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Home , Fan Changlong, Li Jianguo, Ma Kai, Xu Qiliang, Zhang Chunxian

Emerging Markets in 2013: Domestic Developments, Global Implications

Presented by: David P. Loevinger Managing Director Emerging Markets

Summary • A significant slowdown, but recovery gaining strength • Demand & employment holding up • Looser monetary conditions should support investment • Long-term growth downshifting, but still plenty fast • Little progress to date in reducing dependence on investment and manufacturing • Less misaligned, but RMB still has room to appreciate • Liberalizing interest rates should spur SME lending and bond market financing • Is U.S. willing/able to attract more Chinese investment?

For Information Only This publication is for general information purposes only. Past performance is no guarantee of future results. While the information and statistical data contained herein are based on sources believed to be reliable, we do not represent that it is accurate and should not be relied on as such or be the basis for an investment decision. Subject to Change This report may include estimates, projections and other "forward-looking statements." Due to numerous factors, actual events may differ substantially from those presented. TCW assumes no duty to update any such statements. Past performance is no guarantee of future results. Any holdings of a particular company or security discussed herein are under periodic review by the author and are subject to change at any time, without notice. In addition, TCW manages a number of separate strategies and portfolio managers in those strategies may have differing views or analyses with respect to a particular company, security or the economy than the views expressed herein. This publication is not to be used or considered as an offer to sell, or a solicitation to an offer to buy, any security. Nothing contained herein should be considered a recommendation or advice to purchase or sell any security. TCW, its officers, directors, employees or clients may 1 have positions in securities or investments mentioned in this publication, which positions may change at any time, without notice. Copyright 2012 TCW

A significant slowdown, but recovery gaining strength 25 108

20 106

104 15

102

10

100

5 98

0 96 8/2007 1/2008 6/2008 11/2008 4/2009 9/2009 2/2010 7/2010 12/2010 5/2011 10/2011 3/2012 8/2012

Industrial Value Added Y/Y NBS Leading Indicator (Lagged 2 months)

2 Source: National Bureau of Statistics of China Demand & Employment Holding Up Real Per Capita Income (Wages/Consumption Proxy) 19

14

9

4

-1 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Urban Households Y/Y Rural Households Y/Y

3 Source: National Bureau of Statistics of China Looser monetary conditions should support investment

50

45 30 40

35 25 30

25 20

20

15 15

10

5 10 9/1/2005 6/1/2006 3/1/2007 12/1/2007 9/1/2008 6/1/2009 3/1/2010 12/1/2010 9/1/2011 6/1/2012

Real Urban Fixed Asset Investment 3MMA Y/Y M2 Y/Y 2 month lag (RHS)

4 Source: National Bureau of Statistics of China and PBOC Downshifting, but still plenty fast

13 Past Double Digit Growth Unsustainable

12 SPEED LIMIT 11 10 Future growth to decline over time SPEED 10 LIMIT 8.5 SPEED 9 LIMIT 7.0

8 SPEED LIMIT 6.0 7

6

5 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 Actual GDP Growth Y/Y Potential World Bank/DRC Potential OECD Potential AsDB

5 Source: National Bureau of Statistics of China, The World Bank, Development Research Center of the State Council of China, OECD, Asian Development Bank Current Account Surplus Declining...For Now % GDP, IMF Forecast

12

10

8

6

4

2

0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

6 Source: IMF More Progress in Reducing Dependence on Exports Than Investment 50%

45%

40%

35%

30%

25%

20%

15% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Investment/GDP Household Consumption/GDP Merchandise Exports/GDP

7 Source: National Bureau of Statistics of China Manufacturing Continues to Grow Faster Than Services Real GDP Growth 17

16

15

14

13

12

11

10

9

8

7 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Manufacturing Services

8 Source: National Bureau of Statistics of China More Private Sector Investment Will Sustain Productivity Growth Return on Assets 2008-2010 12%

10%

8%

6%

4%

2%

0% Private Owned Foreign Owned State Owned Enterprises 9 Source: National Bureau of Statistics of China Ongoing Leadership Transition Increases Policy Uncertainty The Party The Government The Military

Politburo Standing Committee (7 members) State Council 1. 2. (new leaders will start in March) 3. Dejiang State Council Cabinet (10 members) 4. Premier: Li Keqiang (?) Central Military Commission 5. Liu Yunsheng Executive Vice Premier: 6. (?) Chairman: Xi Jinping 7. Zhang Gaoli Other Vice Premiers: (3) ? Vice Chairmen: & State Councilors: (5) ? And 8 members The Politburo (7 Standing Ministers/Bureau Heads (40) Committee Members above + 18) NDRC (National Development and , , , Liu Reform Commission) Chairman: ? Qibao, Xu Qiliang, , Sun PBOC Governor: ? Zhengcai, , , People’s Liberation Army (PLA) , , Fan Minister of Finance: ? Changlong, , , CBRC (China Banking Regulatory , , , Commission) Chairman: Shang Fulin (current) CSRC (China Securities Regulatory People’s Armed Police (PAP) Central Committee (205 members Commission) Chairman: Guo and 171 alternate members) Shuqing (current) CIRC (China Insurance Regulatory Secretariat: Xi Jinping Commission) Chairman: Xiang Junbo (current)

Party Congress (2000+ members) National People’s Congress Meets once every 5 years (approximately 3,000 members) Meets annually

Provincial-level Party Secretaries (33) Provincial-level Governors (33) 10 Source: TCW Emerging Markets Research Less Misaligned, but RMB Still Has Room To Appreciate 6 110

Appreciate 105 6.5

100 7

95

7.5 90

8 85

8.5 80 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

USDCNY Real Effective Exchange Rate

11 Source: CFETS (China Foreign Exchange Trading System) While Low Wage Assemblers Moving Offshore Chinese Competitiveness Still Strong Chinese Merchandise Exports Market Share of Global Imports (ex-China)

12%

11%

10%

9%

8%

7%

6%

5%

4%

3%

2% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

12 Source: National Bureau of Statistics of China and IMF RMB Appreciation Expectations Have Resumed

6.50

6.45

6.40

6.35

6.30

6.25

6.20 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12

PBOC Daily Reference Rate USD/CNY Spot

13 Source: CFETS (China Foreign Exchange Trading System), Bloomberg, Cutting Guaranteed Lending Should Spur SME Lending and Bond Market Financing

7

6

5 2.4

4 1.5 Base Lending

% Lending Floor 3 Base Deposit Deposit Ceiling

2

1

0

14 Source: PBOC, TCW Emerging Markets Research Large Increase in Bond Issuance by Corporates, Policy Banks, Local Govts RMB Trillions 25

20

Other 15 Commercial Bank PBOC Corporate/Local Govt CP-MT Notes (Corp) 10 Policy Bank Government

5

0 May-07 Nov-07 May-08 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12

15 Source: China Bond COLOMBIA ARGENTINA TURKEY JAPAN ROMANIA SLOVENIA SLOVAK REPUBLIC LUXEMBOURG OECD Average Non-OECD Average ESTONIA DENMARK SWEDEN NETHERLANDS AUSTRIA ...But China’s Financial Markets Remain Largely Closed SPAIN POLAND HUNGARY FDI Regulatory Restrictiveness Index GERMANY IRELAND CZECH REPUBLIC Financial Services FINLAND (Closed = 1; Open = 0) LITHUANIA PORTUGAL EGYPT CHILE ITALY GREECE UNITED KINGDOM BELGIUM BRAZIL MOROCCO NORWAY KYRGYZ REPUBLIC ISRAEL UNITED STATES SOUTH AFRICA PERU KOREA FRANCE SWITZERLAND CANADA LATVIA MONGOLIA ICELAND UKRAINE KAZAKHSTAN MEXICO AUSTRALIA JORDAN INDONESIA NEW ZEALAND TUNISIA SAUDI ARABIA MALAYSIA INDIA RUSSIA CHINA 0.0 0.1 0.2 0.3 0.4 0.5

16 Source: OECD Is U.S. Willing/Able to Attract More Chinese Investment? ODI USD Billions

70

60

50

40

30

20

10

0 2004 2005 2006 2007 2008 2009 2010 2011 June '12 17 Source: Ministry of Commerce Biography

• David joined TCW in June 2012 from the U.S. Treasury Department, where he was Senior Coordinator for China Affairs and the U.S.- China Strategic and Economic Dialogue. While at Treasury, he also served as Minister Counselor for Financial Affairs at the U.S. Embassy in Beijing and Deputy Assistant Secretary for Latin America, Asia, Africa and the Middle East. Mr. Loevinger was previously an economist for the International Monetary Fund and also worked in the office of the IMF’s U.S. Executive Director. He started his career in the Office of the U.S. Trade Representative, the Senate Banking Committee, and the U.S. Commerce Department. ￿ • He earned a Masters in Public Policy from Harvard University’s Kennedy School of Government and a BA in Economics from Dartmouth College.

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