Sunday, November 30, 2008

Yuan Watch : Faster deterioration

By Nipa Piboontanasawat

Dec. 1 (Bloomberg) -- China’s manufacturing contracted by the most on record and export orders slumped as a slowdown in the world’s fourth-biggest economy deepened.

The Purchasing Managers’ Index fell to a seasonally adjusted 38.8 in November from 44.6 in October, the China Federation of Logistics and Purchasing said today in an e- mailed statement.

China’s economy is deteriorating more quickly than expected by the nation’s top planning agency, its chairman, Zhang Ping, said last week. The situation is a test of the Communist Party’s ability to govern, President Hu Jintao said Nov. 29, according to the official Xinhua News Agency.

“November’s PMI shows further signs of an economic slowdown,” Zhang Liqun, a senior research fellow at the State Council’s Development Research Center, said in the statement. Government efforts to revive growth “still need some time to show their full effect, which will be after spring 2009,” Zhang said.

Aristocracies and their silver

By Dakin Campbell

Dec. 1 (Bloomberg) -- In the best year for Treasuries since 2002, fund managers who only buy government bonds are seeking permission to invest in corporate debt they considered toxic just a month ago.

Treasuries ``are yielding next to nothing,'' said Robert Millikan, who manages $5 billion at BB&T Asset Management in Raleigh, North Carolina, including the $51 million BB&T Short U.S. Government Fund. ``Trying to do something for your shareholders, it's hard to sit there and buy a bond that yields less than any fees you charge.''

That helps explain why BB&T, BlackRock Inc., T. Rowe Price Group Inc. and Sage Advisory Services Ltd. are looking elsewhere for returns, including bonds of the banks that were almost ruined by $967 billion in losses and writedowns since the start of 2007. Treasury funds are receiving permission to buy debt of Morgan Stanley, JPMorgan Chase & Co. and Goldman Sachs Group Inc. after the Federal Deposit Insurance Corp. finalized plans on Nov. 21 to guarantee their debt.

The FDIC program announced on Oct. 14 is part of the more than $1.5 trillion in unprecedented financing from the Treasury and the Federal Reserve to end the worst financial crisis since the Great Depression. The U.S. now guarantees more than $13 trillion of debt.

`Great Substitute'

Goldman, which registered as a bank in September after 139 years as a securities firm, became the first U.S. company to take advantage of the program, selling $5 billion of 3.25 percent FDIC-backed notes on Nov. 25. The debt, which matures June 2012, was priced to yield two percentage points more than Treasuries of similar maturity. Before the government announced the guarantees, New York-based Goldman's 6.15 percent bonds due 2018 yielded about five percentage points more than government debt.

Morgan Stanley, which also became a bank on Sept. 21, sold $5.75 billion in FDIC-backed debt in three series, including $2.5 billion of three-year, 3.25 percent notes at a spread of 186 basis points. As recently as Oct. 13, the New York-based company's notes yielded more than six percentage points more than Treasuries.

``It's a great substitute,'' said Millikan, whose Short U.S. Government Fund returned 4.55 percent the past year, beating 78 percent of its peers. He gained approval from BB&T's lawyers to purchase FDIC-backed debt and may buy bonds from New York-based Citigroup Inc. and Bank of America Corp. in Charlotte, North Carolina.

As much as $600 billion of the FDIC-backed bonds may be issued by the time the program ends in June, according to Barclays Plc. Sales of the bonds already total $17.25 billion.

``A lot of Treasury-only funds will be looking at'' FDIC- backed notes, said Brian Brennan, who helps oversee $13 billion in fixed-income assets at T. Rowe Price in Baltimore. ``For investors who are seeking safety, this is a safe instrument that provides more yield.''

``Treasury rates are going higher,'' said Mark MacQueen, a partner and money manager at Austin, Texas-based Sage Advisory, which oversees $6 billion. ``I plan to invest in the guaranteed debt.'

Yuan Watch : Weakening Advantages

December 01, 2008
Jane Macartney in Beijing

The Chinese President has issued a rare warning to the ruling Communist Party, telling his officials that the global economic downturn is so severe that it could shake its 59-year grip on power.

President Hu Jintao's remarks, at a weekend meeting of the ruling 25-member Politburo, appeared on the front page of the party's official mouthpiece, the People's Daily. It was his bluntest message yet delivered on the crisis to China's 1.3 billion people and more than 70 million members of the party.

The subtext of his speech was the increasing risk of social unrest caused by China's rising unemployment, as a slump in exports leads to factory closures and a fall in property sales results in abandoned construction projects.

The President, who is also the head of the Communist Party, said: “In this coming period, we will starkly confront the effects of the sustained deepening of the international financial crisis and pressure as global economic growth clearly slows.” He said that the slowdown would “steadily weaken our country's traditional competitive advantages”.

Mr Hu said: “Whether we can turn this pressure into momentum, turn challenges into opportunities, and maintain steady and relatively fast economic development ... is a test of our Party's capacity to govern.”


(And the conundrum of the Big 3 is that the alternatives to a pre-planned bankruptcy with the Federales providing DIP financing is either liquidation or money pit - GM may need 100 billion by end of 2009! Can you say Carservatorship? - AM

Institutional Risk Analyst
November 24, 2008

Our friends at Katten Muchin Rosenman in Chicago wrote last week in their excellent Client Advisory: "On November 13, 2008, Lehman Brothers Holdings Inc. and its U.S. affiliates in bankruptcy, including Lehman Brothers Special Financing and Lehman Brothers Commercial Paper (collectively, "Lehman") filed a motion asking that certain expedited procedures be put in place to allow Lehman to assume, assign or terminate the thousands of executory derivative contracts to which they are a party. If Lehman's motion is granted, counterparties to transactions that have not been terminated will have very little time to react and will likely find themselves with new counterparties and no further recourse to Lehman because, by assigning contracts to third parties, Lehman will effectively receive, by normal operation of the Bankruptcy Code, a novation."

The bankruptcy court process also allows for parties to terminate or "rip up" CDS contracts, something that has also been fully enabled by the DTCC. The bankruptcy can dispose and the DTCC will confirm.

Hopefully somebody will pull President-elect Obama aside and give him the facts on this mess before reality bites us all in the collective arse with, say, a bankruptcy filing by GM.

You see, there are trillions of dollars in outstanding CDS contracts for the Big Three automakers, their suppliers and financing vehicles. A filing by GM is not only going to put the real economy into cardiac arrest but will also start a chain reaction meltdown in the CDS markets as other automakers, vendors and finance units like GMAC are also sucked into the quicksand of bankruptcy. You knew when the vendor insurers pulled back from GM a few weeks ago that the jig was up.

And many of these CDS contracts were written two, three and four years ago, at annual spreads and upfront fees far smaller than the 90 plus percent payouts that will likely be required upon a GM default. That's the dirty little secret we peripherally discussed in our interview last week with Bill Janeway, namely that most of these CDS contracts were never priced correctly to reflect the true probability of default. In a true insurance market with capital and reserve requirements, the spreads on CDS would be multiples of those demanded today for such highly correlated risks. Or to put it in fair value accounting terms, pricing CDS vs. the current yield on the underlying basis is a fool's game. Truth is not beauty, price is not value.

If you assume a recovery value of say 20% against all of the CDS tied to the auto industry, directly and indirectly, that is a really big number. The spreads on GM today suggest recovery rates in single digits, making the potential cash payout on the CDS even larger.

As Bloomberg News reported in August: "A default by one of the automakers would trigger writedowns and losses in the $1.2 trillion market for collateralized debt obligations that pool derivatives linked to corporate debt… Credit-default swaps on GM and Ford were included in more than 80 percent of CDOs created before they lost their investment-grade debt rankings in 2005, according to data compiled by Standard & Poor's."

At some point, Washington is going to be forced to accept that bankruptcy and liquidation, the harsh medicine used with other financial insolvencies, are the best ways to deal with the last, greatest bubble, namely the CDS market. When the end comes, it will effect some of the largest financial institutions in the world, chief among them Citigroup (NYSE:C), JPMorganChase (NYSE:JPM), GS and MS, as well as some large Euroland banks.

The impending blowback from a CDS unwind at less than face amount is one of the reasons that the financial markets have been pummeling the equity values of the larger banks last week. Any bank with a large derivatives trading book is likely to be mortally wounded as the CDS markets finally collapse. We don't see problems with interest rate or currency contracts, by the way, only the great CDS Ponzi scheme is at issue - hopefully, if authorities around the world act with purpose on rendering extinct CDS contracts as they exist today. Call it a Christmas present to the entire world.

End of daze

'We did it to the world' Mom said.

I was a bit taken back. Dad had said much the same a couple of weeks ago.
Although such commentary is the lingua franca of the blogosphere, Mom and Dad probably have never read a blog. They are very conservative, middle class and have been ,ever since I was indoctrinated by the educational system, usually on the other side of the aisle vis-a-vis laying blame at America's feet.
To hear them speak like the radicalized of the late 19th century was surprising and illuminating.

Socioeconomics or socio-economics is the study of the relationship between economic activity and social life. Are we headed into a depression because we think we are or do we think we are heading into a depression because we are? Socioeconomics says the former is culpable.

Reflecting on the ideological swath of America that shares my parent's views how might the socioeconomic pendulum swing back to marching prosperity?

What pray tell offers redemption for our sins?

The answer I believe, is penance, or that is perceived penance.

At the end of daze, once we collectively feel we have served our penance, the mood will shift.

Game theorists have modeled behavior under negative externalities where choosing the same action creates a cost rather than a benefit. The generic term for this class of game is anti-coordination game. The best-known example of a 2-player anti-coordination game is the game of Chicken.

This game of Chicken is with ourselves.

Or as Citizen Harrison says ' to get through this we have to go through this.'

Quotes from the Wise : Week ending November 30th

'A rolling loan gathers no loss.' - Joshua Rosner

'Maybe,just maybe,blanket guarantees from governments dilute the nature of a guarantee.' - John Jansen

'JP Morgan (with a credit derivatives book of 9.2 trillion) is on one side or another of one out of every six contracts ...It has counterparty risk on the contracts it has bought, even with collateral and faces losses on the contracts it has sold.' - Henny Sender

'There's going to be a lot of information that is not public (about the bailouts & facilities) and it is going to take investigative reporters to find out things that congressman can't find out and the public is not going to be aware of' - Representative Brad Sherman

United Nations Confessional

Washington Post Staff Writer
Sunday, November 30, 2008; Page A08

UNITED NATIONS -- The Rev. Miguel d'Escoto Brockmann, a revolutionary Nicaraguan priest, sounded like the old-school, 1980s-style Latin American leftist he is when he began his presidency of the 192-member U.N. General Assembly in September.

But as the world's financial turmoil deepens and the pillars of modern capitalism appear increasingly shaky, his tirades against what he considers the evils of an American-led economic order are gaining a more sympathetic audience here with each passing day.

A crushing global economic crisis has provided the Maryknoll priest with a pulpit to preach his sermon of class warfare between the world's rich and poor to an increasingly receptive audience, with more moderate figures such as Argentine President Cristina Fernández de Kirchner and French leader Nicolas Sarkozy echoing his criticism of the U.S. free-market system.

"Some of this stuff he was saying in September sounded wacky, but now it's sort of in the mainstream" said Colin Keating, a former New Zealand diplomat who runs the Security Council Report, a policy group focusing on the United Nations. "It does partly account for slightly changed levels of respect."

A Sandinista foreign minister from 1979 to 1990 who once referred to President Ronald Reagan as the "butcher of my people," d'Escoto has emerged as an unlikely standard-bearer of the U.N. membership that had in many ways been moving beyond the Cold War battles that long defined him.

Equipped with a hearing aid and suffering from vertigo, the 75-year-old sermonizes about the cruelty of a political order that has done too little to improve the lives of the poorest. His self-effacing and sometimes humorous style has more in common with a small-town pastor than that of the stern Marxist ideologue -- Nicaraguan President Daniel Ortega -- who championed his candidacy to the U.N. post.

D'Escoto decries the contamination of the world's economic order by a "spirit of selfishness and individualism" that views "justice, mercy and compassion" as incompatible with economic activity, as he said at a recent U.N. interfaith conference. "The world has become a moral basket case," he said at a news conference last week.

In taking on the new job, d'Escoto vowed to tone down his attacks on the United States. But it is a hard promise to keep for a man who claims the CIA once plotted to kill him. D'Escoto often digresses from U.N. business to decry what he sees as acts of U.S. arrogance -- such as support of Israel and the wars in Iraq and Afghanistan.

Last week, d'Escoto took issue with President Bush, whom he called a liar in a June 2004 radio interview, for slighting the U.N. General Assembly. In his final address to the assembly in September, Bush dispensed with the customary practice of mentioning the body's president. "He could not even find the minimum politeness to acknowledge me," d'Escoto said at a Nov. 25 news conference. "Two times he's spoken before the General Assembly, and he ignored me. He's the only person in the world to do that, and I still love him."

On the eve of a development conference in Doha, Qatar, d'Escoto took aim at World Bank President Robert Zoellick and International Monetary Fund chief Dominique Strauss-Khan for failing to attend. D'Escoto belittled them as agents of a U.S.-led order that does not care about the United Nations or the world's poor. "The IMF and the World Bank are controlled by a member of the United Nations who is anti-United Nations, who wants to do it alone," he said. "It's a shame . . . but we pray that it can change."

D'Escoto said that the prospect for better ties with the United States has improved with the election of Barack Obama and that he has extended Obama an invitation to address the General Assembly.

Eurobsolutely stupid

By Ben Hall in Paris and Nikki Tait in Brussels
Published: November 28 2008 17:40 | Last updated: November 28 2008 18:36
FT Weekend

The French government’s plan to shore up the capital position of France’s six main retail banks is being blocked by the European Commission, which insists they must reduce their lending in return for state support.

Christine Lagarde, French finance minister, on Friday spoke to Neelie Kroes, EU competition commissioner, to persuade her to lift her veto on France’s €10.5bn ($13.3bn) support package but Ms Kroes is sticking to her view that banks cannot use state aid to increase their lending books.

The French government reacted furiously to the Commission’s argument. One senior official described it as “ridiculous” and “stupid” because it would exacerbate the credit crunch – the very thing Paris said it was trying to avert when it decided last month to inject capital into all its large high-street banks.

France – unlike the UK, Germany or Italy – intended to recapitalise all its lenders at the same time to ensure they did not tighten credit to business and households. Paris argued that without state support, and in view of the frozen interbank lending markets, banks would have shored up their capital positions by reducing loans, with catastrophic consequences for the real economy.

The finance ministry wanted to provide €10.5bn in subordinated loans to BNP Paribas, Société Générale, Crédit Agricole, Caisse d’Epargne, Banque Populaire and Crédit Mutuel. In return, the banks agreed to increase the stock of credit to households, business and local government by 3-4 per cent in 2009.

The French plan is one of a number of banking aid measures notified to Brussels but still not approved. The Austrian, Spanish and Hungarian framework schemes are still awaiting a green light.

A number of aid packages to individual institutions, such as that proposed for Germany’s Commerzbank, also remain under discussion.

However, it has also already approved some schemes with a recapitalisation element. Germany’s framework scheme included recapitalisation proposals, for example, although beneficiaries would have to give behavioural commitments and maintain high solvency ratios.

Separately, it emerged that the French plan to underpin credit insurance for risky companies may also run into state aid issues.

Economic Hitman 2.0

By Martin Arnold in London and Katya Gorchinskaya in Kiev
Published: November 29 2008 02:00 | Last updated: November 29 2008 02:00
FT Weekend

Blackstone has been appointed as a financial adviser to Ukraine, highlighting the US private equity group's ambition to become the consultant of choice for countries faced with financial crisis.

Ukraine's balance of payments is deteriorating amid falling prices for steel, its major export, and rising prices for gas imports from Russia. In October, its economy contracted 2.1 per cent, according to Commerzbank.

Ukraine's government hired Blackstone as an adviser last week alongside Credit Suisse, joining the list of countries that have called on the New York private equity group, which has advised Iceland.

"Blackstone have followed the food chain from hedge funds to banks to banking systems and now to entire countries," said a person familiar with the private equity group, which advised Northern Rock on its UK state bail-out.

According to a Ukraine cabinet document seen by the Financial Times, Blackstone will be paid a monthly fee of €1m ($1.26m) and a further €3.5m on completion of the contract. It will be paid all expenses, including bodyguards for staff.

The contract, dated November 17, says Blackstone will co-ordinate Ukraine's $16.4bn standby loan from the International Monetary Fund, mediate between the government, the IMF and the World Bank and work on the country's stabilisation plan.

It is also responsible for handling talks with Ukraine's creditors and developing a communication strategy for the stabilisation plan. The contract says Blackstone is not responsible for implementing the stabilisation plan or for its success.

Blackstone's team of advisers to Ukraine's government is being led by Martin Gudgeon, the London head of the private equity group's fast-growing restructuring advisory business in Europe.

Blackstone is thought to be advising on the structure of Ukraine's debt and how to optimise it, possibly through early repayment.

Volodymyr Lytvyn, deputy finance minister, said: "This is a good time to revise our debt and take the opportunity to start paying it early at a reduced rate."

Blutarsky lending forecast

FT Weekend
The Lex Column

Nationally, home prices have fallen 23 per cent since the July 2006 peak, according to the Case-Schiller index, bringing them back to 2004 levels. Returning to 2001 prices, when the housing boom began, requires a further 25-30 per cent drop. At the current rate of decline, that will take just more than two years, meaning housing is only halfway through its slump.

Such a timescale reflects the long process of cutting Americans' debt. Lombard St Research, in a report for Knight Vinke, calculates that to move the proportion of household income spent on debt (at normal interest rates) from the current 18 per cent back to the long-term average of 15 per cent, may require zero growth in lending for the next three years.

Yuan Watch : Fighting deflationary expectations

11-30-2008 14:40
It may be too soon to tell, but the past week has seen some signs of revival in the real estate sector in Beijing. More people are hunting down good buys, although most are still holding out for what they hope will be lower prices in the near future.

According to a real estate website, the last week has seen a huge surge in the number of people signing up to check out what's on the Beijing market. More than 6,000 people signed up, and more than 5,000 actually turned up to view houses. The number is triple that from just a month ago.

Industry insiders say the renewal of interest is largely due to new supporting policies from the government.

Chen Zhi, Deputy Secretary-General, Beijing Real Estate Association, said, "This is mainly a result of recent cuts in transaction fees and lending rates."

Most of the property offered on are units located between the northern fourth and sixth ring roads. Many people are interested, but few are actually taking the plunge just yet.

Potential Home-Buyer, said, "I want to buy a house near the fifth northern ring road. But prices are still high. I hope they will drop to around 5,000 yuan per square meter."

"Although prices are more affordable right now, I'm afraid they will drop even more. So I think I'll keep waiting."

And it seems most who came to view available units felt the same way. 5 thousand may have turned up, but only 63 units were actually booked out.

Yuan Watch : 'Numbah' gazing

November 30,2008
by CSC staff, Shanghai

China's massive economic stimulus package is, unsurprisingly, turning out to be less effective than expected. After the announcement of the 4 trillion yuan plan, it was predicted by many that its contribution to economic growth next year would be 2 to 3 percentage points. Now, the National Development and Reform Commission (NDRC) says that the investment plan may boost economic growth next year by 1 percentage point.

In November, economic indicators declined further. Many economists believe Beijing is readying more measures to stimulate the economy.

Li Huiyong, chief macroeconomic analyst in Shenyin & Wanguo (S&W), a Chinese securities firm, told this reporter that it is impossible that the 590 billion yuan is all stock investment. According to their calculation, among this year's total fixed asset investment, investment from the central budget will reach 750 billion yuan. "But it is also impossible that all of that investment is incremental. The country's GDP is about 28 trillion yuan this year and 1% is only about 280 billion yuan."

Stephen Green, chief economist at Standard Chartered Bank, predicted that one third of the central investment is to be incremental and the rest is stock.

In order to get results as soon as possible, some projects under construction and those having passed preliminary approval have been injected into the investment plan, the construction of the “old faces” being sped up and the new projects started ahead of schedule.
Li Huiyong noted S&W’s forecast figures, including for fixed-asset investment growth, fiscal revenue, industrial added value, price index data, and so on, are all declining. Stephen Green also told this reporter that economic growth in the fourth quarter will continue to slow and that some indicators will sharply decline.

If the 4 trillion yuan stimulus plan can spur economic growth by only a percentage point next year, economic growth may not achieve Beijing’s goal -- 8% economic growth next year is thought to be the bottom line. Taking into account further economic deterioration and the need to maintain growth, the government will have to further intensify its efforts to stimulate the economy. Zhang Ping said: "We will take various measures, including policies to encourage employment.”

Among the three options of fiscal, monetary, and exchange rate policy, decision-makers have operational space in monetary policy and exchange rates, with less maneuver room for fiscal policy.

Stephen Green predicts that by the second quarter next year, China's deposit and loan interest rates will be 160 basis points under the current rate, and the "most liberal" monetary policy is likely to be reached. But it takes time for the monetary policy to take effect, only six months to a year after the most difficult times will companies gain support from the relaxation of monetary policy.

As to exchange rate policy, Li Huiyong suggested that in view of the sharp currency depreciation in neighboring countries, appropriate depreciation of RMB could be considered in order to maintain the competitiveness of China’s exports.

Underwriter Sam

by Doug Noland
November 27, 2008

Investment-grade debt issuance included JPMorgan Chase $6.5bn, Morgan Stanley $6.75 TN, Goldman Sachs $5.0 TN, Dominion Resources $600 million, Burlington Northern $500 million, and Public Service E&G $275 million.

I saw no junk, convert or international debt issues.

Yuan Watch : West has 30 more years

Sun, Nov 30 2008, 02:32 GMT

Ex-China Regulator: Sees Yuan As Reserve Currency In 30 Yrs

BEIJING -(Dow Jones)- The Chinese yuan will likely take 30 years to become an international reserve currency, Tang Shuangning, a former senior bank regulator and central bank official, said Sunday in prepared remarks.

The yuan will become a currency for trade between China and neighboring countries in the first 10 years, a regional currency for investments in the next 10 years, and finally become an international reserve currency in the following 10 years, said Tang, who is now chairman of state-controlled financial conglomerate China Everbright Group.

Over the next three decades the U.S. dollar's dominant role in the world won't change, he said. He added, however, that the dollar's position will face challenges from a U.S. recession and the growth of emerging economies.

China now continues to have foreign-exchange controls in the capital account, making it hard for the yuan to be used, for example, in cross-border financial investments.

Tang said China should continue to allow the local unit to steadily rise and gradually become fully convertible over the next 30 years to increase its role as a currency used in payments and for reserve. Beijing has said repeatedly it aims to gradually make the yuan fully convertible, but hasn't given a timeline for it.

China's financial markets should also continue to grow, a trend that would help the yuan become a reserve currency, Tang added.

Yuan Watch : Whisper Number? 2008-11-30 14:40:34

BEIJING, Nov. 30 (Xinhua) -- China's economy is expected to grow by 10 percent in 2009 despite the impact of the financial crisis and global economic downturn, a researcher with the country's Cabinet said.

"Although dim world economic situation has led to weak overseas demand, domestic consumption and investments, vast development potential decided the country's economy will grow at fast paces," said Zhang Liqun, the Development Research Center of the State Council researcher.

He forecasted China's economic growth would accelerate largely at the second half of next year.

Zhang said his remarks were based on the country's huge domestic consumption, and investment potentials; sufficient fund, technology, labor and social security, and the government's gradually mature macro-economic control measures.

"Personal income continues to increase as millions of migrant workers flow into the city to get their lives improved. Enlarging demand for houses and autos will form huge and lasting consuming power," he said.

"However, domestic enterprises need to accelerate their paces in upgrading business structure, in a bid to better cope with severe world economic situation," he said.

China's gross domestic product (GDP) grew to 20.16 trillion yuan (2.96 trillion U.S. dollars) in the first three quarters of this year, up 9.9 percent from the same period of last year. The growth rate was 2.3 percentage points lower than the same period of last year.

In addition, Zhang expected the country's consumer price index, or the main inflation gauge, to increase by three percent in 2009 year on year. The index hit a record of 8.7 percent in February, and went up seven percent in the first nine months, far high from the government's aim of 4.8 percent.

Yuan Watch : Logically growing 2008-11-30 15:35:38

BEIJING, Nov. 30 (Xinhua) -- China saw its domestic logistics turnover increase 23.8 times during 1991-2007 period, representing an increase of 22.2 percent annually.

Domestic logistics turnover increased to 75.2 trillion yuan (11 trillion U.S. dollars) in 2007 from 3 trillion in 1991, said Lu Jiang, China Federation of Logistics and Purchasing head.

Foreign enterprises invested 6,996 logistics programs in China in 2007, accounting for 18.5 percent of the country's total volume of foreign investment.

China has invested 7.8 trillion yuan to improve its logistics infrastructure since 1991. The country has 475 logistics basis nationwide, and more than 100 consultation organs currently.

Lu said that the fast development of logistics business had helped to improve the business process of the country's booming production and manufacturing industries and promoted the prosperity of social consumer goods retail sector and E-business.

Last year, sales volume of the nation's 100 largest chain store companies topped one trillion yuan, accounting for 11.2 percent of the country's total social consumer goods retail volume.

Yuan Watch : Regionalize First

11.30.08, 01:35 AM EST

HONG KONG, Nov 30 (Reuters) - Hong Kong's central bank said on Sunday it hoped to further develop Chinese currency business in the city but declined comment on a report saying China was considering currency swaps with Hong Kong and allowing Hong Kong banks to issue yuan bonds.

'We do not comment on individual reports,' a spokesman for the Hong Kong Monetary Authority (HKMA) said.
The South China Morning Post newspaper on Saturday quoted officials at the People's Bank of China (PBOC), China's central bank, as saying Beijing was considering allowing currency swaps with Hong Kong to help the city weather the financial crisis.

The report said China was also studying expanding Chinese currency business in Hong Kong; using the city as a centre for trade settlement between Taiwan and mainland China; and allowing Hong Kong banks incorporated in China to issue yuan-denominated bonds in Hong Kong.

HKMA Chief Executive Joseph Yam said earlier this month that Hong Kong had sent a signal to Beijing that it wanted to become a settlement centre for yuan business and that any yuan business between China and Taiwan should go through Hong Kong.

Last week, Yam repeated his view that China should expand the issue of yuan bonds in Hong Kong. At the moment only Chinese financial institutions can issue yuan-denominated bonds in the city.

The introduction over the past few years of yuan-denominated bonds and other Chinese currency business in Hong Kong is seen as Chinese policy to use the city as a testing ground for gradual liberalisation of China's currency, which is not fully convertible

We are all derivatives now

(The Masters of the Universe turned themselves into the RAV, got the AAA pixie dust and put themselves to market. It is not too often where, we the people, get to witness and insure the birth of a new asset class.I'm glad that it is only a liquidity problem and not a solvency problem because if it were the latter, the bad assets are still there and you need to get 'em off by 'er doing something like this. Of course Goldie got to go first. Figures that we are copying the Brits. Soon anyone that can read the three page TARP application can apply to be a BHC and issue AAA debt also. Instead of a rebate check can we just get part of the takedown?
Today's 'gold supply' is the full faith and credit of the United States.
Goldie and the girls just got the keys to the safety deposit box. - AM
Friday, November 21, 2008
Goldman Sachs: General, count me in
The FDIC announced their final rules on the so-called Temporary Liquidity Guarantee Program, or TLGP (Pronounced "Teelgup"). This is the program that was designed to allow banks to issue FDIC insured debt, ensuring that they'd be able to roll over any debt coming due in the coming months.

The key change in the final rules is that the guarantee will now be timely principal and interest. Under the original rules it would be possible for an investment in a failed bank to get tied up in bankruptcy court, and while the FDIC would eventually pay you, there was no assurance as to exactly when.

Already Goldman Sachs says they will be bringing FDIC insured debt as early as Monday, and I'd expect an avalanche of banks to come with new issues in the next few weeks.

This debt will now carry a full faith and credit guarantee for as long as three years (6/30/12 to be exact). Note that similar debt has been issued in Europe, most notably Barclays who did the first deal in the U.K. That deal was priced at swaps +25. I expect U.S. debt to come wider. To me, its got to trade in context of Agency bonds, which are more like swaps +50, Treasuries +165.

There are three interesting wrinkles here. First, the FDIC bank debt will be explicitly guaranteed, while Fannie and Freddie are not. However, I'm hearing the FDIC stuff will have a 20% risk weighting for banks. That's equal to Agencies currently, but there has been talk that the Agencies will be reduced to 10%.

Finally, there will be extensive supply of the FDIC stuff over the next month or so, whereas the Agencies have done very little term issuance. So given the market's poor liquidity, I'd expect the new FDIC issues to have a new issue concession, and therefore price wider than Agencies.

Sheila C. Bair for Treasury Secretary

Citizen Mish relays some disturbing factoids.

From -

If you think the housing slump can't get much worse, Martin Feldstein thinks that both home prices and the broader economy can — and very likely will — get a whole lot worse.

"There are now 12 million homes in the United States with a loan-to-value ratio greater than 100 percent. That's one mortgage in four. The aggregate amount of that is some $2 trillion," said Feldstein. "If you look at the median (midpoint) loan-to-value ratio in that 12 million group of underwater mortgages — mortgages with negative equity — the median loan-to-value ratio is 120 percent."

That means about 25 percent of all U.S. mortgages exceed the value of the homes the mortgages are financing. In the case of half the homes that are underwater, homeowners are paying a mortgage that's now 20 percent higher than the value of the home.

That's bad — but it's likely to get worse.

A recent report by First American Core Logic, a real-estate data firm in Santa Ana, Calif., estimated that as of Sept. 30, 7.5 million mortgages, or 18 percent of all properties with a mortgage, had negative equity. The group thinks there are another 2.1 million mortgages that are within 5 percent of going underwater.

The implications for many homeowners are staggering. Before the recent housing boom of 2000 to 2006, homes increased in value at a historical annual rate of about 2.3 percent when adjusted for inflation.

That means that for homeowners who owe 35 percent more than their homes' value, it would take, at historical averages, about 15 years just to break even on their home investment. They won't build equity. It would be a huge incentive for millions to hand the keys back to the lender and seek cheaper housing.

Saturday, November 29, 2008

The Second Great Depression

Now reread the last post but wherever you see the term 'gold supply' replace with 'full faith and credit of the United States.'

Hence my particular outrage at the recent introduction of synthetic Treasuries.

As stated in the introduction to this blog:

This much is clear: They will inflate until they can’t. Inflation rewards those that have their wealth first. All roads lead to deflation. The stock market will bottom when no one cares. Much like the aristocracy when the barbarians are at the gates… you save the silver (banks) first. They will destroy the village (dollar and markets) in order to save it. After the deflation is overwhelmed, the West will never be the same.

Like the authorities of the First Great Depression, the kitchen sink will be thrown until it is constrained by outside events.

As Citizen Jesse points out today in his commentary on a recent Krugman blog:

'And this is where we do part company with Mr. Friedman and Ms. Schwarz and join Lord Keynes in his observation that it requires fiscal and legislative actions to repair an economic shock such as the country was experiencing in the early 1930's....
Keynes would have likely observed that money supply was not enough, but was only a first step in stabilizing the system. The 'real cure' was to get people working again, to provide wages and gainful employment, to encourage consumption and economic activity.'

Am in complete agreement with Jesse and here are some concrete steps we can take to achieve that:

1) Accelerate construction of housing projects for
low-income urban residents.

(2) Accelerate infrastructure construction in rural

(3) Accelerate construction of railways, highways,
airports and other major infrastructure.

(4) Accelerate health, culture and education

(5) Enhance environment.

(6) Speed up innovation and structural adjustment.

(7) Speed up the reconstruction of the hurricane stricken

(8) Improve the income of urban and rural residents.

(9) Implement tax reform,encourage technological reform, and reduce the
burden on companies.

(10) Increase financial support for economic growth.

The blueprint is provided courtesy of The Peoples's Republic of China's '10 Measures for Increasing Domestic Demand and Increasing Economic Growth.' put out on Novemebver 5th, 2008.

History shows that the countries that spent more money on social development came out of the First Great Depression faster.

History of the First Great Depression

(To appreciate today's depression within the context of the last one must first understand the last depression. Here is a most cogent description by the Wise Citizen King. - AM)

The King Report
M. Ramsey King Securities, Inc.
February 11, 2008
Issue 3808

We want to take a moment and disabuse our readers of the propaganda that has been spewed for years, ‘if only the Fed had pumped more credit after the 1929 Crash, there would not have been depression.’
This is patently wrong. The Fed and NY Fed went Bernanke after the 1929 Crash and pumped as much credit as it legally could until late 1931 when a global gold run handcuffed the Fed. Interest rates then increased, but for only two quarters.

We pulled out an old reference book over the weekend, Economics and Public Welfare - A Financial and Economic History of the United States, 1914-1946, by Benjamin M. Anderson, a professor who taught at Harvard, Columbia and Cal, and was Chase Bank’s economist from 1920-1939. Professor Anderson notes the Fed and NY Fed aggressively expanded credit after the ’29 crash until they exhausted their ability to create credit in Q3, 1931.
By Q3 1931 the Fed had bought as much collateral they could – the US government only had about $3B of debt issued. This was before FDR created the welfare state and budget deficits generated large issuance of US government debt. And at that time, US law forbade Fed repoing of most instruments.
The stuff hit the fan in 1931, when a series of global crises created global depression. First, Kredit Anstalt went bankrupt on May 12, 1931. Austria collapsed on May 29, 1931. A foreign run on Germany commenced just three days later. The runs of Austria and Germany’s gold supply precipitated an international effort to bail them out in July 1931.
After the international bailout effort failed, a run on England commenced on July 13, 1931. On September 20, 1931, England abandoned the gold standard. Sweden abandoned the gold standard on September 27, 1931. The first run on the US’s gold supply commenced after England’s abandonment.
The run on the US gold supply devastated banking reserves and by law sharply reduced Fed reserves and its ability to create credit. Glass-Steagall mandated that Federal Reserve Notes would be backed 40% by ‘free’ gold. All the Fed’s gold was ‘free’ gold.
“Moreover, Federal Reserve notes were not created by the Federal Reserve banks…they were obligations of the government of the United States issued not by but through Federal Reserve banks. They were issued to the Federal Reserve banks by the government.”
Poignantly, Professor Anderson pens a sub-chapter as, Reckless Buying of Government Securities in 1930 Made for Money Market Tension in Winter of 1931-1932.
“The Federal Reserve System was gambling, using dangerous devices to stave off and unpleasant liquidation, and hoping for a return of the prosperity which was “just around the corner. They succeeded in making cheap money. They succeeded in bringing about a further expansion of bank credit against securities. [Sound familiar?]
But the Federal Reserve System also succeeded in bringing the banking system of the United States into and extremely vulnerable position, tragically revealed when the foreign run on our gold came in late 1931, and when depositors, fearful of individual banks, were taking cash out of these banks and hoarding it.” (p. 263)
Foreigners repatriated gold and other securities from US banks. US citizens and businesses hoarded cash,which produced a cataclysmic collapse in system reserves – sound familiar? We are back to the future.
Interest rates increased in Q4 1931 to Q2 1932 due to the above-mentioned factors. Treasury notes,which had declined from 4.58% in September 1929 to 0.41% by July 1931, increased to 2.41% by December 1931 and 2.42% by May 1932. Commercial paper went from 6.25% in September 1929 to 2% by July 1931. The rates then increased to 4% by December 1931 and declined to 2.75% - 3.5% by May
1932. The Fed shot all its bullets and that fact precipitated a global run on gold and securities in 1931.
One chapter in the book is, The Consequences of Cheap Money Policy in the United States Down to the Summer of 1927. (Five years of cheap money policies)
A long period of egregiously easy money precipitated stock bubbles in the ‘20s and the past 10 years.When the bubbles burst, the Fed created even more cheap credit until the global financial system revolted.

Zirpmeister Ben has a friend in Zimbabwe

(Hand to God these are actual words of encouragement from Dr. G. Gono, Chairman of the Reserve Bank of Zimbabwe - AM)

"As Monetary Authorities, we have been humbled and have taken heart in the realization that some leading Central Banks, including those in the USA and the UK, are now not just talking of, but also actually implementing flexible and pragmatic central bank support programmes where these are deemed necessary in their National interests.

...That is precisely the path that we began over 4 years ago in pursuit of our national interest and we have not wavered on that critical path despite the untold misunderstanding, vilification, and demonization we have endured from across the political divide.

...Here in Zimbabwe we had our near-bank failures a few years ago and we responded by providing the affected Banks with the Troubled Bank Fund (TBF) for which we were heavily criticized even by some multi-lateral institutions who today are silent when the Central Banks of UK and USA are going the same way and doing the same thing under very similar circumstances thereby continuing the unfortunate hypocrisy that what’s good for goose is not good for the gander.

...As Monetary Authorities, we commend those of our peers, the world over, who have now seen the light on the need for the adoption of flexible and practical interventions and support to key sectors of the economy when faced with unusual circumstances."

Friday, November 28, 2008

Master of Disaster ups the ante

(This post starts with 'Finally' because it is the end of the recent Forbes article where the preceding paragraph entitled 'crazy monetary policy' was in fact official policy a few days after MOD wrote it...
This final section starts with the heading 'even crazier policy actions'. - AM)

Nouriel Roubini

Finally, the Fed could try to follow aggressive policies to attempt to prevent deflation from setting in: massive quantitative easing; flooding markets with unlimited unsterilized liquidity; talking down the value of the dollar; direct and massive intervention in the forex sphere to weaken the dollar; vast increases of the swap lines with foreign central banks aimed to prevent a strengthening of the dollar; attempts to target the price level or the inflation rate via aggressive preemptive monetization; or even a money-financed budget deficit (an idea suggested by Bernanke in 2002 that he termed to be the equivalent of a "helicopter drop" of money in the economy).

The problem with many of these "extreme" policy actions is that they were tried in Japan in the 1990s and the last few years, and they failed miserably. Once you are in a liquidity trap and there are fundamental deflationary forces in the economy as the excess aggregate supply of goods faces a falling aggregate demand, it is very hard--even with extreme policy actions--to prevent deflations from emerging.

Some very aggressive policy actions--such as letting the dollar weaken sharply--may do the job, but they may also be beggar-thy-neighbor policies that would export even more deflation to other countries. The world economy has been massively imbalanced for the last decade with the U.S. being the consumer of first and last resort, spending more than its income and running ever larger current account deficits while creating a massive excess productive capacity via over-investment.

All the while, China and other emerging markets have been the producers of first and last resort, spending less than their income and running ever larger current account surpluses. With U.S. spending now faltering, a global glut of unsold goods may lead to persistent and perverse deflationary forces that may last for a longer time unless proper policy actions--mostly non-necessary monetary--are undertaken.

Thus, dealing with this deadly combination of deflation, liquidity traps, debt deflation and defaults that I termed a global stag-deflation may be the biggest challenge that U.S. and global policy makers have to face in 2009.

It will not be easy to prevent this toxic vicious circle unless (1) the process of recapitalizing financial institutions via temporary partial nationalization is accelerated and performed in a consistent and credible way; (2) such actions are combined with massive fiscal stimulus to prop up aggregate demand while private demand is in free fall; (3) the debt burden of insolvent households is sharply reduced via outright large debt reduction (not cosmetic and ineffective "loan modifications"); and (4) even more unorthodox and radical monetary policy actions are undertaken to prevent pervasive deflation from setting in.

Fiscal Bubblicious

'Now we want to take debt off the balance sheet by putting the full faith and credit behind it, i.e., synthethic Treasuries. The last bubble is the FISCALBUBBLE.
When it pops so do we, for it is our balance sheet that will 'blow up'. - AM

A nugget from Dr. Doom&Gloom [his comments]

Alan Greenspan, during a question answer season in London,November 2007 midnight California time, in which he said, "During early 1990s the money supply numbers stopped working [money supply was growing but banks were reluctant to lend]. We [Fed] put buckets of money out there [in the banks, similar to what the Fed is trying to do now] and it didn't work. It was only after Wall Street came up with more [or newer] CDO products ["innovations" in securitization of debt] and took debt off the banks' balance sheets that banks started to lend again and the economy began to respond."

Londonbanker hits it right into the lumberyard

Friday, 28 November 2008

When a central bank thinks its house is on fire, it too will rush to save the thing valued most. In the United States, the central bank has rushed to save the bonuses and dividends of its Wall Street clientele by hiding away the bad assets that can no longer be foisted on gullible investors. In Europe too the response of central banks has been to save the wholesale banking and securities industry rather than the consumers and businesses underlying the real economy’s longer term productive strength.

For a comparative of what is valued elsewhere, it is worthwhile to look at what is being saved. I received in my inbox yesterday documents outlining the efforts being taken by the Hong Kong and Chinese authorities to address the liquidity crisis in their respective jurisdictions. They are available online here (Hong Kong) and here (PRC). The contrasts with the West are striking, and humbling.

Hong Kong is swiftly introducing a scheme to guarantee credit to SMEs (small and medium enterprises) and exporters. China is introducing controls to limit bank credit to over-extended speculative sectors, accelerate rebuilding in the regions affected by the earthquake earlier this year, and promote improvements in local infrastructure, education and economic adjustment.

Holmes would have been disgusted by a married woman who grabbed her jewel-box in preference to her baby. In the same way, I am disgusted by the central banks preserving the privileges of the financial elite in preference to the jobs, incomes and businesses powering the real economy. The US and UK authorities may criticise the banks for their inaction in freeing up lending to commercial businesses constrained by the credit crunch. The Hong Kong and Chinese authorities are implementing guarantee schemes and innovating initiatives to rapidly address the problem.

As Holmes would have considered a child’s life worth more than jewels, I consider the workers and businesses in the real economy as meriting greater protection than the financial elite. It is not merely that I think the financial elite little better than criminals for their irresponsible excesses of recent years, but that I fear long term harm and political instability will come from neglecting the needs of the real economy.

Shortsightedness is a peculiar affliction of the Western economies. We cannot seem to project the consequences of our actions beyond the next quarterly report, fiscal year or - at most - election cycle. Eastern policy makers have a capacity for longer vision – and longer memory – which makes them appreciate sooner the potential consequences of bad policy. Perhaps this is a consequence of the longer term dedication required to gain political ascendancy in their less cyclical heirarchy.

That China's leadership is concerned with the implications for the real economy – and political stability – was confirmed this morning in an unusually blunt public statement by the chairman of the National Development and Reform Commission. From the Financial Times:

The downturn in the Chinese economy accelerated over the past month and could lead to high unemployment and social unrest, the country’s top economic planner warned on Thursday.

Zhang Ping, chairman of the National Development and Reform Commission, said the government needed to take “forceful” measures to limit the slowdown in the economy, which included Wednesday’s large cut in interest rates and a sharp increase in fiscal spending. The rate cut was the fourth since September.

“The global financial crisis has not bottomed out yet. The impact is spreading globally and deepening in China. Some domestic economic indicators point to an accelerated slowdown in November,” Mr Zhang said on Thursday at a rare news conference.

Mr Zhang’s warning about the potential for social unrest as a result of factory closures underlined the mounting concern in Beijing about the fallout from the global financial crisis.

“Excessive production cuts and closures of businesses will cause massive unemployment, which will lead to instability,” Mr Zhang said.

As Jim Rohm observed, “Failure is not a single, cataclysmic event. You don't fail overnight. Instead, failure is a few errors in judgement, repeated every day.”

The crisis in debt markets has been rolling since the sub-prime collapse of August 2007. The increasing illiquidity of commercial paper, trade credit, municipal finance and other debt markets was foreseeable and inevitable. And yet the central banks and treasury authorities of the Western nations have done nothing to shield these essential sectors from the ill effects of the financial sector implosion while giving virtually unlimited funds to the banks authoring the collapse.

Any discussion of China always invites criticism of its anti-democratic governance. It is worth remembering that the philisophical defense of democracy lies in the proposition that it is more likely over time to serve the interests of the electorate than a system which disenfranchises the people from the determination of their leadership. If the democratically elected governments - through their appointed executives and central bankers - are free over an extended timespan to ignore the interests of the people, then how is a Western democracy superior to a Chinese bureaucracy? From looking at the policies and practices of the past year, the merits of Western democracy are not immediately apparent in ensuring that policy responses to the financial crisis are aligned with the interests of the people. Even over the past decade, it is not clear that the policies of the democratic Western governments have aimed to strengthen and broaden the economy to benefit of the electorate rather than a narrow, self-serving elite.

According to Brad Setser, the World Bank is projecting increases to China’s trade surplus in 2009 as falling commodity prices lower production costs. Those unelected bureaucrats are doing something right.

If China and Hong Kong recover sooner, prosper more, and gain global political and economic authority in consequence, it will be because they made fewer mistakes and made them less persistently than their Western counterparts. If the promoters of democracy want to strengthen their case, they might best do so by ensuring that their leadership adheres to policies which promote the longer term health and well being of the economy as a whole rather than the short term enrichment of an undemocratic elite.

Bennie and the bets

(The warning on the Bernakke voodoo doll will state 'sticking pins will result in the destruction of your children's standard of living.' - AM)

By Gregory Viscusi and Heather Smith
Nov. 28 (Bloomberg) -- French President Nicolas Sarkozy voodoo dolls can still be sold by a publisher as long as they come with a warning that sticking pins in the toy is an affront to his dignity, a Paris court ruled today.

The court rejected Sarkozy’s appeal to block the sale of the dolls. It awarded him 1 euro ($1.27) and required the warning labels be added to the packaging in conspicuous block lettering. Sarkozy’s lawyer said the ruling wasn’t a defeat.

The appeals court said the warning on the dolls’ packaging must be printed in black on a red background.

Qu'ils mangent de la câpres

By Elena Logutenkova
Nov. 28 (Bloomberg) -- Citigroup Inc. Chairman Win Bischoff said changing bankers’ pay to include more stock and longer-term awards will fail to stop the industry racking up losses.

“By itself, more share and retention-based compensation is not the magic bullet because it certainly didn’t stop us from running up very large losses,” Bischoff, 67, said at a Swiss- American Chamber of Commerce event in Zurich today.

The mother of all opportunity costs

(Amen brother. Please visit Citizen Jesse's website, see link to right, to reflect upon referenced chart - AM)


'One can quibble with the details, and even make the case that any expenditures financed by debt are of equal economic value, that there is no difference between pure consumption and greed, and productive investment in infrastructure. That there exists no good or evil and that justice has no penalty or value.

But one has to ask what could have been accomplished, what great achievements could we have endowed to posterity, if we had only restrained the greed of Wall Street and the corruption of the world's economy through the US dollar as its reserve currency which permitted the almost unrestrained creation of debt by a succession of narcissists and sociopaths?

If this chart is not shocking, does not sicken you at heart, repulse you, fill you with righteous anger, make you feel ashamed, then you may no longer be human.'

Yuan Watch : Betting on Red

NOVEMBER 28, 2008, 8:06 A.M. ET

For China's banks, the good times are coming to an end.

Aggressive rate cuts mean falling net interest margins are in store just as bad loans are expected to creep up.

Still largely under state-ownership, the banks will be expected to play their part in supporting the Chinese economy -- rather than pulling up the drawbridge like their foreign counterparts have been doing.

If that means earnings are pinched, few in Beijing will mind. For investors, it's a reminder that Chinese institutions aren't always the true masters of their own destiny.

The country's banks have reaped the rewards from the country's rapid economic expansion. Even now things aren't so bad. At Bank of China, the laggard among the top listed institutions, earnings rose 32% on-year through the third quarter.

Maintaining this will be tough as China continues to ease policy. This week, one-year lending and deposit rates were slashed by 108 basis points.

If Chinese government bond yields now fall as much as headline interest rates, net interest margins at the banks will fall by 26% says Citi Investment Research. Major Chinese banks invest most of their surplus cash in yuan-denominated bonds.

The spread between official lending and deposit rates, which helps the banks maintain an inbuilt profit margin, will continue to narrow. China's already cut the lending rate by more than the deposit rate in this easing cycle. The one year lending rate, at 5.58%, has much more to give than deposit rates do -- a loan rate below 4% next year now looks possible.

This comes at a critical time, when China's stimulus efforts have global implications. BNP Paribas estimates China could account for a staggering three-quarters of world economic growth next year.

Beijing wants banks to do their duty by expanding credit, which could mean lowering credit standards even as banks already face rising bad loan levels.

Whatever the cost, China's banks are unlikely to say no.

Tail shorting the dog

(So where can I short the CDO of CDS created by the hedge -short sovereign CDS- against the 'full faith and credit' synthetics? - AM)

November 28, 2008

A fresh asset class is quickly carving a new niche for itself on Wall Street.

In just two days, Goldman Sachs Group Inc., Morgan Stanley and J.P. Morgan Chase & Co. sold a cumulative $17.25 billion of government-guaranteed bank bonds as part of the Federal Deposit Insurance Corp.'s Temporary Liquidity Guarantee Program.

The program has opened the financing door for banks that were otherwise shut out from repaying or refinancing debt as a result of the credit crisis.

Strangle Herbie

By Alexis Xydias

Nov. 28 (Bloomberg) -- Porsche SE, which earns more through derivatives than by selling cars, may run into difficulties stemming from the options strategy that helped it build its stake in Volkswagen AG, analysts said.

Porsche’s tactic is a “daunting mix of risk and reward” that may force it to buy Volkswagen shares if they fall toward 200 euros, leaving the maker of the 911 sports car highly indebted, Citigroup Inc. said in a report dated yesterday. Separately, Sanford C. Bernstein Ltd. said Porsche faces “material” risk should Volkswagen shares near 242 euros.

Analysts have speculated that Porsche has financed the acquisition of calls by selling puts, which would force the carmaker to buy VW shares if the contracts are exercised. Porsche said earlier this month that its Volkswagen options bets produced a gain of 6.83 billion euros ($8.8 billion) in the last fiscal year. The company made 1 billion euros from selling vehicles.

Are Porsche’s management “the smartest guys in the room” or “in trouble?” wrote Max Warburton, an analyst at Bernstein in London, in a note today. “In our view, Porsche is still in control, but possibly at considerable risk until the put options apparent in its balance sheet expire by July 2009.”

A call option gives the holder the right to buy an underlying security at a given price and by a set date, while a put gives the holder the right to sell. Porsche said Oct. 26 that it had acquired cash-settled calls equivalent to 31.5 percent of Europe’s biggest carmaker, an announcement that caused Volkswagen shares to more than quadruple.

‘Full Control’

Porsche shares fell 2.62 euros, or 4.8 percent, to 51.68 euros as of 1:04 p.m. in Frankfurt. Volkswagen dropped 3.46 euros, or 1.2 percent, to 291.54 euros.

Stuttgart-based Porsche “seems to need full control of the Volkswagen share price to extricate itself without cost from its huge apparent put liabilities, which appear to become onerous” if VW stock approaches the estimated strike price of 200 euros, Citigroup analyst John Lawson wrote.

Money for nothing

By Liz Capo McCormick

Nov. 28 (Bloomberg) -- The rate to exchange floating for fixed interest payments for 10 years may drop below yields on similar maturity Treasury notes for the first time as the Federal Reserve buys mortgages to unfreeze credit markets.

The 10-year swap spread may turn negative as the purchases push mortgage rates lower, triggering a surge in demand to lock in fixed rates. Lower mortgage rates tend to increase consumers refinancing levels, causing a decline in bondholders’ duration, a measure of price sensitivity to interest-rate change expressed as a number of years.

The 10-year spread dropped as low as seven basis points after the Fed announced its plan to buy as much as $600 billion in mortgages on Nov. 25. The 30-year swap spread, which turned negative last month for the first time, is minus 42.50 basis points.

The byproduct of the central bank’s program will create a “need to synthetically extend duration by receiving fixed on longer dated swaps,” wrote Fidelio Tata, head of derivatives strategy at RBS Greenwich Capital in Greenwich, Connecticut, in a note on Nov. 25. “This will create significant swap spread tightening pressure. Some market participants now even see the potential for 10-year swap spreads to follow 30-year spreads into negative territory.”

Swap rates have traditionally been higher than Treasury yields in part because the floating payments are based on interest rates that contain credit risk, such as the London interbank offered rate, or Libor.

Tragedy, farce, and arithmetic

Commentary by Joe Mysak

Nov. 28 (Bloomberg) -- Swaps live.

Yes, states and localities across the nation are paying millions of dollars to get out of the interest-rate swaps and other derivatives that they engaged in during the past decade.

Yes, Jefferson County, Alabama, has been toying with the idea of bankruptcy, its finances in ruins because of an infatuation with variable-rate debt and interest-rate swaps.

Yes, the federal government is looking into the whole reinvestment-of-bond-proceeds business, which includes guaranteed investment contracts, swaps and derivatives. “Looking into” is probably too mild a term for the high- profile investigation.

And yes, JPMorgan Chase & Co., once one of the biggest purveyors of swaps and derivatives in public finance, said on Sept. 3 that it was getting out of the business. It seems the risks of selling these things to local governments are greater than the rewards.

Well, I have news for you. Don’t bury swaps. They’re not dead yet.

What? Is this possible?

There are still some municipalities getting involved in swaps and derivatives, judging from rating-company reports. Most seem to be planning or executing exit strategies. Some are deciding what to do about contracts they entered into years ago. Still, that any municipalities are even contemplating their use, at all, is amazing and appalling.

Big Secret

Can’t you folks just say no?

I’m sure your bankers are coming in and saying, “Hey, you know what, we can put together a transaction that makes a lot of economic sense right now.”

And there are probably some financial advisers who are even saying how much money you can make today by selling an option for a swap to be entered into at some point in the future.

Does the experience of the last nine months or a year mean nothing? Doesn’t it at least give you pause? Shouldn’t you get in touch and talk it over with some of your fellow government finance officers, who have had to unwind their nightmarish involvement in the swaps and derivatives market?

Terminating their runaway swaps is costing cities, towns and school districts millions of dollars right now. Many of the public officials involved are ashamed and are trying to keep a lid on it all, I realize, especially because everything about the swaps market is supposed to be a big secret. Surely some of them will talk about it, especially the ones filing lawsuits.

State Law

I like to read new-issue ratings reports (it’s an acquired taste) from the companies that grade municipal bonds.

I was especially taken with what Moody’s Investors Service said in its analysis of a Pennsylvania school district’s rating earlier this month.

This particular district was refinancing some debt and retaining two interest-rate swaps with Royal Bank of Canada.

In 2003, the state of Pennsylvania gave its municipalities the power to use swaps as long as they hired an independent financial adviser to help them figure out the deals. A 2008 story in Bloomberg Markets magazine showed that this was like letting the fox loose in the henhouse.

It seems that most of the school districts that were examined paid far too much for their swaps.

Common Tools

That’s easy if you don’t really know what you are doing, and most municipalities don’t, when it comes to these kinds of transactions. The story’s conclusions were so alarming that I suggested the state prepare a comprehensive study detailing just how the state’s school districts have fared with their use of swaps and derivatives since passage of the 2003 law.

Not very well, I suspect. Moody’s nevertheless said in its rating report that it “expects these tools to become common for Pennsylvania school districts for asset and liability management,” adding that there was “little state supervision” of their use.

Moody’s continued: “The use of swaps will require credit monitoring given the increasingly complex nature of these instruments. Moody’s will also continue to base its analysis on the amount of exposure and our assessment of district management’s understanding of the complexities and additional risks involved in swaps.”

That’s nice. Moody’s thinks school districts’ use of swaps will become “common.”

This is too funny to be a tragedy, too sad to be a farce

Yuan Watch : China needs more meatballs

China Daily
Updated: 2008-11-27 11:21

China's total social investment is predicted to reach 18 trillion yuan ($2.64 trillion) in 2009, National Development and Reform Committee (NDRC), the country's top economic planner, announced in Beijing on Thursday.

"The 4 trillion ($586 billion) stimulus package is only part of the whole picture. China's total social investment exceeded 13 trillion yuan in 2007 and is expected to top 16 trillion yuan this year," said NDRC head Zhang Ping.

Yuan Watch : Communist Spin Cycle

Citizen Sester provides The December 2008 quarterly update by the World Bank.

Please visit his site per link to the right.

The World Bank report states that much of the Chinese slowdown (so far) has come from weaker domestic demand mostly in real estate and construction. The real estate sector has suffered a 'particulary pronounced' slowdown as a result of policy tightening in 2008. Weakness in construction has led to a sharp slowdown in heavy industries like steel and cement.

Domestic consumption has been a bright spot, even if autos and home sales growth has suffered. Incomes are up.

China-weighted global GDP growth (growth around the world weighted by importance of markets) will be weaker than the 90's Asian Crisis. Overall exports in value-added terms are 17.5% of GDP.

Government-influenced investment make up almost one-third of total investment.
Government-influenced direct spending wil contribute more than half of estimated 2009 GDP growth. This spending is expected to be front-loaded.

Despite export volume weakness, China's current account surplus is likely to increase in 2009 due to lower raw commodity prices. (estimation is 430 billion, which will buy a lot of Treausries).

The case for stimulating domestic demand is stronger than the case for stimulating exports by depreciating the exchange rate or giving tax incentives to exporters.

My comments:

China Inc. will have to spin hard to not fall into its' own liquidity trap. Industry and investment are the drivers, as the study shows, but domestic demand is what the authorites are now focusing on. However the Chinese consumer may very well see lower interest rates as meaning that they have to 'save longer' and 'save more' to make the same amount. If the ideology of 'it is patriotic to shop and support the economy', can take hold China will make the transition. The question is how quickly and in the intermediate term will it avoid a brutal hard landing.

In the short term, China will mildly appreciate the yuan against the dollar- although this will be seen as either appreciating or depreciating in other countries based on the dollars travails - a kind of virtual re-peg with a little juice to account for 'reported' GDP growth differentials and a desire not to dissuade FDI since they don't have enough money to fund announced stimulus packages if they stay within the 3% debt to GDP measurement.

Much like GE they will keep making the 'numbah' ( the numbah being whatever minimum they think it can be whilst maintaining morale) until they are stretched so far that they can't. They will try to fight the caution of the consumer with spin.

Yuan Watch : Chinese Rousseau

(As of late there have been many accounts of government officials initiating 'listening tours' to economically challenged regions as spin begins to substitute for suppression. -AM)

Author: Yongsheng Zhang
November 27th, 12:22pm
.China has always put economic development and social stability as the top priority. But in the past, stability was achieved even through times of high pressure. This kind of stability was not real stability and not sustainable. The real social stability needs to be achieved through rule of law and civil society (or, as Hu Jintao put it at the 17th congress, “socialist democracy”). When the first strike happened in Chongqing, the party chief of Chongqing, Bo Xilai, solved it in a different way to what is sometimes expected in China — to listen to the appeal of the taxi driver and reform the regulation of the government, rather than put pressure to stop the strike in the first place. These kind of examples can be seen as definite progress toward civil society in China.
Chongqing’s solution encouraged taxi drivers elsewhere to take action. In Hainan, Guangdong, Jiangxi and other places, taxi drivers followed Chongqing and organised strikes. In the old thinking, the strike means instability. But, actually, strikes are a sign that the Chinese society is becoming more and more open, transparent and democratic, since now the people can protest publicly, and the government has to solve problems through reforming and disciplining their own behaviour. Some western media may report the strike from a different angle and deem the strikes as the evidence of instability in China, or even the evidence of the crisis of Gongchandang’s rule. This kind of conclusion is incorrect and misleading.

Will Christopher Cox investigate Reuters?

Mon Nov 24, 2008 6:52pm EST
By Elinor Comlay

NEW YORK (Reuters) - A government rescue plan has eased investors' concerns about Citigroup Inc, but mines lurking in the balance sheets of rivals including Bank of America Corp could still tempt short-sellers.

Bank of America, the No. 3 U.S. bank by assets, has loaded up on mortgages as the world's largest economy wrestles with the worst housing market since the Great Depression.

The Charlotte, North Carolina-based bank further heightened its exposure to home loans by acquiring Countrywide Financial Corp, the largest U.S. independent mortgage lender and agreeing to buy Merrill Lynch & Co, which owns the world's largest retail brokerage.

If losses on mortgages and other debt securities mount significantly, the bank may see the ratio of equity to risk-weighted assets, known as Tier-1 capital, dwindle to alarmingly low levels.

"I would expect there are more banks who are in dire straits and more who can expect to be helped," said Michael Farr, president of investment management company Farr, Miller & Washington in Washington, D.C. "The share price makes it look like Bank of America might be next in line," he said.

Before Monday's stock market rally, Bank of America shares had lost 52 percent in November alone, making them the second biggest decliner for the month in the KBW Banks index after Citigroup.

Analysts at independent research company CreditSights forecast that in a scenario where the commercial and residential real estate markets really tank beyond banks' expectations, Bank of America would have a Tier-1 capital ratio of 7.15 percent.

The minimum that regulators seek to consider a bank "well capitalized" is 6 percent, but any ratio near or below 7 percent tends to spook investors.

Bank of America declined comment.

CreditSights also expressed concern about Wells Fargo & Co, which it said would have a Tier-1 capital ratio of 6.98 percent under its worst case scenario. Wells Fargo recently agreed to buy Wachovia Corp.

Under the same assumptions, and before the government's latest investment, Citigroup would have a Tier-1 capital ratio of 8.64 percent.

Wells Fargo, based in San Francisco, declined to comment.

To be sure, by some measures Citigroup looks worse than Bank of America and Wells Fargo, most notably the ratio of tangible assets to tangible equity, a metric on which some investors have focused.

Citigroup's tangible assets are about 42 times shareholder equity minus intangible assets, compared with 11 times for Bank of America.

The U.S. banking system is broadly undercapitalized, perhaps to the tune of more than $1 trillion, and the only investor that can bail it out is the U.S. government, analysts said.

"The banks already have an enormous hole to plug, and the recession will make that hole larger," noted Daniel Alpert, investment banker at Westwood Capital in New York, estimating banks may need to write down $1 trillion more in bad debt, in addition to the roughly $750 billion announced so far.


Bank of America, through its acquisition of Countrywide, has more than $250 billion in residential mortgages and while it has stopped offering some of the most toxic types of mortgages, chargeoffs in the portfolio are increasing.

Wells Fargo inherited a portfolio of more than $260 billion in consumer loans when it acquired Wachovia, and JPMorgan Chase & Co acquired exposure to some of the most risky classes of mortgages, in addition to its own large consumer loan portfolio, when it bought Washington Mutual Inc.

Still, there are big differences. Critically for Citigroup, investors lost confidence in the company and its management after it failed to buy Wachovia Corp, thereby losing an important potential source of deposit-based funding, analysts said.

"The difference between Citi and the other three is that Citi clearly had more suspect management," said Mal Polley, chief investment officer at Stewart Capital Advisors in Pittsburgh. "They had not done enough to take the fat out of the system and right the ship," he added.

But management at Bank of America and Wells Fargo, and even JPMorgan, widely regarded as the bank that has best survived the credit crisis to date, will need to allay investors' concerns about their capital position as financial conditions worsen.

And if their losses are big enough, or investors fear they will be big enough, Bank of America and Wells Fargo could turn to the same place Citigroup did: the U.S. government.

"I definitely think other companies will need this help," said Paul Miller, analyst at Friedman, Billings, Ramsey & Co in New York

Thursday, November 27, 2008

Citigroup says market will either go up or down

By Ambrose Evans-Pritchard
Last Updated: 7:29AM GMT 27 Nov 2008

The bank said the damage caused by the financial excesses of the last quarter century was forcing the world's authorities to take steps that had never been tried before.

This gamble was likely to end in one of two extreme ways: with either a resurgence of inflation; or a downward spiral into depression, civil disorder, and possibly wars. Both outcomes will cause a rush for gold.

"They are throwing the kitchen sink at this," said Tom Fitzpatrick, the bank's chief technical strategist.

"The world is not going back to normal after the magnitude of what they have done. When the dust settles this will either work, and the money they have pushed into the system will feed though into an inflation shock.

"Or it will not work because too much damage has already been done, and we will see continued financial deterioration, causing further economic deterioration, with the risk of a feedback loop. We don't think this is the more likely outcome, but as each week and month passes, there is a growing danger of vicious circle as confidence erodes," he said.

"This will lead to political instability. We are already seeing countries on the periphery of Europe under severe stress. Some leaders are now at record levels of unpopularity. There is a risk of domestic unrest, starting with strikes because people are feeling disenfranchised."

"What happens if there is a meltdown in a country like Pakistan, which is a nuclear power. People react when they have their backs to the wall. We're already seeing doubts emerge about the sovereign debts of developed AAA-rated countries, which is not something you can ignore," he said.

Gold traders are playing close attention to reports from Beijing that the China is thinking of boosting its gold reserves from 600 tonnes to nearer 4,000 tonnes to diversify away from paper currencies. "If true, this is a very material change," he said.

Mr Fitzpatrick said Britain had made a mistake selling off half its gold at the bottom of the market between 1999 to 2002. "People have started to question the value of government debt," he said.

Citigroup said the blast-off was likely to occur within two years, and possibly as soon as 2009. Gold was trading yesterday at $812 an ounce. It is well off its all-time peak of $1,030 in February but has held up much better than other commodities over the last few months – reverting to is historical role as a safe-haven store of value and a de facto currency.

Gold has tripled in value over the last seven years, vastly outperforming Wall Street and European bourses.

Yuan Watch : Market determining RMB

(This is also what the Chinese told the French several weeks ago.-AM)
By Si Tingting (China Daily)
Updated: 2008-11-27 14:07

Zhang Ping, minister of the National Development and Reform Commission (NDRC), China's top economic planning body, said at a press conference this morning that China will stick to the direction of letting the market determine the value of RMB.
"China will stick to this direction in the long term," said Zhang. The RMB has appreciated by 20 percent since China de-pegged it from the US dollar in July 2005

Yuan Watch : Accelerated Decline

1 hour ago

BEIJING (AFP) — China's economy slowed further in November, a senior official said Thursday, as he warned the government was being forced to act to avoid massive unemployment and social unrest.

Zhang Ping, the minister in charge of the National Development and Reform Commission, made the sombre remarks at a briefing explaining recent measures to trigger domestic consumption and lift economic growth.

"In November, a number of economic indicators are showing accelerated decline. The production at some enterprises has encountered difficulties, especially enterprises that focus on exports," he said.

"Some companies have stopped all or part of their operations, and this will naturally have an impact on employment. In some areas we're seeing rural workers returning back home to the countryside."

He defended measures taken in the south of China to support struggling enterprises, with reports of local governments earmarking major funds aimed at keeping them in business.

"I think it's necessary. If too many enterprises suspend business or stop production, it will result in large-scale unemployment, and it could trigger social instability," he said

Yuan Watch : Issuing Bonds in Hong Kong

BEIJING, Nov. 27 (Xinhua) -- China might raise capital in its Hong Kong Special Administrative Region as a way to involve the southern international financial hub in efforts to stimulate the domestic economy, an official of the National Development and Reform Commission (NDRC), the top economic planner, said here on Thursday.

NDRC head Zhang Ping said the agency would encourage well-established Chinese companies to go public in Hong Kong as well as issue bonds there to raise capital for economic development.

"Hong Kong is a good platform to raise funds," said Zhang, without elaborating.

Of the 4 trillion yuan (586 billion U.S. dollars) stimulus plan announced by the State Council (cabinet) earlier this month to tackle an economic slowdown amid the global financial crisis, 1.18trillion yuan will come from the central government, according to the NDRC.

The remainder largely depends on social investment.

Yuan Watch : China lowers their numbah

By Zhou Xin
BEIJING, Nov 27 (Reuters) - The downturn in China's economy is gathering force as the global financial crisis spreads, foreshadowing rising unemployment and social unrest, the country's top planner said on Thursday.
Alarm bells are ringing in Beijing over the abrupt cooling, which prompted the central bank on Wednesday to make the biggest cut in interest rates since the 1997 Asian financial crisis.
"Owing to dramatic changes in the international economic and financial environment, the Chinese economy currently faces growing downside pressure," Zhang Ping, chairman of the National Development and Reform Commission, told a news conference.
The State Information Centre, a government think-tank, forecast on Thursday that annual gross domestic product growth would slow to 8.0 percent this quarter from 9.0 percent in the third quarter under the impact of weakness in exports and a slump in the property market.
"The global financial crisis has not bottomed out yet. The impact is spreading globally and deepening in China. Some domestic economic indicators point to an accelerated slowdown in November," Zhang said.
In the latest official admission of strains in the social fabric, Zhang said China would face serious jobless problems next year.
"Excessive bankruptcies and production cuts will lead to massive unemployment and stir social unrest," Zhang warned.
With factory closures spreading, especially in the export sector, laid-off workers protested this week against low compensation in three Chinese provinces.
On Tuesday, an angry crowd of 500 workers overturned police cars in front of a major toy company that was firing workers in the southern export centre of Dongguan near Hong Kong.
Zhang was speaking a day after the People's Bank of China cut banks' benchmark lending rates by 1.08 percentage points.
The aggressive rate cut -- four times the central bank's usual increment of 0.27 percentage point -- was in line with the need for strong steps to tackle the crisis, Zhang said
The cut in borrowing costs will reinforce a 4 trillion yuan ($586 billion) fiscal package unveiled on Nov. 9 aimed at boosting domestic demand over the next two years.
According to the NDRC's estimates, the stimulus will boost growth by about 1 percentage point each year, Zhang said.
Breaking down the package, he said the money would be spent in six sectors:
-- 1.8 trillion yuan on railways, roads and airports;
-- 1.0 trillion yuan for reconstruction after May's devastating earthquake centred in Sichuan;
-- 370 billion yuan for improving rural living standards and infrastructure;
-- 350 billion yuan for environmental protection;
-- 280 billion yuan for housing;
-- 160 billion yuan for innovation;
-- 40 billion yuan on healthcare and education.
The central government is financing nearly 30 percent of the headline figure itself and hopes to drum up the remainder from local authorities, state-owned banks and businesses.
Zhang played down media reports that Beijing intended to engineer a big boost in personal incomes, perhaps by cutting income taxes or increasing minimum wages.
But he said the government would introduce further measures to create jobs and increase spending power, for example through subsidies targeted at low-income households.
"We will continue to consider further measures to boost consumption according to market conditions and the economic situation," Zhang said

Wednesday, November 26, 2008

Downtown to Crazy Town

President-Elect Barack Obama Announces the President’s Economic Recovery Advisory Board
Paul Volcker to Serve as Chair of the Board

How will this administration be able to acquire the funds to fund what is necessary to be funded?

If Amerika has any hope of being able to have its' cake and eat it too ... grow itself out of debt without destroying the scrip - by keeping its' costs of financing low...

Volcker needs to be the fiscal equivalent of 'Only Nixon could go to China.'

Mr Volcker has to go to Crazy Town.

And needs to do it convincingly.

Yuan Watch : Yin-Yang

by Antoaneta Bezlova

Global Research, November 25, 2008

The specter of a prolonged global recession has dampened China’s wish for a world financial order less dominated by the United States and its dollar, giving way to more urgent dealings with recession worries at home.

As every day brings news of more factory closures and social unrest all over the country, Beijing has swung into a crisis management mode, mandating a sober media tone and attempting to shore up public confidence.

Over the last few weeks the lead pages of major Chinese news outlets have been headed by titles like "coping with crisis" and "withstanding the financial tsunami." Where once editorials and commentaries were ubiquitously calling for an end to American-style capitalism and the global sway of the dollar, these days the emphasis is on salvaging China’s own boat.

"It is not dissimilar to when you mobilise to go to war," Liu Jin, an expert on capital markets at the Cheung Kong Graduate School of Business in Beijing, said. "We are in a crisis and the mood in the media is set to help the public cope with the crisis."

To boost the slowing economy, China unveiled a stimulus package earlier this month. The money will be pumped into constructing railways, housing, airports, highways and other projects aimed at expanding domestic demand.

"It must be now obvious to many that the impact of the financial crisis to China is not only about us buying U.S. treasury bonds that could shrink in value," says Wang Luolin, researcher with the Chinese Academy of Social Sciences. "The end of the U.S. development model driven by consumption means the end of China’s development model based on exports."

The lunatics need to be persuasive

B.S. Bernakke has to convince the world he is insane.

He has to be willing to convice the world that he will bankrupt Amerika and monetize a cow if need be.

Mr. Market needs to believe that a 'printing money' policy will not bring out a future mop.

(All of a sudden my antennae are goin' up about CDS on Amerikan sovereign debt... you know what I'm talking about..Goldie?)

If Mr. Market thought ZIRPmeister Ben would get all teary-eyed about future generations then Mr. Market would start to price in much higher future interest rates.

In this current liquidity trap folks need to appear to drive the buggy off the cliff .

Look at a chart as to how low the yields went on the long bond and stayed in the 30s before it popped.

The asylum needs to believe that the lunatics are in charge.

Trying not to be part of the problem

Citizen Harrison is asking for thoughts on potential fixes for our economic condition:

My prescription -

Fiscal insanity. Depressed equities and bubble bonds.
Drop and roll ... keep long bonds as strong as possible as long as possible to lock in cheap financing.
Invest our pesos in that which gives us the greatest 'bang' in future GDP.
Hopefully Obama Smartypants can make that happen.

Yuan Watch : Relevant measures needed

(The relevant measures, in my opinion, will be an appreciating yuan that offers a 'guaranteed' fixed-income for FDI. China cannot afford the stimulus package headline number. Purchasing power parity suggest the yuan is anywhere from 20-60% undervalued. -AM)

Editor: Zoe Zhang
26 Nov 2008 09:30:39 GMT

The recent 4 trillion yuan ($586 billion) investment package by the State Council for the next two years has spurred a fever in infrastructure constructions around China, with sources saying the fixed assets investment plans for local governments have expanded from 6 trillion to 18 trillion yuan in a week. However, local finances in fact could not bear such huge expenses, according to a report from today's Shanghai Securities News.
In a press conference held by the State Council Information Office, Wang Jun, Vice Minister of Finance, said central financial deficits will inevitably increase when China adopts positive financial policies, but he emphasized the deficits would be under control.
Wei Fengchun, a senior analyst at the South China Securities, said the controllable proportion between financial deficit and GDP should be less than three percent.According to 2007 GDP figures and a desirable annual growth rate of 8 percent, the controllable deficits predicted in China over the next three years will be 799 billion yuan, 862.9 billion yuan, and 932 billion yuan respectively, or 2.59 trillion yuan in
total. Government investment will bring more social funds, and figures show the multiplier effect for infrastructure investments between 1998 and 2002 was 3.2. Therefore local financial power will reach 8 trillion yuan in three years if the multiplier effect is kept stable.
The multiplier effect means the expansion of a country's money supply results from banks being able to lend.
"In fact, the multiplier effect from government investments will be lower than that of ten years ago," said a report from China International Capital Corporation Ltd.
Compared with that of ten years ago, the return on investment in infrastructure construction has seen negative growth, and the housing market has been in an adjustment period, said the report.
Hence, together with 2.59 trillion yuan in government deficits and 8 trillion yuan in local finances, the desired
total may reach 10 trillion yuan. That makes it significantly lower than the 18 trillion yuan that is supposed to be raised by local governments.
According to local investment plans, the 18 trillion yuan is mainly from central government, local governments, business circles and banks.
However, experts familiar with the matter said governments have more passion for the plans than business ciricles and banks.
In addition, local finance bears more invisible pressure, which is easily forgotten by the market, said Wei from the South China Securities.
Currently, local governments' financial income is mainly from land bidding and its derivatives soaring, and cities would like to push up housing prices. But this year, many cities saw a decline in housing prices, with many failed bids on land.
The National Development and Reform Commission, the top planner, said on November 11 that property prices in China's 70 large and medium-sized cities rose 1.6 percent year-on-year in October, the lowest growth rate since 2006.
The average price of Beijing's high-end residential apartments fell 5.5 percent quarter-on-quarter from July to September, the first time since the first quarter of 2006.
"Past fast increasing financial income will never show up,"said Wei, adding the risks brought on by high financial pressure will be hard to control if there are no relevant measures taken.

Yuan Watch : Priming the pump

( My gut feeling is that China will continue yuan appreciation in order to attract FDI,foreign direct investment,for its' recently announced infrastructure projects. China flat out does not have the money for it, cannot use its' forex for it -unless they internationalize the yuan- and they've upped the headline to 10 (or is it now 18?) trillion yuan. Export tax rebates have the same impact as yuan depreciation and will cause less consternation and are easier for China to defend in this environment. China's growth may be 2% already but the headline reported numbah will never reflect that.- AM)

By Parmy Olson, 11.26.08, 08:10 AM EST
Beijing enacts the largest cut in more than a decade to support the country's faltering economy.
China continues to make bold moves to boost its faltering economy. The People's Bank of China made a 108-basis-point cut to interest rates on Wednesday following the markets' close as it continued its recent policy of monetary loosening in the face of slowing growth, export and industrial production figures.
Though a rate cut was expected by the central bank, its magnitude--the largest since the Asian financial crisis in October 1997--was surprising. "Bottom line is the Chinese authorities think the economy is slowing down fast," said Nigel Rendell, a senior emerging market strategist at RBC Capital Markets.
Earlier this week, the World Bank cut its' forecast for economic growth in China to 7.5%, from 9.2%, though many economists expect an even slower rate of expansion, of anywhere between 2.0% and 7.0%.
This is the fourth time in three months that Beijing has reduced Chinese interest rates, but the several prior reductions, in October and August, were by just 27 basis points each time. China's benchmark rate now stands at 2.52%. The central bank also lowered its reserve requirements by 200 basis points for large banks and by 100 basis points for smaller banks on Wednesday.

China's economy is still feeling the impact of previous measures that Beijing made to cool the economy and keep a lid on inflation; it was tightening monetary policy in the first half of this year, when the economy appeared to be growing too quickly. But in October, a lower than expected level of imports for the month showed that China was not picking up the slack from slowing economies elsewhere.

China's currency actually strengthened slightly after the rate cut: the U.S. dollar bought 6.82 yuan late Wednesday in Beijing, down from the 6.83 yuan it bought on Thursday.
Rendell expects the currency to stay between 6.80 and 6.90 against the dollar, which is the range around which it has hovered since June. If exports suffered more markedly, the analyst said Beijing might let the yuan weaken further in 2009. But, given that China still has a notable current account deficit, there would undoubtedly be strong international pressure to keep it from going down that route any time soon, which would put struggling exporters in the West at a disadvantage.