Key financial market driver 3 - China growth outlook Key questions Nascent rebound in domestic commodity e What are the drivers for a modest sequential growth recovery? prices e What is our policy expectation? ° How strongly will the recently announced infrastructure projects boost growth? 130 CIO View (Probability: 70%*) Stabilization in economic momentum 129 \ f ¢ We continue to expect a sequential recovery in the growth momentum in the current quarter. Inventory reductions sae | \0 ~~ should be less of a drag on growth and the government is rolling out more investment plans. At the same time, = j “i. political uncertainty should diminish after the power handover in November. We think that real GDP will grow 7% y/y zg 100 a in 4Q (consensus: 7.7%) before improving mildly to 7.3% in 1Q 2013 (consensus: 7.9%). ~ ¢ Indicators measuring inventory levels have fallen recently, showing that the destocking cycle is well advanced. In = addition, domestic prices for some major raw materials appear to have bottomed out, which should support a mild re rebound in production activity in the coming months. However, this may not be sustainable without a genuine = recovery in final demand. 70 ¢ While the government has recently announced trillions of infrastructure investment projects, the spending will span Apr-10 Oct-10 Apr-11 Det-11 Apr-12 Oct-12 several years and the source of funding remains unclear. In addition, real estate investment growth is likely to stabilize a a but not rebound strongly in the months ahead. We therefore do not expect a sharp rise in investment growth. Fiscal SOUFESZTEIC, Wind, UBS, eset 15 Odtebet 2012 support measures should help to stabilize economic growth, but are unlikely to result in a strong growth boost. ¢ The 18th National Congress of the Communist Party of China will be held on 8 November, which is exactly the same date as in the previous leadership handover in 2002. With the transition of the senior Communist Party leadership Investment stay