1. ABC Global Research China growth vs. reform Prospects and challenges China Research Dr. Zhi Ming ZHANG ( 张之明） Managing Director, Head of China Research The Hongkong and Shanghai Banking Corporation Limited +852 2822 4523zhimingzhang@hsbc.com.hk View HSBC Global Research at: http://www.research.hsbc.comhttp://www.research.hsbc.com Issuer of report: The Hongkong and Shanghai Banking Corporation Limited Disclosures and Disclaimer This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it February 2014 INTERNAL

2. China’s growth dynamics  Cyclical rebound vs. structural challenges:  Recent growth deceleration vs. stabilization  Quantity vs. quality of growth  Rising growth dependency on credit  Growth, rising property risk and RMB exchange rate  What’s unique about China’s “shadow” banking?  Road ahead: “We need to properly manage the dynamics between growth, reform and stability” ……President XI Jinping 2 INTERNAL

3. China’s reform: ambition vs. roadmap  Comprehensive and aggressive targets set for 2020:  The Party announced a 60-measure comprehensive reform initiative 3 rd plenum last November  Covers financial (interest rate + capital account) and SOE reform  Roadmap or milestone yet to be specified  “China (Shanghai) Pilot Free Trade Zone (FTZ)”  Reform challenge:  Vested interests: Local province governments vs. Beijing; SOE vs. POE  Emphasis placed on domestic policy  Ability and willingness to allow short-term setbacks  What’s on the new leadership’s mind? 3 INTERNAL

4. China vs. Europe  China’s strategic priority  The European advantage: strategic partner or competitor?  Where does the US fit in?  Incentives to open markets and reform service sector  Ensure China remains active in political dialogue  China’s aggressive investment abroad  Still at early stage: China now vs. Japan in the 80’s  What does China want? Investment return, access to resource and technology & technical know how  What role is there for Europe to play in supporting China’s ‘going out’ strategy? 4 INTERNAL