Global Economic Research July 2, 2010

Oscar Sánchez
1 (416) 862-3174
oscar_sanchez@scotiacapital.com

Pablo Bréard
1 (416) 862-3876
pablo_breard@scotiacapital.com

• Chinese equity securities markets on the defensive; modest currency gains in sigh
• Prime Minister Kan will aim at fiscal reform in Japan; Export-led recovery still vibrant
• Australia’s Labour party executes leadership change; economic recovery on track
• Taiwan launches monetary policy normalization lifting benchmark rate 25 bps

Chinese equity securities markets on the defensive; modest currency gains in sigh

Global currency markets continue to be strongly influenced by developments in Europe (particularly in

connection with the sovereign credit risk re-pricing under way and the systemic position of the large
banks), the pace and strength of economic recovery dynamics in advanced economies, and investors’
reaction to ongoing policy adjustments to China’s currency regime. Non-deliverable forward (NDF) mar-
ket metrics indicate that the Chinese renminbi (CNY) will appreciate by a modest 1.6% over the next 12
months from the current rate of 6.77 per US dollar (USD). With US$2.45 trillion in foreign exchange
reserves, the Chinese authorities continue to easily dictate movements in global currency markets. Of
utmost relevance to global portfolio investors, Chinese equity securities have been in retrenchment
mode since November 2009 placing emerging market investors on alert; indeed the country-benchmark
CSI 300 index has lost 32% since the beginning of the year, and the bearish trend remains unchal-
lenged, for the time being. There are growing concerns about the pace of economic deceleration in the
world’s largest economies and the impact from the increase in capital requirements to meet more strin-
gent banking sector regulations in the US, Europe and China. Notwithstanding these concerns, China
remains the world’s third largest economy following the release of a revision to last year’s growth statis-
tics: the government revised China’s GDP growth to 9.1% from 8.7%, stressing that industrial produc-
tion expanded by 9.9% last year.

Prime Minister Kan will aim at fiscal reform in Japan; Export-led recovery still vibrant

The change at the helm of the Democratic Party of Japan (DPJ) has clearly boosted its chances ahead
of the July upper-house election. Japan’s incoming Prime Minister, Mr. Naoto Kan (previous deputy
Prime Minister and Finance Minister), has unveiled a cabinet indicating that he is likely to favour fiscal
reform in order to limit further deterioration in government finances. Prime Minister Kan has raised the
possibility of increasing the controversial sales tax –although the hike would be at least two years
away– with an aim of halving the public deficit by mid-decade. According to the most recent Interna-
tional Monetary Fund projections Japan’s budget deficit is estimated to approach 10% of GDP in 2010,
taking gross public sector debt above 225% of GDP.

Trade figures coming out of Japan have continued to provide a positive element underpinning the coun-
try’s economic recovery. Export volumes increased at a 1% m/m rate in May following April’s brisk
6.5% gain, taking the average for the two months over 9% above the corresponding figure for the first-
quarter. Foreign shipments have picked up consistently since last October as growing demand from
China and developing Asia have bolstered the outlook of Japanese conglomerates. Foreign sales
drove most of the first-quarter GDP gains when the Japanese economy grew at a 1.2% q/q rate, the
highest quarterly expansion in a decade. Although euro weakness is bound to have an adverse effect
in coming months as competitiveness losses vis-à-vis Germany’s manufacturing products are likely to
dent some momentum from Japanese foreign shipments, currently we have yet to be convinced of a
slowdown in export demand. An improvement in labour market indicators has been a by-product, as the
seasonally adjusted unemployment rate has fallen to 5.2%, from the 5.6% July 2009 peak. Although
the joblessness rate increased for a third consecutive month in May, the rise was accompanied by a
pickup in the participation rate as people have been encouraged to reignite their job search, a natural
consequence of the economic recovery. Notwithstanding the latest employment gains, their reflection

Asia/Oceania Weekly Outlook is available on www.scotiabank.com and Bloomberg at SCOE

Global Economic Research
has yet to show in a significant pickup in domestic de-
mand as consumption growth has been lagging. The 2%
monthly fall in retail sales revenue during May, the first
decline this year, corroborates the view that Japanese
consumer spending will still lag in the recovery.
Australia’s Labour party executes leadership
change; economic recovery on track
A reshuffling within Australia’s Labour party leadership
resulted in Ms. Julia Gillard being sworn as prime minis-
ter on June 24th. The political shift followed former Prime
Minister Kevin Rudd’s loss of electoral support after he
was unable to convince the public of the merits of his
proposal of a massive 40% tax on mining sector profits.
Mr. Rudd’s popularity started to dwindle in mid-May co-
inciding with the announcement of the resource sector
tax; the Labour party’s call for a change was forced by
the imminence of the country’s general elections which
are to be held by April 2011. Ms. Gillard takes over as
Primer Minister in the midst of an outstanding economic
rebound, as most indicators still point towards a persis-
tent expansion. Last week’s publication of the leading
and coincident indicators displayed a continuation of the
favorable outlook that has been the norm since the turn
of the year. On a similar note, Australia’s statistics bu-
reau reported 36,400 full-time employment positions
were created in May, bringing the total number of full-
time jobs added since August 2009 to over 170,000;
2.2% of the labour force. The unemployment rate fell
from 5.4% to 5.2%. With skilled job vacancies still on the
rise, the robust demand for workers will likely be in-
creasingly reflected in higher wages, with positive ramifi-
cations for consumer spending but potentially adverse
implications for inflation. After its latest board meeting in
early June the Australian central bank kept the bench-
mark cash rate at 4.5% as it deemed monetary condi-
tions “appropriate for the near-term”. The Reserve Bank
of Australia has been the leader in the global monetary
policy cycle as it has raised the benchmark interest rate
in six of the past eight policy meetings. The cash rate
currently stands at 4.5%, it has been raised by 150 ba-
sis points since October. Monetary policy tightening will
likely be resumed later this year to prevent wage pres-
sures from stoking inflation.
July 2, 2010
Taiwan launches monetary policy normalization lift-
ing benchmark rate 25 bps
Job market conditions in Taiwan have responded well to
the pickup in economic activity, with the seasonally ad-
justed unemployment rate coming down in May to 5.2%,
the lowest level in 17 months. The jobless rate has
come down from a peak of slightly over 6% in August of
2009. The improvement in labour market data has been
following the persistent strengthening of industrial activ-
ity a key cyclical determinant of employment and in-
come growth. Industrial output has expanded for nine
consecutive times on a yearly basis and is over 30%
above last year’s levels as manufacturing exports re-
bounded strongly. Taiwanese exporters have been lead-
ing the economic recovery in Asia after being among the
hardest-hit by the global economic downturn. The value
of export shipments is equivalent to 70% of GDP, mak-
ing it a principal driver of the country’s economic activity.
With exports running at an over 30% yearly rate in the
past six months, Taiwan witnessed an output expansion
of over 13% y/y in the first quarter of 2010, the fastest
pace in more than three decades. Looking ahead, al-
though export orders during April and May fell on a
monthly basis, they remain over 10% above first quarter
levels as demand from China and Hong Kong continues
to propel ahead. Even orders coming out of the Euro-
pean market, which represent about 17% of the total in
May, have increased in the second quarter. The strong
economic rebound has translated into an improvement
in domestic demand, where the recovery in investment
spending has been noteworthy, but inflationary con-
cerns are yet to emerge with headline consumer price
inflation at 1% y/y. This, however, did not stop the cen-
tral bank from deciding to increase the rediscount rate
by 12.5 basis points after its monetary policy meeting in
May, with the interest rate increase representing a nor-
malization of sorts as the benchmark rate was left still
below 2%.
2
 Global Economic Research July 2, 2010

INTERNATIONAL RESEARCH GROUP

Pablo F.G. Bréard, Head

1 (416) 862-3876
pablo_breard@scotiacapital.com

Tuuli McCully
1 (416) 863-2859
tuuli_mccully@scotiacapital.com

Estela Ramírez
1 (416) 862-3199
estela_ramirez@scotiacapital.com

Oscar Sánchez
1 (416) 862-3174
oscar_sanchez@scotiacapital.com

Scotia Economics
Scotia Plaza 40 King Street West, 63rd Floor
Toronto, Ontario Canada M5H 1H1
Tel: (416) 866-6253 Fax: (416) 866-2829
Email: scotia_economics@scotiacapital.com
This Report is prepared by Scotia Economics as a resource for the
clients of Scotiabank and Scotia Capital. While the information is from
sources believed reliable, neither the information nor the forecast shall
be taken as a representation for which The Bank of Nova Scotia or
Scotia Capital Inc. or any of their employees incur any responsibility.