CChhiinnaa IInndduussttrryy MMoonniittoorr (2012 Second Half Issue)

1st October 2012

【OVERVIEW】Stable growth expected but not enough to drive overall global economy The Chinese economy was able to sustain over 7%’s year on year growth, with real GDP in Q3 2012 growing 7.4% YoY, but has seen signs of deceleration. While individual consumption as a whole showed stable growth, exports registered notable drop as external demand, especially from Europe, declined sharply. Real economic indicators including power generation and railway cargo traffic also went into a stall.

By sectors, assembly manufacturing industries performed differently. Production of construction machines and machine tools was low due to significant drop in FAI in the beginning of 2012. Home appliances production was sluggish, partly affected by few property transactions. On the other hand, automobile production growth turned positive with supports by the widening range of customers. Production of tablets and smart phones continued to expand thanks to the rising global demand.

As for material related industries, manufacturers underwent low profitability as prices of a number of materials were kept at a low level because of the continuous expansion of production amid low demand from downstream sectors. Meaningful improvements in prices are not expected in the short term under current supply-demand imbalance.

In contrast, individual consumption related industries had favorable economy. Growth of real retail sales value was kept high at 10% YoY and property prices also saw signs of bottom out most recently.

Looking forward, the Chinese economy is likely to re-accelerate on the back of high consumer sentiment and effects of ease of monetary policies and economic measures promoting investments as well as consumptions. Yet, in worries of second inflation and overheating of the economy, large scale economic measures are unlikely. Thus, although China will maintain stable economic growth, such growth will not be enough to fuel up the engine of global economy, despite the world’s expectations. One should also pay attention to Japan-China relations as their economic growth could be affected if high tension lasted.

1

Table of Contents

Industry Indicator Latest Data Page

Automobile 1. Automobile Production July 2012

2. Machine Tool ： Metal Cutting Machines Production July 2012

2

Machinery 3. Construction Machinery： Hydraulic Excavator Shipment June 2012

Precision Machinery 4. Photocopying and offset printing equipments July 2012

3

5. PC Production June 2012 Electronics

6. Mobile Phone Production June 2012 4

7. Home Appliance: Washing Machine and Air Conditioner Production July 2012

Home Appliance 8. Color Television Production July 2012

5

Electricity 9. Power Generation July 2012

Oil 10. Crude Oil Production / Net Import July 2012 6

Petrochemistry 11. Synthetic Resin & Ethylene Production July 2012

Steel 12. Steel Prodction July 2012 7

Nonferrous Metals 13. Copper / Aluminium Production / Net Import July 2012

Food & Beverages

14. Food Manufacturing Sales, Beer Production, Soft Drink Sales Volumes June 2012

8

Apparel 15. Apparel Production and Exports July 2012

Retail 16. Retail Sales Volumes of Consumer Goods July 2012 9

Construction 17. Fixed Asset Investments and Floor Space Started July 2012

18. Property Price（Beijing / Shanghai / Guangzhou / Shenzhen） June 2012

10

Real Estate 19. Office Rent（Beijing / Shanghai / Guangzhou / Shenzhen） Q2 2012 11

Appendix Macroeconomic Indicators 12

Note: The “FORECAST” period added in this edition is a short-term outlook (about 6 months to 1 year).

This bulletin is issued semi-annually.

2

1. Automobile Production Forecast: Maintain steady growth at mid-to-high

single digit level

0

20

40

60

80

100

120

140

160

180

200

2007 2008 2009 2010 2011 2012 2013-60%

-30%

0%

30%

60%

90%

120%

150%

180%

210%

240%

Commercial Vehicle (CV) Production: 25.2 (Jul)

Passenger Car (PC) Production: 118.4 (Jul)

YoY Growth (CV Production): ▲1.3 (Jul)YoY Growth (PC Production) : 12.8 (Jul)

('0,000 units)

Source: China Association of Automobile Manufacturers

Automobile production recovered from the sluggish atmosphere in 2011, growing 4.0% YoY to 9.54 million units in H1 2012. Although weak infrastructure investments led production of commercial vehicles to a year on year decline (▲8.0% YoY), passenger car production improved by 7.5% YoY. By segments of passenger cars, on the back of continuously improving income level due to economic growth, not only the volume zone (medium cars) enjoyed stable sales, sales of luxury cars were also maintained at favorable level. Negative impacts of the sluggish economy in Europe on exports were small as the Chinese automakers concentrated in emerging markets including Asia. Total exports grew steadily by 17.4% YoY to 440,000 units.

Outlook: The market may turn into temporary production adjustments as distribution inventory seems to be accumulating. Nevertheless, automobile production is expected to grow at mid-to-high single digit level with the support of widening customer base due to continuously improving income level; and new automobile subsidy (RMB 6 billion) which is expected to bring positive effects to the auto market. Besides the accumulating distribution inventory, automakers may launch more promotion events as they lag behind in sales progress in comparison to the target. Competition among automakers is expected to intensify further.

2. Machine Tool ： Metal Cutting Machines Production

Forecast: Market condition expected to remain unfavorable

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

2007 2008 2009 2010 2011 2012 2013-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

Production: 59,000 (Jul)NC Machine Production: 16,000 (Jul)YoY Production Grow th: ▲29.8 (Jul)YoY NC Machine Production Grow th: ▲30.4 (Jul)(Units)

Source: CEIC Data Co., Ltd.

Metal cutting machine production declined ▲5.2% YoY to 383,000 units. Demand was stable in automobile sector as automakers tried to enhance production capacity; and EMS sector which produces smart phones and tablets. However, weak demand from other sectors including metal parts processing sector, which are closely linked to export related industries, has largely dented total production. Nevertheless, recent import figures of machine centers and NC machines were still stable, indicating China’s strong needs for high value-added machines. China continued to be an attractive market for Japanese and other manufacturers who are superior in technology.

Outlook: Despite anticipated re-acceleration of Chinese economy, small-medium companies of the metal part processing sector are likely to stop purchasing new facilities in the short term as weak European economy prevails and their finished products are usually for external markets. Recovery in exports is also not expected to be strong enough to drive the whole industry. Consequently, metal cutting machine production is expected to recover in beginning of 2013 the earliest. Industry concentration will likely increase with the government aiming to promote exports and enhance technology of domestic manufacturers by prompting industry reform.

3

3. Construction Machinery： Hydraulic Excavator Shipments Forecast: Recover at a moderate pace

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

2007 2008 2009 2010 2011 2012 2013-100%

-50%

0%

50%

100%

150%

200%

250%

300%

350%

Shipments: 8,287 (Jun)

YoY Growth: ▲16.8 (Jun)(Units)

Note: Number of shipments is calculated by total domestic production of the association members (exports included) Source: China Construction Machinery Association

Hydraulic excavator shipments plunged ▲39.1% YoY to 76,000 units, recording a significant year on year decline. It was mainly due to sluggish infrastructure investments and property constructions in China. Utilization rate of construction machines was also low. By products, demand for mid-large excavators, which foreign manufacturers are strong at, was especially low. It was dented by decreasing number of large scale infrastructure projects as well as slump in mine exploration as coal price continues to drop and the government speeded up shutdowns of illegal mines. Moreover, foreign manufacturers are losing market share after raising their selling price due to increased production cost. On the other hand, domestic manufacturers are expanding market share mainly in small excavator segments by improving competitiveness through price cuts and aggressive sales promotions.

Outlook: With the ease of monetary policy and re-acceleration of infrastructure construction, demand for construction machines is expected to recover gradually. However, true recovery of excavator shipments before 2013 is unlikely as current utilization rate is low and there is high possibility of disposal of high quality machines to second hand market. The western region is expected to show earlier recovery due to low penetration rate and “Go West” policy.

4. Photocopying and offset printing equipments Forecast: Unfavorable market condition expected to continue

0

100

200

300

400

500

600

700

800

900

1,000

2007 2008 2009 2010 2011 2012 2013-75%

-50%

-25%

0%

25%

50%

75%

100%

125%

150%

175%

Production: 527 (Jul)YoY Growth: ▲6.1 (Jul)(th units)

Note: Data before 2008/Dec- Copy Machines Note: Data since 2009/Jan- Photocopying and offset printing Note: equipments Source: CEIC Data Co., Ltd.

Production of photocopying and offset printing equipments grew just 0.6% YoY to 3.65 million units in H1 2012. Given the increasing uncertainty over global economy, overall demand for office machines turned from neutral to slight negative. Although there was replacement demand for printers, demand for photocopying and offset printing equipments as a whole showed marginal decline due to drop in the main Europe and US market. While domestic demand (accounts for around 10% of the total, estimated) grew steadily at double digit, the main external market (around 90%, estimated) underwent difficult times.

Outlook: Production of photocopying and offset printing equipments is expected to see marginal growth at best. Domestic demand is likely to expand at a mid-to-high single digit level on the back of the continuously growing Chinese economy. However, demand from the main external market will soften. Although growth is expected in emerging markets, European market is likely to remain weak as affected by the gloomy economic outlook. In addition, as for the biggest US market, companies are unlikely to invest much on IT equipments. Thus, we expect overall production to be low. One should also be aware of rising downside risks due to the increase in paperless offices promoted by penetration of tablets.

4

5. PC Production (including tablets) Forecast: Ensure around 10%’s year on year

growth

(mil units)2012

1H

137 182 246 320 158

13.2% 33.3% 35.1% 30.2% 8.6%

28 34 60 n.a. 47

25.2% 21.5% 75.9% n.a. 26.0%

109 148 186 n.a. 111

25.2% 36.3% 25.6% n.a. 2.6%(YoY Growth)

PC Production

(YoY Growth)

Desktop PC

(YoY Growth)

Laptop PC

201020092008 2011

Note: Tablets are included in production units of PC in China. Production of desktop PC and laptop PC in 2011 is

unknown as figures of Dec 2011 are not available. Source: Ministry of Industry and Information Technology of the Source: People’s Republic of China

PC (including tablets) production decelerated to 8.6% YoY (160 million units) in H1 2012. It was mainly due to production adjustments in the main laptop PC segment, of which inventory accumulated as demand from Europe and other countries were weaker than expected. On the other hand, production of tablets continued to be strong. Production plans of manufacturers for laptop PC were adjusted downward and those for tablets were revised upward, showing the fact that demand is shifting from laptop PC to tablets at a faster pace.

Outlook: Although demand from emerging markets is expected to grow, production of traditional PC is likely to show marginal growth at best as demand from personal users in the main US market continues to be weak; uncertainty over the European economic outlook is increasing; and the new operating system Window 8 may not push up traditional PC demand as users’ feedbacks were not favorable. In contrast, production of tablets is expected to rise significantly with anticipated launch of new model by the leading manufacturer in year end; and production & sales enhancements by other manufacturers. Therefore, overall PC production, including tablets, is foreseen to ensure around 10%’s year on year growth.

6. Mobile Phone Production Forecast: Ensure mid-to-high single digit growth

(mil units)20121H

Production 560 619 998 1,133 535

(YoY Growth) 2.0% 10.7% 61.2% 13.5% 6.1%

Exports 533 583 758 875 458

(YoY Growth) 10.2% 9.4% 30.0% 15.5% 17.7%

2011201020092008

0

200

400

600

800

1,000

1,200

1,400

2007 2008 2009 2010 2011 2012 20130

5

10

15

20

25

30

35Mobile Phone Subscribers (LHS):1,062 (Jul)Subscriber increased from last month(RHS): 10.0 (Jul)

(mil ppl) (mil ppl)

Source: Ministry of Industry and Information Technology of the Source: People’s Republic of China

Mobile phone production grew 6.1% YoY to 540 million units in H1 2012, a relatively satisfactory performance considering a delay in production of the leading brand’s new models, which was re-scheduled to H2. Both external and internal demand showed steady growth. As for domestic demand, demand from new mobile users continued to be strong, with cumulative mobile subscribers exceeding 1 billion. Replacement demand for smart phones was also stable. In addition, demand for exports driven mainly by the emerging market was able to maintain expansion although some regions underwent adjustments.

Outlook: Demand for exports is anticipated to show stable year on year growth at low single digit, supported by consistently growing demand in emerging markets and the effect of new models by leading brand in developed markets. In addition, the world’s largest mobile phone market in China is likely to expand at a pace slightly lower than double digit, as new subscribers will continue to rise and replacement demand for smart phones may also be stable. Consequently, mobile phone production is expected to ensure mid-to-high single digit year on year growth.

5

7. Home Appliance: Washing Machine and Air Conditioner Production Forecast: Moderate recovery expected

＜Washing Machine Production＞

0100200300400500600700800

2007 2008 2009 2010 2011 2012 2013-40%-20%0%20%40%60%80%100%120%

Production: 512 (Jul)YoY Growth: 8.2 (Jul)

('0,000 units)

＜Air Conditioner Production＞

0

500

1,000

1,500

2,000

2007 2008 2009 2010 2011 2012 2013-60%-30%0%30%60%90%120%150%180%

Production: 835 (Jul)YoY Growth: ▲ 37.2 (Jul)

('0,000 units)

Source: CEIC Data Co., Ltd.

Home appliance production was low, with washing machine and air conditioner showing decline at ▲3.0% YoY (30.41 million units) and ▲7.9% YoY (78.57 million units). Washing machine exports grew steadily by double digit due to stable demand from the main emerging markets as well as demand from Thailand which is established by recovery activities after the flood. In contrast, exports of air conditioners continued to decline over year ago level as exports to the main European market plunged. Domestic demand was affected by the end of subsidy programs, sluggish property sales and inventory adjustments. Both products showed double digit negative growth.

Outlook: Home appliance production is expected to recover. Washing machine exports will be kept stable by emerging markets including Asia. Exports of air conditioners although will be affected by low demand in the main European market, is unlikely to see sharp year on year decline as previous year’s total exports was already low. Domestic demand of the two may become stable on the back of increasing penetration rate mainly in rural areas; moderate recovery in property sales; and effects of new subsidy programs. Industry concentration may also increase as subsidy program is only applicable to large manufacturers with production scale over 100 thousand units.

8. Color Television Production Forecast: Expand at mid single digit to double digit

0

300

600

900

1,200

1,500

1,800

2007 2008 2009 2010 2011 2012 2013-50%

0%

50%

100%

150%

200%

250%

Production: 1,043 (Jul)YoY Growth: 11.9 (Jul)('0,000 units)

Source: CEIC Data Co., Ltd.

Color television production grew steadily by 12.4% YoY to 56.16 million units in H1 2012. Demand for exports (account for slightly over 50% of the total, estimated) was able to maintain marginal positive growth with demand from emerging markets including Asia covering drops in developed markets. On the other hand, domestic demand (slightly less than 50%, estimated), which was pushed up by people purchasing televisions before subsidy program ends, fell in H1. However, the overall market still showed stable growth as previous year’s performance was poor and online sales were favorable.

Outlook: With color televisions penetrating into the emerging markets, demand from these regions is expected to drive total exports to a stable trend despite the anticipated sluggish demand from developed markets. Domestic demand is also likely to grow at double digit benefiting from the government’s new subsidy programs. Therefore, total color television production is forecasted to grow between mid single-digit and double digit level. On the other hand, small manufacturers are likely to face difficult times as the new subsidy programs are only applicable to large manufacturers with production scale over 500,000 units and the anticipated drop in demand after the end of the programs (May 2013) will threaten their business.

6

9. Power Generation Forecast : Moderate increase in power generation

<Power Generation>

050

100150200

250300350400450

2007 2008 2009 2010 2011 2012 2013-20%-10%0%10%20%

30%40%50%60%70%

Nuclear Power: 8.64 (Jul)Thermal Power: 321.5 (Jul)Hydaulic Power: 91.6 (Jul)YoY Power Generation Growth: 2.3 (Jul)

(bil kWh)

<Price>

50

51

52

53

54

2007 2008 2009 2010 2011 2012 201360

65

70

75

80(RMB/100kWh) (RMB/100kWh)

Residential (LHS)Industrial (RHS)

Source: CEIC Data Co., Ltd.

Total power generation grew 3.7% YoY to 2.3 trillion kWh in H1 2012, mainly because growth of heavy power consuming industries including chemicals, cement and metals, increased by only 1.6%. By methods, while growth of hydro power generation, which was dented by drought in 2011, increased strongly by 9.9% YoY, thermal power generation rose marginally by 2.6% YoY. Overall power generation capacity also reported a small growth of 8.7% YoY as thermal power capacity growth slowed significantly. As for profitability of power companies, coke cost is rising due to long-term contracts despite current decline trend in market price. Thus, although electric price towards industrial sectors was lifted, only slight improvement in operating profit margin was reported.

Outlook: Power demand is expected to recover moderately with the anticipated improvements in Chinese economy. On the other hand, the possibility of severe power shortage is relatively low at current stage as water supply for hydro power generation is sufficient in most regions; coal inventory levels are high; and rapid growth in power demand is not expected. Although coke costs are expected to trend downward, thermal power companies may only enjoy slight improvements in profit margin as large revise in electric price is not expected.

10. Crude Oil Production / Net Import Forecast: Slow growth in demand

<Imports・Production・Consumption>

05

1015202530354045

2007 2008 2009 2010 2011 2012 2013

(mil tons)

-10%-5%0%5%10%15%20%25%30%35%

Net Imports (3-months MA): 22.8 (Jul)Production (3-months MA): 17.0 (Jul)YoY Apparent Consumption Growth: 6.7% (Jul)

<Crude Oil Price>

406080

100120140

2007 2008 2009 2010 2011 2012 2013

Import PriceDubai Price

(USD/Barrel)

Source: CEIC Data Co., Ltd.

Apparent consumption of crude oil grew 5.6% YoY to 240 million tons but domestic production declined ▲1.0% YoY to 100 million tons in H1 2012. The gap was covered by imports (net import grew 11.1% YoY) and China became even more import dependent. Demand from transportation and residential sectors, which account for slightly over 50% of total crude oil demand in China, saw steadily expansion because of increased total vehicle fleets. Demand from industrial sector, which shares slightly over 20% of the total, fluctuates easily with economic changes and its crude oil demand flatted due to weak performance of the export industry. Meanwhile, although crude oil price somewhat declined due to uncertainties over global economy, it remained at a high level as geopolitical risks bring threats against stability of supply.

Outlook: Demand from transportation and industrial sectors is expected to grow steadily and that from industrial sector may recover under the government’s economic measures. However, overall demand will likely increase at a slow pace as significant economic growth is unlikely. Crude oil imports will keep rising as domestic production has little chance to grow. Despite the uncertain economy, we do not expect sharp drop in crude oil price as demand from North America may recover and unstable politic condition in Middle East continuously add pressure on supply.

7

11. Synthetic Resin & Ethylene Production Forecast: Modest improvements in demand

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2007 2008 2009 2010 2011 2012 2013-20%

-10%

0%

10%

20%

30%

40%

50%

Synthetic Resin Imports: 2,050 (Jul)Synthetic Resin Production: 4,331 (Jul)YoY Apparent Consumption Growth (Synthetic Resin): 13.4 (Jul)

(th tons)

0

500

1,000

1,500

2007 2008 2009 2010 2011 2012 2013

Ethylene Output: 1,200 (Jul)(RMB/ton)

Source: CEIC Data Co., Ltd.

Apparent consumption of synthetic resins registered strong growth of 10.6% YoY to 36.9 million tons in H1 2012. However, inventory of synthetic resins seemed to be accumulating. Domestic production in H1 2012 increased by 15.3% YoY due to capacity enhancements and imports also rose marginally by 0.8% YoY. In contrast, except for automobile and home appliance sectors which showed stable growth, other downstream customers such as construction sector continued to decelerate. Therefore, squeezed by the declining synthetic resin price and consistently high crude oil price, manufacturer’s profit margin is narrowing.

Outlook: Growth in demand for synthetic resins is likely to be modest, mainly because meaningful recovery in demand from construction and export industries is not expected although demand from consumer goods sectors including food and beverages as well as automobile industry will be stable. On the other hand, domestic production is expected to maintain strong expansion and weigh on import growth. Manufacturers may continue to face narrow profit margin as crude oil price was kept high and they may be unable to raise selling price amid sluggish demand growth. As for ethylene production, it is likely to trend upward with completion of new production plants.

12.Steel Production Forecast: Moderate improvements in demand may help restore supply-demand balance

<Production・Inventory>

0102030405060708090

2007 2008 2009 2010 2011 2012 2013-20%-10%0%10%20%30%40%50%60%70%

Output of Steel Products: 81(Jul)Steel Products Inventory: 14 (Jul)YoY Growth of Steel Output: 7.3 (Jul)

(mil tons)

<Price>

3,000

4,000

5,000

6,000

7,000

2007 2008 2009 2010 2011 2012 20134006008001,0001,2001,400

Iron Ore & Concentrate Import Price (RHS)Coking Coal Transaction PriceRound Steel Transaction Price (LHS)

(RMB/tons) (RMB/tons)

Source: CEIC Data Co., Ltd.

Steel production grew 8.0% YoY to 470 million tons in H1 2012, maintaining high production despite a decrease in growth rate. On the other hand, domestic demand from downstream customer sectors such as infrastructure investments remained weak, resulting in supply-demand imbalance. Steel manufacturers had to rely on exports to Asian countries to maintain favorable utilization rate. In comparison to the high raw material costs, steel products’ prices have stayed at a low level. As a result, steel manufacturers posted significant deterioration in profits.

Outlook: Apart from the anticipated stable growth in automobile production, effects of economic measures will likely drive recovery in demand from customer sectors, mainly in infrastructure investments. On the supply side, retirement of decrepit facilities and industry reform prompted by the government will take time to develop. However, we expect gradual decrease in excessive production capacity as production capacity growth is slowing. Besides, although market mechanism does not apply to the industry, recent production cuts by steel manufacturers due to profit decline may prevent further drop in steel products’ prices. Moreover, raw material prices dented by low global steel production may lift profit margin of the steel companies. However, one should not expect large improvements in performance as demand will recover at a slow pace.

8

13. Copper / Aluminium Production / Net Import Forecast: Moderate demand growth and production

expansion expected to continue

<Coppor>

0

200

400

600

800

1,000

2007 2008 2009 2010 2011 2012 2013

(th tons)

0

20

40

60

80

100

LM E (3rd M ) Settlement Price (RHS)Shanghai Future Exchange (3rd M ) Settlement Price (RHS)

Production

Net Imports

(th RMB/tons)

<Aluminium>

-500

0

500

1,000

1,500

2,000

2007 2008 2009 2010 2011 2012 2013

(th tons)

0

5

10

15

20

25(th RMB/ton)

Production

Net Imports

Net Exports

Source: CEIC Data Co., Ltd.

<Copper> China is the world’s largest consumer and importer of copper. Demand was covered by imports although production kept increasing. Refined copper production grew 10.2% YoY to 2.7 mil tons in H1 2012. Apparent consumption registered 29.5% YoY growth (4.5 million tons), mainly because inventory, which was low in previous year due to rapid rise in price, has been accumulating as price was low in H1. Net imports also grew significantly by 80.0% YoY.

Outlook: Production will likely remain increasing. Actual demand is expected to pick up next year at the earliest, in which infrastructure investment growth is anticipated. Inventory is likely to keep accumulating; however, apparent consumption growth will be low due to the high year-ago level.

<Aluminum> China is the world’s largest production and consumption country of aluminium. Production growth was steady in H1 2012, at 10.9% YoY (9.5 million tons), partly due to low automobile production in the same period a year ago.

Outlook: Aluminium production is expected to remain stable with the support of anticipated graduate recovery in industrial sectors and FAI. However, H2 2012 may post lower growth rate than H1 due to high year-ago level.

<Price> Nonferrous metal prices kept falling since the beginning of 2012 due to worries over economic slowdown of China. Although price hit the bottom recently as economic measures is expected, meaningful improvements in Chinese economy is not likely and price will recover at a slow pace.

14. Food Manufacturing Sales / Beer Production / Soft Drink Sales Volumes Forecast: Sustain stable growth

2009 2010 2011 1H2012

Food Sales Value 886.5 1113.4 1397.5 719.1

(RMB bil) YoY Growth 18.6% 26.0% 25.5% 14.2%

Beer Production 43.3 45.1 48.9 23.8

(bil ℓ) YoY Growth 5.9% 4.0% 8.5% 1.6%

Soft Drinks Sales Vol. 79.8 97.9 116.2 59.1

(mil tons) YoY Growth 26.4% 23.0% 18.7% 3.7% Source: CEIC Data Co., Ltd., National Bureau of Statistics China

Given the decelerating economy of China, revenue growth of food manufacturing sector (food processing sector excluding beer and soft drink production) slowed in H1 2012 to 14.2%YoY (RMD 71.91 billion). Some manufacturers delayed capacity expansion. Growth momentum was weak especially for confectionery, dairy products and canned food. Beer production remained weak but sales rebounded mildly in Q2, thanks to growing demand in the hot weather. Soft drink sales volume edged up 3.7% YoY as juice beverages' sales revenue continued to expand but ready-to-drink tea sales revenue declined because of shift in consumer taste. Food and beverage manufacturers’ margin improved in H1 due to lower raw material costs and upgrades in product mix.

Outlook: We expect demand to improve with government’s economic measures, although revenue of food and beverages might post slower growth. Rural areas will generate future growth potential with rising per capita income. Food and beverage industry, especially beer segment, is under intense competition with top players grabbing market share in various regional markets. Under continuous competitions, Food and beverages manufacturers should upgrade product portfolio and optimize distribution network to maintain and improve their profit margin.

9

15. Apparel Production and Exports Forecast: Gradual slowdown in production growth

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

2007 2008 2009 2010 2011 2012 2013

Apparel YoY Production Growth: 16.8 (Jul)YoY Growth of Apparel Export Value: ▲8.2 (Jul)

Source: CEIC Data Co., Ltd., National Bureau of Statistics China

Apparel production declined ▲5.0% YoY in H1 2012, the lowest first-half growth rate in 10 years. Production in January and February 2012 dropped sharply by 30.5% YoY and 19.4% YoY respectively, partly affected by declines in number of orders from Europe since second half of 2011. However, year on year growth rebounded and was maintained positive since March as production a year ago was low and domestic demand was relatively stable. On the other hand, although export value was able to sustain positive growth at 0.9% YoY in H1 2012, such growth was mainly because of the price lift due to rising labor cost. Exports as a whole was sluggish, except for the US market which showed signs of recovery.

Outlook: Production for exports is likely to continue to decrease as European economy will remain gloomy. However, domestic demand is expected to be relatively stable supported by the continuously growing Chinese economy, and may support production of the industry. As a whole, production growth is forecasted to slow down moderately. Recently, ASEAN apparel manufacturers have lifted their competitiveness and have attracted foreign companies to shift more orders from China to ASEAN countries. Chinese manufacturers are required to strengthen their branding power and develop high value added products.

16. Retail Sales Volumes of Consumer Goods Forecast: Stable individual consumption

0

300

600

900

1,200

1,500

1,800

2007 2008 2009 2010 2011 2012 20130%

5%

10%

15%

20%

25%

30%

Retail Sales: 1,632 (Jul)YoY Growth: 13.1 (Jul)Adjusted YoY Growth: 12.2 (Jul)(RMB bil)

Note: Adjusted year-on-year comparison: growth adjusted for price change

Figures of Jan and Feb 2012 were the average of the two as only cumulative data was available.

Source: CEIC Data Co., Ltd., National Bureau of Statistics China

Retail sales of consumer goods grew 14.9% YoY to RMB 9.8 trillion in H1 2012, mainly because of the slowdown in income growth due to decelerating economy. By products, year on year sales growth of a number of products including food and beverages, apparel and daily used goods dropped. Home appliances registered notable deceleration in sales growth as property market stumbled. Nevertheless, retail sales growth is still maintained at a high level. Ticking out price factors, most recently, real retail sales value actually turned into an improving trend.

Outlook: The government has implemented a set of policies to maintain economic growth, such as tax relaxation for private enterprises, ease of monetary policies, re-acceleration of infrastructure investments, subsidies to energy-saving home appliances, etc. However, these policies are not enough to lift consumer sentiment immediately. Nevertheless, the government still maintain growth target of 2012 firmly and mentioned that the government’s fiscal surplus and fiscal stability fund would be used at appropriate times to prevent a further slowing. Therefore, retail sales of consumer goods are not expected to post further slowdown. Instead, retail sales growth is likely to remain stable and recover slowly in the residual of 2012.

10

17. Fixed Asset Investments and Floor Space Started Forecast: Moderate recovery expected

-20%-10%

0%10%20%30%40%50%60%

2007 2008 2009 2010 2011 2012 2013

YoY FAI Growth (3-months MA): 21.2% (Jul)YoY Construction FAI (3-months MA): 25.2% (Jul)YoY Real-Estate FAI Growth (3-months MA): 19.3% (Jul)YoY Infrastructure FAI Growth (3-months MA): 13.9% (Jul)

-40%0%

40%80%

120%

2007 2008 2009 2010 2011 2012 2013

YoY Growth of Commodity Bldg Floor Space Started (3-months MA): ▲15.2% (Jul)

Note: Infrastructure related figures are the total of utilities, transport and environment Source: CEIC Data Co., Ltd.

Overall FAI posted fast growth at 21.0% YoY in H1 2012. However, growth rate showed significant deceleration in the beginning of this year and has remained at the level lower than that of the same period in 2011. Investment growth on real estate and manufacturing sectors saw notable decline. Infrastructure investment growth picked up quickly driven by road and port constructions. As for floor space started in H1 2012, it declined year-ago level as some developers faced great pressure in funding new projects. In addition, government remained a firm stance on property market control, bringing developers’ cautious on new projects construction.

Outlook: To maintain economic growth, some local governments carried out various policies to encourage investments. As the government has speeded up approvals of railway and urban transit construction projects, overall FAI growth is likely to improve moderately mainly with the support of infrastructure investments. On the other hand, although commodity housing construction is not expected to face further deterioration in market condition, floor space started would remain low with cooling policies still in place.

18. Property Price (Beijing / Shanghai / Guangzhou / Shenzhen) Forecast: Post slow but positive growth

50

75

100

125

150

2007 2008 2009 2010 2011 2012 2013

Beijing: 134 (Jun) Shanghai: 117 (Jun)

Guangzhou: 123 (Jun) Shenzhen: 130 (Jun)

(Dec 2007=100)

Source: CREIS

Residential prices fell in the first five months of 2012 as government maintained the tight property market policies. Number of property transactions also continued to decline in the first quarter. However, transactions rebounded in the second quarter as PBOC cut the benchmark interest rate in June, the first time since late 2008. Developers then narrowed the discounts and as a result prices in Beijing, Shanghai, Guangzhou and Shenzhen picked up in June.

Outlook: We expect the government to continue the current tightening policies on the residential sector from a mid- to long-term perspective, although no further restriction measures is expected on the immediate timeline. Speculation transactions will still be strictly constrained. However, purchase demand for first-time buyers and upgrades in living conditions will be stable. Discounts offered by developers may decrease with a recovery in transaction volumes. As the government is keeping a close eye on property prices and major aim of the government is to keep property market stable, we do not expect big lift in prices. However, price will still increase at a mild pace.

11

19. Office Rent (Beijing / Shanghai / Guangzhou / Shenzhen) Forecast: Marginal overall growth expected

80

100

120

140

160

180

200

220

2008 2009 2010 2011 2012 2013

Beijing: 203.2 (12/2Q)Shanghai: 106.7 (12/2Q)Guangzhou: 121.0 (12/2Q)Shenzhen: 136.6 (12/2Q)

(Q4 2007=100)

Source: CBRE

Rental growth in major cities slowed down in H1 2012, except for Beijing. In Beijing, office rental continued to grow fast due to limited supply; however, growth started to soften most recently. As for Shanghai, as new supply in core business locations was well absorbed, vacancy in distant business areas increased. As a result, overall office rents in Shanghai flatted in the first half. As for Shenzhen and Guangzhou, rents declined for the first time since 2009. Facing the softening of Chinese economy, landlords lowered rents to attract quality tenants and maintain a low vacancy rate.

Outlook: Although at a slow pace, the Chinese economy is expected to re-accelerate. Therefore, office rental in China is not likely to drop significantly but to post marginal growth. However, in Beijing, rental growth should slow down to a moderate pace with the completion of some new projects which provide more supply. Continuous new supply in Shanghai, Guangzhou and Shenzhen will also add pressure to office rents. In addition, affected by increasing uncertainty over global economy, multiple nation companies might continue to shrink their budgets for leasing. Rents might trend differently by regions and types of offices.

Appendix: Macroeconomic Indicators (Annual & Quarterly Basis)

08 09 10 11 11/3Q 11/4Q 12/1Q 12/2Q

9.1 8.9 8.1 7.6

9.4 9.3 8.1 7.8

12.9 11.0 15.7 13.9 14.2 13.9 11.6 10.5

12.9 11.0 15.7 13.9 13.8 12.8 16.6 9.5

(Urban Area)(％)22.7 15.5 18.4 17.1 17.3 17.5 14.8 13.9

16.8 16.2 15.1 11.7 11.0 12.9 10.9 11.0

7.3 52.9 33.2 5.2 7.9 2.1 ▲1.8 16.6

6.5 6.3 13.8 11.7 10.8 8.9 6.5 1.3

5.1 0.9 9.3 8.0 7.5 8.3 4.3 1.4

5.9 ▲0.7 3.3 5.4 6.3 4.6 3.8 2.9

2,981 1,957 1,827 1,549 626 483 4 685

Export Growth (％) 17.2 ▲16.0 31.3 20.3 20.6 14.2 7.6 10.5

Import Growth (％) 18.5 ▲11.2 38.7 25.0 24.9 20.1 6.9 6.5

(No. of Contract)Growth (％) ▲27.3 ▲14.9 16.9 1.1 6.2 1.1 ▲9.4 ▲13.1

1,083 941 1,057 1,160 867 1,160 295 591

Growth (％) 29.7 ▲13.2 12.4 9.7 16.6 9.7 ▲2.8 ▲3.0

(No. of Contract)Growth (％) ▲27.2 ▲11.3 38.2 5.5 11.7 5.5 ▲1.1 ▲3.8

37 41 41 63 48 63 20 41

Growth (％) 1.8 12.4 ▲0.5 55.0 168.1 55.0 12.5 16.7

19,460 23,992 28,473 31,812 32,017 31,812 33,050 32,400

17.8 27.7 19.7 13.6 13.0 13.6 13.4 13.6

49,042 95,943 74,950 74,715 15,111 17,895 24,602 23,948

1,912 3,437 2,940 2,304 2,471 2,304 2,370 2,330

6.950 6.832 6.768 6.463 6.417 6.358 6.310 6.327

14.88 13.70 12.96 12.33 12.10 12.16 12.57 12.66

9.29.6 9.2 10.4

Industrial Value-added Output (％)

Consumer Price Index (％)

Fixed Assets Inv.

Retail Sales of Consumer Goods (%)Retail Sales of Consumer Goods (Real, %)Sales Volumes of Passenger Cars (%)

Power Generation (%)

Real GDP (%)(Upper:Figure of each quater, Lower:Year-to-date Figure)Industrial Production (％)

Exchange Rate (RMB/USD)

Exchange Rage(JPY/RMB)

FDI from Japan (USD'00 mil)

Foreign Reserve (USD'00 mil)

FDI from Japan

Stock Market (SSE A)

Trade Balance (USD'00 mil)

Foreign Direct Investment

Foreign Direct Investment (USD'00 mil)

26.1 30.5 24.5 23.8 24.9 23.8

27,537 23,442 27,406 27,712 20,407 27,712

1,438 1,275 1,762 1,859 1,379 1,859

20.9 20.4

447 872

5,379 11,705

Railway Cargo Traffic (%)

M2 (%)

Growth in RMB Loans

Note: % means a year-on-year growth rate. The number of direct investments is counted on contract base while direct investments are counted by utilized amount. The quarterly figures of tined area are cumulative total of the year while the others are figures of the quarter. Foreign exchange reserves and stock value are figures at term-end. Exchange rate is the average rate of the given period. Source: CEIC Data Co., Ltd., National Bureau of Statistics of China, General Administration of Customs of the PRC, MOFTEC,

Bloomberg, Corporate Research Division of BTMU

Appendix: Macroeconomic Indicators (Monthly Basis)

PMI Industrial FAI Retail Passenger Power Railway CPI Exports Imports Trade M2 Growth

Value-added Sales of Car Generation Cargo Growth Balance in

Output Consumer Sales Traffic RMB Loans

Goods Units

(YoY, %) (YoY, %) (YoY, %) (YoY, %) (YoY, %) (YoY, %) (%) (YoY, %) (YoY, %) (USD bil) (YoY, %) (RMB bil)

2010 Jan 55.8 n/a 26.6 14.0 113.2 39.5 21.8 1.5 21.0 85.6 14,168 26.1 1,393

Feb 52.0 12.8 26.6 22.1 55.3 10.1 15.1 2.7 45.7 44.7 7,612 25.5 700

Mar 55.1 18.1 26.4 18.0 63.2 18.9 15.5 2.4 24.2 66.4 ▲7,236 22.5 511

Apr 55.7 17.8 26.1 18.5 33.2 22.2 8.5 2.8 30.4 50.1 1,681 21.5 774

May 53.9 16.5 25.9 18.7 25.8 19.9 8.0 3.1 48.4 48.9 19,530 21.0 639

Jun 52.1 13.7 25.5 18.3 19.4 11.8 9.0 2.9 43.9 34.6 20,022 18.5 603

Jul 51.2 13.4 24.9 17.9 13.6 12.9 8.1 3.3 38.0 23.2 28,730 17.6 533

Aug 51.7 13.9 24.8 18.4 18.7 13.4 6.3 3.5 34.3 35.5 20,036 19.2 545

Sep 53.8 13.3 24.5 18.8 19.3 8.8 5.6 3.6 25.1 24.4 16,875 19.0 596

Oct 54.7 13.1 24.4 18.6 27.1 6.7 6.3 4.4 22.8 25.4 27,148 19.3 588

Nov 55.2 13.3 24.9 18.7 29.3 6.8 7.6 5.1 34.9 37.9 22,890 19.5 564

Dec 53.9 13.5 24.5 19.1 18.6 5.1 2.7 4.6 17.9 25.6 13,080 19.7 481

2011 Jan 52.9 n/a 24.9 19.9 16.2 8.2 6.7 4.9 37.7 51.4 6,461 17.2 1,040

Feb 52.2 14.9 24.9 11.6 2.6 15.0 6.9 4.9 2.3 19.7 ▲7,306 15.7 536

Mar 53.4 14.8 25.0 17.4 6.5 13.7 6.8 5.4 35.8 27.4 139 16.6 664

Apr 52.9 13.4 25.4 17.1 2.8 10.5 9.5 5.3 29.8 22.0 11,421 15.3 740

May 52.0 13.3 25.8 16.9 ▲0.1 10.9 8.9 5.5 19.3 28.4 13,047 15.1 552

Jun 50.9 15.1 25.6 17.7 6.2 14.5 9.5 6.4 17.9 19.0 22,273 15.9 634

Jul 50.7 14.0 25.4 17.2 6.7 12.6 6.8 6.5 20.3 23.0 31,484 14.7 493

Aug 50.9 13.5 25.0 17.0 7.3 9.1 6.8 6.2 24.4 30.4 17,759 13.6 549

Sep 51.2 13.8 24.9 17.7 8.8 10.7 8.9 6.1 17.0 21.1 14,514 13.0 470

Oct 50.4 13.2 24.9 17.2 1.4 9.4 8.8 5.5 15.8 29.1 17,033 12.9 587

Nov 49.0 12.4 24.5 17.3 0.3 7.5 6.8 4.2 13.8 22.6 14,528 12.7 562

Dec 50.3 12.8 23.8 18.1 4.6 9.8 9.1 4.1 13.3 12.1 16,521 13.6 641

2012 Jan 50.5 n/a 21.5 n/a ▲23.8 ▲5.1 3.7 4.5 ▲0.5 ▲15.0 27,278 12.4 738

Feb 51.0 21 21.5 n/a 26.5 19.4 5.9 3.2 18.3 40.3 ▲31,483 13.0 711

Mar 53.1 12 20.9 15.2 4.5 7.3 3.6 3.6 8.8 5.4 5,347 13.4 1,011

Apr 53.3 9 20.2 14.1 12.5 1.5 4.8 3.4 4.9 0.4 18,427 12.8 682

May 50.4 10 20.1 13.8 22.6 3.2 3.4 3.0 15.3 12.7 18,699 13.2 793

Jun 50.2 9.5 20.4 13.7 15.8 ▲0.9 ▲3.9 2.2 11.3 6.3 31,722 13.6 920

Jul 50.1 9.2 20.4 13.1 10.7 2.3 ▲8.0 1.8 1.0 5.7 25,147 13.9 540

Aug 49.2 8.9 20.2 13.2 11.3 2.6 ▲8.6 2.0 2.7 ▲2.7 26,661 13.5 704 Source: CEIC Data Co., Ltd. , Corporate Research Division of BTMU

1

【BTMU Greater China Area Network】

Dalian Economic-Technological

Hong Kong Kowloon East Tsim Sha Tsui

Chengdu

Dalian

Shenyang

Taipei

Wuxi

Shanghai

Tianjin Binhai Tianjin

Beijing

Shenzhen Guangzhou

Branch

Sub-Branch

Representative Office

This report is intended only for information purposes and is not intended to constitute an offer or solicitation to buy or sell securities or any other products. Contents of the report are information as at 1st Oct 2012 and are subject to change without notice. This report has not been prepared to provide legal, taxational, financial, market-judgmental, or any other advises on propriety of any transactions. In taking any action, each reader is requested to act on the basis of his or her own judgment upon consulting certified lawyers, accountants or other professionals regarding the accuracy, validity and reliability of information appeared in this report. Bank of Tokyo-Mitsubishi UFJ is regulated by the Financial Services Authority. Copyright © The Bank of Tokyo-Mitsubishi UFJ, Limited 2011 No part of this publication may be reproduced, stored in a retrieval system or transmitted without the prior written permission of The Bank of Tokyo-Mitsubishi UFJ Limited. Publisher: The Bank of Tokyo-Mitsubishi UFJ, Ltd. Corporate Research Division (Hong Kong)

6/F., AIA Central, 1 Connaught Road Central, Hong Kong

Tomoo Nishina（仁科 知夫） （852）2249 -3030 Tomoo_Nishina@hk.mufg.jp Bee Yen Ooi（黄 美艶） 2249 3028 Bee_Yen_Ooi@hk.mufg.jp Daisuke Ikeda（池田 大輔） 2249 3033 Daisuke_Ikeda@hk.mufg.jp Takehiro Takehara（竹原 毅洋） 2249 3078 Takehiro_Takehara@hk.mufg.jp Tomoko Matsuura（松浦 知子） 2249 3031 Tomoko_Matsuura@hk.mufg.jp Jessica Kim（金 恵敬） （852）2821 3406 Jessica_Kim@hk.mufg.jp With the cooperation of Bank of Tokyo-Mitsubishi UFJ(China),Ltd. Corporate Planning Division, Corporate Research Team Tsunenobu Yoshida（吉田 常誠） （86）21-6888 -1666 （Ext. 5050） Guo Qingqing（郭 擎晴） 1666 （Ext. 5363） Chen Xing（陳 星） 1666 （Ext. 5361）

Guangzhou Nansha

Shanghai Hongqiao

Qingtao

Development Area

Wuhan

Beijing Economic-Technological Development Area