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3 January 2018 HY Corporate Credit HY Multi Sector.Media. Cable & Satellite Figure 38: Rolling 12 month balance sheet changes from the big 4 central banks 3,000 Fed NONE Sof P..R aim BoJ —Total Dec- I7 Zhiwel aging, Ph.D. 2.500 Chief Economist 2,000 +862-2203 8308 1500 1.000 Yi XiOng. Ph 0. 500 Economist 0 +852-2203 6139 . 5 0 0 -1,000 1.500 Jui•2009 Jul Ion Jut•20I3 Jul•7015 Sane Of unctiaert f lean. Regan, Ilart .4prt trite Engles, Jul 201 / Jul 2019 In China, the domestic economic condition will also go through significant changes in the next five years. The labor intensive and investment-driven old growth model is facing increasingly tighter constraints: Demographic dividend is coming to an end. Similar to Korea and Japan, China's relatively small share of young and old population enabled the economy to grow rapidly in the past four decades. This is now changing: the dependency ratio bottomed out in 2010 and is expected to rise rapidly as the population ages. Total working-age population peaked in 2014-15, and is expected to shrink by 2-3mn each year between 2018-22 (Figure 39). A cross comparison shows China's demographic dividend lasted a shorter time than its East Asian peers, and reached a demographic turning point at a much lower per capita income level, only 1/3 of the income in Japan and Korea when their dependency ratio reached the lowest point (Figure 40). Figure 39. Working age population of China 25 mean elliA'orlinp ape poptiaben. ^to •r* 0•06140•oe oofrJetion 20 IS 10 S .5 Figure 40: "Demographic dividend.' is fading out at low income level eaten 1100 so . Depteleta:i *Jew: • Korn • C.14 ,11 iliitiMg1§§1RAIMAT4111 darn Oftarcheilla* MIS An IM,.. 1000 900 600 700 too 500 400 l i • • r 0 f0 • [repeated 3 times] % W \\ rn t dete•less. 1992..5.31 .6. --. um • 40 • %neer* "... % PPP c.a, 2010 30 0 Oa: 10000 20000 30000 :-ola 533. £C000 cso,Is GOP 50000 sr Sane Paha* Swat Meng Mernat Na. Deiwndenry leo adornosayaw UMW Neon a Me Pero ap:paiton 014W 66. or banana% parxiabonag• 1544 77w pm Goias GOO At in 201) rawnitovieAtra • Leverage is already high. China's credit to the nonfinancial sector is at 255% of GDP in H1 2017 according to the BIS. To put this into perspective, China's debt level is somewhere between the US and Euro area. By our own estimate, total nonfinancial sector debt was at 274% of GDP in HI. Local governments and corporates are heavily indebted, accounting for >200% of GDP of debt (Figure 41). Page 200 Deutsche Bank Securities Inc. CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0086759 CONFIDENTIAL SDNY_GM_00232943 EFTA01385473