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Lunar Monthly Update

This month we would like to comment briefly on China’s macroeconomic environment.

Recent economic data (Table 1) suggests the risk of a slowdown in 2012 is real. Compounding this is concern over the health of Chinese banks, non-performing loans within both the public and private sector, a deflating property market, and a slowdown in capital markets activity. This is a challenging situation for policymakers, and as we stated during our AGM, China faces substantial headwinds.

• China’s non-manufacturing PMI fell below 50 in November to 49.7.
• Industrial production has cooled, dropping from 15.10% YoY in June to 12.40% YoY in November.
• Exports, an important (albeit increasingly less so) component of China’s economy, are under pressure.

Our view as investors, however, is positive, and we believe that prudent risk takers should welcome certain developments. Tightened liquidity, a challenging operating environment, and omnipresent fear have increased demand for capital providers with operational expertise and a long-term outlook. Furthermore, as one of our AGM guest speakers from Gavekal Dragonomics noted, many concerns regarding China's slowdown are misguided (the Gavekal presentation shown during our AGM is available upon request).

• Inflation, which we consider a chief threat to China’s long-term growth, appears to be easing.
• Domestic retail sales have remained persistently strong and YTD figures are up 17% YoY.
• Liquidity growth is slowing as tightening measures begin to take effect.

We are excited about the coming year and, in particular, about finding opportunities that are 1) synergistic with our current portfolio and 2) where we can add genuine operational value-add.

Lunar | November 15, 2011