China to Cut Infrastructure Spending, Aims to Spur Consumption March 5 (Bloomberg) -- China pledged to pare spending on roads, railways and airports and boost outlays on health and social security as Premier Wen Jiabao seeks to raise the role of consumer spending in the world’s third-largest economy.
“The domestic economy still faces some prominent problems,” Wen, 67, said in the text of a speech to the National People’s Congress, similar to the U.S. State of the Union address. He cited a surge in property prices, one result of the record fiscal stimulus and credit expansion from last year that was designed to counter the impact of the global recession.
Today’s pledges include raising health and social security outlays by more than 8 percent and expanding pensions, efforts that may help boost consumer spending and ease a reliance on exports that tumbled last year. At the same time, Wen indicated no roll-back in the fiscal stimulus that spurred a rebound: the government targeted a deeper budget deficit for 2010.
“Wen needs policy consistency to sustain the economic recovery, create enough jobs and maintain social stability,” Shen Minggao, chief economist for greater China at Citigroup Inc. in Hong Kong, said before today’s report.
After budgeting for a record 950 billion yuan fiscal deficit in 2009, Wen today pledged a 1.05 trillion yuan shortfall this year to fund the second year of a 4 trillion yuan stimulus package. Spending on transportation will fall 2.7 percent, the government said.
Growth Accelerated
China’s growth accelerated to 10.7 percent, the fastest pace since 2007, in the fourth quarter of last year, partly because of record bank lending.
“Last year’s meeting was all about policies to boost growth,” Tim Condon, a Singapore-based chief Asia economist at ING Groep NV, wrote before today’s meeting of lawmakers. “This year’s will be about adjusting policies to deal with some of the side effects of the policies put in place last year.”
The government needs to tackle “the fastest money supply growth since the over-heating, hard-landing period” of the early 1990s, Condon said.
The property market will probably weaken because the government has signaled that it wants prices to fall, billionaire Zong Qinghou, the chairman of Hangzhou Wahaha Group Co., said March 3.
China may struggle to fix economic imbalances because key leaders are nearing the end of their tenures and vested interests can block measures such as a property tax that could help to wean local governments from dependence on land sales and taxes on industrial production.
‘Election Mode’
“China’s in severe election mode,” said Jim McGregor, a senior counselor in Beijing at APCO Worldwide, a public-affairs group advising clients including China Cosco Holdings Co., Asia’s biggest shipping company. “They have 2 1/2 years left in their term,” he said before the meeting. There is “a lot of jockeying for position.”
Wen has said China’s growth model is unbalanced and unsustainable.
In last year’s work report, the premier said that the nation faced “unprecedented difficulties and challenges” and he pledged to “significantly increase” spending to reverse an economic slide. In contrast, this year the central bank has twice raised lenders’ reserve requirements to cool the economy.
Still, policy makers have left interest rates unchanged and also maintained the yuan’s effective peg to the dollar, which has kept the currency at about 6.83 since July 2008, aiding exporters as global demand remains weak.
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Yuan Options Most Expensive as China Pledges No Rise (Update1) March 5 (Bloomberg) -- Options traders are more bullish on the yuan than any other currency as they bet that growing exports and accelerating inflation will overcome China’s vows to maintain a 20-month dollar peg.
The premium charged for the right to buy yuan in three months over contracts to sell has more than tripled this year to the most among 44 currency options tracked by Bloomberg. The 2 percentage point difference is the most since China last ended a fixed-exchange rate in July 2005, so-called risk-reversal rates show. Expectations for price swings also have tripled in the fastest implied volatility rise among the currencies.
Premier Wen Jiabao today told lawmakers at an annual meeting the government will promote the yuan’s usage abroad and aims to manage inflation expectations, a goal that may be aided by a stronger currency. While President Barack Obama has urged China to let the yuan climb to aid U.S. manufacturers, Chinese exporters say a gain of more than 2 percent may wipe out profits.
“It’s the optimal timing to bet on yuan appreciation,” said Richard Benson, who oversees $14 billion as an executive director at Millennium Global Investments in London. “They have a number of tools in their armory to tighten monetary policy, and the currency is the bluntest one. It is highly likely the yuan will rise at least 3 percent this year.”
Flat Yuan
The People’s Bank of China has held the currency almost unchanged at about 6.8 per dollar since July 2008 as it protected exporters from the global financial crisis, which left 20 million Chinese migrant laborers unemployed. Policy makers had allowed the yuan to strengthen 21 percent in the previous three years.
Traders are betting it will gain 0.8 percent by June, three-month non-deliverable forwards show. The yuan will rise 4.2 percent to 6.55 by the end of 2010, according to the median estimate in a Bloomberg survey of 20 analysts. The consensus was 2.2 percent weaker at 6.7 in September.
Jim O’Neill, the chief Goldman Sachs Group Inc. economist who coined the term BRICs for Brazil, Russia, India and China in 2001, said last month that “something is brewing” and predicted policy makers will allow a one-time 5 percent gain.
Chinese Commerce Minister Chen Deming told reporters in Beijing on March 3 that the yuan will be held steady. Yao Jian, spokesman for the ministry, said on Feb. 25 the policy was necessary because China’s foreign trade hasn’t recovered to pre- crisis levels.
Weakening Euro
The dollar peg has pushed the currency 8.9 percent higher against the weakening euro in the past three months, increasing the price of China’s imports in Europe, its largest trading partner, said Warren Hyland, who helps Schroder Investment Management Ltd. oversee $200 billion in assets from London.
Exporters also are being hit by rising wages. China’s Jiangsu province, the third largest export region, increased minimum wages by about 13 percent in February to ease a labor shortage. Shanghai, the No. 2 exporter, will do likewise on April 1.
“They may find this is still a fragile environment to drop the peg,” said Hyland, who abandoned a wager on the currency’s appreciation earlier this year. “At this juncture, betting on the yuan’s gain is probably a poor bet.”
The central bank is reducing its focus on protecting growth to contain inflation. Regulators have ordered banks to set aside more cash as reserves and to curb lending after the economy grew 10.7 percent in the fourth quarter, the most in two years. Housing prices climbed at the fastest pace in 21 months.
$1 Million
Anti-inflation efforts are being undermined as central bank sales of yuan for dollars to maintain the peg flood the economy with cash. China’s accumulation of foreign reserves grew by $1 million per minute in the second half of 2009 to $2.4 trillion, a sum approaching the size of the U.K. economy, central bank data show. Money supply, as measured by M1, rose a record 39 percent in January, triple the average rate in 2005, according to the data.
Consumer prices probably climbed 2.5 percent in February from a year earlier, up from 1.5 percent in January in the biggest increase since October 2008, according to the median estimate from 23 economists. The inflation rate was 1.8 percent in July 2005, when the government loosened its grip on the currency by letting it appreciate 2.1 percent in one day after maintaining a peg of about 8.3 for a decade. China’s statistics bureau will issue its next inflation report on March 11.
Fighting Inflation
“Additional tools will be needed to fight inflation, and one of them is to allow the currency to appreciate,” said Guillermo Osses, who helps oversee $50 billion in emerging- market assets at Pacific Investment Management Company LLC, manager of the world’s biggest bond fund. “The currency has room to appreciate much more than 5 percent in the medium to long run.”
A fixed-exchange rate adds inflation pressure because the Chinese central bank can’t raise interest rates without luring more speculators at a time when the U.S. Federal Reserve’s target rate is near zero. China’s benchmark deposit rate is 2.25 percent.
“An earlier appreciation would give more freedom for policy makers as hot money inflows increase and foreign pressure rises,” said Zhang Ming, deputy chief of the International Finance Research Office of the Chinese Academy of Social Sciences, the government’s economic adviser.
Overseas shipments have rebounded from the global recession, rising 21 percent in January from a year earlier, the fastest pace in 16 months. Fifteen U.S. senators called for stiffer tariffs on China’s imports last week, accusing the country of artificially keeping the yuan cheap.
‘Manipulator’
Under the Omnibus Trade and Competitiveness Act of 1988, the Obama administration must decide by April whether to declare China a “currency manipulator,” a designation the U.S. hasn’t invoked since 1994. China held $895 billion of Treasuries on Dec. 31, the leading overseas investor in such debt.
The Chinese government is surveying manufacturers to gauge the effect appreciation would have, according to a Feb. 26 report in the 21st Century Business Herald, a Guangzhou newspaper.
Ten companies surveyed by Bloomberg News at the East China Fair trade show on March 1 said they could withstand appreciation of between about 1 percent and 5 percent. The median response was 2.3 percent. Exports accounted for a quarter of China’s gross domestic product last year, down from a third in 2008.
Increased Swings
Traders are increasing bets on the currency. Three-month implied volatility on yuan options show traders expect swings of 3.27 percent, a one-year high, up from 1.07 percent on Jan. 1. Implied volatility has risen for six of 44 other currencies, including the Chilean peso and the Israeli Shekel, Bloomberg data show. The premium on three-month contracts to buy the yuan over options for sales has risen to 2.03 percentage points, from 0.58 point at the start of 2010 and the most since July 2005.
“Implied volatility has gone through the roof,” said Bernard Yeung, the head of currencies for Asia at National Australia Bank Ltd. in Hong Kong. “Everyone is banking on a one-off revaluation or a big jump” by May, he said.
A stronger yuan increases the purchasing power of Chinese residents and reduces the country’s reliance on exports, said Karthik Sankaran, a money manager and principal in New York at Covepoint Capital Advisors, an emerging-market hedge fund.
Chinese President Hu Jintao urged “no delay” on Feb. 3 in efforts to reduce dependence on exports and to boost service industries and domestic consumption.
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Yen Drops on Speculation Bank of Japan Will Expand Easing
By Yasuhiko Seki and Ron Harui
March 5 (Bloomberg) -- The yen declined against higher- yielding currencies on speculation the Bank of Japan will step up credit easing measures to stave off deflation.
The Japanese currency fell against all its 16-most active counterparts as Nikkei English News said, without citing anyone, the central bank will likely discuss more monetary easing measures at its two-day meeting starting March 16. The euro is poised for a weekly drop against the dollar on receding optimism that Greece will receive outside financial aid to fix its debt problems, hurting confidence in the common currency.
“Given the fact that the BOJ is already running far behind other central banks in exit strategies and prospects that interest rates here will remain low, yen-carry trade may become popular again,” said Soichiro Mori, a Tokyo-based strategist at FXOnline Japan Co., a margin-trading company.
The yen fetched 89.24 per dollar as of 9:15 a.m. in Tokyo from 89.02 in New York yesterday when it touched 88.14, the strongest since Dec. 10. The euro stood at $1.3586 from $1.3581 in New York, set for a 0.3 percent decline on the week. It bought 121.26 yen from 120.91 in New York.
In carry trades, investors get funds in one currency with relatively low borrowing costs to invest at higher yields in another. The benchmark interest rate of 0.1 percent in Japan makes the yen popular for funding such transactions.
The cost of borrowing in yen for three months between banks fell below the dollar rate for the first time since August, reducing the appeal of the greenback as a funding currency for leveraged purchases of assets.
New Measures
The new measures by the Bank of Japan could focus on ways to lower short-term rates, the Nikkei said. A decision on specific measures is likely to take place in April, when two board meetings are scheduled, the newspaper said.
Brian Kim, a currency strategist in Stamford, Connecticut, at UBS AG, cited the Nikkei story in a research report yesterday, saying the brokerage maintained its three-month dollar-yen forecast at 95.
The Bank of Japan unveiled a 10 trillion yen ($112.1 billion) lending facility for commercial banks in December after the yen surged to 84.83 per dollar the previous month, the strongest since July 1995, and government ministers urged the central bank to do more to combat falling prices. A stronger yen pushes down the cost of imports, adding to deflation.
Consumer prices excluding fresh food slid 1.3 percent in January from a year earlier, matching the drop in the previous month, the statistics bureau said last month.
Greece Concerns
European Central Bank President Jean-Claude Trichet said it would not be “appropriate” for the International Monetary Fund to aid Greece.
“There is emerging doubt Greece can get any outside assistance,” said Toshiya Yamauchi, manager of foreign-exchange margin trading at Ueda Harlow Ltd. in Tokyo. “Uncertainties over sovereign risks in the region will continue to weigh heavily on the euro.”
The euro rallied on March 3 after Greece announced its third package of deficit-cutting measures as it seeks to alleviate Europe’s largest budget shortfall. Trichet yesterday spoke out against appealing to the IMF “as a supplier of help,” keeping pressure on Greece to cut its shortfall.
Europe’s Turn
Greek Finance Minister George Papaconstantinou said the European Union should outline the specifics of an aid package to send a message of “tangible solidarity” to markets.
“If they would be clearer in what way they’d help Greece if it were necessary, then Greece wouldn’t need support,” Papaconstantinou told Mega television, according to a transcript of his comments e-mailed yesterday by the Athens-based ministry.
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Trichet Halts Greece’s Courting of IMF, Stirs European Tensions
By James G. Neuger and Simon Kennedy
March 5 (Bloomberg) -- European Central Bank President Jean-Claude Trichet pressed Greece to halt its flirtation with International Monetary Fund aid and work with European allies to tame its record budget deficit.
As protesters besieged the Greek Finance Ministry to denounce 4.8 billion euros ($6.5 billion) of tax increases and spending cuts, the Athens government said the absence of European support might force it into the hands of the IMF.
Trichet yesterday spoke out against appealing to the Washington-based lender “as a supplier of help,” keeping the pressure on Greece to cut the highest deficit in the euro’s 11- year history -- and on European governments to step in if Greece can’t go it alone.
“For Trichet, using the IMF would be an admission that Europe can’t deal with its own business,” said Gilles Moec, a senior economist at Deutsche Bank AG in London and a former Bank of France official. “Trichet’s very keen on saying that Europe has its own system of safeguards. He went almost as far as saying Europe has something in the pipeline.”
The region’s premier deficit sinner collides with Europe’s paymaster tonight when Greek Prime Minister George Papandreou meets in Berlin with German Chancellor Angela Merkel, co-author of a Feb. 11 European pledge of “determined and coordinated action, if needed” to aid Greece.
Domestic Pressure
Facing political pressure at home not to squander German taxpayers’ money, Merkel said two days ago that tonight’s Berlin encounter won’t be “about aid commitments.”
Starting five days of financial diplomacy that take him to Berlin, Luxembourg, Paris and Washington, Papandreou pushed for European help in getting credit at rates below the 6.11 percent investors currently demand on Greek 10-year bonds. Papandreou will meet with U.S President Barack Obama and not the IMF in his swing through Washington.
“We’re not asking for money,” Papandreou said in an interview in today’s Frankfurter Allgemeine Zeitung. “We don’t want to be the Lehman Brothers of the EU. I’m not demanding loans for Greece at the same favorable conditions that Germany gets, but we need more favorable terms than we’re getting now.”
Greece bought time yesterday by selling 10-year bonds with investors bidding for more than three times the 5 billion euros it sought to raise. The goal was to avoid a repeat of a five- year note sale in January, when the debt tumbled on the first day of trading. Greece faces more than 20 billion euros in debt redemptions in April and May.
Wage Cuts
“Now it’s really playing for time,” said Carsten Brzeski, an economist at ING Group in Brussels who used to work at the European Commission.
Tax increases and pay cuts for government employees outlined on March 3 were designed to guarantee Greece would meet a January pledge to trim the deficit to 8.7 percent of gross domestic product from 12.7 percent, more than four times the euro region’s 3 percent limit.
Concern that Europe will fail to cope with Greece’s fiscal woes has knocked the euro down 5.4 percent against the dollar this year. Trichet’s opposition to the IMF as a safety valve further undercut the currency yesterday. It fell more than 1 cent to $1.3560.
“Europe is being short-sighted,” said Ted Truman, a senior fellow at the Peterson Institute for International Economics and a former adviser to U.S. Treasury Secretary Timothy F. Geithner. “If Europeans get it wrong then this impacts financial markets. It will likely impact European growth and that of the rest of the world.”
Greek Backlash
Yesterday brought mixed messages about Greece’s romance with the IMF. Finance Minister George Papaconstantinou called the IMF a last resort if the European Union fails to “rise to the occasion.”
That shifted the focus back to Greece’s efforts to get out of the fiscal jam on its own, a job made harder by protests against austerity steps by a socialist government that came to power in October on promises of higher wages and pensions.
“Grossly unfair” was the verdict of Dimitris Bratis, president of the Greek teaching federation, on NET TV yesterday. Teachers plan to walk off the job today, along with the main public transport union.
Trichet -- involved in drawing up the Feb. 11 declaration of moral support for Greece -- didn’t rule out European support yesterday, while keeping vague about what the EU would do.
“I gave publicly my support for the statement,” Trichet said, reading excerpts aloud at his Frankfurt press conference. “I take that commitment as very, very important.”
German lawmakers briefed on the aid discussions have spoken of contingency plans to offer Greece about 25 billion euros, enough to cover the maturing debt. One option may be for state- owned lenders such as Germany’s KfW Group to buy Greek bonds.
Full article:
http://www.bloomberg.com/apps/news?pid=20601087&sid=aQXE3b.GPMDU&pos=2
PS. Lots of newsflows to go thru each and every day to come up with a good traqding strategy. When all is said and done, imho, commodities up and US dollar down.
Cheers,
Dave.