08 Feb 2015 Please read the "Special Disclaimer" Section on the last page Securities Research Report Macro Economy Spring Festival Misalignment Skews Trade Data, PBOC Aggressively Maintains RMB Exchange Rate Stability Macro Economy Weekly Latest Outlook  Spring Festival factors impact judgments on real economic conditions. According to trade data released on February 8, China’s imports and exports in January both dropped from the previous year due to Spring Festival factors, driving the trade surplus to a historical high of US$60bn. Given that the upcoming Spring Festival holiday falls in mid-to-late February, year-on-year indictors of imports and exports may improve somewhat. Since year-on-year macroeconomic indicators are affected by Spring Festival factors, real economic conditions are difficult to judge. However, a high trade surplus in January implies that domestic demand remains relatively weak, and appreciation in the RMB effective exchange rate may curb external demand over the next several months to some extent.  Policy adjustment is unlikely until economic conditions become clear. Under pressure from capital outflows, the People’s Bank of China last week announced a system-wide reduction in the reserve requirement ratio, which replenished liquidity to some degree. Nevertheless, as economic fundamentals remain unclear, the possibility of policy changes based on economic situations is relatively low.  Bad news for the real economy is good news for the capital market. If China’s economic fundamentals continue to deteriorate, the central bank will face stronger pressure to loosen monetary policy, meaning broad easing measures such as an RRR cut are more likely to surface. From this perspective, the further the real economy deteriorates the stronger liquidity expectations become for the capital market. However, given the impact of Spring Festival factors on economic data, any significant monetary easing measures will not be introduced until March after January-February consolidated macro data is published. In the short term, the PBOC will continue to use short-term instruments to maintain liquidity stability. Economic Review  Monetary policy is seeking a balance amidst a dilemma. Last week the PBOC announced broad and targeted RRR cuts, with an expected liquidity injection of over 600bn yuan. This move should be regarded as a neutral operation to adjust interbank market liquidity. The central bank is faced with a monetary policy dilemma: downward pressure on the economy calls for monetary policy easing, but structural problems cannot be addressed through monetary policy; on the contrary, they will increase policy easing costs. Analyst: Gao Xu 010-56513082 gaoxu@ebscn.com Practice license number: S0930512080004 Contact: Yang Yewei 010-58452024 yangyewei@ebscn.com Yicong Wang also contributed to this report 010-58452072 wangyicong@ebscn.com Weekly Data Tracking This Week Last Week WoW change in food prices (%) 1/ 0.2 -0.1 WoW change in prices of means of production (%) -0.4 -0.4 Net injection on open market (Bn yuan) 55 50 7-day repo rate (%) 4.170 3.910 Rmb/dollar central parity rate 6.137 6.134 Appreciation of yuan closing price versus central parity rate (%) -1.824 -1.519 Source: CEIC, Wind Note 1/: CPI growth is expected to remain at low level of around 1.7% while PPI growth is expected to be around negative 2.1% in November. Watch Everbright Macro Grasp the Economic Pulse 2015-02-08 China’s Economy Weekly Please read the "Special Disclaimer" Section on the last page - 2 - Securities Research Report Additionally, transmission of monetary policy to the real economy becomes more complex amid economic restructuring, as loose monetary policy is likely to generate adverse consequences. Meanwhile, increased use of leverage in the capital market after last November’s rate cut has also restrained a further easing of monetary policy. Thus, a "discretionary approach” has become a better option with a “neutral” monetary policy. Following the latest system-wide RRR cut, monetary policy is expected to continue along this track, coupled with flexible adjustments according to the status of economic growth. Weekly Economic Data  The PBOC aggressively maintains RMB exchange rate stability, and stricter regulations add funding pressure on the stock market. 1) Affected by misalignment of the Spring Festival holiday, real economic indicators improved significantly year-on-year, but the broad trend requires further observation. The four-week average year-on-year growth rate of coal consumption at six major power plants surged to 27.7% this week from a 7.5% rise the prev