Chinese rebar prices have dropped to an even worse level. At RMB 2,965 per tonne, the average rebar price has not been seen since 2006. We do not want to miss the inflection point; however, we maintain our view that investors should wait for concrete positive signals from the housing market or the fall construction sites before turning positive on sectors related to steel inputs such as iron ore, coking coal, and nickel.

Exhibit 1: Refined Nickel Trade

-10,000

0

10,000

20,000

30,000

Apr-11

Aug-11

Dec-11

Apr-12

Aug-12

Dec-12

Apr-13

Aug-13

Dec-13

Apr-14

Aug-14

Refin

ed N

icke

l Tra

de (t

onne

)

Imports Exports Net Imports

Source: GACC.

Exhibit 2: Nickel Ore and Concentrate Imports

-

800

1,600

2,400

3,200

4,000

4,800

5,600

6,400

7,200

8,000

Aug-10

Nov-10

Feb-11

May-11

Aug-11

Nov-11

Feb-12

May-12

Aug-12

Nov-12

Feb-13

May-13

Aug-13

Nov-13

Feb-14

May-14

Aug-14

Nick

el Or

e & C

once

ntra

te Im

ports

(1,00

0 ton

nes)

Source: GACC.

Exhibit 3: China’s Coking Coal Imports (Thousand Tonnes)

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

Aug-10

Dec-10

Apr-11

Aug-11

Dec-11

Apr-12

Aug-12

Dec-12

Apr-13

Aug-13

Dec-13

Apr-14

Aug-14

Source: GACC.


9

Feature Article

RMB500 Billion Liquidity Injection


• Local media just reported that the People’s Bank of China has provided RMB100 billion liquidity to each of China’s five largest banks, through PBOC’s Standing Lending Facility (SLF) with durations of three months. We offer three observations:

• First, we calculate that the move equals a 45-basis points cut of the required reserve ratio (RRR) for three months. If the market assumes that this facility will be rolled over every three months, which we are not sure about, then the move can be viewed as a permanent RRR cut. In that case the only difference is that the move through SLF carries a higher financing cost for commercial banks, although the interest rate charged under the SLF facility was not disclosed.

• Second, with this move, the near-term chance of an RRR cut is significantly reduced. It seems that the PBOC still does not want to use high-profile vehicles such as an RRR cut to inject liquidity. This is because an RRR cut or an interest rate cut signals a change in monetary policy.

• And third, although the move helps restore confidence in the financial market for China-sensitive sectors, the real impact on the Chinese economy might not be significant. In the past few months, new loan growth was muted in China, mainly for two reasons: first, the borrowing cost was a bit too high for some borrowers; and second, the banks were reluctant to lend either due to a risk-averse attitude or due to the constraints of loan-deposit ratio regulation. Therefore, we believe that if the Chinese government really wants to boost near-term growth, it should also cut interest rate. Our current suspicion is that at the current stage the government is still not prepared to cut benchmark interest rates – Premier Li simply wants to use the SLF injection to prevent any further erosion of confidence in the Chinese economy.


10

Commodities Markets


11

China Commodities Index

120

130

140

150

160

170

18-Apr-11

20-Jun-11

22-Aug-11

24-Oct-11

26-Dec-11

27-Feb-12

30-Apr-12

2-Jul-12

3-Sep-12

5-Nov-12

7-Jan-13

11-Mar-13

13-May-13

15-Jul-13

16-Sep-13

18-Nov-13

20-Jan-14

24-Mar-14

26-May-14

28-Jul-14

29-Sep-14

Note: This fixed-weighted index tracks the price performance of a wide range of "cyclical" commodities in the local Chinese spot markets, including copper (12.5% weight), aluminum (12.5%), zinc (5%), re-bar (10%), HRC (7.5%), CRC (7.5%), iron ore (10%), coal (15%, export price), and ethylene (20%, FOB S. Korea). Source: CNC.

Baltic Dry Index

500

1,000

1,500

2,000

2,500

3,000

3,500

09/30/10

09/30/11

09/29/12

09/29/13

09/29/14

Source: Bloomberg.


12

Copper

Price Relative: Shanghai Spot vs. LME Cash

1.00

1.10

1.20

1.30

06/17/11

09/25/11

01/03/12

04/12/12

07/21/12

10/29/12

02/06/13

05/17/13

08/25/13

12/03/13

03/13/14

06/21/14

09/29/14

Shan

ghai

Spo

t vs.

LM

E C

ash

Source: SHFE; LME.

Average Copper Spot Price

44000

52000

60000

68000

76000

06/17/11

09/25/11

01/03/12

04/12/12

07/21/12

10/29/12

02/06/13

05/17/13

08/25/13

12/03/13

03/13/14

06/21/14

09/29/14

Spot

Cop

per P

rice

in S

hang

hai, Y

uan/

tonn

e

Source: Shanghai Changjiang Non-ferrous Metals Market.

Copper Stocks in SHFE

0

50,000

100,000

150,000

200,000

250,000

09/30/09

09/30/10

09/30/11

09/29/12

09/29/13

09/29/14

SHFE

Cop

per S

tock

s (to

nnes

)

Source: SHFE.

Refined Copper Apparent Consumption

-

200,000

400,000

600,000

800,000

1,000,000

Aug-11

Dec-11

Apr-12

Aug-12

Dec-12

Apr-13

Aug-13

Dec-13

Apr-14

Aug-14

Ref

ined

Cop

per A

ppar

ent C

onsu

mpt

ion

(tonn

es)

Production Net Imports Apparent Consumption

Source: GACC; NBS.

Data Snapshot: Copper (tonnes)

Aug-14 MOM YOY Jan-Aug YOYRefined Copper Production 680,128 7.4% 20.2% 4,930,270 11.2% Imports 234,462 -4.3% -10.8% 2,359,970 22.6% Exports 19,787 -30.5% 57.1% 193,143 -12.1% Net Imports 214,675 -0.8% -14.2% 2,166,827 27.1%Apparent Consumption 894,803 5.3% 9.6% 7,097,097 15.6%

Semi Production 1,419,252 -1.3% 6.1% 11,307,754 15.6%

Source: NBS; Customs; CNC.

Refined Copper Trade

-

100,000

200,000

300,000

400,000

Aug-11

Dec-11

Apr-12

Aug-12

Dec-12

Apr-13

Aug-13

Dec-13

Apr-14

Aug-14

Refin

ed C

oppe

r Tra

de (to

nnes

)


Source: GACC.

Copper Concentrate Imports (Tonnes)

300,000

500,000

700,000

900,000

1,100,000

Aug-10

Dec-10

Apr-11

Aug-11

Dec-11

Apr-12

Aug-12

Dec-12

Apr-13

Aug-13

Dec-13

Apr-14

Aug-14

Source: GACC.


13

Aluminum


0.80

0.90

1.00

1.10

1.20

1.30

1.40

1.50

06/17/11

09/25/11

01/03/12

04/12/12

07/21/12

10/29/12

02/06/13

05/17/13

08/25/13

12/03/13

03/13/14

06/21/14

09/29/14

Pric

e R

atio

: Sha

ngha

i Spo

t/LM

E C

ash

Source: SHFE; LME.

Average Aluminum Spot Price

11000

13000

15000

17000

19000

06/17/11

09/25/11

01/03/12

04/12/12

07/21/12

10/29/12

02/06/13

05/17/13

08/25/13

12/03/13

03/13/14

06/21/14

09/29/14

Spo

t Pric

e in

Sha

ngha

i, Y

uan/

tonn

e


Aluminum Stocks in SHFE

0

80,000

160,000

240,000

320,000

400,000

480,000

560,000

09/30/09

09/30/10

09/30/11

09/29/12

09/29/13

09/29/14

SHFE

alu

min

um s

tock

s (in

tonn

es)

Source: SHFE.

Primary Aluminum Apparent Consumption

-200,000

200,000

600,000

1,000,000

1,400,000

1,800,000

2,200,000

Aug-11

Oct-11

Dec-11

Feb-12

Apr-12

Jun-12

Aug-12

Oct-12

Dec-12

Feb-13

Apr-13

Jun-13

Aug-13

Oct-13

Dec-13

Feb-14

Apr-14

Jun-14

Aug-14

Prim

ary A

ppar

ent C

onsu

mpt

ion

(tonn

es)


Source: GACC; NBS.

Data Snapshot: Aluminum (tonnes)

Aug-14 MOM YOY Jan-Aug YOYPrimary AluminumImports 8,487 -39.8% -74.6% 249,753 62.9%Exports 13,177 66.9% 29.5% 81,450 25.4%Net Imports (4,690) -175.6% -120.2% 168,303 90.5%Production 2,027,459 2.6% 8.8% 15,546,949 7.6%Apparent Consumption 2,022,769 2.0% 7.2% 15,715,252 8.1%Semis Production 4,207,124 2.7% 19.9% 30,817,673 19.3%

AluminaImports 350,410 -24.4% 142.7% 3,578,133 76.6%Production 3,896,710 -0.9% 1.9% 30,597,935 5.4%Apparent Consumption 4,247,120 -3.4% 7.0% 34,176,068 10.0%


Aluminum Net Exports

-160,000

-80,000

0

80,000

160,000

240,000

320,000

400,000

Aug-11

Dec-11

Apr-12

Aug-12

Dec-12

Apr-13

Aug-13

Dec-13

Apr-14

Aug-14Prim

ary a

nd S

emis

Trad

e (to

nnes

)

Semis Primary Aluminum Alloy

Source: GACC.


14

Nickel


0.90

1.00

1.10

1.20

1.30

17-Jun-11

25-Sep-11

3-Jan-12

12-Apr-12

21-Jul-12

29-Oct-12

6-Feb-13

17-May-13

25-Aug-13

3-Dec-13

13-Mar-14

21-Jun-14

29-Sep-14

Shan

ghai

Spo

t vs.

LM

E Ca

sh

Source: Shanghai Changjiang Non-ferrous Metals Market; LME.

Average Nickel Spot Price

70000

110000

150000

190000

230000

06/17/11

09/25/11

01/03/12

04/12/12

07/21/12

10/29/12

02/06/13

05/17/13

08/25/13

12/03/13

03/13/14

06/21/14

09/29/14

Refin

ed N

icke

l Spo

t Pric

e in

Sha

ngha

i (Yu

an/to

nne)


Refined Nickel Trade

-10,000

0

10,000

20,000

30,000

Apr-11

Aug-11

Dec-11

Apr-12

Aug-12

Dec-12

Apr-13

Aug-13

Dec-13

Apr-14

Aug-14

Refin

ed N

icke

l Tra

de (t

onne

)


Source: GACC.

Nickel Ore and Concentrate Imports

-

800

1,600

2,400

3,200

4,000

4,800

5,600

6,400

7,200

8,000

Aug-10

Nov-10

Feb-11

May-11

Aug-11

Nov-11

Feb-12

May-12

Aug-12

Nov-12

Feb-13

May-13

Aug-13

Nov-13

Feb-14

May-14

Aug-14

Nick

el O

re &

Con

cent

rate

Impo

rts (1

,000

tonn

es)

Source: GACC.

Data Snapshot: Nickel (tonnes)

Aug-14 MOM YOY Jan-Aug YOYRefined NickelImports 9,595 -45.9% -32.9% 103,306 -11.0%Exports 17,910 1.5% 227.4% 80,758 130.8%Net Imports (8,315) -11811.3% -194.2% 22,548 -72.2%Production 33,967 7.7% 38.1% 228,445 35.0%Apparent Consumption 25,652 -18.8% -23.3% 250,993 0.3%


Refined Nickel Apparent Consumption

-10,000

0

10,000

20,000

30,000

40,000

50,000

Apr-11

Aug-11

Dec-11

Apr-12

Aug-12

Dec-12

Apr-13

Aug-13

Dec-13

Apr-14

Aug-14Refin

ed N

icke

l App

aren

t Con

sum

ptio

n (to

nne)


Source: GACC; NBS.

Stainless Steel Net Imports

-300,000

-250,000

-200,000

-150,000

-100,000

-50,000

0

50,000

100,000

Aug-08

Feb-09

Aug-09

Feb-10

Aug-10

Feb-11

Aug-11

Feb-12

Aug-12

Feb-13

Aug-13

Feb-14

Aug-14

Stain

less

Stee

l Net

Impo

rts v

s. 1

2-m

onth

Ave

rage

(ton

ne

Source: GACC.


15

Zinc Price Relative: SHFE Spot vs. LME Cash

1.0

1.1

1.2

1.3

1.4

1.5

06/17/11

09/25/11

01/03/12

04/12/12

07/21/12

10/29/12

02/06/13

05/17/13

08/25/13

12/03/13

03/13/14

06/21/14

09/29/14

Rela

tive

Zinc

Pric

e: S

hang

hai v

s. L

ME

Source: SHFE; LME.

Average Zinc Spot Price

13000

14000

15000

16000

17000

18000

19000

20000

06/17/11

09/25/11

01/03/12

04/12/12

07/21/12

10/29/12

02/06/13

05/17/13

08/25/13

12/03/13

03/13/14

06/21/14

09/29/14

Zinc

Spot

Pric

e in

Shan

ghai

(Yua

n/to

nne)

4000

4500

5000

5500

6000

6500

Galva

nize

d St

eel S

pot P

rice (

Yuan

/tonn

e)

Zinc Spot PriceGalvanized Steel Price


Zinc Stocks in SHFE

120000

160000

200000

240000

280000

320000

360000

400000

440000

06/17/11

09/25/11

01/03/12

04/12/12

07/21/12

10/29/12

02/06/13

05/17/13

08/25/13

12/03/13

03/13/14

06/21/14

09/29/14

Zinc

Sto

cks

in S

HFE

(in to

nnes

)

Source: SHFE.

Refined Zinc Apparent Consumption

(50,000)

50,000

150,000

250,000

350,000

450,000

550,000

650,000

Jun-11

Aug-11

Oct-11

Dec-11

Feb-12

Apr-12

Jun-12

Aug-12

Oct-12

Dec-12

Feb-13

Apr-13

Jun-13

Aug-13

Oct-13

Dec-13

Feb-14

Apr-14

Jun-14

Aug-14

Refin

ed Z

inc

Appa

rent

Con

sum

ptio

n (to

nnes

)


Source: GACC; NBS.

Data Snapshot: Zinc (tonnes)

Aug-14 MOM YOY Jan-Aug YOYRefined ZincImports 58,641 40.7% 12.5% 479,771 35.4%Exports 21,227 111.2% 2881.5% 35,890 1043.9%Net Imports 37,414 18.3% -27.2% 443,881 26.4%Production 486,255 -5.6% 8.3% 3,685,525 3.9%Apparent Consumption 523,669 -4.2% 4.7% 4,129,406 5.9%

Coated Sheet Output 4,366,998 2.6% 16.0% 32,672,290 13.1%


Refined Zinc Trade

-

20,000

40,000

60,000

80,000

100,000

Jun-11

Aug-11

Oct-11

Dec-11

Feb-12

Apr-12

Jun-12

Aug-12

Oct-12

Dec-12

Feb-13

Apr-13

Jun-13

Aug-13

Oct-13

Dec-13

Feb-14

Apr-14

Jun-14

Aug-14

Refin

ed Z

inc

Trad

e (to

nnes

)


Source: GACC.

Plated Steel Output (Tonnes)

-

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

Feb-11Apr-11Jun-11Aug-11O

ct-11D

ec-11Feb-12Apr-12Jun-12Aug-12O

ct-12D


ct-13D

ec-13Feb-14Apr-14Jun-14Aug-14

Source: GACC; NBS.


16

Gold Shanghai Gold Premium (US$ per ounce)

(20)

-

20

40

60

06/17/11

09/25/11

01/03/12

04/12/12

07/21/12

10/29/12

02/06/13

05/17/13

08/25/13

12/03/13

03/13/14

06/21/14

09/29/14

Source: Shanghai Gold Exchange, Bloomberg. Note: Five-day MA.

Gold Price (Yuan per gram)

200

240

280

320

360

400

6/17/2011

9/25/2011

1/3/2012

4/12/2012

7/21/2012

10/29/2012

2/6/2013

5/17/2013

8/25/2013

12/3/2013

3/13/2014

6/21/2014

9/29/2014

Source: Shanghai Gold Exchange. Note: Au9999.

Gold Price Versus Chinese CPI

400

600

800

1000

1200

1400

1600

1800

2000

20-Mar-07

20-Dec-07

20-Sep-08

22-Jun-09

24-Mar-10

24-Dec-10

25-Sep-11

26-Jun-12

28-Mar-13

28-Dec-13

29-Sep-14

-4

-2

0

2

4

6

8

10

Gold Price (Left,US$/Ounce)CPI (Right, YOY %)

Source: Bloomberg, NBS, CNC.

Monthly Jewellery Sales (Billion yuan, %)

0

5

10

15

20

25

30

35

Aug-04

Aug-05

Aug-06

Aug-07

Aug-08

Aug-09

Aug-10

Aug-11

Aug-12

Aug-13

Aug-14

-40

-20

0

20

40

60

80

100Retail Sales - Gold, Silver, & Jewelry (Billion Yuan, Left)YOY (%, Right)

Source: NBS, CNC.

Weekly Withdrawals From Shanghai Gold Exchange Vaults (kg)

-

20,000

40,000

60,000

80,000

2009-1

2009-11

2009-21

2009-31

2009-41

2010-01

2010-11

2010-21

2010-31

2010-41

2011-01

2011-11

2011-21

2011-31

2011-41

2012-01

2012-11

2012-21

2012-31

2012-41

2013-01

2013-11

2013-21

2013-31

2013-41

2014-01

2014-11

2014-21

2014-31


Data Snapshot: Gold Consumption (Tonnes)

H1/14 YOYTotal Consumption 569.5 -19.4%

Jewellery 426.2 11.0%Bar 105.6 -62.1%

Industrial 26.8 11.3%Other 11.0 -44.3%

Source: China Gold Association

Net Gold Imports from Hong Kong (Tonnes)

0

20

40

60

80

100

120

140

Aug-08

Dec-08

Apr-09

Aug-09

Dec-09

Apr-10

Aug-10

Dec-10

Apr-11

Aug-11

Dec-11

Apr-12

Aug-12

Dec-12

Apr-13

Aug-13

Dec-13

Apr-14

Aug-14

Source: Census and Statistics Department, HKSAR.


17

Steel

Finished Steel Products Trade

-8,000

-6,000

-4,000

-2,000

0

2,000

4,000

6,000

8,000

10,000

Aug-09

Feb-10

Aug-10

Feb-11

Aug-11

Feb-12

Aug-12

Feb-13

Aug-13

Feb-14

Aug-14

Stee

l Pro

duct

s Net

Impo

rts in

'000

tonn

es Net Imports Steel Imports Steel Exports

Source: GACC.

Iron Ore Port Inventory (million tonnes)

40

50

60

70

80

90

100

110

17-Jun-11

25-Sep-11

3-Jan-12

12-Apr-12

21-Jul-12

29-Oct-12

6-Feb-13

17-May-13

25-Aug-13

3-Dec-13

13-Mar-14

21-Jun-14

29-Sep-14

Source: Antaike.

Data Snapshot: Steel (thousand tonnes)

Aug MOM YOY Jan-Aug YOYIron OreImports 74,880 -9.3% 8.5% 614,380 16.9%Production 136,521 -0.2% 3.9% 986,041 8.5%

Steel ProductsImports 1,170 -4.1% -4.9% 9,640 4.4%Exports 7,760 -3.7% 26.4% 56,830 35.4%Net Exports 6,590 -3.7% 34.2% 47,190 44.1%Production 94,970 0.2% 2.4% 742,100 5.4%Apparent Consumption 88,380 0.5% 0.6% 694,910 3.5%


Steel Products Inventory (million tonnes)

10

12

14

16

18

20

22

17-Jun-11

25-Sep-11

3-Jan-12

12-Apr-12

21-Jul-12

29-Oct-12

6-Feb-13

17-May-13

25-Aug-13

3-Dec-13

13-Mar-14

21-Jun-14

29-Sep-14

Source: Antaike.

Average Weighted Steel Spot Price

2800

3200

3600

4000

4400

4800

5200

06/17/11

09/25/11

01/03/12

04/12/12

07/21/12

10/29/12

02/06/13

05/17/13

08/25/13

12/03/13

03/13/14

06/21/14

09/29/14

Stee

l Pric

es, Y

uan/

tonn

e

Source: Antaike, CNC. Note: 50% Rebar, 30% HRC, 20% CRC.

Average Daily Crude Steel Output (million tonnes)

1.5

1.6

1.7

1.8

1.9

Sep 11-20, 2012

Oct 21-31, 2012

Dec 1-10, 2012

Jan 11-20, 2013

Feb 21-30, 2013

Apr 1-10, 2013

May 11-20, 2013

Jun 21-30, 2013

Aug 1-10, 2013

Sep 11-20, 2013

Oct 21-31, 2013

Dec 1-10, 2013

Jan 11-20, 2014

Feb 21-28, 2014

Apr 1-10, 2014

May 11-20, 2014

Jun 21-31, 2014

Aug 1-10, 2014

Sep 11-20, 2014

Source: CISA. Note: CISA Members Only.

Iron Ore Imports

10

20

30

40

50

60

70

80

90

Aug-09

Aug-10

Aug-11

Aug-12

Aug-13

Aug-14

Iron

Ore I

mpo

rts vs

. 6-M

Ave

(mln

tonn

es)

Source: GACC.

Iron Ore Prices

60

80

100

120

140

160

180

200

09/25/11

01/03/12

04/12/12

07/21/12

10/29/12

02/06/13

05/17/13

08/25/13

12/03/13

03/13/14

06/21/14

09/29/14

Iron

Ore

Pric

es, d

olla

rs/to

nne

Source: Steel Business Briefing. Note: 62% Fines; Tianjin Spot.


18

Grain

Spot Soybean Price (Yuan/tonne, Guangzhou)

3400

3900

4400

4900

5400

17-Jun-11

15-Oct-11

12-Feb-12

11-Jun-12

9-Oct-12

6-Feb-13

6-Jun-13

4-Oct-13

1-Feb-14

1-Jun-14

29-Sep-14

Source: CNGOIC.

Spot Corn Price (Yuan/tonne, Dalian)

2100

2300

2500

2700

17-Jun-11

15-Oct-11

12-Feb-12

11-Jun-12

9-Oct-12

6-Feb-13

6-Jun-13

4-Oct-13

1-Feb-14

1-Jun-14

29-Sep-14

Source: CNGOIC.

Spot Corn Price (Yuan/tonne, Shanghai)

2200

2400

2600

2800

17-Jun-11

15-Oct-11

12-Feb-12

11-Jun-12

9-Oct-12

6-Feb-13

6-Jun-13

4-Oct-13

1-Feb-14

1-Jun-14

29-Sep-14

Source: CNGOIC.

Pork Wholesale Price (Yuan/kilogram)

16

18

20

22

24

26

28

17-Jun-11

15-Oct-11

12-Feb-12

11-Jun-12

9-Oct-12

6-Feb-13

6-Jun-13

4-Oct-13

1-Feb-14

1-Jun-14

29-Sep-14

Source: Ministry of Commerce.

Grain Supply/Demand Projection (000 tonnes)

Beginning Stocks 60,270 77,460 13,240

Production 126,000 217,000 12,000 Imports 2,000 3,000 74,000 Total Supply 128,000 220,000 86,000

Domestic Use 124,000 220,000 84,950 Exports 1,000 100 300 Total Demand 125,000 220,100 85,250

Inventory Change 3,000 (100) 750

Ending Stocks 63,270 77,360 13,990

Wheat Corn Soybean

Source: USDA. Note: 2014/2015 marketing year.

Corn Import Economics (Yuan/tonne)

1400

1600

1800

2000

2200

2400

2600

2800

3000

17-Jun-11

15-Oct-11

12-Feb-12

11-Jun-12

9-Oct-12

6-Feb-13

6-Jun-13

4-Oct-13

1-Feb-14

1-Jun-14

29-Sep-14

Chinese Corn Spot PriceCBOT Corn (Yuan Equivalent)

Source: CBOT, CNGOIC, CNC.


19

Fertilizer

Average Potash Ex-Factory Price (Yuan/tonne)

1800

2200

2600

3000

3400

17-Jun-11

15-Oct-11

12-Feb-12

11-Jun-12

9-Oct-12

6-Feb-13

6-Jun-13

4-Oct-13

1-Feb-14

1-Jun-14

29-Sep-14

Source: CNCIC.

MOP Imports (Tonnes)

-

200,000

400,000

600,000

800,000

1,000,000

Dec-10


ct-11D


ct-12D


ct-13D


Source: GACC.

DAP Trade (Tonnes)

-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

Dec-10

Feb-11A

pr-11Jun-11A

ug-11O

ct-11D

ec-11Feb-12A

pr-12Jun-12A

ug-12O

ct-12D

ec-12Feb-13A

pr-13Jun-13A

ug-13O

ct-13D

ec-13Feb-14A

pr-14Jun-14A

ug-14

Source: GACC.

Data Snapshot: Fertilizer (Physical Tonnes)

Aug-14 MOM YOY Jan-Aug YOY

UreaExports 1,306,156 17.6% -9.5% 6,589,242 62.0%

DAPExports 801,282 181.7% 4.4% 2,358,193 30.0%

MOP Imports 705,043 3.5% 34.2% 5,253,231 15.6%

Source: NBS; GACC.

Averge DAP Ex-Factory Price (Yuan/tonne)

2600

2800

3000

3200

3400

17-Jun-11

15-Oct-11

12-Feb-12

11-Jun-12

9-Oct-12

6-Feb-13

6-Jun-13

4-Oct-13

1-Feb-14

1-Jun-14

29-Sep-14

Source: CNCIC.

Urea Exports (Tonnes)

-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

Dec-10


ct-11D


ct-12D


ct-13D


Source: GACC.

Average Urea Ex-Factory Price (Yuan/tonne)

1500

1700

1900

2100

2300

2500

17-Jun-11

15-Oct-11

12-Feb-12

11-Jun-12

9-Oct-12

6-Feb-13

6-Jun-13

4-Oct-13

1-Feb-14

1-Jun-14

29-Sep-14

Source: CNCIC.


20

Chemicals

Methanol Trade

-

100,000

200,000

300,000

400,000

500,000

600,000

700,000

Aug-11

Dec-11

Apr-12

Aug-12

Dec-12

Apr-13

Aug-13

Dec-13

Apr-14

Aug-14

Met

hano

l Tra

de (t

onne

)

Exports Imports Net Imports

Source: GACC.

Methanol Spot Price (C&F China, USD/tonne)

100

200

300

400

500

600

30-Sep-08

30-Sep-09

30-Sep-10

30-Sep-11

29-Sep-12

29-Sep-13

29-Sep-14

Source: Polymer.

Ethylene Production

400,000500,000600,000700,000800,000900,000

1,000,0001,100,0001,200,0001,300,0001,400,0001,500,0001,600,000

Jul-10Sep-10Nov-10Jan-11M

ar-11M

ay-11Jul-11Sep-11Nov-11Jan-12M

ar-12M

ay-12Jul-12Sep-12Nov-12Feb-13Apr-13Jun-13Aug-13Oct-13Dec-13Apr-14Jun-14Aug-14

Chin

a's E

thyle

ne P

rodu

ctio

n (to

nne)

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

Production YOY Growth

Source: NBS.

Ethylene Spot Price

300

600

900

1200

1500

09/30/08

09/30/09

09/30/10

09/30/11

09/29/12

09/29/13

09/29/14Eth

ylen

e S

pot P

rice,

US

$/to

nne

FOB

S. K

orea

Note: The price is a mainstream quotation on FOB South Korea basis. Source: Polymer.

Polyethylene Price (LLDPE, Yuan/tonne)

5000

7000

9000

11000

13000

15000

17000

09/30/08

09/30/09

09/30/10

09/30/11

09/29/12

09/29/13

09/29/14

Source: DCE.

Methanol Apparent Consumption

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

Aug-10

Dec-10

Apr-11

Aug-11

Dec-11

Apr-12

Aug-12

Dec-12

Apr-13

Aug-13

Dec-13

Apr-14

Aug-14

Met

hano

l App

aren

t Con

sum

ption

(ton

ne)

Net Imports Output Apparent Consumption

Source: GACC, NBS, CNC.


21

Oil

Apparent Consumption of Refined Oil Products

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

Aug-11

Feb-12

Aug-12

Feb-13

Aug-13

Feb-14

Aug-14

Refin

ed O

il Ap

pare

nt C

onsu

mpt

ion,

mm

bbl/d

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

Apparent Consumption YOY Growth

Source: NBS; GACC.

Oil Product Prices (Yuan/Liter)

6.8

7.0

7.2

7.4

7.6

7.8

8.0

8.2

8.4

8.6

6/29

/201

1

9/29

/201

1

12/2

9/20

11

3/29

/201

2

6/29

/201

2

9/29

/201

2

12/2

9/20

12

3/29

/201

3

6/29

/201

3

9/29

/201

3

12/2

9/20

13

3/29

/201

4

6/29

/201

4

9/29

/201

4

#93 Gasoline#0 Diesel

Note: State Guidance Retail Price Set by NDRC for Beijing.

Net Imports of Crude Oil and Refined Oil Products

(1.0)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Aug-09

Feb-10

Aug-10

Feb-11

Aug-11

Feb-12

Aug-12

Feb-13

Aug-13

Feb-14

Aug-14

Chi

na's

Tot

al O

il N

et Im

port

s, m

mbb

l/d

Refined Oil Crude Oil

Source: GACC.

Data Snapshot: Crude and Refined Oil

Aug MOM YOY Jan-Aug YOYCrude Oil (kbbl/d)Imports 5,948 6.0% 17.5% 6,052 8.4%Exports - N/A -100.0% 8 -79.4%Net Imports 5,948 6.0% 18.7% 6,045 9.0%Production 4,130 0.9% 0.9% 4,169 0.1%Apparent Consumption 10,078 3.8% 10.7% 10,214 5.2%

Oil Products (kbbl/d)Imports 597 36.0% -1.6% 592 -28.3%Exports 645 18.2% 9.6% 576 -0.5%Net Imports (47) -55.6% -350.0% 16 -93.5%Production 9,773 0.8% 4.4% 9,869 3.6%Apparent Consumption 9,726 1.4% 3.7% 9,885 1.1%

Note: 1 tonne = 7.32 barrels.

Source: Preliminary customs data; NBS; CNC.

Monthly Crude Run

5.0

6.0

7.0

8.0

9.0

10.0

11.0

Aug-11

Feb-12

Aug-12

Feb-13

Aug-13

Feb-14

Aug-14

Chi

na's

Cru

de R

un, m

mbb

l/d

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

Crude Run YOY Growth

Source: NBS.


22

Coal

China’s Coking Coal Imports (Thousand Tonnes)

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

Aug-10

Dec-10

Apr-11

Aug-11

Dec-11

Apr-12

Aug-12

Dec-12

Apr-13

Aug-13

Dec-13

Apr-14

Aug-14

Source: GACC.

Export Price of Coke (US$/tonne)

150

200

250

300

350

400

450

09/30/10

09/30/11

09/29/12

09/29/13

09/29/14

Coke

Pric

e, U

S$/to

nne

FOB

Chin

ese

Ports

Note: FOB Tianjin. Source: Antaike.

TData Snapshot (Thousand Tonnes)

Aug-14 MOM YOY Jan-Aug YOYCoking CoalImports 3,835 -24.0% -39.0% 39,846 -16.1%Exports 70 61.7% -31.5% 554 -29.8%Net Imports 3,765 -24.8% -39.1% 39,292 -15.9%

CokeExports 661 31.3% 79.0% 5,090 111.0%Production 39,920 -0.8% 1.4% 314,290 -0.3%Apparent Consumption 39,259 -1.2% 0.7% 309,200 -1.2%

Total CoalImports 15,174 -15.0% -32.0% 156,595 -9.6%Exports 450 43.9% -12.2% 3,922 -27.2%Net Imports 14,724 -16.0% -32.4% 152,672 -9.2%

Source: NBS, GACC.

Total Coal Trade (Million Tonnes)

(5)

(1)

3

7

11

15

19

23

27

31

Aug-09

Dec-09

Apr-10

Aug-10

Dec-10

Apr-11

Aug-11

Dec-11

Apr-12

Aug-12

Dec-12

Apr-13

Aug-13

Dec-13

Apr-14

Aug-14

Net Imports Exports Imports

million tonnes

Source: GACC.

TThermal Coal Price (Yuan/tonne)

Price of Shanxi Quality Blends (Yuan/tonne)

400

500

600

700

800

900

29-Sep-09

29-Jan-10

29-May-10

29-Sep-10

29-Jan-11

29-May-11

29-Sep-11

29-Jan-12

29-May-12

29-Sep-12

29-Jan-13

29-May-13

29-Sep-13

29-Jan-14

29-May-14

29-Sep-14

Price of Shanxi Quality Blends (Yuan/tonne)

Note: Price quoted at Qinhuangdao Port. Source: SX Coal.

TChina’s Coke Exports (Thousand Tonnes)

-

200

400

600

800

1,000

1,200

Aug-09

Feb-10

Aug-10

Feb-11

Aug-11

Feb-12

Aug-12

Feb-13

Aug-13

Feb-14

Aug-14

Coke

Exp

orts,

in th

ousa

nd to

nnes

Source: GACC.

TCoking Coal Price (Yuan/tonne)

600

800

1000

1200

1400

1600

09/30/10

09/30/11

09/29/12

09/29/13

09/29/14

Note: Yinchuan / Pingdingshan Average. Source: Steelhome.

TCoal Inventory at Ten Chinese Ports (Million tonnes)

12

16

20

24

28

32

36

7/21/12

10/9/12

12/28/12

3/18/13

6/6/13

8/25/13

11/13/13

2/1/14

4/22/14

7/11/14

9/29/14

Source: Port Authority of Qinhuangdao.


23

Pulp, Lumber, and Logs

Imports of Paper Pulp

300

500

700

900

1,100

1,300

1,500

1,700

Aug-09N

ov-09Feb-10M

ay-10Aug-10N

ov-10Feb-11M

ay-11Aug-11N

ov-11Feb-12M

ay-12Aug-12N

ov-12Feb-13M

ay-13Aug-13N

ov-13Feb-14M

ay-14Aug-14

Mon

thly

vs.

12-

Mon

th A

vera

ge (t

hous

and

tonn

es)

Source: GACC.

Pulp Price (BHKP, Yuan/tonne)

3500

3700

3900

4100

4300

5-Aug-13

16-Sep-13

28-Oct-13

9-Dec-13

20-Jan-14

3-Mar-14

14-Apr-14

26-May-14

7-Jul-14

18-Aug-14

29-Sep-14

Source: FOEX.

Lumber Imports (Million Cubic Meters)

0.5

1.0

1.5

2.0

2.5

3.0

Aug-10

Feb-11

Aug-11

Feb-12

Aug-12

Feb-13

Aug-13

Feb-14

Aug-14

Source: GACC, CNC.

Log Imports (Million Cubic Meters)

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

Aug-10

Feb-11

Aug-11

Feb-12

Aug-12

Feb-13

Aug-13

Feb-14

Aug-14

Source: GACC, CNC.


24

Uranium

China’s Nuclear Plant Timelines

Time ReactorsApril 1991 0.3 Qinshan Phase 1 #1February 1994 0.984 Da Ya Wan #1May 1994 0.984 Da Ya Wan #2April 2002 0.65 Qinshan Phase 2 #1May 2002 0.99 Ling Ao Phase 1 #1December 2002 0.7 Qinshan Phase 3 #1January 2003 0.99 Ling Ao Phase 1 #2November 2003 0.7 Qinshan Phase 3 #2March 2004 0.65 Qinshan Phase 2 #2

May 2007 1.06 Tianwan #1

August 2007 1.06 Tianwan #2

July 2010 1.08 Ling Ao Phase 2 #1 (Guangdong); Construction Started in December 2005; Trial Operation Started on July 22, 2010.

October 2010 0.65 Qinshan Phase 2 Expansion #1 (Zhejiang); Commercial Operation Started in October, 2010

August 2011 1.08 Ling Ao Phase 2 #2 (Guangdong); Construction Started in May 2006: Operation Started in August, 2011

2012 0.65 Qinshan Phase 2 Expansion #2 (Zhejiang); Construction Started in January 2007; Operation Started in April, 2012

2013 1 Hongyanhe (Liaoning); Construction Started in August 2007; Commercial Operation Started in February 2013

2013 1 Hongyanhe (Liaoning); Construction Started in April 20082014 1 Hongyanhe (Liaoning); Construction Started in March 20092015 1 Hongyanhe (Liaoning); Construction Started in August 20092016 1 Hongyanhe (Liaoning); Construction Started in July 20102016 1 Hongyanhe (Liaoning); Construction Started in July 20102013 1 Ningde (Fujian); Construction Started in February 20082013 1 Ningde (Fujian); Construction Started in November 20082014 1 Ningde (Fujian); Construction Started in January 20102015 1 Ningde (Fujian); Construction Started in July 20102013 1 Fuqing (Fujian); Construction Started in November 20082014 1 Fuqing (Fujian); Construction Started in June 20092015 1 Fuqing (Fujian); Construction Started in January 20112016 1 Fuqing (Fujian); Construction Will Start in 20112017 1 Fuqing (Fujian); Construction Will Start in 20112017 1 Fuqing (Fujian); Construction Will Start in 20112013 1 Yangjiang (Guangdong); Construction Started in December 20082013 1 Yangjiang (Guangdong); Construction Started in August 20092015 1 Yangjiang (Guangdong); Construction Started in March 20102015 1 Yangjiang (Guangdong); Construction Started in July 20102013 1 Fangjiashan (Zhejiang); Construction Started in December 20082014 1 Fangjiashan (Zhejiang); Construction Started in July 20092013 1 Sanmen(Zhejiang); Construction Started on April 20092014 1 Sanmen(Zhejiang); Construction Started on December 20092014 1 Haiyang (Shandong); Construction Started in October 20092015 1 Haiyang (Shandong); Construction Started in June 20102014 1.6 Taishan (Guangdong); Construction Started in October 20092015 1.6 Taishan (Guangdong); Construction Started in April 20102014 0.65 Changjiang (Hainan); Construction Started in April 20102015 0.65 Changjiang (Hainan); Construction Started in April 20102015 1 Fangchen (Guangxi); Construction Started in July 20102016 1 Fangchen (Guangxi); Construction Started in July 20102015 1 Tianwan Phase 2 (Jiangsu); Construction to Start in October 20102015 1 Tianwan Phase 2 (Jiangsu); Construction to Start in October 20102015 2 Xianning (Hubei); Construction to Start in 2011.2016-2020 35

Total 13.528 35.5 35 Total Capacity: 80 GW in 2020. Government Target (Announced Oct 2012): 58 GW in 2020

Capacity (GW)

Source: Chinese media Reports, CNC.


25

Key Macro Trends


26

Growth Drivers

Purchasing Manager’s Index

35

40

45

50

55

60

Aug-08N

ov-08Feb-09M

ay-09Aug-09N

ov-09Feb-10M

ay-10Aug-10N

ov-10Feb-11M

ay-11Aug-11N

ov-11Feb-12M

ay-12Aug-12N

ov-12Feb-13M

ay-13Aug-13N

ov-13Feb-14M

ay-14Aug-14

Source: NBS.

PMI – New Export Orders

25

30

35

40

45

50

55

60

Aug-0

8

Nov-0

8

Feb-0

9

May-0

9

Aug-0

9

Nov-0

9

Feb-1

0

May-1

0

Aug-1

0

Nov-1

0

Feb-1

1

May-1

1

Aug-1

1

Nov-1

1

Feb-1

2

May-1

2

Aug-1

2

Nov-1

2

Feb-1

3

May-1

3

Aug-1

3

Nov-1

3

Feb-1

4

May-1

4

Aug-1

4

Source: NBS.

PMI – Raw Materials Inventory

35

37

39

41

43

45

47

49

51

53

55

Aug-0

8

Nov-0

8

Feb-0

9

May-0

9

Aug-0

9

Nov-0

9

Feb-1

0

May-1

0

Aug-1

0

Nov-1

0

Feb-1

1

May-1

1

Aug-1

1

Nov-1

1

Feb-1

2

May-1

2

Aug-1

2

Nov-1

2

Feb-1

3

May-1

3

Aug-1

3

Nov-1

3

Feb-1

4

May-1

4

Aug-1

4

Source: NBS.

PMI – New Orders

30

35

40

45

50

55

60

65

Aug-0

8

Nov-0

8

Feb-0

9

May-0

9

Aug-0

9

Nov-0

9

Feb-1

0

May-1

0

Aug-1

0

Nov-1

0

Feb-1

1

May-1

1

Aug-1

1

Nov-1

1

Feb-1

2

May-1

2

Aug-1

2

Nov-1

2

Feb-1

3

May-1

3

Aug-1

3

Nov-1

3

Feb-1

4

May-1

4

Aug-1

4

Source: NBS.

New Yuan Loans and M2 Money Supply

10

15

20

25

30

35Jan-09

Jul-09

Jan-10

Jul-10

Jan-11

Jul-11

Jan-12

Jul-12

Jan-13

Jul-13

Jan-14

Jul-14

M2

YOY

% G

rowt

h

0

200

400

600

800

1000

1200

1400

1600

1800

2000

New

Yuan

Loa

n, B

ln Y

uan

Loan Increase (Decrease) M2 GrowthSource: People’s Bank of China (PBOC).

Aggregate Social Financing (Billion Yuan)

0

500

1000

1500

2000

2500

3000

Aug-08

Feb-09

Aug-09

Feb-10

Aug-10

Feb-11

Aug-11

Feb-12

Aug-12

Feb-13

Aug-13

Feb-14

Aug-14

Source: People’s Bank of China (PBOC).


27

Growth Rates

GDP (Quarterly, YOY, %)

6

7

8

9

10

11

12

13

Jun-05

Jun-06

Jun-07

Jun-08

Jun-09

Jun-10

Jun-11

Jun-12

Jun-13

Jun-14

Source: NBS.

Fixed Asset Investment (YOY, %)

10

20

30

40

Aug-05

Aug-06

Aug-07

Aug-08

Aug-09

Aug-10

Aug-11

Aug-12

Aug-13

Aug-14

Source: NBS.

Trade

-45%

-25%

-5%

15%

35%

55%

75%

Feb-10

May-10

Aug-10

Nov-10

Feb-11

May-11

Aug-11

Nov-11

Feb-12

May-12

Aug-12

Nov-12

Feb-13

May-13

Aug-13

Nov-13

Feb-14

May-14

Aug-14

Impo

rt a

nd E

xpor

t Gro

wth

-35

-25

-15

-5

5

15

25

35

45

55

Trad

e B

alan

ce, B

ln U

SD

Trade Balance Import GrowthExport Growth

Source: GACC.

Industrial Production (YOY, %)

0

5

10

15

20

25

Aug-06

Aug-07

Aug-08

Aug-09

Aug-10

Aug-11

Aug-12

Aug-13

Aug-14

%

Source: NBS.

Retail Sales (YOY, %)

3

8

13

18

23

28

Aug-05

Aug-06

Aug-07

Aug-08

Aug-09

Aug-10

Aug-11

Aug-12

Aug-13

Aug-14

Source: NBS.

GDP (Yearly, YOY, %)

0%

2%

4%

6%

8%

10%

12%

14%

16%

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Source: NBS.


28

Growth Indicators

Electricity Output

150

200

250

300

350

400

450

500

550

Aug-09

Aug-10

Aug-11

Aug-12

Aug-13

Aug-14

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

Electricity Output (Billion Kwh, Left)

YOY Growth (%, Right)

Source: NBS.

Freight Traffic – Railway (Million Tonnes)

200

220

240

260

280

300

320

340

360

Aug-09

Aug-10

Aug-11

Aug-12

Aug-13

Aug-14

-10

-5

0

5

10

15

20

25

China Freight Traffic- Railway(Million Tonnes, Left)YOY (%, Right)

Source: NBS, CNC.

Cement Output

60

80

100

120

140

160

180

200

220

240

Aug-09

Aug-10

Aug-11

Aug-12

Aug-13

Aug-14

-50%

-30%

-10%

10%

30%

50%

70%

90%

110%Monthly Cement Output (Million Tonnes, Left)

YOY Growth (%, Right)

Source: NBS.

Crude Steel Output

20

30

40

50

60

70

80

Aug-09

Aug-10

Aug-11

Aug-12

Aug-13

Aug-14

-20%

-10%

0%

10%

20%

30%

40%

50%Monthly Crude Steel Output (Million Tonnes, Left)YOY Growth (%, Right)

Source: NBS, CNC.

Monthly Vehicle Sales (Units)

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

Aug-10

Nov-10

Feb-11

May-11

Aug-11

Nov-11

Feb-12

May-12

Aug-12

Nov-12

Feb-13

May-13

Aug-13

Nov-13

Feb-14

May-14

Aug-14

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%UnitsYOY Change (%)

Source: CAAM.

Monthly Car Sales (Units)

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

2,000,000

Aug-10

Nov-10

Feb-11

May-11

Aug-11

Nov-11

Feb-12

May-12

Aug-12

Nov-12

Feb-13

May-13

Aug-13

Nov-13

Feb-14

May-14

Aug-14

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%Units - Car SalesYOY Change (%)

Source: CAAM


29

Inflation & Monetary Cycle

CPI & PPI (YOY, %)

-10

-5

0

5

10

15

Sep-04

Sep-05

Sep-06

Sep-07

Aug-08

Aug-09

Aug-10

Aug-11

Aug-12

Aug-13

Aug-14

PPICPI

Source: NBS.

Reserve Ratio

3

7

11

15

19

23

1-Oct-04

1-Oct-05

1-Oct-06

1-Oct-07

30-Sep-08

30-Sep-09

30-Sep-10

30-Sep-11

29-Sep-12

29-Sep-13

29-Sep-14

%

Source: CITIGroup, PBOC

Interest Rate

3

5

7

9

1-Oct-04

1-Oct-05

1-Oct-06

1-Oct-07

30-Sep-08

30-Sep-09

30-Sep-10

30-Sep-11

29-Sep-12

29-Sep-13

29-Sep-14

U.S. Prime Lending Rate

China's Benchmark Lending Rate

%

Source: CITIGroup, PBOC.

What Is China Exporting – Inflation or Deflation?

U.S. Import Price Index - All Commodities from China

96.5

98.5

100.5

102.5

104.5

106.5

Aug-08

Aug-09

Aug-10

Aug-11

Aug-12

Aug-13

Aug-14

Source: U.S. Bureau of Labour Statistics.

China’s Holding of U.S. Treasuries

25%

30%

35%

40%

45%

50%

55%

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Apr-12

Jul-12

Oct-12

Jan-13

Apr-13

Jul-13

Oct-13

Jan-14

Apr-14

Jul-14

-

200

400

600

800

1,000

1,200

1,400

China's Holding of U.S. Treasuries (bln Dollars)

% of China's FX Reserve

Source: PBOC, U.S. Department of Treasury.


30

Property Market

New Area Started

0

50

100

150

200

250

Aug-09

Aug-10

Aug-11

Aug-12

Aug-13

Aug-14

-50%

0%

50%

100%

150%

200%

250%New Starts (Left, Million Square Metres)YOY Growth (Right, %)

Source: NBS.

Floor Space Sold

0

50

100

150

200

250

Aug-09

Aug-10

Aug-11

Aug-12

Aug-13

Aug-14

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%Areas Sold (Left, Million Square Metres)YOY Growth (Right, %)

Source: NBS.

New Floor Space Under Construction (YOY, %)

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

Aug-09

Aug-10

Aug-11

Aug-12

Aug-13

Aug-14

Area Under Construction Growth (3M MA)Steel Apparent Consumption Growth (3M MA)

Source: NBS.

Fixed Asset Investment – Residential

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

Mar-1

1

May-1

1

Jul-1

1

Sep-1

1

Nov-1

1

Jan/F

eb 12

Apr-1

2

Jun-1

2

Aug-1

2

Oct-1

2

Dec-1

2

Mar-1

3

May-1

3

Jul-1

3

Sep-1

3

Nov-1

3

Jan/F

eb 14

Apr-1

4

Jun-1

4

Aug-1

4

RMB mn

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%Real estate inv estment (residential) - LHS YoY % grow th

Source: NBS.

Average New Home Price – 100 Cities (Yuan/sqm)

9,000

9,300

9,600

9,900

10,200

10,500

10,800

11,100

11,400

Aug-10O

ct-10D


ct-11D


ct-12D


ct-13D


Source: CREIS.

Primary Home Sales in Top Cities (Units)

-

5,000

10,000

15,000

20,000

25,000

30,000

3/28/2013

5/28/2013

7/28/2013

9/28/2013

11/28/2013

1/28/2014

3/28/2014

5/28/2014

7/28/2014

9/28/2014

Source: Soufun. Note: Top ten cities.


31

Financial Markets


32

Key Financial Markets

Yield Curve – CNY Interest Rate Swap

2.5

3.0

3.5

4.0

4.5

5.0

3 Months

6 Months

9 Months

1 Year

2 Years

3 Years

4 Years

5 Years

6 Years

7 Years

8 Years

9 Years

10 Years

9/29/20144/2/2014

Source: ChinaBond.

Equity Market – Shanghai Composite Index

1,800

2,000

2,200

2,400

2,600

09/25/11

01/13/12

05/02/12

08/20/12

12/08/12

03/28/13

07/16/13

11/03/13

02/21/14

06/11/14

09/29/14

Source: Bloomberg.

Currency Market (U.S. cents per Yuan)

15.6

15.8

16

16.2

16.4

16.6

10/4/13

11/3/13

12/3/13

1/2/14

2/1/14

3/3/14

4/2/14

5/2/14

6/1/14

7/1/14

7/31/14

8/30/14

9/29/14

(0.50)

(0.40)

(0.30)

(0.20)

(0.10)

-

0.10

0.20

0.30

0.40

0.50

Spread (Right)12-Month NDF (Left)Spot (US cents per Yuan, Left)

Source: Bloomberg.

Interest Rate – 1-Month Shibor

0.5

2.5

4.5

6.5

8.5

10.5

1/3/2012

4/12/2012

7/21/2012

10/29/2012

2/6/2013

5/17/2013

8/25/2013

12/3/2013

3/13/2014

6/21/2014

9/29/2014

1 Month Shibor

Source: Chinabond.

Equity Market – Hang Seng China Enterprises Index

7,500

8,500

9,500

10,500

11,500

12,500

09/25/11

01/13/12

05/02/12

08/20/12

12/08/12

03/28/13

07/16/13

11/03/13

02/21/14

06/11/14

09/29/14

Source: Bloomberg.

PBOC Open Market Operation (Net Input, Billion)

-500

-400

-300

-200

-100

0

100

200

300

400

500

5/17/2013

7/6/2013

8/25/2013

10/14/2013

12/3/2013

1/22/2014

3/13/2014

5/2/2014

6/21/2014

8/10/2014

9/29/2014

Source: PBOC.


33

Market Correlation

Shanghai Versus Goldman Sachs Commodities Index

1500

1900

2300

2700

3100

3500

18-Apr-11 15-Oct-11 12-Apr-12 09-Oct-12 07-Apr-13 04-Oct-13 02-Apr-14 29-Sep-14400

450

500

550

600

650

700

750

800SHCOMP GSCI

Source: CNC.

Shanghai Versus S&P 500

1500

1900

2300

2700

3100

3500

18-Apr-11 15-Oct-11 12-Apr-12 09-Oct-12 07-Apr-13 04-Oct-13 02-Apr-14 29-Sep-14900

1100

1300

1500

1700

1900

2100SHCOMP S&P500

Source: CNC.


34

Equity Market Drivers

Expectation of Yuan Appreciation

0

1000

2000

3000

4000

5000

6000

700013-Jul-06

9-May-07

4-Mar-08

29-Dec-08

25-Oct-09

21-Aug-10

17-Jun-11

12-Apr-12

6-Feb-13

3-Dec-13

29-Sep-14

-10%

-5%

0%

5%

10%

15%

Shanghai Composit Index1-Year Yuan Expectation (%)

Source: Bloomberg, CNC.

Liquidity

0

5

10

15

20

25

30

35

40

45

27-Sep-01

15-Jan-03

4-May-04

22-Aug-05

10-Dec-06

29-Mar-08

17-Jul-09

4-Nov-10

22-Feb-12

11-Jun-13

29-Sep-14

0

1000

2000

3000

4000

5000

6000

7000

M1Shanghai Index

Source: PBOC, Bloomberg.

Sentiment

1500

1700

1900

2100

2300

2500

2700

3-Jan-12

12-Apr-12

21-Jul-12

29-Oct-12

6-Feb-13

17-May-13

25-Aug-13

3-Dec-13

13-Mar-14

21-Jun-14

29-Sep-14

SHC

OM

P In

dex

0

50

100

150

200

250

300

Stoc

k M

arke

t New

Acc

ount

(000

)

SHCOMP Index China Stock Market New Account

Source: Shanghai Stock Exchange, Bloomberg.

Policy and Monetary Cycle

0

1000

2000

3000

4000

5000

6000

7000

27-Sep-01

15-Jan-03

4-May-04

22-Aug-05

10-Dec-06

29-Mar-08

17-Jul-09

4-Nov-10

22-Feb-12

11-Jun-13

29-Sep-14

2

7

12

17

22

27Shanghai Index

Bank Reserve Ratio

Source: PBOC.

Real Interest Rate

0

1000

2000

3000

4000

5000

6000

7000

27-Sep-01

15-Jan-03

4-May-04

22-Aug-05

10-Dec-06

29-Mar-08

17-Jul-09

4-Nov-10

22-Feb-12

11-Jun-13

29-Sep-14

-5

-4

-3

-2

-1

0

1

2

3

4

5Shanghai IndexReal Interest Rate

Source: Bloomberg.

Valuation

0

1000

2000

3000

4000

5000

6000

7000

27-Sep-01

15-Jan-03

4-May-04

22-Aug-05

10-Dec-06

29-Mar-08

17-Jul-09

4-Nov-10

22-Feb-12

11-Jun-13

29-Sep-14

0

10

20

30

40

50

60

70

80

Shanghai IndexTrailing P/E

Source: Bloomberg, CNC.


35

Relative Performance – Absolute & Relative

Basic Materials

Relative Performance

0.30

0.35

0.40

0.45

0.50

1-Jan-12 19-Jul-12 4-Feb-13 23-Aug-13 11-Mar-14 27-Sep-14

Rel

ativ

e Pe

rform

ance

to S

HC

OM

P

Source: CNC, Bloomberg.

Basic Materials

Absolute Performance

0

300

600

900

1200

1500


Bas

ic M

ater

ials

Indu

stry

1000

1200

1400

1600

1800

2000

2200

2400

2600

SH

CO

MP

Basic Materials IndustrySHCOMP


TCoal & Alternative Energy


0

300

600

900

1200


Coa

l & A

ltern

ativ

e En

ergy

Indu

stry

1000

1200

1400

1600

1800

2000

2200

2400

2600

SHC

OM

P

Coal & Alternative Energy IndustrySHCOMP


Iron & Steel


0.35

0.40

0.45

0.50


Rela

tive

Perfo

rman

ce to

SHC

OMP


TIron & Steel


0

300

600

900

1200


Iron

& St

eel I

ndus

try

1000

1200

1400

1600

1800

2000

2200

2400

2600

SHC

OM

P

Iron & Steel IndustrySHCOMP


TOil & Gas


0.35

0.40

0.45

0.50


Rel

ativ

e Pe

rform

ance

to S

HC

OM

P


TOil & Gas


0

300

600

900

1200


Oil &

Gas

Indu

stry

1000

1200

1400

1600

1800

2000

2200

2400

2600

SHC

OM

P

Oil & Gas IndustrySHCOMP


TCoal & Alternative Energy


0.20

0.30

0.40

0.50


Rel

ativ

e Pe

rform

ance

to S

HC

OM

P



36

Construction


0.40

0.45

0.50

0.55


Rel

ativ

e Pe

rform

ance

to S

HC

OM

P


Construction


0

300

600

900

1200

1500


Con

stru

ctio

n In

dust

ry

1000

1200

1400

1600

1800

2000

2200

2400

2600

SHC

OM

P

Construction IndustrySHCOMP


TTransportation


0

300

600

900

1200

1500


Tra

nspo

rtat

ion

Indu

stry

1000

1200

1400

1600

1800

2000

2200

2400

2600

SH

CO

MP

Transportation IndustrySHCOMP


Industrial & Manufacturing


0.35

0.40

0.45

0.50

0.55

0.60


Rel

ativ

e Pe

rform

ance

to S

HC

OM

P


TIndustrial & Manufacturing


0

300

600

900

1200

1500


Indu

stria

l & M

anuf

actu

ring

Indu

stry

1000

1200

1400

1600

1800

2000

2200

2400

2600S

HC

OM

P

Industrial & Manufacturing IndustrySHCOMP


TReal Estate


0.40

0.45

0.50

0.55

0.60

0.65


Rel

ativ

e Pe

rform

ance

to S

HC

OM

P


TReal Estate


0

300

600

900

1200

1500


Rea

l Est

ate

Indu

stry

1000

1200

1400

1600

1800

2000

2200

2400

2600

SHC

OM

P

Real Estate IndustrySHCOMP


TTransportation


0.35

0.40

0.45

0.50

0.55


Rel

ativ

e P

erfo

rman

ce to

SH

CO

MP



37

Banks


0.40

0.45

0.50

0.55


Rel

ativ

e Pe

rform

ance

to S

HC

OM

P


Banks


0

300

600

900

1200

1500


Ban

ks In

dust

ry

1000

1200

1400

1600

1800

2000

2200

2400

2600

SH

CO

MP

Banks IndustrySHCOMP


TUtilities


0

300

600

900

1200

1500


Util

ities

Indu

stry

1000

1200

1400

1600

1800

2000

2200

2400

2600

SH

CO

MP

Utilities IndustrySHCOMP


Insurance


0.40

0.45

0.50

0.55

0.60


Rel

ativ

e Pe

rform

ance

to S

HC

OM

P


TInsurance


0

300

600

900

1200

1500


Insu

ranc

e In

dust

ry

1000

1200

1400

1600

1800

2000

2200

2400

2600SH

CO

MP

Insurance IndustrySHCOMP


TInvestment Services


0.40

0.45

0.50

0.55

0.60

0.65

0.70


Rel

ativ

e Pe

rform

ance

to S

HC

OM

P


TInvestment Services


0

300

600

900

1200

1500

1800


Inve

stin

g Se

rvic

es In

dust

ry

1000

1200

1400

1600

1800

2000

2200

2400

2600

SHC

OM

P

Investing Services IndustrySHCOMP


TUtilities


0.40

0.45

0.50

0.55

0.60


Rel

ativ

e P

erfo

rman

ce to

SH

CO

MP



38

Consumer Products


0.40

0.45

0.50

0.55


Rel

ativ

e Pe

rform

ance

to S

HC

OM

P


Consumer Products


0

300

600

900

1200

1500


Basi

c M

ater

ials

Inde

x

1000

1200

1400

1600

1800

2000

2200

2400

2600

SHC

OM

P

Consumer Products IndustrySHCOMP


TIT & Telecom


0

300

600

900

1200

1500

1800


Tele

com

m &

IT In

dust

ry

1000

1200

1400

1600

1800

2000

2200

2400

2600

SHC

OM

P

Telecomm & IT IndustrySHCOMP


Consumer Services


0.35

0.40

0.45

0.50

0.55


Rel

ativ

e Pe

rform

ance

to S

HC

OM

P


TConsumer Services


0

300

600

900

1200

1500


Con

sum

er S

ervi

ces

Indu

stry

1000

1200

1400

1600

1800

2000

2200

2400

2600S

HC

OM

P

Consumer Services IndustrySHCOMP


THealth Care


0.35

0.45

0.55

0.65

0.75


Rel

ativ

e Pe

rform

ance

to S

HC

OM

P


THealth Care


0

400

800

1200

1600

2000


Hea

lth C

are

Indu

stry

1000

1200

1400

1600

1800

2000

2200

2400

2600

SHC

OM

P

Health Care IndustrySHCOMP


TIT & Telecom


0.30

0.40

0.50

0.60

0.70


Rel

ativ

e Pe

rform

ance

to S

HC

OM

P



39

Appendix

Comparing Apples to Apples on China’s Debt

• This Appendix is a re-print of a Feature Article in our China Investment Strategies report dated April 8, 2014. It is included in this report for marketing purpose.

• Apparently China permabears are holding their breath these days, waiting for their “told-you-so” glory. As the Chinese reformers started to introduce two-way trade for the yuan and began to allow defaults in the bond market, the Minsky moment for China must be imminent, they say. When crunching the numbers and finding that China’s total government debt is not unreasonably high as a percentage of GDP, their advice is not to forget other debt in China, particularly corporate debt. Adding together all debt in the economy, the debt-to-GDP ratio for China could be well over 200% – this is clearly unsustainable, they say.

• Our clients are understandably concerned. Routinely we are requested to comment on articles and newsletters that predict implosion scenarios for the Chinese economy. In fact, we ourselves share deep concerns about China’s debt issue – the growth rate of debt over the past few years is not sustainable and a deleveraging process is inevitable, in our view. During the deleveraging process, the structural growth of the economy is set to slow down. However, we do not expect to see a sudden collapse of the Chinese economy through an imminent Minsky moment. The reason is simple – the overall debt level in China is actually not that high.

• When the permabears pitch their story about China’s debt burden, they rarely compare apples to apples. They usually add up all debt in China to calculate its debt-to-GDP ratio and then compare that with the public debt-to-GDP ratios in other economies. Exhibit 1 below shows an apples-to-apples comparison of China’s debt burden in all four categories versus some mature economies. The China number is taken from a detailed study from the China Academy of Social Sciences. This number is fairly accurate, in our view, and it is in line with market consensus. For instance, in early April, Bloomberg surveyed 11 leading economists about China’s overall debt-to-GDP ratio; the average estimate is 225% as of end of 2013. For other economies, we use the results of a comparable study by McKinsey & Company published in 2012. The McKinsey results actually underestimated the debt level for certain economies. For instance, if the liabilities of Fannie Mae and Freddie Mac are included, the U.S. total debt-to-GDP ratio would be 360%, not 279% as presented in the table.

• That said, as Exhibit 1 shows, from a static perspective, the gross debt level in China, at 215.7% of GDP as of December 2012, is not exceptionally lofty. The data implies that, before we worry about a systemic implosion in China due to its “heavy” debt, we should worry about the U.S., Canada, the U.K., Japan, and Ireland. Netting out the debt, net assets in China exceeded RMB 300 trillion in 2011, almost three times China’s gross indebtedness.

Exhibt 1: Debt-to-GDP Ratios for Selected Countries (Percentage of GDP)

Household Non-Financial Corporations Financial Institutions Government Total Note

China 31.1 113.5 17.6 53.5 215.7 as of Dec 2012; Source: CASS

Canada 91 53 63 69 276 as of Q2/2011; Source McKinsey

U.S. 87 72 40 80 279 as of Q2/2011; Source McKinsey

U.K. 98 109 219 81 507 as of Q2/2011; Source McKinsey

Japan 67 99 120 226 512 as of Q2/2011; Source McKinsey

Ireland 124 194 259 85 662 as of Q2/2011; Source McKinsey

Source: China Academy of Social Sciences; McKinsey & Company. Note: If asset-backed securities are included, the U.S. number would be 360%.


40

• Some investors would argue that China should not be compared with mature economies. Instead, it should be compared with the total indebtedness in key developing countries. We disagree. The key difference between China and some key developing countries such as India is very pronounced in that China’s debt is predominantly domestic. In other words, China has been borrowing in a currency it can print, while some other developing countries routinely borrow in a currency called the greenback, which they cannot print. China has twin surplus in its balance of payments, its external debt is low, and its foreign exchange reserve is formidable. In a highly extreme situation that would require a systemic bailout, China’s Ministry of Finance could raise funds to bail out the banking system simply by issuing bonds to the People’s Bank of China – yes, this is called quantitative easing. If QE has not proven a disaster in the U.S., it stands to reason that China could undertake its own experiment when needed.

• Overall debt levels aside, a detailed look at Exhibit 1 actually shows where China’s strength and weakness lie. For instance, despite all the discussion about local government debt, China’s total government debt (local plus central) is actually the lowest among major economies. And China’s households are good savers too. The real issue for China is non-financial corporate debt.

• China’s high corporate debt is a direct result of its failure to launch an effective equity market, in our view. As we know, companies have two main channels to receive funding – debt financing or equity financing. Unfortunately, the Chinese equity market has been an ineffective source of financing for companies, and as a result corporate China has had to rely on bank loans and bond issuance. In fact, in the not-too-remote history, bank loans were as high as 80% of China’s aggregate social financing. In recent years, other types of financing have developed, from the bond market to shadow banking. However, equity financing is still lacking. In fact, this phenomenon – high corporate debt – is not unique to China. Before their financial markets became more mature and diversified, most of today’s mature economies went through a similar stage in their histories. The same issue, the immaturity of equity and bond markets, also explains the high M2 money supply in China, another issue repeatedly warned of by the permabears.

• In fact, the apples-to-apples comparison of China’s debt exposures in different categories versus more mature economies illuminates the direction of China’s financial reforms. First, to foster a consumer economy, it should help households to leverage up. When consumers feel safe about their retirement and medical care, they will be more likely to use their credit cards. Second, to help corporate China deleverage, China should foster a more mature and effective equity market and increase equity financing’s share of total social financing. On this point, the latest IPO reform is a good start. And lastly, as to government debt, the overall level is fine, in our view; however, we believe the central government should leverage up its balance sheet so that local governments can deleverage. This requires the central government to shoulder more spending obligations. Fortunately, all the three areas are targeted in the reform package announced after the 3rd Plenum of the Party last November.


41

APPENDIX A – IMPORTANT DISCLOSURES

This report is prepared and published by CNC Asset Management Ltd. (CNC). CNC is independent of and unaffiliated with The Bank of Nova Scotia and its subsidiaries and affiliates (individually or collectively, “Scotiabank”). For the time being, Scotia Capital Inc. is authorized by CNC to distribute this report on an exclusive basis.

The views expressed in this report represent the views of CNC, and do not represent the views of Scotiabank. Scotiabank has no right to exercise any control over CNC’s business and operation, and CNC retains full autonomy on how, where, and when CNC conducts its business, expands its operation, manages its investments, solicits its potential clients, uses sub-contractors, and produces its products including this report. Therefore, this report is prepared without any knowledge of Scotiabank's security positions and transactions, as well as Scotiabank's compliance procedures. The policies and procedures of Scotiabank do not apply to this publication and its author. CNC takes full regulatory, compliance, and financial risks for preparing and publishing this report.

This report only discusses geographic markets and industry or commodity sectors, and it does not assess individual issuers. Therefore, it is not an equity research report. Consequently this report is not governed by rules applicable to the publication and distribution of research reports, including relevant restrictions or disclosures required to be included in research reports.

Information, opinions, estimates, projections, statements and other materials contained herein are provided as of the date hereof, intended for information purposes only, and are subject to change without notice. In addition, the opinions and statements contained herein are based on information taken from sources believed to be reliable, but no representation or warranty, express or implied, is made as to their accuracy, completeness, or timeliness. CNC takes no responsibility for any errors and omissions which may be contained herein, and accepts no liability whatsoever for any loss arising from any use of or reliance on such information.

No part of this report constitutes a recommendation that any particular investment or investment strategy is suitable for any specific person. This report is not intended as investment advice tailored to the particular circumstances, investment objectives, and risk tolerances of any entity or individual. CNC does not continuously follow any investment vehicles or any issuers even if mentioned in this report. Accordingly, readers of this report must regard the report as providing stand-alone analysis as of the date of publication and should not expect continuing analysis or additional reports on any topics of the report. This report should not be construed as investment advice/recommendation or as a solicitation for or an offer to buy or sell any securities or other financial instruments.

If this report discusses any industry or commodity sectors, it should be noted that the views on industry or commodity sectors do not always align with CNC’s views on individual equities related to the industry or commodity sectors. For example, this report might express positive views on a particular commodity, but CNC, its directors, officers, employees, clients, or its managed accounts/funds may be bearish on a single issuer whose value generally rises and falls with the value of the commodity. CNC, its directors, officers, employees, clients, or its managed accounts/funds may decide to sell positions in that issuer, either because of concerns about any company-specific issues (such as management, debt level, geographic risk, and etc) of the issuer or because CNC, its directors, officers, employees, clients, or its managed accounts/funds may have determined that the issuer’s stock price is inflated even relative to CNC’s positive view of the value of the underlying commodity.

To make it clear, CNC, as a principal or advisor, and CNC’s directors, officers, employees, clients, or its managed accounts/funds may hold or may later acquire or sell securities of issuers tied to the industry or commodity sectors this report is commenting on. Although this report may be bullish (or bearish) on a particular industry or commodity sector in general, CNC, its directors, officers, employees, clients, or its managed accounts/funds may still determine that a particular issuer’s securities are overpriced (or underpriced) and may determine to sell (or buy) securities of that issuer. The readers of this report should understand that CNC, its directors, officers, employees, clients, or managed accounts/funds may be buying or selling securities that might appear contrary to the views expressed in this report.

All rights reserved. Unauthorized reproduction, distribution, transmission or publication of this report without the prior express written consent of CNC is strictly prohibited. If you believe that this report was sent to you in error, please forward a message to that effect as soon as practicable to [email protected].

Documents

China Investment Strategies · grains, chemicals, oil, coal, uranium, and pulp & paper products. • The second part, “Key Macro Trends,” covers major macroeconomic data such