China: An Old-Fashioned Recovery, Headwinds Ahead Li-Gang Liu Chief - - PowerPoint PPT Presentation

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China: An Old-Fashioned Recovery, Headwinds Ahead Li-Gang Liu Chief - - PowerPoint PPT Presentation

China: An Old-Fashioned Recovery, Headwinds Ahead Li-Gang Liu Chief Economist, Greater China MAR 2013 1 Industrial production rebounded, led by the heavy industry sector China - Industrial Production China - Electricity Consumption (y/y)


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SLIDE 1

China: An Old-Fashioned Recovery, Headwinds Ahead

Li-Gang Liu Chief Economist, Greater China MAR 2013

1

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SLIDE 2

Industrial production rebounded, led by the heavy industry sector

China - Industrial Profits (y/y)

  • 10
  • 5

5 10 15 20 25 Jan 12 Feb 12 Mar 12 Apr 12 May 12 Jun 12 Jul 12 Aug 12 Sep 12 Oct 12 Nov 12 Dec 12

China - Industrial Production (y/y)

8 10 12 14 16 18 20 22 24 26 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

Light Industry Heavy Industry

China - Industrial Production Growth vs Ferrous Metal Smelting & Pressing (y/y)

5 10 15 20 25 Oct 10 Dec 10 Feb 11 Apr 11 Jun 11 Aug 11 Oct 11 Dec 11 Feb 12 Apr 12 Jun 12 Aug 12 Oct 12 Dec 12 Feb 13 Headline Industrial Production Smelting & Pressing of Ferrous Metals

China - Electricity Consumption (y/y)

  • 10
  • 5

5 10 15 20 25 30 Feb 11 Apr 11 Jun 11 Aug 11 Oct 11 Dec 11 Feb 12 Apr 12 Jun 12 Aug 12 Oct 12 Dec 12 Feb 13

Overall Light Industry Heavy Industry

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SLIDE 3

Fiscal policy implementation had sped up after September 2012; newly started projects surged in Q4.

China - Government Expenditure Target 2012

20 40 60 80 100 Jan 12 Feb 12 Mar 12 Apr 12 May 12 Jun 12 Jul 12 Aug 12 Sep 12 Oct 12 Nov 12 Dec 12

Government Expenditure, % implemented Target (45 degree line)

China - Newly Started Projects (y/y)

  • 20
  • 10

10 20 30 40 50 60 70 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

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SLIDE 4

Meanwhile, property market warmed up in H2 2012

China - Residential Property Investment vs GDP (y/y, ytd)

5 10 15 20 25 30 35 40 45 2008 2009 2010 2011 2012 6 8 10 12 14 Residential Property Investment GDP (RHS)

China - 70 City New Residential Property Price (number of cities m/m change)

10 20 30 40 50 60 70 Jan 11 Mar 11 May 11 Jul 11 Sep 11 Nov 11 Jan 12 Mar 12 May 12 Jul 12 Sep 12 Nov 12 Jan 13

Decrease No Change Increase Number of Cities

China - 70 City New Residential Property Price (number of cities y/y change)

10 20 30 40 50 60 70 Jan 11 Mar 11 May 11 Jul 11 Sep 11 Nov 11 Jan 12 Mar 12 May 12 Jul 12 Sep 12 Nov 12 Jan 13

Decrease No Change Increase Number of Cities

China - Property Price Index (y/y)

  • 4
  • 2

2 4 6 8 10 12 14 16 18 2005 2006 2007 2008 2009 2010 2011 2012 2013

Official Property Price Index ANZ Property Price Index

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SLIDE 5

But this is an old-fashioned recovery, driven by investment. No visible change in China’s economic structure

China - Contribution to GDP Growth

  • 5

5 10 15 20 01 02 03 04 05 06 07 08 09 10 11 12 Consumption Investment Net Exports GDP, y/y

China - Incremental Capital Output Ratio

1 2 3 4 5 6 7 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 ICOR, 5 year moving average

Period Avg. GDP Growth Investment Share of GDP (%) ICOR 1981-1990 9.3 35.2 3.8 China 1991-2000 10.5 37.8 3.6 2001-2011 10.6 43.4 4.1 Japan 1960-70 10.4 26.1 2.5 Korea 1981-91 9.7 30.4 3.1 Incremental Capital Output Ratio

China - Provincial Growth and Investment Targets in 2013 (%)

5 10 15 20 25 30 35

Guizhou Shaanxi Jilin Gansu Qinghai Yunnan Chongqing Tianjin InnerMongolia Tibet Ningxia Heilongjiang Fujian Sichuan Guangxi Xinjiang Henan Jiangsu Hubei Hunan Jiangxi Hainan Shanxi Anhui Shandong Liaoning Hebei Zhejiang Guangdong Beijing Shanghai 2013 GDP Growth Target 2013 Investment Growth Target

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SLIDE 6

Inflation will return as a major threat

China - Inflation vs CRY Index (y/y)

  • 10
  • 5

5 10 15 2005 2006 2007 2008 2009 2010 2011 2012

  • 60
  • 40
  • 20

20 40 60 CPI PPI CRY Index (RHS) China Hog Price Cycle 50 70 90 110 130 150 170 190 6 12 18 24 30 36 2011 - current 2008 to 2011 2005 to 2007 2002 to 2004 months Index

China - CPI Inflation

  • 4
  • 2

2 4 6 8 Aug 10 Nov 10 Feb 11 May 11 Aug 11 Nov 11 Feb 12 May 12 Aug 12 Nov 12 Feb 13

  • 1

1 2

m/m (RHS) y/y

China - PPI Inflation

  • 10
  • 8
  • 5
  • 3

3 5 8 10 Aug 10 Nov 10 Feb 11 May 11 Aug 11 Nov 11 Feb 12 May 12 Aug 12 Nov 12 Feb 13

  • 2
  • 1

1 2

m/m (RHS) y/y

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SLIDE 7

Risk of asset bubble will be rekindled on the back of re-affirmed urbanization drive

China - First Tier City New Residential Property Prices (y/y)

  • 4
  • 2

2 4 6 8 Jan 11 Mar 11 May 11 Jul 11 Sep 11 Nov 11 Jan 12 Mar 12 May 12 Jul 12 Sep 12 Nov 12 Jan 13

Beijing Shanghai Guangzhou Shenzhen

China - Property Prices (y/y)

  • 3
  • 2
  • 1

1 2 3 4 5 6 7 8 Jan 11 Mar 11 May 11 Jul 11 Sep 11 Nov 11 Jan 12 Mar 12 May 12 Jul 12 Sep 12 Nov 12 Jan 13

39 cities with property curbs 31 cities without property curbs *average prices

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SLIDE 8

Monetary policy in 2013: A tightening bias has set in?

PBOC resumed repos to drain liquidity from the

  • pen market

Market rates much more stable this year, suggesting relaxed market liquidity Capital inflows rebounded in Q4 2012 and are expect to surge in Q1, prompting repos operations Food prices hit record high, raising inflation concerns

China Food Price Index

140 150 160 170 180 190 200 210 220 230 Jul 09 Oct 09 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 China - PBoC Weekly Open Market Operations (RMB bn)

  • 1,000
  • 800
  • 600
  • 400
  • 200

200 400 600 800 1,000 27 Aug 17 Sep 08 Oct 29 Oct 19 Nov 10 Dec 31 Dec 21 Jan 11 Feb 04 Mar

CB Bill Matured Repo Matured Reverse Repo CB Bill Repo

  • Rev. Repo Matured

Net Liquidity Injection Liquidity Withdrawal

China - 7-day Repo Rate

1 2 3 4 5 6 7 8 9 10 Aug 10 Nov 10 Feb 11 May 11 Aug 11 Nov 11 Feb 12 May 12 Aug 12 Nov 12 Feb 13

One week before Chinese New Year

China - Monthly Change of Financial Institutions FX Position (RMB bn)

  • 200
  • 100

100 200 300 400 500 600 700 800 Jan 09 May 09 Sep 09 Jan 10 May 10 Sep 10 Jan 11 May 11 Sep 11 Jan 12 May 12 Sep 12 Jan 13

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SLIDE 9

Fear of hard landing has diminished and an 8% growth can be obtained; but inflation will rebound and the renewed risk of asset bubble will return

  • We hold a cautiously optimistic view on

China’s economic outlook over the next

  • year. The economy should see a

continuous and modest upturn in 2013, with an annual GDP growth rate at 8.1% y/y for the whole year.

  • Inflation remained tamed in Q4 2012,

but will started to rise in Q1 2013. Inflation is expected to reach to 4% y/y in late Q2 or early Q3 2013. We forecast China’s inflation will increase by around 3.5% to 4% in 2013.

China-GDP(y/y)

7 8 9 10 11 12 13 Mar 10 Sep 10 Mar 11 Sep 11 Mar 12 Sep 12 Mar 13 Sep 13

forecasts

China - CPI (y/y)

  • 3
  • 2
  • 1

1 2 3 4 5 6 7 Mar 09 Sep 09 Mar 10 Sep 10 Mar 11 Sep 11 Mar 12 Sep 12 Mar 13 Sep 13 Government Target

forecasts

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SLIDE 10

10 10

After the enlargement of the trading band, CNY’s one-way bet is now difficult to realize, but two-way fluctuation is here to stay.

Source: Bloomberg, ANZ

CNY Exchange Rate (Index: 1 Jan 2012 = 100)

90 95 100 105 110 115 120 125 130 Jan 12 Mar 12 May 12 Jul 12 Sep 12 Nov 12 Jan 13 Mar 13 CNY/EUR CNY/JPY CNY/AUD CNY/USD CNY Appreciation

USD/CNY

6.20 6.25 6.30 6.35 6.40 6.45 Jan 12 Mar 12 May 12 Jul 12 Sep 12 Nov 12 Jan 13 Mar 13 USD/CNY Spot Trading Band Fixing

China - CNY and CNH Rates

6.18 6.20 6.22 6.24 6.26 6.28 6.30 6.32 6.34 6.36 6.38 Sep 12 Oct 12 Nov 12 Dec 12 Jan 13 Feb 13 Mar 13

  • 300
  • 200
  • 100

100 200 300 400 500 Spread (pips, RHS) USD/CNY USD/CNH China - CNY Basket 6.20 6.30 6.40 6.50 6.60 6.70 Jan 11 Mar 11 May 11 Jul 11 Sep 11 Nov 11 Jan 12 Mar 12 May 12 Jul 12 Sep 12 Nov 12 Jan 13 Mar 13 ANZ Basket Track CNY Spot

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SLIDE 11

China: Medium-term Outlook

11

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SLIDE 12

Political transition is unlikely to change economic policy: A Case study of the 12th five-year plan Phase 1: 2 years (March 2008 – February 2010)

  • The State Council organised an interim evaluation of the 11th FYP through all

ministries, provincial governments and independent research institutes including the World Bank, Asian Development Bank, and universities. A report was submitted to NPC Standing Committee.

  • The State Council arranged an initial research of 39 topics of 8 areas in the form of

research projects. The research report was submitted to the Party’s Politburo Standing Committee which determined the directions and issued a “circular” to relevant units (February 2010). Phase 2: 8 months (February 2010 – October 2010)

  • The State Council Vice-Premier Li Keqiang led drafting of the proposal with all nine

members of Politburo Standing Committee involved. Each of them was responsible for an area of “investigation and research”. All ministries and provincial governments draft their own plans concurrently.

  • At the 5th Central Committee meeting held in October 2010, Premier Wen presented

the final proposal for consideration, and then announced the approved proposal. Phase 3: 5 months (October 2010 – March 2011)

  • The State Council prepared the FYP Outline for further deliberation and public

consultation and presented the Outline to the Politburo. It was also vetted and approved by NPC in March 2011.

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SLIDE 13

13 13

The Medium-Term Outlook Remains Positive § By any standard, we cannot regard an economy still growing at 7-8% with inflation capped at 2-3% as a hard landing economy, let alone for a second largest economy in the world. § While structural issues will continue to challenge China’s sustainability, we think cyclical factors will still dominate China’s growth by 2015. Chinese growth at around 7 to 8% can still be maintained with relative ease. § The 12th 5-Year Plan (2011-15) indicates the government is determined to rebalance the economy with an emphasis to boost consumption, move up technology ladder, increase energy efficiency, and reduce CO2 omissions. § If these targets progress can progress as planned, the economic fundamentals for a more sustainable growth in the following five years (2015-2020) will become more solid. § Our core view remains that China’s growth will be domestic demand driven in the next 3 years; Resources-rich economies will benefit from an ever enlarged Chinese market.

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SLIDE 14

From now to 2015, the overall policy emphasis will be to boost consumption and gradually reduce the importance of investment

China - Contribution to GDP Growth (ppt)

  • 4
  • 2

2 4 6 8 10 12 14 16 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Final Consumption Investment Net Exports GDP China - GDP Composition (2011)

Household Consumption 35% Investment 49% Net Exports 3% Government Consumption 13%

China - GDP Composition (2015)

Household Consumption 39% Investment 47% Government Consumption 13% Net Exports 1%

China - GDP Composition 2011

Secondary: Other 14% Tert: Transport, Storage, Post 5% Tert: Wholesale & Retail 9% Tert: Banking & Insurance 5% Tert: Real Estate 6% Tert: Other 19% Primary 10% Secondary: Manufacturing 32% Total Tertiary 43%

Source: CEIC, ANZ Projection

14

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SLIDE 15

Urbanisation is to be a major driver for growth in the medium to long run

China’s urbanisation also requires huge infrastructural investment

  • 350 million people will be added to

China’s urban population. That’s three times the amount of rural Chinese (103 million) that have migrated to the cities since 1990

  • 1 million kilometres of new road and 28,000

kilometres of metro rail will be laid

  • 170 mass-transit systems will be built -

twice the number that all of Europe has today

  • 40 billion square metres of floor space

will be built to construct five million buildings

  • the equivalent of building two Chicago's

every year

  • 97 new airports will be built and one in

every ten planes assembled by Boeing and Airbus will be delivered to China

  • Energy demand will more than double

from 60 quadrillion British thermal units (QBTUs) to between 123 QBTUs and 142 QBTUs – equivalent to 25% of the world’s total energy demand today

Capital Stock per Capita in 2011 (USD 2005 Price)

50,000 100,000 150,000 200,000 250,000 300,000 US Japan China

It will take China 10 more years to reach Japan's level assuming 20% (p.a) growth in capital stock It will take China 12 more years to reach US level assuming 20% (p.a) growth in capital stock

China - Urbanisation 200 400 600 800 1,000 1,200 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 20 40 60 80 100 Rural population (mn) Urban population (mn) Percentage urban (%, RHS)

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SLIDE 16

Urbanisation will continue driving fast investment; we will not have a 25% y/y investment, but an around 20% y/y growth by 2015 can still be obtainable

  • China has planned to urbanize the whole nation through a “Two Rows Three Column”

strategy by connecting major regions within which cities and townships are clustered.

  • Target 2015: 42 transportation hubs; 45 thousand km of railways to serve cities with

500k population , 83 thousand highways to serve cities with 200k people; 82 new airports built (to 230 by 2015), covering 80% of population

China’s high speed rail network by 2020 China’s city clusters by 2020

16

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SLIDE 17

Consumption to hold up solidly on rising wages and social protection We project total consumption (household+govt) could rise to 52% of GDP by 2015

17 Consumption versus out-of-pocket health spending 2007 Brazil China India Indonesia Italy Russia Thailand France Germany Japan South Korea South Africa UK US y = -0.2815x + 0.8243 R2 = 0.24 40% 50% 60% 70% 80% 90% 100% 0% 10% 20% 30% 40% 50% 60% 70% OOP share in total health spending, % Consumption as % of GDP

China - Durable Units per 100 Urban Households

93 83 1 36 13 121 32 96 97 17 119 79 134 203

50 100 150 200 250 Washing Machines Refrigerators Automobiles Air Conditioners Computers Color TV Mobile Phone 12/2001 03/2011

China - Rural Cash Income Per Capita (ytd, y/y)

5 10 15 20 25 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

China - Average Wage (ytd, y/y)

10 11 12 13 14 15 16 17 18 19 20 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

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SLIDE 18

Encouraging RMB’s Use in China’s Trade with Key Partners

18

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SLIDE 19

China GDP: 12,383 M2: 15,637 Australia GDP: 961 M3: 1,567 Brazil GDP: 2,366 M2: 859 Japan GDP: 4,617 M2: 9,506 New Zealand GDP: 129 M3: 210 ASEAN-5 GDP: 3,087 M2: -- United States GDP: 15,653 M2: 10,459 Eurozone GDP: 16,074 M2: 11,912 CH -> EU: 334 CH <- EU: 213 CH -> ASEAN: 153 CH <- ASEAN: 165 CH -> JP: 152 CH <- JP: 178 CH -> US: 352 CH <- US: 133 CH -> AU: 38 CH <- AU: 85 CH -> NZ: 3.9 CH <- NZ: 5.8 CH -> BZ: 33 CH <- BZ: 52 Source: IMF, China General Administration of Customs, Bloomberg, CEIC, ANZ Research

Bilateral Trade in USD (billion) GDP figures are IMF’s 2012 estimates based on purchasing power parity M2 and M3 figures are denominated in USD (billion)

RMB’s eventual global use is a compelling story

CH -> AFRICA: 85 CH <- AFRICA: 113

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SLIDE 20
  • Dec: The PBOC

appointed a clearing bank for personal RMB business in Hong

  • Kong. Hong Kong

residents can

  • pen RMB

accounts.

  • Jul: RMB exchange rate reform

began.

  • Sep: Hong Kong RMB business
  • expanded. Designated merchants

engaging in tourism and consumer services can open RMB deposits and convert RMB receipts into HKD; current account is allowed for Hong Kong residents who are subject to a daily remittance limit

  • f RMB80,000 and conversion limit
  • f RMB20,000.
  • Nov: Hong Kong launched retail

RMB non-deliverable forwards.

  • Jul: First offshore

issuance of RMB bonds by China Development Bank.

  • Jan: The PBOC and HKMA

signed Currency Swap Agreement (3 years, RMB200bn/HKD227bn)

  • Jul: China piloted RMB cross

border trade settlements in four

  • cities. Enterprises in the

relevant Mainland provinces and cities can settle their merchandise imports, service trades and other current account transactions in RMB, while an expanded list of eligible enterprises were able to settle their merchandise exports in RMB.

  • Aug: RMB trade settlement

expanded to cover 20 provinces and cities.

  • Dec: Hong Kong RMB clearing

platform to conduct cash notes business for Taiwan.

  • Jan: The Clearing Bank and

Participating Banks of RMB Business in Hong Kong can conduct trading in the Mainland’s interbank bond market upon approval by the PBOC.

  • Dec: HKMA regulated RMB

banking activities including the introduction of net open position and 3-month requirement for trade settlements.

2003 2005 2007 2009 2010 2011 2012 2013 - 2015

Many more in the pipeline China’s RMB capital account to basically convertible by 2015

  • Jan: The PBOC introduced
  • verseas direct investments in

RMB.

  • Apr: First RMB equity IPO in Hong

Kong Exchange by Huixian REIT.

  • Jun: Hong Kong Treasury Market

Association launched offshore RMB fixing.

  • Aug: China’s Vice Premier Li

Keqiang announced a series of measures to support Hong Kong’s

  • ffshore RMB centre. The MOF

tendered 3-, 5-, 7-, 10-year RMB sovereign bonds in Hong Kong. Cross-border trade settlement scheme was expanded to the whole country.

  • Oct: China launched RMB Foreign

Direct Investment Programme.

  • Dec: First batch of RMB Qualified

Foreign Institutional Investor (RQFII) scheme was announced.

  • Jan: China’s National Reform and Development Commission approved

Shanghai’s plan to be global RMB centre by 2015.

  • Mar: China removed the MDE requirement that had limited certain

exporters’ participation in RMB trade settlements.

  • Mar: HKMA, BNM and Euroclear Bank piloted platform for cross-border

investment and settlement of debt securities.

  • Mar: China and Australia signed a bilateral currency swap agreement.
  • May: Hong Kong and London held a joint private-sector forum to enhance

their linkages in the RMB market, specifically regarding clearing and settlement systems, market liquidity and the development of new RMB denominated financial products.

  • Jun: HKMA launched RMB liquidity facilities to local banks and removed

NOP requirements.

  • Jun: Shanghai and Tokyo launched direct JPYCNY conversion and quotation
  • Aug: Non-Hong Kong residents can open personal RMB accounts in Hong

Kong.

  • Aug: Taiwan and the Mainland central banks signed an MOU on RMB

clearing in Taipei and Shanghai.

  • Sep: HKEX launched CNH futures on a deliverable basis.
  • Dec: Detailed regulation governing Qianhai-Hong Kong RMB lending flows

released.

  • Dec: Bank of China Taipei Branch was appointed as RMB clearing bank
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SLIDE 21

The CNH Market: State of Affairs and the Path of Development

London

  • Total RMB deposits

reached RMB 14bn in H1 2012

  • Spot RMB forex grew to

an average daily volume of US$ 1.7bn

  • The volume in letters of

credit grew 20 times to RMB 3.7bn

  • The City of London

initiative was formally launched in April 2012.

  • Established a seamless

services via RTGS with Hong Kong desks

  • RMB bonds are issued

frequently Hong Kong: China’s preferred testing ground for a market-based RMB under the National 12th Five Year Plan. Total deposits reached RMB624bn in January 2013. Taiwan: RMB clearing is available in 2013 Singapore Issued full banking licences to two Chinese banks in 2012 RMB banking services available at institutional and retail level

2011 2015 RMB to become convertible RMB as trade currency 2012 Promote RMB reciprocal capital flows 2013 2014

Hong Kong's RMB Market 500 1,000 1,500 2,000 2,500 3,000 2009 2010 2011 2012

1 2 3 4 5 6 7 8 9 10 RMB Deposits (billion) RMB Trade Settlements (Billion) % of Total Deposits Taiwan - OBU RMB Deposits (RMB million)

5,000 10,000 15,000 20,000 25,000 Aug 11 Nov 11 Feb 12 May 12 Aug 12 Nov 12

Australia/New Zealand RBA and NZRB signed bilateral currency swap agreements with the PBoC in 2011 and 2012 RBA set up a joint forum with HKMA for RMB business cooperation Japan Yen-Yuan direct trading launched in Shanghai and Tokyo in June

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SLIDE 22

22

22

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