Equity Research AsiaPacific Economics Report Economics Team Morgan

Equity Research Asia/Pacific Economics Report Economics Team Morgan Stanley does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Asia/Pacific Economics 1) Global Cycle Has Peaked 2) China: Secular vs. Cyclical 3) Taiwan: Consumer Economy 4) Korea: Housing Boom June 2004 Andy Xie (852 2848 -5220) Andy. Xie@morganstanley. com 1 Please see important disclosures starting on page 82.

Equity Research Asia/Pacific Economics Report Economics Team Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 2

Equity Research Asia/Pacific Economics Report Economics Team Global Cycle Has Peaked June 2004 Andy Xie (852 2848 -5220) Andy. Xie@morganstanley. com 3 Please see important disclosures starting on page 82.

Equity Research Asia/Pacific Economics Report Economics Team GDP Distribution: Shifting Center Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 4

Equity Research Asia/Pacific Economics Report Economics Team Asian Exports Have Peaked 1) Asia experienced the best export performance in 2003 on (1) strong euro due to low US rates, (2) China’s FDI boom, (3) US fiscal stimulus, and (4) China’s investment boom. 2) However, exports peaked in 4 Q 03, in my view. China’s investment slowdown is likely to deflate intra-regional trade. The front-loading of exports due to the expected reduction of the VAT rebate also exaggerated 4 Q 03 growth. Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 5

Equity Research Asia/Pacific Economics Report Economics Team Economic Cycles Become Shorter 1) Export cycles appear to have become shorter. The main factor, in my view, is that Asia’s exports are becoming bigger relative to the global economy. Thus, Asia’s supply is big enough to affect global cycles. Because Asia is investment/export-led, it tends to have boom-bust cycles; the volatility in global economy also increases. Asian Exports Are Highly Volatile Export-led Asia Gets Heavier to Carry 2) Policy stimulus also shortens cycles, because part of the stimulus keeps alive inefficient excesses. Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 6

Equity Research Asia/Pacific Economics Report Economics Team China/US-led Global Restructuring I: G (Industrializin g)China Consume r Goods Capital Goods Consume r Goods (Deindustrializing) Europe/Japan/Tig ers bn $450 CA Surplus Consume r Goods Raw Materials Capital Goods (Deindustrialized) Anglo- $600 bn Saxons CA Deficit Raw Materials Primary Producers $150 bn CA (yet to Surplus Industrialize) Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 7

Equity Research Asia/Pacific Economics Report Economics Team East Asia’s Supply Side Restructures 1) East Asia’s supply side restructures around China. All East Asian economies try to be complementary to China. Thus, they avoid competing against China in the US, the most competitive market in the world. The US increasingly buys Chinese goods to replace those from other East Asian economies. 2) Other East Asian economies try to export directly to China to take advantage of its growth. We expect China to replace the US as the biggest market for East Asia within two years. Source: CEIC E = Morgan Stanley Research Estimates Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 8

Equity Research Asia/Pacific Economics Report Economics Team East Asian Growth Depends on China Invest 1) China is the focus of international capital and the main export platform to western consumer. The resulting abundant liquidity turns China into a massive investment machine. Other Asian economies have become hooked to this source of demand 2) Japan and Korea stand out in their dependence on China’s investment boom, as they are major suppliers of commodities and capital goods to China. Their export growth is mostly due to China. Source: CEIC E = Morgan Stanley Research Estimates Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 9

Equity Research Asia/Pacific Economics Report Economics Team China/US-led Global Restructuring II: Ca China FDI Europe/Japa n… China’s industrialization means deindustrialization of mature economies whose surplus capital is being parked in US Treasuries. FDI Buy Treasurie s Buy Treasuries US $500 bn CA Deficit Buy Treasurie s Primary Producers Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 10

Equity Research Asia/Pacific FDI Fuels China’s Purchase of US Bonds Economics Report Economics Team Oil Price Determines East Asia’s Surplus 1) Global capex migrates to China to take advantage of low costs. This displaces China’s own savings, which are used instead to purchase US bonds. 2) Capex in China is cheaper. Its migration to China generates savings surpluses that also go into US bonds. Trade Balance ($ bn) Brent Crude US East Asia ($/bbl) 1988 -97 -1255 758 18. 8 1998 -230 242 12. 8 1999 -329 227 18. 0 2000 -436 192 28. 5 2001 -411 137 24. 4 2002 -468 183 25. 0 Jan-Oct 02 -379 149 24. 7 Jan-Oct 03 -446 160 28. 7 Net Purchase of US LT Securities: China vs. Japan ($ bn) Net Purchase China Japan 1988 -97 48 209 1998 4 20 1999 17 43 2000 16 52 2001 52 57 2002 59 91 Jan-Oct 02 40 73 Jan-Oct 03 52 131 Trade Surplus China Japan 69 874 44 108 29 108 24 100 23 54 30 79 25 65 15 70 East Asia: Net Purchases of LT US Securities ($ bn) Total 1988 -97 1998 1999 2000 2001 2002 Jan-Oct 03 390 42 74 87 159 199 152 237 US Bonds Treasury Agency 265 42 28 -2 34 54 39 141 70 10 31 57 79 95 73 71 Corp. US Stocks 41 2 11 20 26 25 16 22 14 -12 5 13 21 23 24 3 Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 11

Equity Research Asia/Pacific Economics Report Economics Team US Liquidity Bubble Sustains Globalization 1) The Fed is pumping liquidity to increase demand, regardless of consequences. Fed Is Giving Money Away (weekly average close) 2) As globalization diverts demand to other parts of the global economy, the US has to pump more liquidity to achieve the same stimulus effect for home production (i. e. , employment). The massive liquidity creates asset bubbles. 3) The bubble fools Americans into spending more than they earn as they believe in the appreciation of their wealth. Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 12

Equity Research Asia/Pacific Economics Report Economics Team US: Too Much Money Causes Bubbles US liquidity policy amplifies global volatility in both the real economy and financial markets. US Money Supply Could Cause A Mini Equity Bubble (Yo. Y % change) Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 13

Equity Research Asia/Pacific Economics Report Economics Team US: Liquidity at All-Time High US Liquidity at All-Time High Relative to GDP Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 14

Equity Research Asia/Pacific Economics Report Economics Team US: The Fed Sustained Artificial Wealth The Fed Liquidity Policy Kept Up Paper Wealth 1) Market would have adjusted household wealth to the normal 335% of GDP from 443% in 1999 to squeeze all the air out of the economy. The Fed policy, instead, pushed household wealth to 400% of GDP again to rekindle the wealth effect. 2) The Fed can start another bubble economy soon after the NASDAQ bubble as long as interest rates are not zero and foreigners are willing to fund the US savings gap. Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 15

Equity Research Asia/Pacific Economics Report Economics Team US: But, It’s Time to Unwind Inflation Scare Forces the Fed to Unwind 1) The Fed kept interest rate substantially below normal even as the economy picks up. Its excuse is no inflation. But, there is some inflation that is the echo from the US asset bubble and China’s investment bubble. The bond becomes edgy and demands rate hike. 2) While there are still many issues with the US economy, the current interest rate is still too low. The neutral rate for the Fed funds rate is about 4. 5%. The Fed may cap the rate at 3. 5% to account for the recovery fragilities. Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 16

Equity Research Asia/Pacific Economics Report What Next? Economics Team Bigger bubble (10 Y T at 2%, US housing prices up another 30%, another US demand-led party) Protectionis m (recession in Europe and Japan. US low growth with more jobs) US Bubble (If the US acts alone) Dollar Crash (deflation in Europe and Japan, stagflation in US, 10 Y T at 10%) US Deflation (The Fed increases interest rate to crush bubble. 10 Y T at 1. 5%, US dollar strong, multiyear recession) Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 17

Equity Research Asia/Pacific Economics Report Economics Team What Next? Japan (Decreasing savings rate by allowing property prices to fall by another 50% to transfer wealth to young from old) China Europe US Bubble (Increasing Rmb by 20% in (If the US works with China, Europe (Increasing exchange for and Japan to create a new order) property prices better trade by decreasing protection, transaction costs timetable for to boost reforming consumption) financial sector to float currency) Global Balance (Bringing China into G -7 and turning it into Big-4 with one seat for Europe) Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 18

Equity Research Asia/Pacific Economics Report Economics Team China: Secular Growth Opportunity June 2004 Andy Xie (852 2848 -5220) Andy. Xie@morganstanley. com Morgan Stanley does and seeks to do business with companies covered in its research reports. Investors should consider this report as only a single factor in making their investment decision. 19 Please see important disclosures starting on page 82.

Equity Research Asia/Pacific Economics Report Economics Team Globalization Drives Income Integrating cheap Chinese labor into global economy is the income driver for China’s development. Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 20

Equity Research Asia/Pacific Economics Report Economics Team Industrialization Drives Urbanization Export income drives industrialization, which underpins urbanization ─ the primary form of wealth accumulation. Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 21

Equity Research Asia/Pacific Economics Report Economics Team Industrialization With High Productivi Low base of capital stock is the primary reason for rapid productivity growth. Urbanization: Jobs for Migrants Trade: Increasing capital/labor efficiency Core Is Industrialization Technology: Raising Productivity Measuring Productivity (Ave. Annual % Growth, 1990 -2000) Total Primary Service/Indu. TFP 4 4 4 Labor 8. 9 4. 8 8. 1 Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 22

Equity Research Asia/Pacific Economics Report Economics Team Prosperity Spreads to Interior Via Investm Japan Northeast Pop = 128 mn GDP = US$4, 190 bn Exp = US$458 bn Pop = 107 mn GDP = US$156 bn Exp = US$21 bn West Pop = 57 mn GDP = US$59 bn Exp = US$6 bn Northern Plain Pop = 192 mn GDP = US$159 bn Exp = US$12 bn Korea Bohai Basin Pop = 182 mn GDP = US$308 bn Exp = US$58 bn Lower Yangtse Mid/Upper Yangtse Pop = 137 mn GDP = US$337 bn Exp = US$150 bn Pop = 350 mn GDP = US$295 bn Exp = US$14 bn Southwest Pop = 141 mn GDP = US$87 bn Exp = US$5 bn Guangdong/Fujian Pop = 113 mn GDP = US$226 bn Exp = US$177 bn Pop = 48 mn GDP = US$525 bn Exp = US$194 bn Interior development depends on investment funded by coastal export earnings via bank debt. Taiwan Pop = 22. 5 mn GDP = US$285 bn Exp = US$144 bn Hong Kong Pop = 6. 8 mn GDP = US$58 bn Exp = US$15. 6 bn Source: CEIC, CIA, Morgan Stanley Research. Export, GDP and population are for 2003. Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 23

Equity Research Asia/Pacific Economics Report Economics Team China and Japan: Trading Places • China is replacing Japan as the workshop of the world. It has already exceeded Japan in the US market. Its total exports will exceed Japan’s in 2 -3 years, in our view. • Economics is dictating this change. China has a massive amount of cheap labor, a high savings rate and low wealth. Trade is the natural path to full employment and rising wealth. • China is replacing IT as the dominant factor in driving the global economy. Source: CEIC. Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 24

Equity Research Asia/Pacific Economics Report Economics Team IT Adoption Fuels Productivity Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 25

Equity Research Asia/Pacific Economics Report Economics Team Dependency on Debt Financing Low product prices keeps margins low. Hence, capex depends on bank debt Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 26

Equity Research Asia/Pacific Economics Report Economics Team Deflationary Model Persists Households channel high savings, partly due to low consumption prices, to state-owned banks that lend onwards to firms. The state ownership of the financial system underpins the equilibrium. Bank (High Savings) (Low Cost Capital) Household Business (Price Discount) Businesses make high profits during an investment boom. But, high profits come from investment and, hence, are not sustainable. Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 27

Equity Research Asia/Pacific Economics Report Economics Team 10% Margin Economy? Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 28

Equity Research Asia/Pacific Economics Report Economics Team China Causes Inflation and CRB to Disconnect 1) China causes natural resource prices to rise but finished product prices to fall, as it charges less for value added due to its vast labor surplus. 2) China also gives prestige brands and upstream technologies pricing power, as it is two decades away from joining the competition but is raising demand now. 3) China essentially redistributes wealth from those that depend on labor and capital to those that depend on natural resources or intangibles. 4) Because China experiences wild investment cycles, its impact on redistribution of pricing power also swings. The short-term price movements in commodity prices usually reflect China’s cyclical momentum rather than secular growth. Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 29

Equity Research Asia/Pacific Economics Report Economics Team Wealth and Jobs Determine Deflation Retail Sales (Average Yo. Y % change) 1) Chinese household wealth has increased to Rmb 17 trillion, from Rmb 6 trillion in 1997, as Chinese have saved aggressively in response to the disappearance of the state enterprise-funded social safety net. 2) Household wealth is still substantially below 300 -400% of GDP, the level at which households feel secure about funding retirement; reaching that level would remove a major deflationary force. 3) Overhang of labor surplus, which keeps wages and consumption low, is another source of deflation. 4) In a deflationary growth model, productivity gains go to consumers. Bad debts tend to persist. Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 30

Equity Research Asia/Pacific Economics Report Economics Team Labor Quality Rapidly Improving Household preference for education is very high. Return on education appears to be negative. Hence, households are subsidizing human capital formation. Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 31

Equity Research Asia/Pacific Economics Report Economics Team But Wages Will Remain Low For Years Non-rural labor output is rising at only 2. 2% per annum in constant US, half as much as TFP, i. e. , consumers capture half of China’s productivity gain. Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 32

Equity Research Asia/Pacific Economics Report Economics Team When Can China Say ‘No’ to Price Reduc When non-rural employment reaches 80% of labor force, China can capture its productivity gain in wages. That is about 15 years away. Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 33

Equity Research Asia/Pacific Economics Report Economics Team When China Abandons Cheap Labor Stra Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 34

Equity Research Asia/Pacific Economics Report Economics Team The Next US$10 Trillion Economy E = Morgan Stanley Research Estimates, Source: CEIC , Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 35

Equity Research Asia/Pacific Economics Report Economics Team Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 36

Equity Research Asia/Pacific Economics Report Economics Team China: A Hard or Soft Landing? June 2004 Andy Xie (852 2848 -5220) Andy. Xie@morganstanley. com 37 Please see important disclosures starting on page 82.

Equity Research Asia/Pacific Economics Report Economics Team Energy Consumption Shows 5 Y Cyc Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 38

Equity Research Asia/Pacific Economics Report Economics Team Capital Inflow Supercharged This Cyc (2003) Export K Inflow $162 bn $113 bn ▲ Banks Credit ▲$40 bn Cars est. GDP ▲$220 bn est. Credit ▲$120 bn est. Property Credit ▲$175 bn est. Capacity Expansion Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. Credit system functions on collateral-based lending. Property and cars have emerged as the main assets for lubricating the credit system, attracting capital inflow. Low Fed funds rate served to push capital into China. 39

Equity Research Asia/Pacific Economics Report Economics Team Cars Accounted for 10% of Growth in 2 Passenger car sales appear to have peaked out. The rapid sales increase in the past two years was due to the introduction of auto financing. Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 40

Equity Research Asia/Pacific Economics Report Economics Team Property Accounted for 20% of Growth in Other fixed investment accounted for about one third of growth last year. Such investment was largely tied to suppliers to property and car industries. Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 41

Equity Research Asia/Pacific Economics Report Economics Team Electricity Is the Main Growth Bottlene 1) China’s electricity demand grew by 14. 3% in 2003 and 13. 3% in 2002 but averaged 7. 8% over the preceding ten years. The current electricity supply is 10% above trend. 2) Brownouts have become widespread. The government approved more power projects in early 2003 to address the issue. But the extra capacity will not come online before 2006. Capacity additions in 2004 will accommodate only 7 -8% growth in electricity supply. Brownouts Have Become Widespread Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 42

Equity Research Asia/Pacific Economics Report Economics Team What Happened? When the US bond yield dropped below China’s, money began to flood into China, triggering an investment bubble. Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 43

Equity Research Asia/Pacific Economics Report Economics Team Gauging Excess If 1 Q 04 trend continues, 2004 would create FI excess equal to 150% of 2001 -03 FI excess. Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 44

Equity Research Asia/Pacific Economics Report Economics Team A Hard or Soft Landing? Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 45

Equity Research Asia/Pacific Economics Report Economics Team Credit Tightening Has Backfired 1) Property investment rose 42% in 1 Q 04 from last year, compared to 26% in 2003; overall fixed investment accelerated to 43% from 26. 7%. 2) Mild tightening measures caused local governments, commodity businesses and property developers to rush out investment projects before the central government took stronger measures. 3) Such behavior has made tougher government measures a self-fulfilling outcome. 4) The political wind has shifted, and local government officials are now incentivized to curb investment. Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 46

Equity Research Asia/Pacific Economics Report Economics Team Property Is A Quantity Phenomenon 1) China needs to build a great quantity of property to urbanize. But the quantity growth is limited by purchasing power. Price is already ten times annual income in most major cities. New Property Sales (% of GDP) 2) Rapid volume increase will likely cause price decline, triggering another wave of bad debts. Thus, I believe that the sales will slow to 10 -15%, from 25%, starting from this year. That means that the starts last year were 100 million square meters too much. Residential Property Price (US$ per square meter) 3) Price declines in 2004 may be inevitable. Hot markets like Shanghai and Beijing are quite vulnerable. Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 47

Equity Research Asia/Pacific Economics Report Economics Team China: The Commodity Linkage Unit import price of minerals/metals rose by 57% and volume by 81% from 1 Q 02 -1 Q 04 as investment bubble exaggerated demand. Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 48

Equity Research Asia/Pacific Economics Report Economics Team China: Steel Consumption Could Call Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 49

Equity Research Asia/Pacific Economics Report Economics Team Commodity Prices Could Decline in 2 • Commodity prices have skyrocketed with China’s investment boom – in particular, the property boom, which has driven demand for commodities such as nickel for stainless steel, aluminum. • China accounts for over half of the demand increase in most commodities. As its property sector slows, China’s imports of such commodities will also soften; such imports could grow by less than half as much in 2004 compared to 2003. (ton mn) Mineral Imports Iron Ore Manganese Copper Ore Chromium Ore Aluminium Oxide Metal Imports Steel Aluminium Copper incl. scrap Oil Imports Crude Refined products Domestic Production Steel Aluminium Iron Ore Crude Oil Refined products 1993 1998 2001 2002 2003 32. 9 0. 6 0. 2 0. 6 1. 0 52. 0 1. 2 0. 7 1. 6 92. 4 1. 7 2. 3 1. 1 3. 4 111. 5 2. 1 1. 2 4. 6 148. 2 2. 9 2. 7 1. 8 5. 6 33. 5 0. 3 0. 6 12. 4 0. 6 1. 8 17. 2 0. 9 5. 0 24. 5 1. 1 5. 3 37. 2 1. 4 5. 8 15. 7 17. 4 26. 8 21. 6 60. 2 21. 4 69. 4 20. 4 91. 1 28. 2 89 114 225 132 103 197 165 113 143 2. 3 218 210 145 180 2. 7 230 219 150 219 3. 6 258 242 164 • Intermediate commodities suffer more than natural resources; China has built capacity for intermediate production during the investment boom, which will crush processing margins during the investment downturn. Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 50

Equity Research Asia/Pacific Economics Report Economics Team Inflation Isn’t A Problem 1) China does not have wage-led inflation but has bottleneck-induced inflation at times. PPI rose sharply with commodity prices as China’s property boom increased demand dramatically. China’s raw material imports increased by over 40% in volume last year. 2) Rising grain prices also bumped CPI last year. But it was due to a poor harvest and low inventory. The government probably tolerated the price increase by not releasing reserves into the market to redistribute income from the urban to the rural sector. The inflation reflected income redistribution rather than too much income. Raw Material Costs Push Inflation Interest Rates Will Remain Stable 3) As many interior cities have low income and spend a high proportion of income on food, the government cannot tolerate higher prices. CPI is likely to be tame in 2004. Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 51

Equity Research Asia/Pacific Economics Report Economics Team ‘Overheating’ Is Over Investment, Not Inf Raw Material Costs Push Inflation 1) ‘Overheating’ is a misnomer applied to China. Usually, the term refers to inflation caused by rising wages due to labor shortages. Because (1) China has ‘unlimited’ labor supply except for some pockets of expertise at times, which can be de-bottlenecked via learning, and (2) China has a competitive goods market, only raw material costs can cause inflation. 2) Investment drives raw material demand. That is why the investment cycle leads the inflation cycle. And Investment Is The Cause 3) Because China’s investment is such a big part of global demand, global commodity prices become more sensitive to China’s investment cycle. Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 52

Equity Research Asia/Pacific Economics Report Economics Team China: Consumer Could Be In Play 1) China’s government has been taking away state-sponsored economic security without giving households the wealth to handle the extra risks. Chinese households have been saving more to cope with more economic insecurity. 2) The government has cushioned the blow by transferring public housing units to tenants at one-third to one-fourth of market prices. That increased household wealth by 10% of GDP. 3) Chinese household wealth has roughly doubled in the past five years but consumption has increased by 56%. Total household wealth is about 140% of 2003 GDP. Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 53

Equity Research Asia/Pacific Economics Report Economics Team China: Less Deflationary Consumptio Retail Sales (Average Yo. Y % change) 1) Retail sales vary little in real price, as Chinese investment is supply-driven and production must be priced to go. The dismantling of So. E social safety net decreased consumption preference, which forced businesses to cut prices. 2) Deflation in the past five years has constituted a massive wealth redistribution from government, businesses to the people. But, the wealth distribution may not be all real, as NPLs accumulate in banks. 3) The tripling of household wealth in five years should make consumption less deflationary and, hence, lead to a better pricing environment. 4) However, capex discipline is also needed to improving pricing power. Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 54

Equity Research Asia/Pacific Economics Report Economics Team China: Consumption Could Outperform 1) Consumption has underperformed capex and exports continuously in the past two decades, as households increase savings rates to cope with declining economic security. Consumption to GDP ratio may hit an all-time low of 56% in 2003. 2) However, savings behavior may have absorbed most of the recent reform shocks. There are virtually no more shocks to come. Thus, consumption behavior could become normal in future. 3) It is quite possible that consumption could outperform capex for two years. It is even possible that consumption might outperform exports in the foreseeable future. Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 55

Equity Research Asia/Pacific Economics Report Economics Team China: Room to Stimulate Consumptio 1) China could promote local standards for digital TV and 3 G mobile technology to stimulate domestic demand, if protectionism limits export growth. 2) 50 million households could afford a TV under $1, 000. If China sets up a local standard, it would keep production at home and stimulate the economy. 3) If China creates its own 3 G standard, it could boost economy by 10% over 5 years. 4) 30 million households could afford cars priced under $5, 000. China could invest in transport networks and urban infrastructure to tap this demand. Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 56

Equity Research Asia/Pacific Economics Report Economics Team Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 57

Equity Research Asia/Pacific Economics Report Economics Team Taiwan: Consumer Economy June 2004 Andy Xie (852 2848 -5220) Andy. Xie@morganstanley. com 58 Please see important disclosures starting on page 82.

Equity Research Asia/Pacific Economics Report Economics Team Taiwan: Hollowing Out What Next? Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 59

Equity Research Asia/Pacific Economics Report Economics Team Taiwan: No New Source of Competitive Taiwan has not found a new source of competitiveness since IT outsourcing Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 60

Equity Research Asia/Pacific Economics Report Taiwan: What Next? Economics Team Consumer Economy: Offshore profits fund imports Current: IT OEM hollowing out (The current path) New competitive Industry: investment/ex port-led growth again Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 1) Stable living standard 2) Waiting for China to catch up in living standards 3) Reaching Western living standards with China 1) Rising living standards 2) Closing income gap with the West 3) Maintaining living standard premium over China 61

Equity Research Asia/Pacific Economics Report Economics Team Taiwan: Deflation Takes Hold Taiwan: Deflation Sets In 1) Taiwan is a mature economy and has entered a period of slow growth. 2) Deflation has taken hold, because capex has gone to China, while savings rate remains high. The surplus savings keep the currency strong, which brings deflation. 3) The only way out of deflation is either to reduce the savings rate or increase household capital demand. Both require home prices to be much lower than where they are. The political implications of lower property prices keep Asian countries in deflation …Because Capex Goes to China Taiwan: Low Growth Is Here to Stay Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 62

Equity Research Asia/Pacific Economics Report Economics Team Taiwan: Can Loan Growth Revive? 1) Loan demand is not responding to interest rates or liquidity. Demand from corporate sector is low as capex is shifted to China. Taiwan: Interest Rates Are Low 2) Demand from household sector is low as land prices are falling. 3) Loan demand could revive a bit if land prices stop falling. This is a possible case in the short term. 4) Yet property prices are still too high for savings and credit demand to be in balance. …Because Loan Growth Is Low Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 63

Equity Research Asia/Pacific Economics Report Economics Team Taiwan: China Profits Pressure NTD to Appr 1) Capex weakness doesn’t correspond with capital outflow, even though production share in China has gone up (half of IT production is in China now). Taiwan: Capital Outflow Has Stopped 2) It appears that Taiwan’s production in China is so profitable that its capex there is funded from profits. 3) The profitability of Taiwan’s businesses in China is putting a lot of pressure on the But Production Share In China Has Increased Taiwan dollar to appreciate. But weak capex is already causing deflation. A stronger currency would worsen deflation. Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 64

Equity Research Asia/Pacific Economics Report Economics Team Korea: Housing Boom June 2004 Andy Xie (852 2848 -5220) Andy. Xie@morganstanley. com 65 Please see important disclosures starting on page 82.

Equity Research Asia/Pacific Economics Report Economics Team Korea: Bottoming Out Slowly 1) Retail sales appear to be bottoming out. The impact of the credit bubble unwinding appears to be fully absorbed in current consumption. Economic Cycle Is Turning Up Slowly (Yo. Y % change) 2) Consumption will likely recover slowly. Household debt is still too high. Households cannot increase consumption quickly by borrowing. 3) Exports are still resilient. Japan appears to be recovering. The US is growing fast again. China is still strong. Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 66

Equity Research Asia/Pacific Economics Report Economics Team Korea: Capex May Be Migrating to Ch Capex Will Likely Remain Weak (Yo. Y % change) 1) Facility investment appears to be weaker than usual. It appears that Korean companies are stepping up capex in China to improve competitiveness and consolidate their market positions in China. 2) Construction is still strong due to a robust housing market and government infrastructure projects. This sector should remain strong for the foreseeable future. FDI Deficit Widens (Yo. Y % change) Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 67

Equity Research Asia/Pacific Economics Report Economics Team Korea: Exports May Not Mean Income Capex Will Likely Remain Weak (Yo. Y % change) 1) The recent strong exports may reflect components following migrated factories rather than rising demand or competitiveness. 2) The decoupling between IP and exports is similar to what has occurred in Taiwan in the past five years. Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 68

Equity Research Asia/Pacific Economics Report Economics Team Currency Is Key to Slowing Factory Out • The government appears to be determined to hold down the currency value in order to slow the outflow of factories to China. Korea tries to manage its currency in lines with its terms of trade. Manufacturing Withers with Deflation • The government is likely to institute more policies to keep factories in Korea, e. g. , increasing depreciation allowance. • But, the key problem is high wages and an inflexible labor market. Without addressing both, Korea can slow but not reverse the migration of factories to China. Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 69

Equity Research Asia/Pacific Economics Report Economics Team De-industrialization Is Source of Defla 1) Inflation continues to fall despite labor strikes and a high oil price. If China slows and commodity prices decline, the inflation rate will likely continue to decline. 2) Deflation risk remains significant even as an economic recovery is under way. Because the recovery is likely to be quite mild, the demand pickup may not be sufficient to offset the deflationary forces: (1) declining export prices and (2) too much debt. Inflation May Continue to Decline in Recovery (%) Weak Currency Policy Keeps Deflation at Bay 3) Bank of Korea is quite aggressive in weakening the won against the yen to keep deflation at bay. However, the trade surplus is rising rapidly as a result. Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 70

Equity Research Asia/Pacific Economics Report Economics Team Bond Market Anticipates Slow Grow 1) The yield curve is still quite flat, which suggests that the bond market predicts little economic acceleration. This is consistent with our view. 2) The Bank of Korea has been targeting property prices, which have outperformed the CPI. Monetary conditions are, therefore, too tight for the real economy. Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 71

Equity Research Asia/Pacific Economics Report Economics Team Housing Sector Should Support Gro Construction Sector Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 72

Equity Research Asia/Pacific Economics Report Economics Team Because Real Interest Rate Is Low Real Interest Rate Reaches 10 Y Low Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 73

Equity Research Asia/Pacific Economics Report Economics Team As Capex Demand Is Weak Business Demands Less Capital Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 74

Equity Research Asia/Pacific Economics Report Economics Team Due to Lack of New Competitive Indust 1) Together with other Tiger economies, Korea is losing competitiveness in traditional manufacturing. But, it has not found enough new competitive industries to invest its savings. 2) Korea’s relative gain in living standards appears to be stalling. It could reinvest its capital in improving living standard, i. e. , accepting a lower growth rate, or fund the development of new competitive industries. 3) The political paralysis means that finding new competitiveness is a distant dream. The housing sector is stepping forward to absorb the surplus capital. Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 75

Equity Research Asia/Pacific Economics Report Economics Team Construction Can Still Support Invest Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 76

Equity Research Asia/Pacific Economics Report Economics Team Local Investors Buy Bonds Separate Markets: Foreign Liquidity Dominates Equity Local Liquidity Dominates Bonds 1) While KOSPI is pricing in recovery in the global economy and, hence, the Korean economy, the bond market continues to lower inflation expectations and, probably, the growth outlook. The tight monetary conditions drive declining inflation expectations. 2) The current bond yield implies a forecast 5% nominal GDP growth rate. This is too low for Korea. The nominal growth rate should be about 6. 5% with inflation at 2 -2. 5% and the real growth rate at 4 -4. 5%. The current monetary conditions may be pushing Korea into a deflationary equilibrium. Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 77

Equity Research Asia/Pacific Economics Report Economics Team Competitiveness Problem Is Here To St • Korea has stabilized its export price over the past three years, as rising competitiveness in IT consumer products and automobiles has offset declining competitiveness in other industries. Is this a sustainable phenomenon? Manufacturing Withers with Deflation • The key is how rapidly China will increase its competitiveness, which would inevitably lead to a price decline. China is investing heavily in IT and automobiles. Prices in these two industries will likely decline, in my view. Source: CEIC, Morgan Stanley Research Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 78

Equity Research Asia/Pacific Economics Report Economics Team Internationalization Can Boost Competiti • Korea is discussing measures to sustain competitiveness. Proposed ideas include – North Asian Hub – Special Economic Zones • Targeting may not be the best answer. Improving incentives could work much better for Korea. In particular, we suggest, – Simplifying and reducing tax rates – Encouraging foreign ownership in the service sector – Internationalizing Korean consumption Better Improving Manufacturing Factory Efficiency Relying on design Current and IP for value R&D creation Competing against Hong Kong & Service Singapore • Korea must improve efficiency in all areas to sustain its living standard, with the rise of China. Becoming more global is the most important response, in our view. Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 79

Equity Research Asia/Pacific Economics Report Economics Team Asia/Pacific: Economic Forecast Summa Source: Morgan Stanley Research E = Morgan Stanley Research Estimates Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 80

Equity Research Asia/Pacific Economics Report Economics Team Asia/Pacific: Economic Forecast Summa Source: Morgan Stanley Research E = Morgan Stanley Research Estimates Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 81

Equity Research Asia/Pacific Economics Report Economics Team Important Disclosures Important US Regulatory Disclosures on Subject Companies The information and opinions in this report were prepared or are disseminated by Morgan Stanley Dean Witter Asia Limited and/or Morgan Stanley Dean Witter Asia (Singapore) Pte. and/or Morgan Stanley Asia (Singapore) Securities Pte Ltd and/or Morgan Stanley & Co. International Limited, Taipei Branch and/or Morgan Stanley & Co International Limited, Seoul Branch, and/or Morgan Stanley Dean Witter Australia Limited (A. B. N. 67 003 734 576, a licensed dealer, which accepts responsibility for its contents), and/or JM Morgan Stanley Securities Private Limited and their affiliates (collectively, "Morgan Stanley"). The research analysts, strategists, or research associates principally responsible for the preparation of this research report have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues. Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 82

Equity Research Asia/Pacific Economics Report Ratings Disclaimers Distribution and Definitions Economics Team Global Stock Ratings Distribution (as of May 31, 2004) Data include common stock and ADRs currently assigned ratings. For disclosure purposes (in accordance with NASD and NYSE requirements), we note that Overweight, our most positive stock rating, most closely corresponds to a buy recommendation; Equal-weight and Underweight most closely correspond to neutral and sell recommendations, respectively. However, Overweight, Equal-weight, and Underweight are not the equivalent of buy, neutral, and sell but represent recommended relative weightings (see definitions below). An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan Stanley or an affiliate received investment banking compensation in the last 12 months. ANALYST STOCK RATINGS Overweight (O). The stock’s total return is expected to exceed the average total return of the analyst’s industry (or industry team’s) coverage universe, on a risk-adjusted basis, over the next 12 -18 months. Equal-weight (E). The stock’s total return is expected to be in line with the average total return of the analyst’s industry (or industry team’s) coverage universe, on a risk-adjusted basis, over the next 12 -18 months. Underweight (U). The stock’s total return is expected to be below the average total return of the analyst’s industry (or industry team’s) coverage universe, on a risk-adjusted basis, over the next 12 -18 months. More volatile (V). We estimate that this stock has more than a 25% chance of a price move (up or down) of more than 25% in a month, based on a quantitative assessment of historical data, or in the analyst’s view, it is likely to become materially more volatile over the next 1 -12 months compared with the past three years. Stocks with less than one year of trading history are automatically rated as more volatile (unless otherwise noted). We note that securities that we do not currently consider "more volatile" can still perform in that manner. Unless otherwise specified, the time frame for price targets included in this report is 12 to 18 months. Ratings prior to March 18, 2002: SB=Strong Buy; OP=Outperform; N=Neutral; UP=Underperform. For definitions, please go to www. morganstanley. com/companycharts. ANALYST INDUSTRY VIEWS Attractive (A). The analyst expects the performance of his or her industry coverage universe to be attractive vs. the relevant broad market benchmark over the next 12 -18 months. In-Line (I). The analyst expects the performance of his or her industry coverage universe to be in line with the relevant broad market benchmark over the next 12 -18 months. Cautious (C). The analyst views the performance of his or her industry coverage universe with caution vs. the relevant broad market benchmark over the next 12 -18 months. Stock price charts and rating histories for companies discussed in this report are also available at www. morganstanley. com/companycharts. You may also request this information by writing to Morgan Stanley at 1585 Broadway, 14 th Floor (Attention: Research Disclosures), New York, NY, 10036 USA. Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 83

Equity Research Asia/Pacific Economics Report Economics Team Other Disclosures Other Important Disclosures For a discussion, if applicable, of the valuation methods used to determine the price targets included in this summary and the risks related to achieving these targets, please refer to the latest relevant published research on these stocks. Research is available through your sales representative or on Client Link at www. morganstanley. com and other electronic systems. This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The securities discussed in this report may not be suitable for all investors. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. This report is not an offer to buy or sell any security or to participate in any trading strategy. In addition to any holdings disclosed in the section entitled "Important US Regulatory Disclosures on Subject Companies", Morgan Stanley and/or its employees not involved in the preparation of this report may have investments in securities or derivatives of securities of companies mentioned in this report, and may trade them in ways different from those discussed in this report. Derivatives may be issued by Morgan Stanley or associated persons. Morgan Stanley & Co. Incorporated and its affiliate companies do business that relates to companies covered in its research reports, including market making and specialized trading, risk arbitrage and other proprietary trading, fund management, investment services and investment banking. Morgan Stanley sells to and buys from customers the equity securities of companies covered in its research reports on a principal basis. Morgan Stanley makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. We have no obligation to tell you when opinions or information in this report change apart from when we intend to discontinue research coverage of a subject company. With the exception of information regarding Morgan Stanley, reports prepared by Morgan Stanley research personnel are based on public information. Facts and views presented in this report have not been reviewed by, and may not reflect information known to, professionals in other Morgan Stanley business areas, including investment banking personnel. Morgan Stanley research personnel conduct site visits from time to time but are prohibited from accepting payment or reimbursement by the company of travel expenses for such visits. The value of and income from your investments may vary because of changes in interest rates or foreign exchange rates, securities prices or market indexes, operational or financial conditions of companies or other factors. There may be time limitations on the exercise of options or other rights in your securities transactions. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. To our readers in Taiwan: Information on securities that trade in Taiwan is distributed by Morgan Stanley & Co. International Limited, Taipei Branch (the "Branch"). Such information is for your reference only. The reader should independently evaluate the investment risks and is solely responsible for their investment decisions. This publication may not be distributed to the public media or quoted or used by the public media without the express written consent of Morgan Stanley. Information on securities that do not trade in Taiwan is for informational purposes only and is not to be construed as a recommendation or a solicitation to trade in such securities. The Branch may not execute transactions for clients in these securities. (continued on next page) Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 84

Equity Research Asia/Pacific Economics Report Economics Team Other Disclosures Other Important Disclosures Certain information in this report was sourced by employees of the Shanghai Representative Office of Morgan Stanley Dean Witter Asia Limited for the use of Morgan Stanley Dean Witter Asia Limited. This publication is disseminated in Japan by Morgan Stanley Japan Limited; in Hong Kong by Morgan Stanley Dean Witter Asia Limited; in Singapore by Morgan Stanley Dean Witter Asia (Singapore) Pte. , regulated by the Monetary Authority of Singapore, which accepts responsibility for its contents; in Australia by Morgan Stanley Dean Witter Australia Limited A. B. N. 67 003 734 576, a licensed dealer, which accepts responsibility for its contents; in Canada by Morgan Stanley Canada Limited, which has approved of, and has agreed to take responsibility for, the contents of this publication in Canada; in Spain by Morgan Stanley, S. V. , S. A. , a Morgan Stanley group company, which is supervised by the Spanish Securities Markets Commission (CNMV) and states that this document has been written and distributed in accordance with the rules of conduct applicable to financial research as established under Spanish regulations; in the United States by Morgan Stanley & Co. Incorporated and Morgan Stanley DW Inc. , which accept responsibility for its contents; and in the United Kingdom, this publication is approved by Morgan Stanley & Co. International Limited, solely for the purposes of section 21 of the Financial Services and Markets Act 2000 and is distributed in the European Union by Morgan Stanley & Co. International Limited, except as provided above. Private U. K. investors should obtain the advice of their Morgan Stanley & Co. International Limited representative about the investments concerned. In Australia, this report, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The trademarks and service marks contained herein are the property of their respective owners. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. The Global Industry Classification Standard ("GICS") was developed by and is the exclusive property of MSCI and S&P. Morgan Stanley has based its projections, opinions, forecasts and trading strategies regarding the MSCI Country Index Series solely on publicly available information. MSCI has not reviewed, approved or endorsed the projections, opinions, forecasts and trading strategies contained herein. Morgan Stanley has no influence on or control over MSCI’s index compilation decisions. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Morgan Stanley research is disseminated and available primarily electronically, and, in some cases, in printed form. Additional information on recommended securities is available on request. H 1913 P © 2004 Morgan Stanley Andy Xie (852) 2848 5220 andy. xie@morganstanley. com Please see important disclosures starting on page 82. 85