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1. Epsilon Capital Management’s First
Quarter Asia Pacific (Emerging)
Economic Round Up

2. This is Epsilon Capital Management’s 2 Part Series on the Emerging Asia Pacific
Economies for the first quarter of 2012.
In the first part of our report we will look across the region as a whole and more
specifically at China and India.
Emerging Asia Pacific: Economic Review 1st Quarter 2012
Emerging Asia Pacific witnesses a modest rebound despite oil spike Emerging Asia
Pacific economies, which reported dismal economic numbers during the fourth
quarter of 2011, recovered some lost ground during the first quarter of 2012. Export-
led growth in many Asian countries such as Taiwan, Malaysia, South Korea, and
China, which had come under pressure during the last months of 2011, witnessed
slight improvements in 2012 thanks to receding fears about a sovereign debt crisis in
the European Union and a stronger-than-expected recovery in the U.S. China, the
region’s largest economy, however, signaled that it will accept a slightly lower growth
rate of around 7.5% over the coming years. The Chinese economy grew at a pace of
nearly 10% for over two decades.

3. Inflationary pressures in the region also remained subdued in many of these
economies in the face of slowing growth. However, there were significant signs that
inflation could haunt emerging Asia Pacific economies sooner than later. A spike in
oil prices during the first quarter of 2012 stirred inflation in many economies
although the pace of inflation was not as high as witnessed during mid-2011.
Consequently, although many countries experienced relatively low inflation, some
central banks in the region stubbornly refused to cut interest rates. Central banks in
Malaysia, India, and South Korea held on to their current levels of interest rates over
fears of igniting inflationary pressures. On the other hand, central banks in
Indonesia, Thailand, and Philippines were more comfortable cutting interest rates to
stimulate growth.

4. China: Monetary tightening takes a toll on output
China started calendar year 2012 on a sober note. Economic growth in the world’s
second largest economy came under pressure from a stringent monetary policy,
weakened exports, and subdued housing markets. Consequently, China had a
forgettable January and February in 2012, recording the weakest production gain
figures since 2009. During this period, the slowdown in the European Union, one of
China’s largest export markets, hit many of the coastal factories that predominantly
cater to overseas demand. As a result, Chinese exports slowed, forcing the country to
record a $31.5 billion trade deficit in February. The February trade deficit was the first
deficit in the past 12 months and the largest monthly deficit since 1989.
The slowing export industry also pulled down industrial production growth to 11.4%
for the first two months. Other economic indicators such as retail sales growth
slowed to 14.7% in February against an expected 17.6% growth estimated by
economists surveyed by Bloomberg.

5. Nonetheless, Chinese rulers seemed to take the slowing growth in
stride. In early March, Chinese Premier Wen Jiabao pared the
nation’s targeted annual growth rate to 7.5% from the 8% annual
growth target set in 2005. In 2011, China’s annual GDP growth rate
touched 9.2% compared to 10.4% in 2010. China’s GDP growth
rate slowed primarily due to a tight monetary policy that was
introduced to combat stubbornly high inflation. China’s consumer
price inflation, which had climbed as high as 6.5% in July 2011
slowed to an average of 5.4% for the whole year primarily due to
monetary tightening.
But the monetary tightening had other effects as well. China’s
consumption-led growth became a victim to high interest rates.
Sales of passenger cars, including both small cars and SUVs,
declined 4.4% during the first two months of 2012. The industrial
and manufacturing segment also witnessed a slowdown. For
instance, the purchasing manager’s index (PMI) compiled by
HSBC Holdings Plc, fell to 53.3 in March from 53.9 in February.

6. On the other hand inflation, which was subdued, also gained pace
in March. Consumer price inflation in China jumped 3.6% during
the month. Although inflation during March was quite below
China’s targeted inflation of 4%, food price inflation at 7.5% has
caused concerns. Further, a sharp spike in oil prices earlier this
year also forced Chinese authorities to keep a close watch on
inflation numbers. Home prices in China, meanwhile, slipped down
from their peak in 2010. Prices of new apartments fell in 45 of the
70 cities surveyed by the government in February. The fall in home
prices come after a protracted battle from Chinese authorities to
prevent a housing bubble in the country. Zhang Xiaoqiang, the vice
chairman of National Development and Reform Commission, said
that China’s first quarter GDP grew 8.4% citing preliminary
research figures.

7. India: Slowing investment and persistent inflation cloud outlook
India’s GDP for the three months ended December 2011 grew at 6.1%, the
slowest pace in nearly eight quarters. The slowdown in GDP comes amidst the
backdrop of high inflation, slowing investments, and faltering demand from
developed markets. During this period, almost all legs of the economy
encountered substantial challenges. While manufacturing output inched up just
0.4%, mining and farm output declined substantially. A large fiscal deficit arising
from high social sector spending and a spike in oil prices has been troubling
India over the past year. Private economists surveyed by Bloomberg estimate
that India’s fiscal deficit will touch 6.1% of GDP for the year ending March 2012.
On the other hand, the pace of investment is slowing in Asia’s third largest
economy. The investment-to-GDP ratio in the December quarter fell to 30% from
nearly 34% in the year-ago period. Gross fixed capital formation, which measures
investments in roads and factories, declined 1.2% in the December 2011 quarter
following a 4% fall in the previous quarter.

8. India’s central bank, meanwhile, is watching the inflation numbers in order to
trim borrowing costs to boost growth. The central bank had raised interest rates
by nearly 375 basis points since March 2010 to combat inflation. During its policy
meetings in 2012, the central bank refrained from cutting rates but chose to
reduce the cash reserve ratio. India’s inflation, which trended down a bit in late
2011 again showed signs of rising in February, during which month it jumped
6.95%.
In another note of weakness for India, the Purchasing Manager’s Index measured
by HSBC, has consistently fallen over the past three months. After falling to 56.6
in February from 57.5 in January, the reading fell to a low of 54.7 in March. HSBC
reported that the dip in the figures was largely due to domestic factors like high
input costs and supply side constraints like overcrowded ports and roads. India
is currently facing a shortfall of nearly 114 million metric tons of coal required to
produce electricity and keep its factories running.

9. In our second part we will continue to look at the key remaining Asian
Emerging Economies of South Korea, Indonesia, Thailand, The Philippines and
Taiwan.
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decisions. All views, comments, statements and opinions are of the authors.
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