HOUSE_OVERSIGHT_012086.jpg

CHART 2: THE LI KEQIANG INDEX VERSUS CHINESE REAL GDP GROWTH 30% 16% 15% iY) 25% AaB 20% 13% 12% 15% 11% 10% 10% 9% 8% 0, 5% ai 0% ott 2006 2007 2008 2009 2010 ML) Kegiang Index (Left Hand Side) Furthermore, CHART 3 shows that, directionally, the Li Keqiang Index maps pretty well to the ebb and flow of Chinese property prices, confirming the thesis that property prices have much impact on the Chinese economy. A close examination of CHART 2 raises an interesting observation: Lately, the Li Keqiang Index has accelerated much more than the reported GDP growth. One could surmise that China's actual GDP growth (measured on a year-over-year basis rather than on an annualized sequential change) may have been greater than the reported 6.9% in the first quarter of 2017. This could be rationalized by the conjecture that the actual growth in early 2016 may have been lower than the reported 6.7%. One indicator of China’s strong growth is the year-over-year changes in its imports as shown in CHART 4. Imports surged 24% year-over-year in U.S. dollar terms, and 31% in renminbi terms during the first quarter of 2017. To be fair, part of the surge was due to the rebound in commodity prices. However, China’s $58 billion import from Germany and Japan, two non- commodity countries, was still up an impressive 17% year-on- year. In the first quarter of 2016, China’s imports from those two countries had declined 10%. 2011 Mlle Chinese Real GDP Year-over-Year (Right Hand Side) 2012 2013 2014 2015 2016 2017 Source: Bloomberg We believe China’ strong reflation, thanks to the infrastructure buildout and the unprecedented property price increases in major cities, may have been the most impactful yet under- appreciated catalyst that fueled the synchronized global economic recovery since the summer of 2016. The good news is that China’s growth is likely to remain healthy for the remainder of 2017, as stability is paramount ahead of the quinquennial power transition this autumn. However, the uncertainty starts to rise as we look beyond 2017. Shadow Boxing Over the past few years, China watchers have been urging Chinese policymakers to introduce bold reforms and market forces to tackle the country’s rapidly growing leverage, over capacity, and housing bubble. However, with stability being of utmost importance, policymakers could not afford to take a chance with the market's invisible hand. Tough reforms in the context of slowing economic growth also ran the risk of jeopardizing social stability. Now, however, with the economy ona much stronger footing, Chinese policymakers have started to push through some needed reforms. CHART 3: LI KEQIANG INDEX VERSUS YEAR-OVER-YEAR PRICE CHANGE IN CHINESE PROPERTIES 30% 25% 20% 15% 10% 5% 0% -5% -10% 2005 2006 2007 2008 2009 2010 Mumm || Kegiang Index GLOBAL FORESIGHT THIRFD QUAPTER 2017 2011 Ml (Year-over-Year Price Change in Chinese Properties 2012 2013 2014 2015 2016 2017 Source: Bloomberg HOUSE_OVERSIGHT_012086