3 January 2018 HY Corporate Credit HY Multi Sector.Media. Cable & Satellite iFigure 41: China's leverage is ahead, Owne's debttoGDP tem dump 1980-1H l7 3:63 253 203 150 100 0 202 274 •13Sols 24/1 M. Ieere 225 211 „ M la 1m Ix nnnnn " " • 1~1 15205 02 1 ,a7 .23 125 130 """"""" I gstetttsstsittsttitstseeeeeeteeemete &ma Omadoi &Memo n • !Shalom IMmom* 00/91,01).013 13Crwai301.4.11101.11 o 4405455.35 • *Sow vsnesei MUM • Infrastructure investment, a major contributor to investment growth, is set to slow down. Infrastructure accounted for 54% of investment growth in Q1-3 2017. Local government financing vehicles (LGFVs) helped channel large amount of bank loans and market financing into infrastructure projects. As LGFVs continued to pile up debt, their financials deteriorated (Figure 42, 43). The central government is now putting stricter rules on LGFV financing. The debt swap program that helped relieve LGFVs of high debt is also coming to an end. These would constrain LGFVs' ability to borrow and invest in infrastructure. [Figure 42: LGFV debt is still piling up 35 30 25 20 15 1 5 0 radon WEI •■ t. GFV debt m..% of GDP. the Sono 045./M4E0ft WING, elan. CHIC IFigure 43: Deteriorating financials, median LGFV 05 2.5 so 2.0 30 25 IS 20 15 1.0 10 5 0.5 0.0 SROA % eIntenni coverage reti5 em r4 •11 Fd 9xxo• Dana* Ses*, nwo shea IEST basal tit am lite Ina ammo and 1150111SUMM A tightening bias in macro policies Following the 19th party congress in Oct, policymakers sent strong signals for a structural shift in policy focus. Headline GDP growth is no longer a priority, instead, they will focus more on growth quality and containing risks. • At his speech addressing the party congress, President Xi emphasized growth quality over quantity more than any of his predecessors. Improving "social productivity", which had been the main goal of the party for more than two decades, has to give way to "quality and effectiveness of development". He did not mention the growth target for 2020 in his speech. • PBoC's veteran Governor, Zhou Xiaochuan, warned about the risk of a"Minsky Moment" during a group discussions at the party congress. What he meant was the risk of a major crisis caused by excessive risk taking in the financial sector. Zhou later published an article on PBOC's Deutsche Bank Securities Inc. ZillW2.12hami. Ph .D. Chief Economist +852.22038308 Yi Xiong, PhD. Economist +8522203 6139 Page 201 CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0086760 CONFIDENTIAL SDNY_GM_00232944 EFTA01385474