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Mar 10, 2009

China consumer prices fall for 1st time in 6 years

By ELAINE KURTENBACH, AP Business Writer

SHANGHAI, China – China's consumer prices fell for the first time in more than six years in February, underscoring weakness in the world's third-largest economy. Officials downplayed the risk of a debilitating deflationary spiral, but said the economic outlook was still "grim."

The consumer price index, China's main inflation benchmark, fell 1.6 percent from a year earlier, the National Statistics Bureau reported Tuesday.
A 1.9 percent decline in food prices, a major component of the index, and declines in international commodity prices helped to drag the index down. So did excess inventories for many industries.

While consumers might welcome falling prices, if it persists deflation can sap growth by cutting profits and increasing debt burdens, prompting companies to slash jobs, wages and investment.
"Deflation is the symptom of a weak real economy and industrial overcapacity, which has left companies with little pricing power," Jing Ulrich, JP Morgan's chairwoman of China equities, said in a report Tuesday.

But she said that China's deflationary trend was likely to be temporary and should reverse as the impact of government spending to stimulate demand takes hold.
The CPI's first fall since December 2002 suggests China can afford to cut interest rates further to help spur economic growth without reigniting inflation. But analysts said technical factors were the main reason for the decline.

Shortages of grain and pork pushed China's inflation to a 12-year peak of 8.7 percent in February, and that higher benchmark helped to exaggerate the year-later figure. The CPI rose 1 percent in January.
The producer price index, another key price indicator, fell 4.5 percent in February, compared with a 3.3 percent decline in January.

Declining prices for many global commodities are only now reaching consumers in the form of lower prices on the street, the statistics bureau said.
The falls in both the CPI and the producer price index were "due to declining prices for basic commodities on international markets due to various factors and should not be interpreted as a sign of deflation," said a statement posted on its Web site.

Although citydwellers rarely see evidence of falling prices on grocery shelves, some businesses say they are cutting prices.
"We adjusted our prices downward by about 10 percent between December and February," said Zhai Zhi, a salesman at Synear Food Co., a maker of frozen dumplings and snacks based in central China's Henan province.
Synear was cutting prices to match competitors and reflect lower costs, he said.
Economists say China, with its huge underdeveloped rural hinterland, is unlikely to succumb to the kind of protracted price declines that stymied Japan's economy in the 1990s.

A slump in demand for China's exports has left companies in many industries with excess inventories left to be sold, adding to the downward pressure on prices. But signs of stabilizing export orders suggest that process may be winding down, some economists say.
"China's situation is totally different," said Andy Xie, an independent economist based in Shanghai.
"This is temporary. Inventories are being discounted. Once the inventories are sold prices will begin to rise again," Xie said.

Still, China faces other pitfalls.

"It's fair to say in coming months we will see quite a grim picture," Commerce Minister Chen Deming told a news conference in Beijing. Chen said trade figures for February, which he did not disclose, would show declines.

Power consumption, a key indicator of economic activity, fell by 3.7 percent in January and February from the same period last year, while nonferrous metals output fell 9.5 percent, said Li Yizhong, China's industry minister.

"We should not be overly optimistic. China's industry is still in its most difficult situation," Li said. "The international financial crisis has not bottomed out and it is having a more and more profound impact on China's economy."
A China central bank official signaled Monday that authorities may be planning fresh measures to revive growth.
"We still have plenty of space for monetary policy maneuvers," the official Xinhua News Agency quoted Su Ning, a vice governor of the People's Bank of China, as saying.

Although there is room for only small adjustments in interest rates, China has wider leeway to cut bank reserve requirements, Su said.
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AP Business Writer Joe McDonald and Associated Press researcher Bonnie Cao in Beijing contributed to this report.

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Sickly U.S. economy set for 2nd half rebound: survey

WASHINGTON (Reuters) – The recession-hit U.S. economy is proving weaker than economists expected just a month ago, but forecasters still think a recovery is in the cards for later this year, a survey released on Tuesday showed.

"Consumer spending and residential investment are expected to turn positive and begin boosting GDP growth in the third quarter of this year," the newsletter Blue Chip Economic Indicators said, summarizing its survey of private economists.

The consensus of the 51 forecasters surveyed looks for U.S. gross domestic product to tumble at a sharp 5.3 percent annual rate in the first quarter and to decline at a 2 percent pace in the second quarter.

In the third quarter, however, economists expect the economy to expand at a 0.5 percent rate, followed by a 1.8 percent fourth-quarter gain.
For the year as a whole, the economy is expected to shrink 2.6 percent, which would be the largest annual contraction since the Great Depression. A month ago the survey pointed to a drop of 1.9 percent.

"A huge drop in business inventories, further declines in non-residential fixed investment and another sharp drop in residential investment" are expected to drive economic weakness in the first half of 2009, the survey said.
In the first half of the year the economy will also be pressured by "continued, albeit diminishing declines in consumer spending and falling exports," it added.
By the second half consumers are expected to open their wallets, encouraged by the sharp drop in energy costs, tax cuts contained in a recently passed fiscal stimulus package and some loosening of credit conditions, the survey said.

However, consumer enthusiasm will likely be tempered by reminders of sharp declines in home prices and retirement savings and stubbornly high levels of unemployment.
"The unemployment rate now is expected to average 8.6 percent this year and 9.1 percent in 2010, the highest back-to-back years of unemployment since 1982-1983," the survey said.

The pace of the recovery should quicken next year, the survey found. In the first quarter of 2010, the economy is expected to grow at a 2.3 percent pace, which is expected to quicken to a 3.1 percent pace by year end.
The latest poll was conducted prior to a government report on Friday that showed the unemployment rate surged to a 25-year high of 8.1 percent last month as employers cut 651,000 jobs.

(Reporting by Nancy Waitz; Editing by Dan Grebler)

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Mar 6, 2009

Nationalized Banks: Why They Might Work

IndyMac will soon earn the first half of its name back. The government, which seized the failed bank last summer, is expected to close a deal in the next week that would return the California mortgage lender to private ownership. For IndyMac, the deal means independence in less than eight months. For the government, the IndyMac sale provides a shining example that takeovers can work at a time when the Obama administration may soon begin pushing for more nationalizations. (See 25 people to blame for the financial crisis.)

"The fact that the government ownership of IndyMac is coming to an end in just eight months is successful," says Kevin Stein, a former associate director of resolutions at the Federal Deposit Insurance Corporation and an investment banker at FBR Capital Markets. "Nationalization is a tool that has been used in the past and can be effective in the future in certain situations."

A how-to model for nationalizations could prove valuable in the months ahead. The government is in the process of stress testing the nation's largest banks as part of Treasury Secretary Timothy Geithner's plan to fix the ailing sector. And many think the outcome of those tests could lead to more takeovers. So far, Geithner and other officials have denied they are interested in running banks. But in the past few weeks, a number of prominent Republicans and fiscal conservatives, most notably former Federal Reserve Chairman Alan Greenspan and Senator Lindsey Graham, have joined those who think the government should consider nationalizing the most troubled institutions. Bank of America, Citigroup and Wells Fargo could all be candidates for increased government ownership and control. (See the top 10 financial-crisis buzzwords.)

To be sure, many economists, and Americans in general, remain firmly against the idea. Some aversion relates to the very the word, nationalization, which evokes images of socialist regimes seizing private companies. A recent USA Today-Gallup poll found that 57% of Americans are against "temporarily nationalizing U.S. banks." Yet only 44% oppose a less politically threatening version, "temporarily taking [a bank] over."

But the debate involves more than semantics. One concern is that investors aren't going to want to hold any bank shares if the government can simply seize ownership, effectively rendering the bank's stock worthless or close to it. An even greater concern is that the government won't be able to resell banks it takes over. That would expose taxpayers to big losses and leave Uncle Sam in the banking business for years to come.

The success of IndyMac, though, shows the government can accomplish its goal in a relatively short period of time. That's not the only evidence the Feds know how to hustle. Since the beginning of 2008, the government has seized 41 failed banks. In nearly all of those cases, the FDIC already had buyers lined up for the failed institutions by the time they were taken over. Troubled banks are generally closed on a Friday, and given over to new owners over the weekend. In most cases, the failed bank's branches reopen with a new name on the door the following Monday. The one exception is IndyMac, which the FDIC decided to nationalize, rather than sell off immediately. (See the worst business deals of 2008.)

Here's how it worked. The FDIC decided to run the bank itself rather than rely on the bank's past managers or hire new ones. So almost immediately after the FDIC took over IndyMac last July, the agency sent over two of its top officials, chief operating officer John Bovenzi and Dallas-based assistant director Rick Hoffman, to Pasadena, California, to run the bank. Bovenzi became IndyMac's CEO. Hoffman took on the role of president. For Bovenzi and Hoffman, cost cutting was high up on their agenda. They slashed the rate the bank was paying on certificates of deposit. Expensive perks were out as well — the government even sold off the company's Dodgers and Lakers season tickets. A company Porsche fetched $65,000 on Autotrader.com. Also gone is much of the artwork in the elevator lobby, and the high-priced office furniture in now empty cubicles.

But the FDIC also has a public policy mission with IndyMac, which had made many risky mortgage loans. Many of those loans went to borrowers in California, where home prices have fallen sharply. The FDIC tried to show it could keep many of those borrowers in their homes and still turn around the bank. In all, IndyMac modified the loans of more than 10,000 of its borrowers in less than eight months, in many cases eliminating the chance that those borrowers would face foreclosure. (See pictures of Americans in their homes.)
Despite the government's successes, IndyMac also shows that nationalizations can be costly. Last week, the Treasury Department estimated that the IndyMac takeover will end up costing the FDIC nearly $11 billion. Nearly half of those losses came from the actual day-to-day operations of IndyMac, which lost $4.4 billion in the second half of last year.

What's more, IndyMac is only one of four financial firms to have effectively been nationalized during the current financial crisis. Among that group, which also includes Fannie Mae, Freddie Mac and AIG, only IndyMac has been returned to private ownership. The others look a long way off from a similar outcome, if at all. Critics of nationalization say that taking over and resolving the issues at a bank like Citigroup, which had hundreds of thousand of employees and businesses spread around the world, would be a much more difficult task than turning around IndyMac, which is a relatively small bank concentrated in the mortgage business.
"IndyMac was a one trick pony," says Bert Ely, a banking consultant. "Citigroup has a whole stable of horses you have to deal with." Nonetheless, IndyMac does provide an example where nationalization worked, suggesting that at least some of the fears critics have of nationalization may be unfounded.

"The risk is you have a nationalized bank that is treated differently by depositors and borrowers because it is owned by the government," says FBR's Stein. "But in the past that risk has been shown to be manageable."

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Trading Places: China and the U.S.

It would not be fair to compare Mao Zedong to either President Bush or President Obama. Neither has swum the Yangtze River and neither was a rabid communist. Mao created the central government system that is currently being dismantled. Bush and Obama may be remembered by historians as the American leaders who centralized much of the financial and industrial portions of the U.S. economy.

China and the U.S. are passing one another going in opposite directions. Deng Xiaoping, who ran China after Mao had become a tourist attraction lying in a glass box in Beijing, began moving the country to a capitalist economy. By the time he died in 1997, China had begun vigorous trade with the outside world leading to remarkable years of GDP growth. (See pictures of China's electronic waste village.)

China now allows most of it major companies to be privatized and traded on public stock exchanges. It is the largest owner of U.S. Treasuries in the world and a major investor in private businesses through its sovereign wealth fund. The Chinese banking system has clearly been developed by the government to encourage the creation of private enterprise. Parts of the financial and commercial structure of China are still owned by the state, but the government's once-famous totalitarian grip on the economy appears to be loosening some each year.

The liberalization of China's business may recede to some extent because the recession will cause the level of government support for the economy to grow to keep GDP from contracting. The nation's prime minister says GDP will grow 8% this year, which seems nearly impossible. But if the government does have to offer financial support to the banks and industry, it will certainly come with some strings attached and may even cause the central government to take larger shares in businesses that it had planed to privatize.

But, the move in China seems to be relentlessly toward a free market economy. Because China has a rich treasury, it can afford to support a rotation to privatization without the immediate concern that its government will be troubled by huge deficits.

The U.S. faces both large deficits and the need to take de facto control of parts of the credit, financial, and industrial sectors. In effect, the amount of the nation's economic activity controlled by the government will rise to a level which would have been unimaginable even months ago.

There is no way to predict what the American or Chinese system will look like in ten years. If the recession in the U.S. lasts another two years, the amount of GDP that is effectively under government control will increase rapidly as the Administration and Congress do whatever they can to keep large industries from collapsing.

On the other side of the Pacific, China may have the luxury of having an economy that continues to expand, even if it is at a much slower rate than at any time over the last decade. China can bankroll privatizations without worrying that the wealthy residents of the country will fight it in the legislature.

By the end of the downturn, the U.S. may look more like China than China does, at least economically.

— Douglas A. McIntyre

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Mar 4, 2009

Brown tells Congress of 'economic hurricane'

By DESMOND BUTLER, Associated Press Writer

WASHINGTON – British Prime Minister Gordon Brown said Wednesday an "economic hurricane" has swept the world and U.S. leaders shouldn't view the crisis as limited to America's borders.

In a formal address to a Joint Meeting of Congress, Brown said that U.S.-European relations were at an all-time high and that the two nations must seize on the opportunity to bring about change. He warned that protectionism ultimately makes every nation vulnerable because "a bad bank anywhere is a threat to good banks everywhere."

"No matter where it starts, an economic crisis does not stop at the water's edge," he said told lawmakers gathered in the cavernous House chamber. "It ripples across the world," declared Brown, whose speech was applauded on several occasions.
The prime minister was facing a U.S. Congress deeply divided on how to solve America's economic crisis, with Republicans sparring with President Barack Obama on whether more government intervention and money can salvage financial markets.

His remarks come as he is looking for a boost to his own political fortunes. In hard political times at home, he hopes to benefit from Britons' high regard for President Barack Obama and to demonstrate British leadership at a time of economic uncertainty.

Brown repeatedly spoke of Americans' optimism in the face of tough times with nods to President Franklin D. Roosevelt and President Ronald Reagan, as well as Obama. He referenced President George W. Bush once, briefly referring to Bush's work on Middle East peace talks.

Brown took a swipe at Bush's defense secretary, Donald Rumsfeld, who once scoffed at European critics of the war, branding them "Old Europe."
"There is no old Europe, no new Europe," Brown declared. "There is only your friend Europe."

In light of this renewed relationship, Brown said the U.S. and Britain should work together to reduce interest rates worldwide and help emerging markets rebuild their banks. He said the international community must also agree to new standards for the banking system that would improve accountability and transparency.
"Just think how each of our actions, if combined, could mean a whole much greater than the sum of the parts," he said.

Brown was laying the groundwork for a G-20 economic summit of advanced and developing nations meeting in London next month. The summit, which Brown is chairing, is critical for improving global economic confidence as well as Brown's political prospects.
Brown has been falling significantly behind the conservative opposition in British opinion polls. Supporters hope an appearance with Obama and a leading role in next month's economic summit will change his fortunes.

In tackling the protectionist issue, the British leader seeks to present himself as a plain-speaking friend, not reluctant to question his trans-Atlantic ally like predecessor Tony Blair, whom critics dubbed Bush's poodle.

Brown met privately with Obama on Tuesday. The two were said to have discussed the economic meltdown, as well as the war in Afghanistan, Iran's nuclear program, global warming and other topics.

Britain has invested billions to bail out banks and boost the country's economy, while Obama has had a $787 billion economic stimulus bill passed in the United States.

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Citigroup to lower some mortgage payments

By MICHELLE CHAPMAN, AP Business Writer

NEW YORK – Citigroup Inc. said Tuesday that it will lower mortgage payments for some homeowners to an average of $500 a month for three months as part of a new program to help the unemployed.

The struggling bank makes the move as President Barack Obama looks to lenders to adjust the way loans are handled.

Citigroup's new mortgage efforts also come on the heels of the latest attempt to bail out the company, which includes the U.S. government's exchange of up to $25 billion in emergency bailout money given to Citigroup for as much as a 36 percent equity stake in the company. The deal between the Treasury Department and Citigroup represents the third rescue attempt for the bank in the past five months.

Unemployed homeowners who may qualify for assistance from Citigroup under the Homeowner Unemployment Assist program include those that are 60 days or more past due on their mortgages or in foreclosure and can pay the reduced amount. Customers must also have a first mortgage loan that is owned and serviced by CitiMortgage Inc. and conforms to government sponsored enterprise limits. The house must also be the customer's primary residence, with homeowners meeting all insurer and guaranty requirements.

"Our Homeowner Unemployment Assist program is intended to serve as a bridge toward a longer-term solution, helping homeowners stay in their homes and in their communities while they get their feet back on the ground," CitiMortgage Chief Executive Sanjiv Das said in a statement.

Citigroup predicts thousands of homeowners may be eligible for the program over the next two years.

Those that partake in the program and are still without jobs after three months will have their mortgages handled on a case-by-case basis to come up with the best payment option, Citigroup said. Others that find work within the three-month period can go back to paying their original mortgage amount or receive a long-term loan modification if qualified.

The program may also be expanded to include customers that are in early delinquency stages or are current on their mortgage at a later point in time once an initial evaluation of the program is complete.

Homeowner Unemployment Assist is part of the bank's existing Citi Homeowner Assistance, which tries to help customers avoid foreclosure.

One of the hardest hit banks by the ongoing credit crisis, Citigroup is in the process of shedding assets and cutting staff as it looks to reduce costs and streamline operations ahead of splitting its traditional banking businesses from its riskier operations. In January the company reached a deal to sell a majority stake in its Smith Barney brokerage unit to Morgan Stanley.

In premarket activity Tuesday, Citigroup shares climbed 11 cents, or 9.2 percent, to $1.31.

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China to boost defense spending by 15 pct in 2009

By CHRISTOPHER BODEEN, Associated Press Writer

BEIJING – China announced plans Wednesday to boost military spending by 14.9 percent this year, maintaining a longtime trend of annual double-digit percentage increases that have stirred concern in Washington and among Beijing's neighbors.

National People's Congress spokesman Li Zhaoxing said the increase was "modest" and that much of the additional funding would go toward boosting salaries and benefits for servicemen.

"China has always paid attention to controlling the size of defense expenditure and set the defense expenditure at a level that ensures the coordinated development of national defense and our economy," Li said.

China's defense spending is on par with Japan, Russia and Britain, but is still dwarfed by U.S. military expenditures, which are nearly 10 times as large. International military experts say Chine's defense budget may be much higher than Beijing says because spending on military hardware and other items are not included.

The increase to 480.68 billion yuan ($70.27 billion), follows a 17.6 percent increase last year and 17.8 percent in 2007 — the biggest jump in more than a decade. It also marks the 19th double-digit percentage increase in the past two decades.

Li said the latest figure equals 6.3 percent of the overall budget for 2009, down slightly from last year.

He said the increase would not pose a threat to any country, and that much of it would go to salaries and benefits for China's 2.3 million-strong military force, the world's largest.

"The limited military force is for safeguarding the state sovereignty and territorial integrity, and will not pose any threat to any other country," Li said.

Despite such assurances, the U.S., Japan and others have questioned the reasons behind Beijing's rapid buildup. The growth of Chinese military power has prompted widespread speculation over possible future conflicts over Taiwan, the self-governing island Beijing has vowed to reunite with — by force if necessary — as well as over contested island chains in the South China Sea and crucial sea lanes in the Indian Ocean.

U.S. National Intelligence Director Dennis Blair said last month that China's military spending increases "pose a greater threat to Taiwan." Relations between rival China and Taiwan have warmed recently, but Beijing still threatens to use military force to oppose any move by Taiwan to declare formal independence.

Chinese defense analysts said this year's lower percentage increase in spending may reflect both the calming tensions with Taiwan and the tapering off of some of the most ambitious military development programs.

Teng Jianqun, a retired People's Liberation Army colonel who now serves as deputy secretary general of the China Arms Control and Disarmament Association, said that the growth rate for military spending should go down, but that "the double-digit rate will remain for at least a few years in future."

Shanghai-based analyst Ni Lexiong said the smaller increase might also speak to tighter budgets resulting from the world financial meltdown.

"The global economic crisis effected China as well as other countries. I think this year most countries will cut their military budgets," Ni said.

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World stock markets rise amid China stimulus hopes

By JEREMIAH MARQUEZ, AP Business Writer

HONG KONG – Asian stock markets rebounded Wednesday as hopes China would expand measures to revive its economy countered growing signs of economic decay in the U.S. and other major countries. European shares also gained.

The upward move followed heavy selling over the last two days and bucked a fifth-straight day of declines on Wall Street.

Chinese shares led the region's advance, with Shanghai's index jumping more than 6 percent on speculation the country's leaders would unveil new initiatives to bolster the world's third-largest economy, its growth now sputtering, at a legislative meeting that opens Thursday. That gave a boost to other Asian markets, including Japan and Hong Kong.

Also helping sentiment were figures suggesting Chinese manufacturing, while contracting again in February, did so at a slower rate than the previous month. For many investors and analysts, the news signaled the country's downturn may be bottoming out. As one of the few major economies still expanding, China is being closely watched amid hopes its demand and trade can help the region weather the most severe global slowdown in decades.

Optimism over China helped offset more economic gloom elsewhere, this time in Australia, whose economy shrank 0.5 percent in the last quarter of 2008. The contraction, which surprised economists, was the country's first in almost eight years.

Despite the gains, economic and industry data in most countries is still dismal, and analysts were bracing for more selling that could lead Asian benchmarks to test lows reached last year at the height of the credit crisis.

"There are still too many uncertainties," said Peter Lai, investment manager at DBS Vickers in Hong Kong. "The news around the world is still bad and investors are still pessimistic. People are waiting for good news, but no one knows when that's coming."

In Japan, the Nikkei 225 stock average was up 61.24 points, or 0.9 percent, to 7,290.96, while Hong Kong's Hang Seng added 297.27, or 2.5 percent, to 12,331.15. South Korea's Kospi climbed 3.3 percent to 1,059.26.

In mainland China, Shanghai's index surged 126.68, or 6.1 percent, to 2,198.11. Analysts said reports the government may consider lowering fees collected on stock trading supplied an additional jolt.

Markets in Singapore, Taiwan and New Zealand also gained. Australia's index shed 1.6 percent.

In early trade in Europe, Britain's FTSE 100 was up 2.4 percent, Germany's DAX gained 2.9 percent and France's CAC-40 added 2.3 percent. U.S. futures pointed to a solidly higher open for Wall Street on Wednesday. Dow futures rose 119, or 1.8 percent, to 6,788 and S&P500 futures gained 14.3, or 2.1 percent, to 704.

Overnight in the U.S., Wall Street fluctuated throughout the day before closing down after Federal Reserve Chairman Ben Bernanke said economic recovery depends on the government's ability to stabilize weak financial markets.

Investors were also unnerved by figures showing U.S. auto sales plunged 41 percent in February from the previous year, hovering near historic lows.

The Dow fell 37.27, or 0.6 percent, to 6,726.02, its lowest close since April 21, 1997. The index is now down more than 52 percent from its record of 14,164.53 set in October 2007.

Broader stock indicators also fell. The S&P 500 index slid 4.49, or 0.6 percent, to 696.33.

In stocks, Chinese gains spread across most sectors, with resources, properties and banks especially strong. Major state-owned lender, Bank of China, rose 9.4 percent in Shanghai, while Aluminum Corp. of China soared 6.6 percent in Hong Kong.

In Tokyo, material and machinery companies rose on expectations of greater Chinese demand, with Hitachi Construction Machinery Co. up 7.4 percent.

However, Japan's major automakers were hit by selling on last month's sales reading in the U.S. Toyota lost 2.5 percent to 2,985 yen, and Honda fell 3.5 percent to 2,205 yen.

Oil prices rose in Asian trade, with benchmark crude for April delivery up $1.03 to $42.68 a barrel on the New York Mercantile Exchange. The contract added $1.50 to settle at $41.65 overnight.

In currencies, the dollar fell to 99.33 yen compared to 98.43 yen. The euro fell to $1.2513 from $1.2531.

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AP Business Writer Elaine Kurtenbach in Shanghai contributed to this report.

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