Latin America's economies - Pain but no panic

Apr 30th 2009 From The Economist print edition A traditionally crisis-prone region is belying its reputation. But that has not spared it from the world recession Illustration by S. Kambayashi UNTIL recently many Latin Americans saw the financial crisis and the global recession as events happening somewhere else. But in the past six months the region’s economies have swiftly slumped along with the rest of the world, showing double-digit falls in industrial output. Workers have been laid off in Mexican car factories, Brazilian aircraft plants and Peruvian building sites. For Latin Americans such woes are sadly familiar: income per person in the region has fallen on five separate occasions since 1980. What is different this time is that Latin Americans are faring no worse than the rest of the world. And there are reasons to believe that their recession may be relatively short and mild. That may not be cause for celebration but it is a crumb of comfort. The bad news is, however, quite bad. Latin American countries have been hit by four different recessionary forces. As the financial crisis in the developed world transmuted into a collapse of manufacturing, trade plunged: total exports for five of the region’s larger economies fell by a third between August and December, partly because fewer goods were sold and partly because the price of commodities fell. The flow of capital to the region also dried up, leading to a steep rise in borrowing costs for governments and companies. The Institute of International Finance, a bankers’ group, thinks that net private capital flows to Latin America will fall by more than half this year compared with last, to $43 billion (down from a record $184 billion in 2007). Foreign banks have trimmed credit lines, especially for trade. In addition, remittances from Latin Americans working abroad have begun to contract, and fewer tourists have come visiting. Most forecasters think that GDP in Latin America and the Caribbean as a whole will contract slightly this year, but a moderate recovery will follow next year. The IMF, for example, predicts a contraction of 1.5% in 2009 and growth of 1.6% in 2010. With the population growing at 1.3% a year, income per person will shrink. All this brings an abrupt end to five years in which economic growth averaged 5.5% amid generally low inflation. This golden demi-decade also saw social progress: according to household surveys, poverty fell from 44% in 2002 to 33% last year, when 182m people were classed as poor; the region’s wide inequality of income narrowed; and tens of millions of Latin Americans joined an emerging lower-middle class. Just how bad the recession will be varies markedly from country to country (see chart 1). Countries with close ties to the United States’ economy—Mexico and much of Central America and the Caribbean—will fare worse than the regional average. In Mexico the fall in output was still accelerating in February, and the disruption caused by the outbreak of swine flu will make things worse (see article). By contrast, countries such as Brazil whose exports are more diversified, spanning different markets as well as products, or those whose economies are relatively closed, will be hit less badly. In Brazil there are already signs that recession will be short. Guido Mantega, the finance minister, points out that more Brazilians were hired than fired in March. Many forecasters expect Peru’s economy to buck the regional trend by growing this year and next, partly because it exports much gold, whose price has held up, and partly because it has a fat pipeline of foreign and public investment projects. Lessons learnt The good news is that things might be much worse, and in the past usually were. The three classic Latin American sources of weakness—financial systems, currencies and the public finances—have not been an independent source of woe this time, as Augusto de la Torre, the World Bank’s chief economist for Latin America, points out. In the case of financial systems, that is partly because they are relatively small and undeveloped (paradoxically, this was often cited as a drag on growth). But it is also because most were tightly regulated, the result of lessons learnt the hard way over the past quarter-century. So the banking system is not acting as a magnifier of recession. A decade ago governments in many of the larger countries in the region reacted to a previous bout of financial-market turmoil by switching from fixed to floating exchange rates. They backed these up with more responsible fiscal policies, and by requiring their central banks to target inflation. In contrast to the practice during previous booms, Latin America maintained a current-account surplus (and so accumulated reserves), and paid off public debt. In this group of countries (Brazil, Mexico, Chile, Peru and Colombia among the larger ones), these policies are now proving their worth. The currencies of several of them depreciated by around 30% when money fled emerging markets in the weeks surrounding the collapse of Lehman Brothers last September. But devaluation, which will help exports, has not led to panic. In contrast to past recessions, when governments were forced to raise interest rates to defend the currency as well as to cut spending, this time they have been able to take steps to mitigate recession. Several of the larger economies have announced fiscal measures to stimulate demand, averaging around 1% of GDP. Some have done more: both Chile and Peru promise to raise public spending by around 10% this year, much of it on infrastructure such as roads and housing. It is not yet clear how much extra spending will happen in practice. As important, central banks are cutting interest rates steadily (see chart 2). They have scope for further cuts. They have also taken other measures to provide credit. Brazil’s Central Bank, for example, stepped in to provide dollars to help companies to repay foreign debt. It also allowed commercial banks to draw down some of the funds they are required to deposit at the Central Bank in normal times. As a result of these actions, credit is gradually returning, says Henrique Meirelles, the Central Bank’s president. Peru’s Central Bank has taken similar steps. State-owned development banks in Mexico, Chile and Brazil have all stepped up their lending. The dissenters Other countries have taken a radically different approach. Venezuela, Argentina and Ecuador have pursued expansionary fiscal policies in recent years, and their populist governments have harassed the private sector and foreign investors. All have fairly rigid exchange rates: Venezuela’s bolívar is fixed, Argentina has long intervened to manage the peso and Ecuador uses the dollar as its currency. The growth of public spending in these countries was highly dependent on the commodity boom. To sustain spending, Argentina and Ecuador have raided pension funds while Venezuela’s government has plucked reserves from the Central Bank. Venezuela’s public debt is low and it can tap local banks for loans, but it is the only one among the region’s bigger economies to have announced a cut in public spending this year. The IMF reckons that these three will be among the worst-performing Latin American economies, along with Mexico’s, though it thinks Mexico will recover more quickly. Many economists believe that the longer the world recession lasts, the greater the risk that Ecuador, Argentina and Venezuela (in that order) will run out of money. Supporters of these governments point out that the IMF’s past growth forecasts for Venezuela and Argentina have been unduly pessimistic. All three countries are looking to China for support: Venezuela and Ecuador have signed investment agreements, and Argentina has a currency-swap line aimed at reducing its need for dollars. But such help may be inadequate. Other governments are starting to queue up for support from the IMF. This month Mexico arranged a loan of $47 billion under the fund’s new flexible credit line. Colombia has requested a similar loan of $10.4 billion. This credit is designed for countries with sound policies and carries no strings. Buttressing the balance of payments in this way gives more scope for interest-rate cuts without triggering currency weakness, says Nicolás Eyzaguirre, the IMF’s top official for Latin America. Even in the better-run countries, the scope for fiscal stimulus is limited. Only Chile, which saved the equivalent of 12% of GDP in a special fund during the boom, can repeat the dose for several years from its own resources. As recession bites, tax revenues are falling everywhere and public deficits rising. Mr de la Torre predicts that in the region as a whole fiscal revenues will fall as a proportion of GDP from 24.4% in 2008 to 21.2% this year. The multilateral banks are stepping into the breach. The World Bank will lend about $14 billion to the region in the year to June, and a similar amount in the following 12 months, up from a recent annual average of $5 billion, according to Pamela Cox, the bank’s vice-president for the region. The Inter-American Development Bank (IDB) has also increased lending, to $15 billion a year. It is seeking to raise more capital. The big fear in the region is that the longer the recession lasts, the more difficult it will be to sustain government spending without additional aid. That is because the vast stock of public debt to be issued by rich countries may crowd out Latin American borrowers. Researchers at the IDB argue that aid should be geared more to helping government refinance public debt than to providing further stimulus. Unlike rich countries, this argument goes, Latin America may gain more in the medium term by defending its hard-won fiscal stability and relying on the outside world for stimulus. But there will be political pressure to do more. Already recession has halted some of the social progress of the past few years. Even if the recession is short and mild, the result will be 6m more Latin Americans in poverty than would otherwise be the case, estimates Marcelo Giugale, a poverty specialist at the World Bank. Of these, 4m are people whose incomes will sink below the poverty line, while 2m are people who would have risen above it had it not been for the recession. Mr Giugale notes that traditionally recessions in the region see an increase in child malnutrition and in teenagers dropping out of school to seek money in the informal economy. Public-health provision deteriorates both because budgets are cut and because demand rises as some middle-class Latin Americans can no longer afford private health insurance. In social policy, too, the region is better placed than in the past. A dozen countries have cash-transfer schemes aimed at tackling extreme poverty in rural areas. In some countries, such as Mexico and El Salvador, governments have increased payments under these schemes. Many are looking at expanding their coverage. Peru is trying to extend the provision of free school meals to cover family members. In the 1980s poverty rose steeply in Latin America, and public services and investment were slashed. There are reasons to hope that it can be different this time. Seven months after the financial crisis hit the region, pain is spreading but not turmoil, nor is economic stability being lost. “If the world economy rebounds, Latin America can rebound,” says Mr Eyzaguirre. The question is when that will happen.

Caterpillar:China Excavator Sales At Record Levels

Caterpillar Inc. (CAT) Chairman and Chief Executive James W. Owens said Wednesday that the company's excavator sales in China had resumed record levels in recent months, a sharp bounceback from plummeting sales over the winter months. Excavator sales in China for the Peoria-Ill.-based heavy equipment maker had been around 600 a month before the start of the financial crisis last September, Owens said. Sales quickly plummeted thereafter and many orders were canceled, he added. 'In January, I think we sold five,' he said, in an appearance at the Chicago Council on Global Affairs. Owens said the company's overall Asian sales had been up 42% in the third quarter. For the fourth quarter, he said, there was almost a 'complete seizure' of sales and heavy cancellations of back orders. Owens said excavator sales in China were 'back to record levels in March/April.' He declined to say whether the record level matched the 600-a-month figure from before the crisis. Owens said the Chinese market had 'bounced back faster than anywhere else.' He credited China's infrastructure-based stimulus package with the turnaround. He said China continued to have great needs for infrastructure and was able to start work on them much more quickly than similar projects in the U.S. 'It's something like nine months (in the U.S.) vs. 9 weeks' in China, he said. Last week, Caterpillar reported sharply lower earnings and sales for the first quarter and lowered its outlook for the year. Joe Barrett

Chrysler Chapter 11 Is Imminent

Creditor Talks Collapse as Hedge Funds Balk at Deal; Fiat Waiting in the Wings By NEIL KING JR. and JEFFREY MCCRACKEN WASHINGTON -- Talks between the Treasury Department and lenders aimed at keeping Chrysler LLC out of bankruptcy broke down Wednesday, making it all but certain the car maker will file for Chapter 11 protection Thursday, according to people familiar with the discussions. Administration officials, who have been braced for a Chrysler bankruptcy filing for weeks, say all the pieces are in place to get the company through the court quickly, perhaps in a matter of weeks. The talks with Chrysler's lenders broke down after the Obama administration's automotive task force worked into the evening to persuade several hedge funds and other lenders to accept a deal to reduce Chrysler's debt, said people involved in the talks. The Treasury boosted its most recent offer to lenders on Wednesday by $250 million to $2.25 billion in cash for the banks and hedge funds to forgive $6.9 billion in Chrysler debt, people familiar with the matter said. J.P. Morgan Chase & Co., which leads the creditor group as Chrysler's largest lender, gave the other 45 banks and hedge funds 90 minutes Wednesday to vote on the deal. A large number of the funds voted no and refused to budge, paving the way for an all but unavoidable trip to bankruptcy court, said people close to the talks. Chrysler's likely trip to bankruptcy court is a watershed moment for the car maker that popularized the minivan, is the home of the Jeep and managed to rebound from an earlier financial crisis in the late 1970s. But Chrysler's fortunes have faded since its breakup with Daimler AG two years ago. A trip through the courts will open a new chapter of uncertainty as the company's lenders and its thousands of affiliated dealers could mount a series of legal challenges to the administration's efforts to pull off a swift reorganization. If the Obama administration's calculations are correct, the process should pave the way for Italian auto maker Fiat SpA to take over the American company. More Autos News A Chrysler Creditor Finds Himself TornGM Bondholders Seek to Control EquityChrysler Workers Push for OwnershipGM Salaried Workers to See Pay CutMean Street: Mr. Bloom's Magnificent DealBank holdouts may get blamed for pushing Chrysler into court. But there are other reasons behind the move. One reason Chrysler needs to file for bankruptcy protection is so that Fiat can clear out hundreds of auto dealers from its sales network, which is easier to do in bankruptcy where dealer franchisee agreements can quickly be rejected or amended. The auto maker also has asbestos and environmental liabilities that Fiat doesn't want and are more easily shed in bankruptcy court. The administration worked to the wire to seal a deal outside of court that would put Chrysler in an alliance with Fiat and forge an arrangement between the car company and the United Auto Workers union. Chrysler's UAW membership passed a related negotiated deal with the car company late Wednesday. Fiat is expected to signal its approval for an alliance with Chrysler on Thursday. Administration officials said they remained confident Chrysler could shed much of its debt and come out of a court-supervised restructuring as a stronger company. They ruled out the possibility that Chrysler could end up being liquidated and sold off in pieces. Despite shrinking radically in recent years, Chrysler still employs about 54,000 people in the country with assembly and parts plants all over Michigan, Ohio and Indiana. President Barack Obama said Wednesday that he is "very hopeful" of a resolution that maintains Chrysler as a viable company. "I think some tough choices are being made" by Chrysler's lenders and workers, Mr. Obama said in response to questions at a prime-time news conference. If Chrysler were to file, "it would be a very quick type of bankruptcy," Mr. Obama added. Treasury officials remain concerned that a Chapter 11 filing could lead to a loss of control of the car maker's future. Some Chrysler creditors could argue in court that the company is worth more to them in liquidation than they are granted in the Treasury's deal, which offers the creditors about 29 cents on the dollar in cash. Some of the creditors have signaled they are prepared to fight the matter in court. The administration last month gave Chrysler until May 1 to seal an alliance with Fiat, negotiate a new cost-cutting arrangement with the UAW and pare its debt. Assuming a brisk passage through court, the administration has worked out a deal that will grant the UAW's retiree-health-care fund a 55% stake in the car company, while Fiat will eventually gain a 35% stake. The rest will be in the hands of the federal government. Chrysler has about 115,000 retirees. As part of the UAW deal, the union agreed to eliminate a number of benefits. Bank-debt holders, many of them hedge funds or distressed debt funds, voted against the latest deal for various reasons, ranging from financial interests to philosophical ones. Some said their funds had bigger positions in Ford Motor Co. or General Motors Corp. and could benefit by a Chrysler bankruptcy and the production capacity that may eliminate. Some funds may also have credit-default swaps on Chrysler bank debt that pay out in the event of a bankruptcy. Three of the bank-debt holders on the bank-steering committee, Oppenheimer Funds, Perella Weinberg Partners' Xerion Capital Fund and Stairway Cap Management, told J.P. Morgan and the other large lenders on a bank call Tuesday that they wouldn't support the deal and would advise other lenders not to support it. It is unclear whether the later counteroffer changed their position. Write to Neil King Jr. at neil.king@wsj.com and Jeffrey McCracken at jeff.mccracken@wsj.com

Hopeful Signs Seen in GDP Fall

By SUDEEP REDDY The U.S. economy contracted sharply in the first quarter, capping its worst six-month performance in 51 years, the government said Wednesday. But a large decline in inventories and an uptick in consumer spending suggest the economy is inching closer to the day when it resumes growing. The Federal Reserve, meanwhile, signaled it will keep its foot on the accelerator by holding official interest rates low and continuing to buy up government bonds and other debt, in an effort to pump credit into banks and companies. The U.S. economy contracts 6.1% in the first quarter, a greater drop than expected. But as WSJ's Kelly Evans tells colleague Phil Izzo, although the numbers look bad, there are some positives. The Fed statement triggered a fall in bond prices, pushing the yield on a 10-year note up almost a tenth of a percentage point to 3.1%, a five-month high, a sign that some investors were disappointed Fed didn't unveil more aggressive plans to buy Treasurys. The economic data cheered stock investors. The Dow Jones Industrial Average closed up 168.78 points, or 2.1%, to 8185.73, its highest finish since Feb. 9. The gross domestic product shrank at an inflation-adjusted 6.1% annual rate in the first quarter, nearly matching the 6.3% decline in the fourth quarter. Home building continued to drop. Business investment plunged, as did exports. This recession marks the first time since 1954 that the U.S. economy has contracted for three quarters in a row. But in more favorable signs, firms drew down inventories at the fastest pace since the start of the decade. That could lead manufacturers to ramp up production as demand revives. And consumer spending rose, reversing a fourth-quarter decline. "We think we're moving toward stabilization in the economy," said Joseph Brusuelas of Moody's Economy.com. Excluding the drop in inventories, ultimate demand in the economy fell at a 3.4% annual rate -- much less than the 6.2% fall in the fourth quarter. The latest forecasts see the economy slipping this quarter, but at a slower 2% to 3.5%. The Fed, ending a two-day meeting, kept interest rates unchanged. It noted that "the economic outlook has improved modestly" since March, but added that "economic activity is likely to remain weak for a time." The central bank offered no hint of pulling back from its aggressive stimulus efforts. Write to Sudeep Reddy at sudeep.reddy@wsj.com

Consumer Shift: Debit Gains Favor

Visa Shows Credit Use Below 50% of Transactions; What Does It Mean? By ROBIN SIDEL Brad Sagara uses a debit card to buy everything from groceries to climbing gear to bottled water. He barely uses his two credit cards anymore, and is trying to pay off a combined balance of $4,000. "The painful realization is that I need to be an adult, and this is a time to save," said Mr. Sagara, a 26-year-old consulting-firm analyst who lives in Tucson, Ariz. Brad Sagara The urge to not splurge by thrift-conscious consumers is giving the debit-card revolution a new push. On Wednesday, Visa Inc. reported that the total dollar volume of purchases made using its branded debit cards surpassed credit-card purchases for the first time during the last three months of 2008. The $206 billion in U.S. debit-card transactions processed by Visa were 50.4% of the San Francisco company's total transactions in the period, up from about 40% in 2003. "The reality is that the vast majority of consumers want to pay as they go," said Stacey Pinkerd, who oversees Visa's debit-card business. Visa's net income leapt 71% to $536 million, or 71 cents a share, in the fiscal second quarter ended March 31, from $314 million, or 39 cents, a year earlier. The surging popularity of debit cards largely reflects the growing use of plastic by American consumers. Credit- and debit-card purchases of retail goods and services vaulted past cash and checks in 2003. Now the recession is giving many consumers second thoughts about their credit cards. Lenders also are making it more expensive to charge purchases and lowering credit limits on credit-card users. The U.S. government said last month that the personal savings rate rose to 5% in January, the highest level in nearly 14 years. Revolving debt, which mainly reflects credit-card loans, fell 9.7% to $955.7 billion in February, the Federal Reserve said. "A big group of consumers like the discipline that debit spending can bring them, and that is particularly relevant in this kind of environment," said Tim Murphy, who oversees MasterCard Inc.'s main payment products around the world. The Purchase, N.Y., company's debit-card processing volume rose more than 13% last year, compared with a 2.2% decline in credit-card processing. MasterCard, a Visa rival, is likely to offer more details about the spending habits of Americans when it reports quarterly results Friday. Unlike credit cards, which have balances that can be carried month-to-month, debit cards immediately deduct funds directly from a checking account. Debit cards are especially popular with younger consumers. Debit cards are less profitable for banks than credit cards, but merchants still pay banks to accept the cards. In the past couple of years, banks have encouraged debit-card use through rewards programs. Those rewards typically are less generous than credit-card rewards. To be sure, growth rates of debit-card transactions have slowed as Americans rein in their spending. Volume is widely expected to climb by a single-digit percentage this year, compared with more than 10% annually during the past few years. But credit-card usage is expected to keep declining. At U.S. Bancorp, debit-card transaction volume rose more than 2% in the first quarter from a year earlier. Credit-card purchase volume fell more than 4%. "Consumers are being more conservative in the way they manage their finances and that leads to a greater willingness to put transactions on debit cards," said Cliff Cook, chief marketing officer for retail-payment solutions at the Minneapolis bank. The debit-card business also gets a boost from Americans who got their first card as teenagers a decade or so ago. "As these people move into the family stages and career stages of their lives, the level of their household spending on debit cards goes up," Mr. Pinkerd said. Visa is running TV ads that promote its debit cards for buying pizza, going to an aquarium and paying for products online. Write to Robin Sidel at robin.sidel@wsj.com

Visa Inc's Service vs Data processing fees

Service fees Service fees reflect payments by customers for their participation in card programs carrying our brands. Service fees are primarily calculated on the payments volume of products carrying the Visa brand. We rely on our customers to report payments volume to us. Service fees in a given quarter are assessed based on payments volume in the prior quarter, excluding PIN-based debit volume. Therefore, service fees reported with respect to the 12 months ended September 30, 2008, were based on payments volumes reported by our customers for the 12 months ended June 30, 2008. Furthermore, pro forma service fees for the twelve months ended September 30, 2007 were based on payments volumes reported by our customers for the twelve months ended June 30, 2007. These actual and pro forma payments volumes also do not include cash disbursements obtained with Visa-branded cards, balance transfers or convenience checks, which we refer to as cash volume. New service fees were introduced in April 2007, which apply to U.S. consumer debit, consumer credit and commercial payments volume. These fees supersede previously existing issuer programs. Data processing fees Data processing fees consist of fees charged to customers for providing transaction processing and other payment services, including processing services provided under our bilateral services agreement with Visa Europe. Data processing fees are based on information we accumulate from VisaNet, our secure, centralized, global processing platform, which provides transaction processing services linking issuers and acquirers. Data processing fees are recognized as revenues in the same period the related transaction occurs or services are rendered.

Visa's Net Income Jumps 71%

By KATHY SHWIFF and KEVIN KINGSBURY Visa Inc.'s fiscal second-quarter net income surged 71% amid a prior-year litigation provision as results topped analysts' expectations despite falling consumer spending. Visa and its chief rival, MasterCard Inc., are insulated from credit woes arising from increasing delinquencies because they don't lend to consumers. They make money from the fees they charge banks to process card payments on the plastic these banks issue. But as the recession has deepened, consumer spending has slowed, eating into the fees the processors earn from transactions. For the quarter ended March 31, Visa reported net income of $536 million, or 71 cents per Class A share, up from $314 million, or 39 cents per Class A share, a year earlier. Excluding items such as the litigation reserve, earnings rose to 73 cents from 52 cents. Revenue climbed 13% to $1.65 billion. Analysts' latest estimates were for per-share earnings of 64 cents on revenue of $1.61 billion, according to a poll by Thomson Reuters. Payments volume, representing spending on Visa cards, dipped 1% as a drop in the U.S. more than offset gains elsewhere. The number of Visa-branded cards grew 8% world-wide to more than 1.7 billion while the number of transactions processed on its network climbed 9%. Visa's data on payments volume and transactions lag a quarter. Therefore, the payments and transactions volumes reported in the fiscal second quarter are as of the end of December. Visa reiterated its earnings and reduced revenue forecast for 2009 and 2010 while boosting its operation-margin targets for the years. MasterCard reports results Friday. American Express Co. last week said customers reduced spending by 16% in the first quarter, sending the company's quarterly net income down 56%. Unlike other card companies, which either issue plastic or process the transactions, American Express does both. Write to Kathy Shwiff at kathy.shwiff@dowjones.com and Kevin Kingsbury at kevin.kingsbury@dowjones.com

Fed Statment on Rates

By WSJ Staff The Federal Reserve released the following statement after its April meeting on monetary policy. Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slower. Household spending has shown signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Weak sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories, fixed investment, and staffing. Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time. Nonetheless, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability. In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term. In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is facilitating the extension of credit to households and businesses and supporting the functioning of financial markets through a range of liquidity programs. The Committee will continue to carefully monitor the size and composition of the Federal Reserve’s balance sheet in light of financial and economic developments.

Retailers' Rally Faces Tough Winter

By JOHN JANNARONE The spring rally has been a relief for shares of embattled retailers. Can the economy recover in time to justify the new optimism? The key is the holiday season, when retailers make the vast majority of their money. Investors are betting that by the fourth quarter the economy will have stabilized and consumers will be ready to spend again. In anticipation, discretionary retailers have far outperformed the market since the trough in early March. Shares of Macy's and J.C. Penney, for instance, have nearly doubled from their lows. That reflects both a hope that earnings may have bottomed and that debt burdens have become more manageable as credit markets become more forgiving. There is a natural temptation to call the big bounce early. After all, retail stocks tend to rise at the first sign of an actual recovery. They did so in early 2003, heralding a broader market bounce. This time around, however, the recession is far deeper. The unemployment rate stands at 8.5%, and Dallas Federal Reserve Bank President Richard Fisher said earlier this month it will likely surpass 10% before improving. Meanwhile, analysts began to increase earnings estimates for J.C. Penney and Macy's in late February, since when estimates for combined earnings of S&P 500 companies have continued to slide. Macy's itself said on Feb. 24 it expected to earn between 40 and 55 cents a share this fiscal year, but analysts now expect about 60 cents. Macy's stock, trading at its highest level since October, is valued at 21 times earnings -- a rich valuation unless healthy holiday spending is virtually in the bag. Macy's new restructuring steps will save costs by consolidating operations, but the boost to earnings growth will only come once. Also, it will be tough for Macy's to expand through capital expenditure because it risks breaking the terms of its $2 billion credit-revolver agreement. The company has $1.3 billion in cash, but the revolver is an important buffer with $2.7 billion in debt maturing by the end of fiscal 2012. On top of consumer worries, Penney is burdened by pension-fund losses. The company expects to take a noncash charge of $322 million related to a deficit on its pension plan. Even excluding that charge, the company is trading at 22 times this year's expected earnings. Of course, the likes of Penney and Macy's should gain some business if other competitors fold. But as general department stores, they won't benefit to the extent of Best Buy, for example, which operates in a specialist niche that no longer contains bankrupt Circuit City. General retailers will benefit from a meaningful rebound in consumer spending. But with easy credit now gone, investors should beware betting too heavily on a bumper Christmas. Write to John Jannarone at john.jannarone@wsj.com

trust-preferred security

A trust-preferred security is a security possessing characteristics of both equity and debt issues. A company creates trust-preferred securities by creating a trust and issuing debt to the new entity, while the trust issues the trust preferred securities. Trust-preferred securities are generally issued by bank holding companies. The security is a hybrid security with characteristics of both subordinated debt and preferred stock in that it is generally very long term (30 years or more), allows early redemption by the issuer, makes periodic fixed or variable interest payments, and matures at face value. In addition, trust preferred securities issued by bank holding companies will usually allow the deferral of interest payments for up to 5 years. The principal advantages of these hybrid characteristics are favorable tax, accounting, and credit treatment. Trust preferred securities have an additional advantage over other types of hybrid securities (such as similar types of debt issued directly to investors without the intervening trust), which is that if they are issued by a bank holding company, they will be treated as capital (equity/own funds) rather than as debt for regulatory purposes. This is why trust preferred securities are issued overwhelmingly by bank holding companies, even though any company can issue them. Trust preferred securities are used by bank holding companies for their favorable tax, accounting, and regulatory capital treatments. Specifically, these securities are taxed like debt obligations by the IRS, so interest payments are deductible. Dividends on preferred stock, by comparison, are paid out of after-tax income. The company may therefore enjoy a significantly lower cost of funding. If issued by a bank holding company, they are treated as capital rather than liabilities under banking regulations, and may be treated as the highest quality capital (tier 1 capital) if they have certain characteristics. Since the amount of liabilities (such as deposits) that a banking institution may have is limited to some multiple of its capital, this regulatory treatment is highly favorable and is why the trust preferred structure is favored by bank holding companies. Non-financial companies are more likely to use less complex structures, such as issuing junior subordinated debt directly to the public.

Credit Markets Open for Boston Properties, but Terms Are Tough

By MAURA WEBBER SADOVI Mortimer Zuckerman's Boston Properties Inc. did something many thought was nearly impossible in this credit-starved climate: The company obtained a $215 million construction loan to complete work on a mixed-use project currently underway in Boston. But the tough terms of the loan, from a group of five banks led by Bank of New York Mellon Corp., show it wasn't an easy matter. Indeed, the loan shouldn't be seen as a sign that the credit markets are finally loosening up. Boston Properties Inc. A rendering of Boston Properties' Russia Wharf project, under construction on Boston's waterfront. First, Boston Properties acknowledged that the credit drought crimped its proceeds from the deal. The loan is roughly 40% of the total estimated $550 million cost of the office, retail and residential project overlooking Boston Harbor, falling short of Boston Properties' earlier expectations. Back in January, the company anticipated borrowing about $320 million. Michael LaBelle, chief financial officer at Boston Properties, said the higher expectations stemmed from preliminary positive responses from people who ultimately opted not to participate. Boston Properties, scheduled to report first-quarter results on Wednesday, will put more equity in the project to make up for the funds it couldn't borrow. The loan's lower value is "a sign of the lack of depth in the construction-loan market," Mr. LaBelle said. "There are not very many lenders that are active." The five-year loan carries a floating interest rate equal to the London interbank offered rate plus 3% annually. Two years ago, rates on similar loans were lower, said Mr. LaBelle. The loan also carries an onerous "recourse" provision, meaning the company is on the hook for repayment if the development can't generate sufficient proceeds to service the debt. Mr. LaBelle declined to comment specifically on the recourse component but noted that, in the current environment, he didn't think it was possible to obtain a construction loan without "meaningful recourse." The loan comes as lack of financing is turning many formerly active construction sites around the country, including some in Boston, into ghostly lots. Last year, a growing number of stalled projects prompted Boston Mayor Thomas M. Menino to unveil a loan fund to jump-start development. Boston Properties had more success winning over lenders because it offered a package with a number of features banks typically like. Most notably, the project was partly preleased by Wellington Management Co., an institutional asset manager, which is set to occupy about 450,000 square feet of office space. Boston Properties has said it has enough money to continue construction even without the loan. Moreover, the project is located on a section of the Boston waterfront that has generated considerable buzz as a promising extension to the traditional financial district. The area has benefited from the completion of the city's Big Dig roadway project, which improved access and replaced an elevated highway with park and open space that are part of the Rose Fitzgerald Kennedy Greenway. As an 81-year-old asset manager with about $420 billion under management, Wellington is the kind of tenant that gives lenders comfort. Commercial-real-estate finance experts say that, in deals of this kind, banks often ask for as much as 50% recourse to start out and 100% recourse if the tenant reneges on its lease. Wellington and the Bank of New York Mellon declined to comment on the loan terms. Before the financial downturn, Boston Properties would likely have been able to get more money on better terms. Typically, as much as 80% of the cost of a construction project could have been financed, says Riaz Cassum, senior managing director at Holliday Fenoglio Fowler in Boston, a commercial-real-estate services and mortgage-banking firm that wasn't involved in the loan. Another challenge for the loan may have been its size because lenders are now trying to minimize exposure to a single property's risks, says Michael Knott, a senior analyst with Green Street Advisors in Newport Beach, Calif. The project has evolved over time. In 2004, Sam Zell's Equity Office Properties Trust obtained approvals from the Boston Redevelopment Authority for a mixed-use project that was to include residential lofts, a hotel and offices. In 2007, Blackstone Group LP acquired the property when it purchased Equity Office and subsequently sold it to Boston Properties. It also has required patience. While similar loans might have taken 90 days to obtain at the peak of the market, Mr. LaBelle said, Boston Properties has been working since November to obtain the loan it completed just last week. "The environment is clearly challenging, but we prevailed," Mr. LaBelle said. "Clearly, there's more diligence being done and appropriately so ... these banks have to go through more hoops to get their approvals." The 854,000-square-foot mixed-use project, which is slated to include a 31-story tower, is set to be completed in 2011. Write to Maura Webber Sadovi at maura.sadovi@wsj.com

Microsoft and Verizon Plot an iPhone Rival

By AMOL SHARMA and NICK WINGFIELD Microsoft Corp. and Verizon Wireless are in talks to launch a touch-screen multimedia cellphone on the carrier's network early next year, in an ambitious effort to challenge Apple Inc.'s iPhone, according to people familiar with the matter. The discussions are a gambit by Microsoft Chief Executive Steve Ballmer to energize a mobile business that has lost buzz among consumers and software developers to Apple's iPhone and Google Inc.'s Android. The market for smart phones may soon heat up. Microsoft is set to team up with Verizon to launch a competitor to Apple's iPhone, according to reports. The new phone would join a crowded arena that contains BlackBerry's Storm and Palm's Pre. (April 28) Microsoft is a major player in software for cellphones, but it is working hard to develop a new device that will rival Apple's. Verizon, meanwhile, is pushing on several fronts to extend its smart-phone offerings and compete with AT&T Inc., which is the iPhone's exclusive U.S. carrier. Verizon has also had discussions in recent months with Apple about partnering on devices other than the iPhone, people familiar with the matter say. In a recent interview, Verizon CEO Ivan Seidenberg declined to comment on whether Verizon and Microsoft were planning an iPhone-like device. Microsoft's project, which is code-named "Pink," aims to produce a phone that will extend the tech giant's Windows Mobile operating system, adding new software capabilities. It would also likely include Microsoft's new Windows Marketplace for Mobile, a store for cellphone downloads along the lines of Apple's App Store, these people said. Associated Press The discussions with Verizon Wireless are a gambit by Microsoft Chief Executive Steve Ballmer to energize a mobile business that has lost buzz among consumers and software developers to Apple's iPhone and Google Inc.'s Android. Above, Mr. Ballmer speaks at a forum on the future of computing in Cologne, Germany on Friday. While Microsoft is involved in the design of the phone's software and hardware, a third party is expected to build the device, just as Google has worked closely with partners to make handsets based on its Android operating system, some of these people said. The Microsoft-Verizon relationship is evolving from a search-and-advertising partnership the companies struck early this year. The companies have been working on the Pink project for several months, but haven't yet decided key details such as how the device would be branded, one person familiar with the situation said. Verizon Wireless, a joint venture of Verizon Communications Inc. and Vodafone Group PLC, is separately developing its own mobile application store, which it plans to announce soon, according to people familiar with Verizon's plans. Various companies have their own download stores, but Verizon may add a twist: the company is considering selling applications for businesses, these people said. AT&T's exclusive rights to the iPhone in the U.S. expire next year, but the carrier is trying to get a one-year extension, people familiar with the matter say. Apple has had discussions with Verizon recently about its product plans, including a multimedia device that is bigger than the iPod Touch but smaller than a laptop, a person familiar with the situation said. However, the talks haven't become advanced, the person added. The Pink project is the work of a team of designers within Microsoft's mobile division that includes staffers from Danger Inc., a company Microsoft acquired a year ago. Danger designed the software in the Sidekick, a popular cellphone sold by T-Mobile. In the past, Mr. Ballmer and other Microsoft executives have said the company doesn't plan to build its own cellphone. A Microsoft spokesman, without commenting on the Verizon talks, said Microsoft hasn't changed its strategy of licensing Windows Mobile to handset makers. Write to Amol Sharma at amol.sharma@wsj.com and Nick Wingfield at nick.wingfield@wsj.com

Key Lenders Agree to Chrysler Debt Swap

By NEIL KING JR., JOHN D. STOLL and NEAL E. BOUDETTE Chrysler LLC moved a step closer to a historic reorganization after key banks and lenders agreed in principle to a debt-for-cash swap two days before a government-imposed deadline. Lenders, in a deal driven by the U.S. Treasury Department, agreed to accept $2 billion in cash in exchange for the $6.9 billion in secured debt they now hold. The pact is not yet final because some lenders involved oppose the terms. The tentative debt-swap agreement by large lenders including J.P. Morgan Chase & Co. and Citigroup Inc. followed the auto maker's landmark accord that would give the United Auto Workers union a 55% stake in the company in return for wage and benefit concessions. Obama Administration Effort To Save Chrysler In Home Stretch 1:42 The next 48 hours will determine whether the Obama Administration's last-ditch efforts to stave off bankruptcy will succeed, WSJ's Neil King reports. Deals with lenders, the UAW and Fiat need to be signed and sealed to save the Detroit company. If that deal is ratified by union workers Wednesday, Chrysler would ask Italy's Fiat SpA to finalize an alliance that would meet U.S. requirements to release $6 billion in new bailout loans. All three must be achieved Thursday to meet a government-imposed deadline for Chrysler to prove its viability. Chrysler may still file for bankruptcy protection, people familiar with the matter said. Some hedge funds and smaller banks also said they wouldn't back the deal. Those people said three of the bank-debt holders have said they would not support the deal and would advise other lenders to oppose it. One of the lenders from among those opposing the deal said the group sees the deal as providing preferential treatment for junior lenders. A further complication is the fate of Chrysler's financing arm. Chrysler Financial has been surviving this year on about $150 million a week in government loans. The U.S. is encouraging the merger of Chrysler Financial's loan portfolio into GMAC LLC., both owned by Cerberus Capital Management LLC. Whatever happens, the restructurings of Chrysler and rival General Motors Corp. mark an extraordinary turning point for the U.S. auto industry. For the last 100 years, Detroit has reigned as the center of the automotive universe, and the U.S. as the biggest and most important market. That long run is now coming to an end. "It's a pretty safe bet that Detroit is not going to be Motown in the very near future," said John Heitmann, a professor at the University of Dayton who studies the auto industry. At the same time, the U.S. market is losing its allure. Over the last 20 years, foreign auto makers invested billions of dollars to build and expand plants here because the U.S. market was the largest in the world and appeared headed for steady growth. Some auto makers assumed U.S. auto sales would soon rise to 20 million vehicles a year. The recession has changed all that. As soon as this year, the U.S. could be supplanted by China as the world's largest market, and within a few years the industry could be selling nearly as many cars in India as in the U.S. "The U.S. is mature," said Jerome B. York, an auto-industry veteran and advisor to billionaire investor Kirk Kerkorian. The auto industry's center of gravity, he added, "is shifting from the U.S. to Asia." To be sure, Detroit and the U.S. will remain important and influential to the world's auto industry. But its days atop the global industry are fast winding down. For Chrysler, two big hurdles remain to be cleared before the administration feels confident that it can wash Chrysler through bankruptcy and move ahead with additional financing for the company. The government has promised to provide Chrysler as much as $6 billion on top of the $4 billion in loans already received. The first hurdle is for Fiat to sign off on the overall deal. But all parties, including the administration, appear confident that the Italian carmaker will make that move by Thursday. On Tuesday, Fiat Vice Chairman John Elkann said, "The partnership can proceed even if we have to deal with Chapter 11." Asked whether the UAW's potential stake could undermine Fiat's influence over the alliance, he said the final shareholding structure is still being discussed. "There are several negotiation tables," Mr. Elkann said. Mr. Elkann said Fiat won't invest any money in Chrysler as part of a potential deal. However, he opened the door to the possibility that Fiat could eventually put money into Chrysler once an alliance is forged. Fiat is being asked to take what one individual familiar with the negotiations called "a relatively small position" in Chrysler to start. That stake, estimated at about 20%, would rise as Fiat introduced new technologies to Chrysler and met certain, as-yet unspecified obligations. The second obstacle -- what to do with Chrysler's troubled financing arm, Chrysler Financial -- may be more significant. Chrysler Financial has been surviving since the end of 2008 on about $150 million a week. The administration is trying to work out a deal that would essentially fold Chrysler Financial's loan portfolio into GMAC, a Cerberus Capital Management LP owned financing arm, which would then become the main lender to both Chrysler and GM dealers. On Monday, Chrysler reached a deal with the UAW that gives the union a 55% stake in the planned Fiat-Chrysler partnership in exchange for reduced cash payments to the union's retiree health-care trust fund. —Jeffrey McCracken, Stacy Meichtry and Alex P. Kellogg contributed to this article.

As Pfizer Posts Results, Watch the Wyeth Factor

Drug giant Pfizer reports first-quarter results Tuesday morning, marking the midpoint of the earnings season for America's major pharmaceutical companies. So far, industry results have been mixed -- Merck undershot estimates; Schering-Plough beat. Analysts expect Pfizer will earn about 49 cents a share, 20% below the year-ago effort. Analysts are expected to focus in part on what Pfizer says about drug volumes and additional commentary on the recent agreement to acquire Wyeth. Drug volumes industrywide in March rose 2.3%, according to UBS Securities analyst Roopesh Patel's analysis of IMS Health data. That is well ahead of volume changes generally between 0% to 1% in the past year, though there also were two down months. Pfizer has already told analysts to expect flat volume increases for 2009. The Wyeth merger also pushes Pfizer away from reliance on drugs, one of the budding trends in an industry facing potential government changes that could include price controls. Wyeth provides access to vaccines, nutritionals and other products generally outside those price-control concerns and which, in many cases, are consumer-oriented, meaning they are paid for with cash, not insurance or government reimbursement. Pfizer "is a microcosm of this broader trend," says Leerink Swann analyst Seamus Fernandez. Wyeth "gets Pfizer back into the consumer business," he says, and investors "are going to be listening for anything else the company says about its expectations" from that hookup. Email: tape@wsj.com

Office Brokers, Banks Facing Market Woes

By JEFF D. OPDYKE Regulators currently performing stress tests on the country's largest banks are looking at commercial real estate as a possible source of concern. But brokers who lease and sell these properties wouldn't need a secretive stress test to offer an assessment. Those businesses have been miserable lately. That much will be evident when Jones Lang LaSalle reports first-quarter earnings after the market closes Tuesday and CB Richard Ellis Group reports Wednesday afternoon. The companies are among the nation's largest commercial real-estate brokers and services firms. Getty Images The GM Building is one of many New York office buildings managed by Jones Lang LaSalle, according to the firm's Web site. With unemployment rising, more office space is the last thing most companies need, leaving leasing in the doldrums. As for those who might want to buy, financing is practically nonexistent. The losses both companies are expected to report should come as little surprise to investors. At this point, Wall Street's focus is less on current brutal market conditions than hope for what is ahead this year. The stocks of these companies have rebounded off their 52-week lows in recent months largely in anticipation that buildings will start selling again, as banks and other lenders start dumping properties taken back in foreclosures. It will be discounted deal activity, but activity nonetheless. The big issue for banks is at what price. The mere presence of sales wouldn't necessarily mean the market is back to health. In fact, it is at that point that some of the most-intense pain will be felt by banks, which will have to take losses on loans as part of many sales. That could bring on a whole new wave of woe for the broader economy.

Verizon Widens Lead Over AT&T

Carrier Signs Up More Wireless Customers Despite AT&T's Exclusive Deal to Sell Popular iPhone By AMOL SHARMA and ROGER CHENG Verizon Communications Inc. posted strong first-quarter results in its wireless unit, edging out rival AT&T Inc. in customer additions for the first time since Apple Inc.'s iPhone 3G went on sale last summer. Verizon Wireless, a joint venture with Vodafone Group PLC, added 1.3 million net new customers in the period, a notch above the 1.2 million added by AT&T, the exclusive U.S. carrier of the iPhone. AT&T's exclusive U.S. rights to the iPhone expire next year, but the carrier is trying to get an extension from Apple until 2011, according to people familiar with the matter. Verizon CEO Ivan Seidenberg said in a recent interview that it is unlikely his company and Apple would partner to create a device tailored to Verizon's current network. Even without an iconic device like the iPhone, Verizon has managed to keep pace with AT&T and deliver solid growth in its wireless business, relying on basics like network quality and customer service as well as a broad selection of smart phones from handset makers like Research In Motion Ltd. "The iPhone is important, but you can still sell a million or more devices in a quarter that aren't the iPhone," said Chris Larsen, a telecom analyst at Piper Jaffray & Co. "The iPhone isn't for everyone." An AT&T spokesman touted the strength of iPhone sales and said the carrier was taking customers away from every rival. Verizon Wireless and AT&T, the top two U.S. wireless providers by subscribers, are widening their lead as smaller players struggle. Deutsche Telekom AG issued a profit warning last week, citing weakness in its T-Mobile USA wireless business, while analysts expect Sprint Nextel Corp. to report next week it lost at least one million more contract customers during the first quarter. Verizon ended the quarter with an industry-leading 86.6 million total wireless customers, including 13.2 million subscribers added through the acquisition of Alltel Corp. AT&T ended the first quarter with 78.2 million customers. Overall, Verizon posted net income of $3.21 billion, or 58 cents a share, in the quarter, up from $3.05 billion, or 57 cents a share, a year earlier. Revenue increased 12% to $26.59 billion. If Alltel had been part of Verizon a year earlier, the sales increase would have been 3.3%. Verizon's landline unit took a harder hit from the economy. The consumer business continued to contract as the company lost 671,000 access lines and revenue fell 3.8%. On the business side, revenue declined 3.4% to $3.7 billion. More Digits: Verizon Says No News on iPhone, Netbooks 04/27/09Verizon CEO Eyes Global Assets 04/16/09AT&T, Verizon Make Different Calls 01/28/09"The good news is we don't see it getting worse," said Chief Financial Officer John Killian, referring to spending by businesses. "We see stabilization there right now." AT&T's exclusive U.S. rights to the iPhone expire next year, but the carrier is trying to get an extension from Apple until 2011, according to people familiar with the matter. Verizon Chief Executive Ivan Seidenberg said in a recent interview that it is unlikely his company and Apple would partner to create a device tailored to Verizon's current network, which is based on a technology called CDMA. "Apple never had any intension of making a CDMA" version of the iPhone, Mr. Seidenberg said. He said previous overtures by Apple prior to the launch of the original iPhone were meant to help Apple gain negotiating leverage over AT&T. In coming years, both Verizon and AT&T will be upgrading their networks to a fourth-generation standard called LTE. Analysts say it is far more likely Verizon and Apple will wait to collaborate on a 4G iPhone. In an interview Monday, Verizon President and Chief Operating Officer Denny Strigl said Apple "should consider an LTE arrangement, and my guess is they would." Last week, Apple Chief Operating Officer Tim Cook said Apple is "very happy" with its AT&T relationship. Asked if it would make sense to create an iPhone for Verizon's existing 3G network, Mr. Cook said, "CDMA doesn't really have a life to it after a certain point in time." One trouble spot for Verizon in its wireless results was a slight uptick in monthly customer turnover to 1.47% of its subscriber base from 1.19% a year ago. Mr. Strigl blamed businesses cutting back on their wireless accounts, as they lay off workers, and consumers disconnecting laptop broadband cards. Verizon continued to add customers to its Fios high-speed Internet and TV services. Verizon added nearly 300,000 customers to each service during the quarter. Write to Amol Sharma at amol.sharma@wsj.com and Roger Cheng at roger.cheng@dowjones.com

China Faces a Grad Glut After Boom at Colleges

By IAN JOHNSON NANJING, China -- Zhang Weidong has been making the rounds at this city's weekend talent fair for more than a month now and can't understand why he hasn't landed a job. "These companies are looking for employees, and I have a degree," says the 22-year-old computer major, clutching a plastic organizer stuffed with résumés, business cards and company information. "I don't know what I'm doing wrong." Unemployed university graduates used to be rare in China. But now their ranks are ballooning to critical levels just as the country suffers its worst economic slump in two decades. Up to one-third of last year's 5.6 million university graduates are still looking for work, and this year will see another 6.1 million hit the labor market. Finding jobs for graduates is suddenly a national priority: Earlier this month, the central government ordered local governments and state enterprises to hire more graduates to maintain China's "general stability." See how university student enrollment has grown in China. China is suffering from a higher-education equivalent of the global credit bubble. On government orders, China's universities -- most of which are state-controlled -- boosted enrollment by up to 30% a year, year after year for most of this decade, and built vast new campuses. Financing was considered a cinch: New students would mean more tuition to pay off the loans that funded the expansion. But those plans were wildly optimistic, leaving hundreds of universities across China crippled by debt. More serious for China's long-term prospects is that the expansion was so fast, and the pressures to pay off the debts so intense, that many of the schools turned into diploma mills, churning out poorly qualified students. Mr. Zhang got his degree from a school of traditional Chinese medicine with no history of teaching computer sciences. He looks back ruefully, recalling overcrowded classrooms and a lack of materials: "I wonder if this education was of any value?" Many experts are posing the same question, as China's slowdown highlights problems masked earlier this decade. Back then, when the country's economy was expanding at a double-digit clip, getting a job was easy. Now, companies are pickier and many are refusing to hire some of the products of China's higher-education system. "There is a misalignment between the university system and the needs of the economy," says Robert Ubell, who heads a New York University program in China to train young Chinese employees of foreign companies. "Chinese graduates often have few practical skills." The problem lies in the middle layer of China's educational system. The country's basic education ensures that most Chinese are literate, which means that even poor farmers heading to the country's coastal factory boomtowns can easily be trained to operate a machine. At the system's peak are 75 elite universities lavishly funded by China's central government. Because these schools' expansion has been controlled by Beijing, they have been largely exempt from financial problems. Beneath the elite universities are 2,100 others where the vast majority of Chinese undergraduates study. Almost all are saddled with virtually unserviceable debts, say official sources and independent researchers. In impoverished Anhui province, 50 universities owe $1.2 billion to banks, according to Zhao Han, who is vice president of the Hefei University of Technology in Anhui. Mr. Zhao, who is a government adviser with access to the financial figures, says some schools have debt payments that equal half of their tuition revenues. "It is a heavy expenditure affecting the schools' normal operation," he says. View Full Image Getty Images Graduating university students pack a job fair in Nanjing, China, late last year as joblessness among grads soars. Local governments with financial muscle are already organizing bailouts. Last year, wealthy Guangdong province ordered banks -- almost all of which are state-controlled -- to restructure their loans to universities. The province also spent $30 million this year to prevent a string of universities from defaulting. Officials at China's Ministry of Education refused to be interviewed for this article, but have said in speeches that university debts are a top priority. "Objectively there was a need to expand education," says Yang Dongping, head of a nongovernmental organization dedicated to education reform. "But we've just experienced an educational disaster." Some see the trend more optimistically. Hu Angang, a prominent economist at Tsinghua University, says China is paralleling the expansion of universities in the U.S. after World War II. Back then, the G.I. Bill allowed returning soldiers to attend college, opening higher education to broad reaches of society and supporting America's long-term economic rise. The current problems, he says, will work themselves out in the long run. "China's expansion was correct," says Prof. Hu. "It was part of a new deal launched to spread education beyond the elites." For much of Chinese history, higher education had been the purview of the country's Confucian elite. The communist revolution in 1949 did little to change this, with university education reserved for a tiny fraction of the population. Periodic student protests reinforced government suspicion of this class. University 'Cities' Then came 1998. In the midst of the Asian financial crisis, the country's hard-charging premier, Zhu Rongji, decided China needed bold measures. He ordered universities to open their doors. A more skilled Chinese work force, he reasoned, would jump-start domestic consumption, helping to wean China's economy off exports. In 1998, 3.4 million Chinese attended university. By last year, the number was 21.5 million. To handle the surging enrollment, schools spent nearly $100 billion, according to estimates by Chinese researchers, on vast university "cities" of spacious campuses and impressive buildings. But the government was tightfisted. Schools were told to borrow what they needed. Banks, which are also state-controlled, obliged. With little tradition of alumni giving in China, universities had two ways to free up funds to pay off this debt -- slashing costs and luring more students. Teachers' salaries were capped or cut, equipment purchases were put on hold and classroom sizes on average doubled across China, according to government statistics. While experts say the country needs midlevel technical staff, many of these universities have tended to lure tuition-paying students with programs such as English, tourism, government, journalism and law. These are cheap -- no large outlays for equipment are necessary -- and appeal to Chinese sensibilities, which see education as a path to a government or other white-collar position, and not as training for a technical job. The legacy of a decade of haphazard expansion is on display at the school where Mr. Zhang studied computers, the Nanjing University of Chinese Medicine. In the 1990s, the school was a vibrant center of learning that instructed 1,500 students in traditional healing arts. Even though China has relatively few hospitals of Chinese medicine, its graduates almost always found jobs. From the 1950s onward, they had gone on to run prestigious hospitals and research institutes across the country. That tradition ended with the government's expansion order in 1998. The next year, the student body increased by a third. The tiny campus in downtown Nanjing was bursting, with students housed in hotels and taught in cafeterias. The next year, the school began to build. It borrowed $200 million from a consortium of banks -- school officials won't say which, but members of the university's administrative committee say the country's four biggest banks were involved. All four refused to comment. University administrators embraced growth. In a published interview a few years ago, the school's former president, Xiang Ping, said expansion was a chance to boost prestige. When traveling to conferences, foreign educators hadn't treated him seriously because his school was so small. By the time of the 2006 interview, he said, they saw him as head of a large, comprehensive university. "It is huge progress," he said. The school moved to Nanjing's Xianlin University City, a 42-square-mile campus it shares with 11 other universities on the outskirts of town. The front gate is adorned with a fountain and a giant rare stone from a nearby mountain. Construction was plagued by corruption. In 2004, government auditors found that only half the University City area was used for education, with the rest used for commercial projects such as a golf course. Arrests followed, with a top official at the Nanjing University of Chinese Medicine convicted of bribery. Some teachers are outraged. One prominent critic is Ji Wenhui, a scholar of classical medical texts and former head of the library. He watched as the library's holdings increased by one-half while the number of students rose 11-fold, to 17,000. The university has 1,200 faculty and staff, only 20% more than when it was many times smaller. The new library has a leaky roof and lacks many basic electronic tools, such as academic databases. "The reason for expanding had nothing to do with society's needs," Mr. Ji says. "The educational system was pursuing economic benefit." A faculty member of the school's administrative council, Mr. Ji says internal reports showed that the school at one point was committed to $60 million a year in interest payments versus total annual revenues of $30 million. In 2006, the provincial government stepped in and restructured the loans. The school currently spends one-quarter of its budget on debt repayment and has cut teachers' salaries by a quarter, Mr. Ji says. In a faxed response to questions, school administrators declined to address specifics such as student-faculty ratios and spending on materials and supplies. It said the provincial government had been helping the school. "The debt risk is completely under the school's control," the statement read. A statement posted on the university's Web site says the school faces a "complicated situation" and that "the huge debts for new campus construction have caused serious shortages of funds for school management, restricting development of the school." Three Years of Study Few feel these limitations as acutely as the students, even those who came to study Chinese medicine. Sitting in the university's giant cafeteria one rainy afternoon, Chen Sanxing said the education didn't live up to the school's great history. Classes are overcrowded, he said, and there are too many students for the limited interning opportunities at area hospitals. "A lot of the students are here so the school can make money," Mr. Chen said. "That's why they opened all those hot majors." The school's new offerings include international economics and trade, applied psychology and English. Students in these departments say they've been shorted, too. Mr. Zhang, the jobless computer major, says that while his degree sounds useful enough, the training has been sketchy. Like other students here, he said his formally four-year program lasted three years. Students are meant to spend their fourth year looking for work, as he is now doing. Mr. Zhang says computer labs at the school are plentiful, but his classes had more than 100 students and there was no tutoring, little interaction with teachers and a shortage of computer texts. Although this year marks the 20th anniversary of the student-led Tiananmen Square protests, few seem ready to take to the streets. Instead, a sense of gloom is pervasive. Jane Yang, a 21-year-old English major here, nicknames herself "Cheer-up Jane" because she's so pessimistic about the future. "There are no job prospects for someone like me," she said during a quick meal at the school's cafeteria. "I think I'll just go to grad school." —Ellen Zhu contributed to this article. Write to Ian Johnson at ian.johnson@wsj.com

Fed Pushes Citi, BofA to Increase Capital

By DAN FITZPATRICK, DAVID ENRICH and DAMIAN PALETTA Regulators have told Bank of America Corp. and Citigroup Inc. that the banks may need to raise more capital based on early results of the government's so-called stress tests of lenders, according to people familiar with the situation. The capital shortfall amounts to billions of dollars at Bank of America, based in Charlotte, N.C., people familiar with the bank said. Executives at both banks are objecting to the preliminary findings, which emerged from the government's scrutiny of 19 large financial institutions. The two banks are planning to respond with detailed rebuttals, these people said, with Bank of America's appeal expected by Tuesday. The findings suggest that government officials are using the stress tests to send a tough message to struggling banks. Bank of America and Citigroup have been the highest-profile problem children in recent months, but it is unlikely that they are the only banks the Federal Reserve has determined might need more capital. Industry analysts and investors predict that some regional banks, especially those with big portfolios of commercial real-estate loans, likely fared poorly on the stress tests. Analysts consider Regions Financial Corp., Fifth Third Bancorp and Wells Fargo & Co. to be among the leading contenders for more capital. Wells Fargo declined to comment. Representatives of Regions and Fifth Third didn't respond to requests for comment made late in the day. Government officials say their meetings about the stress tests with bank executives over the past few days conveyed preliminary results and that discussions were expected to continue this week about specific findings. They also say that banks directed to raise more capital shouldn't be viewed as insolvent. Instead, the capital is intended to cushion the banks against potential future losses under dire economic conditions. Federal officials say they won't allow any of the top 19 banks to fail. Still, it is unclear how flexible the government will be about adjusting the results, especially as banks plead their cases individually. Banks have until the middle of this week to lodge their formal responses to the tests. Bankers expect that will set the stage for several days of intense negotiations between the banks and their examiners. While the Fed initially planned to release the results of the stress tests on May 4, the government says the results will be released sometime that week. Banks that are deemed to need more capital will have six months to find it, either from private investors, other financial institutions or the U.S. government. Bank of America and Citigroup have required a total of $95 billion in taxpayer infusions, and the government has agreed to protect the banks against most losses on hundreds of billions of dollars worth of assets. Capital Hole Bank of America's capital hole as measured by the regulators is in the billions, said people close to the company, placing added pressure on management as the company prepares for a Wednesday shareholder meeting in Charlotte. It isn't clear how big a capital deficit Citigroup faces. At meetings Friday at the New York Fed's fortress-like headquarters near Wall Street, government examiners informed Citigroup executives that the preliminary stress-test results indicated the company needed more capital, according to a person familiar with the matter. A spokesman for Citigroup declined to comment. Associated Press Traffic passes a Bank of America branch in New York ' s Times Square. Bank of America has already taken $45 billion in capital from the federal government, some of it to help the bank cover losses stemming from its purchase of securities firm Merrill Lynch & Co. If the bank is forced to bolster its capital, it could do so in one of several ways, including selling assets, selling more shares to the public or converting the government's preferred shares into common stock. That would boost the company's capital on paper but could also leave the U.S. government as Bank of America's largest shareholder while diluting the value of the stock held by existing shareholders. Near Impossibility Raising capital in the current environment is nearly impossible for troubled financial institutions. Skittish investors are wary of plowing money into banks that still face potentially large losses. But institutions perceived as healthy have had some success luring investors. Goldman Sachs Group Inc. earlier this month sold $5 billion of its shares, and plans to use the funds to repay the government's capital infusion. Northern Trust Corp. said Monday that it plans to sell $750 million of common stock in a public offering. Like Goldman, Northern Trust said the proceeds will help it close out the U.S. investment in the Chicago-based company. Citigroup wants to get credit for its recent efforts to shrink its balance sheet by selling businesses such as Smith Barney and its Japanese brokerage arm, say people familiar with the matter. While those deals haven't yet been completed, they're expected to ultimately give a significant boost to Citigroup's capital levels. In addition, Citigroup executives have concerns about some of the assumptions the Fed used in calculating the timing and severity of future losses on consumer loans such as credit cards, according to one person familiar with the matter. The preliminary test results added to frustration that already had been building at Citigroup as the government conducted its stress tests over the past two months. 'A Million Questions' During that process, executives have griped that examiners were demanding detailed information from every corner of the sprawling organization, consuming thousands of man-hours without briefing anyone on what the government was looking for, according to people familiar with the matter. The regulators are asking "a million questions" and it's "very unclear what they're aiming at," one senior executive said earlier this month. "We can't discern a pattern." Some bank executives have said that even after meeting with Fed examiners on Friday, they still don't understand details of the government's methodology for conducting the tests. A spokeswoman for the Fed declined to comment on the stress tests. Revenue Projections One question is how the government is projecting banks' revenue streams through 2010. Some bankers are optimistic that the Fed will use their first-quarter numbers to predict their performance for the next two years. That could inflate the banks' earning potentials -- and thus their capital cushions -- because many of the companies had strong first-quarter performances. Analysts, investors and most executives say those results probably aren't sustainable. Write to Dan Fitzpatrick at dan.fitzpatrick@wsj.com, David Enrich at david.enrich@wsj.com and Damian Paletta at damian.paletta@wsj.com

Commercial break

Apr 23rd 2009 From The Economist print edition Disaster looms in yet another asset class GENERAL GROWTH PROPERTIES (GGP) and the Great Basin Bank do not have a lot in common. One is America’s second-largest mall owner, the other a small bank in Elko, Nevada. But both shut their doors within a day of each other this month because of their exposure to commercial property, the most threatening in a line-up of suspect asset classes. Alamy Vegas fashion victimGGP filed for Chapter 11 bankruptcy protection on April 16th. Its assets, which include the Fashion Show Mall in Las Vegas (pictured) and South Street Seaport in New York, are high-quality and continue to generate decent income. Its financing structure is what got it into trouble. GGP found that it simply could not roll over its debts because of a lack of liquidity. GGP’s difficulties were not unexpected. It was carrying lots of debt, principally because of a big acquisition in 2004, and much of it was short-term. But its failure still sends two shock waves. First, by including several properties that back commercial mortgage-backed securities (CMBS) in its Chapter 11 filing, GGP has unnerved investors who expect such assets to be ringfenced in a bankruptcy. The second shock wave is that GGP’s bankruptcy underlines a pervasive refinancing risk for the industry. Foresight Analytics, a research firm, reckons that $594 billion of commercial mortgages will mature in America alone between 2009 and 2011. Many of these borrowers will have a big problem when their loans mature. Just as in residential property, the financing terms that were available to property and construction firms got ever laxer as the bubble inflated. Loan-to-value ratios of 85-95% were common in 2006 and 2007. These have now tightened to 60-65% and below for new lending. That would be bad enough if prices were static. They are not. Commercial-property prices have fallen by 35% or so in America. Richard Parkus, of Deutsche Bank, thinks that 70% of all CMBS issued recently in America will not be able to refinance without a big increase in the capital that borrowers stump up. It is likely to be a similar story with bank lending. Many banks are extending loan terms, hoping that the problem will go away. It will not. A growing overhang of debt will only make it harder for the market to recover. And the full effects of the bust are only just beginning to be felt. Losses on commercial property tend to lag behind rises in the unemployment rate by a year or so, largely because lease terms protect landlords from immediate falls in rental income. (An exception is the hotel industry, where leases are, in effect, renewed daily). The pain is now arriving. Office vacancies in America’s city centres increased to 12.5% in the first quarter, up from 9.9% a year earlier. Delinquencies are spiralling. Write-offs on bank-held commercial-property loans rose sevenfold in 2008. The potential for further damage to the banks is especially worrying. Morgan Stanley’s first-quarter results on April 22nd included a $1 billion loss on its real-estate investments. But the loan books are where the real concerns lie. Commercial-property loans, including construction and development, account for 22% of American bank loans, up from an average of 14% in the 1980s and 1990s. Smaller banks are exposed. Matthew Anderson of Foresight Analytics says that banks with assets between $100m and $10 billion hold commercial-property loans worth more than three times their total risk-based capital. Great Basin Bank, the 25th American bank to fail this year, was undone by heavy losses on commercial property. It will not be the last.

If the Cap Rate Doesn't Fit, Bank Investors Will Have to Wear It Anyway

--value decline of 30% might cause default rate to rise to at least 5% By LINGLING WEI The bigger the balance sheet, the greater the impact of small changes in underlying assumptions. And balance sheets don't come bigger than those belonging to banks undergoing stress testing. One chunk of exposure is commercial real estate; banks and thrifts hold about $1.7 trillion of commercial mortgages. A benchmark used to value such assets is the capitalization, or cap, rate. This determines property values on the basis of rental income. Take an investor buying an office building with annual income of $15 million. If they offer $200 million, they are using a 7.5% cap rate, which is derived by dividing income by value. Increasing the cap rate implies a lower value for the building. Cap rates fluctuate depending on the economy and supply and demand for commercial property. During the last real-estate collapse in the early 1990s, cap rates increased to an average of more than 9%. But at the market's peak in 2007, investors were willing to accept cap rates as low as 4% on prime property, partly on the assumption that rents would keep rising. As banks conduct their stress tests, one big question is what cap rate they are using to value the properties that back their commercial-property portfolios. Most major banks haven't disclosed the cap rates they are using. One exception is General Electric. The conglomerate's finance arm, in a recent investor meeting, singled out cap rates in a presentation of how it valued its property ownerships and assessed potential loan losses. GE now uses the median 18-year cap rate provided by Property & Portfolio Research, which is about 7.5%. Analysts believe many banks also are using a 7.5% cap rate. But they warn that figure likely is too low given that this downturn is anything but median. Matthew Anderson, partner at Foresight Analytics, calculates that cap rates have risen to at least 8%, based on factors including recent property sales and the decline in shares of real-estate investment trusts. The average was 6% at the top of the market. A change in cap rates, combined with other factors such as an approximate drop of 15% in property cash flows, means commercial-property values overall might have fallen more than 30%. Individual distressed property sales have shown bigger declines. The recent sale by developer Harry Macklowe of 1540 Broadway, an office tower in midtown Manhattan, showed a price decline of more than 60% in just two years. A value decline of 30% might cause the default rate to rise to at least 5%, according to Foresight, partly due to the inability of owners to refinance. It also would reduce recovery rates. Only 1.6% of commercial mortgages held by banks were at least 90 days past due at the end of 2008. Banks still have plenty to fear. Write to Lingling Wei at lingling.wei@dowjones.com

Past Due Loans and Non-accruing and Non-performing Assets

Non-accruing and Non-performing Assets Total non-performing assets are the sum of non-accruing loans, foreclosed real estate and other repossessed properties. Non-accruing loans are loans as to which interest is no longer being recognized. When loans fall into non-accruing status, all previously accrued and uncollected interest is reversed and charged against interest income. Past Due Loans Past due loans are accruing loans which are contractually delinquent 90 days or more. Past due loans are either current as to interest but delinquent in the payment of principal or are insured or guaranteed under applicable FHA and VA programs. The Corporation may also classify loans in non-accruing status and recognize revenue only when cash payments are received because of the deterioration in the financial condition of the borrower and payment in full of principal or interest is not expected. During the third quarter of 2007, the Corporation started a loan loss mitigation program providing homeownership preservation assistance. Loans modified through this program are reported as non-performing loans and interest is recognized on a cash basis. When there is reasonable assurance of repayment and the borrower has made payments over a sustained period, the loan is returned to accruing status. --from first Bancorp http://www.sec.gov/Archives/edgar/data/1057706/000095014409001775/g17883e10vk.htm

Bamboo shoots of recovery

--China export account only for 18% of domestic value-added --fiscal stimulus seems work: retail sales, fixed asset investment, industry production show signs of rebound --valid concerns: government led growth might lead to overcapacity and bad loans --big task is to find the engine of growth Apr 16th 2009 HONG KONG From The Economist print edition Signs that a giant fiscal stimulus is starting to work THE Chinese consider eight to be a lucky number because it sounds like the word meaning “prosperity”. And luck, combined with a massive fiscal stimulus, may yet help the government to achieve its growth target of 8% in 2009. Earlier this year, most economists thought such growth was impossible at a time of deep global recession, but some are now nudging up their forecasts. At first sight, the GDP figures published on April 16th were disappointing. China’s growth rate fell to 6.1% in the year to the first quarter, less than half its pace in mid-2007. On closer inspection, however, the economy is starting to perk up. Comparing the first quarter with the previous three months, GDP rose at an estimated annualised rate of around 6%, after nearly stalling in the fourth quarter (see chart). By March the economy was gaining more speed, with the year-on-year increase in industrial production rising to 8.3% from an average of 3.8% in the previous two months. Retail sales were 16% higher in real terms than a year ago, and fixed investment has soared by 30%, signalling that the government’s infrastructure-led stimulus is starting to work. Exports, on the other hand, tumbled by 17% in the year to March and global demand is widely expected to remain weak this year. This is the main reason why some economists expect GDP growth of “only” 5% for 2009 as a whole. But the gloomier forecasts tend both to overstate the importance of exports and to understate the size of the government’s stimulus. Contrary to conventional wisdom, China’s sharp economic slowdown was not triggered by a collapse in exports to America. Its growth began to slow in 2007, well before exports stumbled, driven by a collapse in the property market and construction. This was the result of tight credit policies aimed at preventing the economy from overheating. The global slump dealt a second blow late last year, but China is less dependent on exports than is commonly believed. Exports account for nearly 40% of GDP but they use a lot of imported components, and only make up about 18% of domestic value-added. Less than 10% of jobs are in the export sector. If a collapse in domestic demand led China’s economy down, it can also help lead it up again. Not only is China’s fiscal stimulus one of the biggest in the world this year, but the government’s ability to “ask” state-owned firms to spend and state banks to lend means that the government’s measures are being implemented more rapidly than elsewhere. To take one example, railway investment has tripled over the past year. Only about 30% of the government’s 4 trillion yuan ($585 billion) infrastructure package is being funded by the government. Most of the rest will be financed by bank lending, which had already soared by 30% in the 12 months to March, twice its pace last summer. JPMorgan thinks that this credit and investment boom could lift GDP growth to an annualised pace of over 10% in each of the next three quarters. Jonathan Anderson, an economist at UBS, argues that the property market could be as important as the fiscal stimulus in determining China’s fate. After falling sharply last year, housing sales rose by 36% in value in the year to March. Housing starts are still down, but if sales continue to strengthen, construction could pick up in the second half of 2009. That would also help to support consumption: about half of China’s job losses among migrant workers have been in the building industry. If construction does recover and infrastructure spending continues to rise, then even if exports remain weak, China could see growth of close to 8% this year—impressive stuff when rich economies are expected to contract by 4-5%. There are growing concerns about the quality of that growth, however. The World Bank estimates that government-influenced spending will account for three-quarters of China’s GDP growth this year. The clear risk is that politically directed lending creates more overcapacity, poor rates of return and future bad loans for banks. These are valid concerns. But Andy Rothman, an economist at CLSA, a brokerage, reckons that state-owned firms mainly plan to increase their spending on upgrading existing production facilities, rather than expanding capacity. Also, about half of the increase in investment is on public infrastructure. This will inevitably include some white elephants but, in a poor country, the return on infrastructure investment is generally high. There is no need to build “bridges to nowhere” when two-fifths of villages lack a paved road to the nearest market town. What about the risks to banks? The last time they were forced to support the government’s stimulus policy, during Asia’s financial crisis in 1998, Chinese banks were left with large non-performing loans. Bad loans will rise again this time, but Tao Wang, also at UBS, argues that banks are in a stronger position than in 1998. China is one of the few countries in the world where bank credit has fallen relative to GDP over the past five years. Banks have an average loan-to-deposit ratio of only 67%, low by international standards, and less than 5% of banks’ loans are non-performing, down from 40% in 1998. The biggest task for China is to find a new engine for future growth. It cannot rely on exports, nor can the investment stimulus be sustained for long. Without stronger consumer spending, China’s growth will be much slower than in recent years. Reforms to improve health care and the social safety net will take many years to encourage people to save less. Andy Xie, an independent economist based in Shanghai, suggests that the quickest way to boost consumption would be for the government to distribute the shares that it holds in state-owned enterprises to households, and to force those firms to pay larger dividends. But the authorities in Beijing are unlikely to take his advice. How else could they lean on big firms to support the economy in times like these?

Red flags of NorthStar Realty Finance Corp

--major driver of of the gain in 2008 is from unrealized loss in liability --It is not sustainable. I expect taht the company will report loss in Q1 2009 as the proceeds from operating lease will decline, the provision for loan portfolio will increase, and the momentum of unrealizd gain will flop. --With 1.9 bil exposure to CRE debt, it has not provisioned much. It only provisioned $11 mil in 2008. I expect the loss will deepen in 2009. quoted from company 10k For the year ended December 31, 2008, the Company recognized a net gain of $752.3 million as the result of the change in fair value of financial assets and liabilities for which the fair value option was elected, which is recorded as unrealized gain (loss) on investments and other in the Company's condensed consolidated statement of operations. http://www.sec.gov/Archives/edgar/data/1273801/000104746909001790/a2190701z10-k.htm#ei41901_item_8._financial_statements_and_supplementary_data opinion underweight wait until company to release Q1 09. If the company market cap drop below 0.1 bil, buy it.

中国移动面临市场饱和挑战

Andrew Peaple 中国电信业市场真的已经饱和了吗？ 至少对中国最大的电信运营商中国移动(China Mobile)来说，电信市场的确是在日趋饱和。在中国13亿人口中，移动电话的普及率仅为50%，但迅速扩张的黄金时期似乎已经过去。 中国移动第一季度新增用户数放缓，当季新增用户数较上年同期下降6%，而且每用户平均收入也较上年同期下降12%。 虽然其中中国经济增长放缓构成了一定的影响，但相对于其他竞争对手而言，中国移动所受电信市场日渐饱和的冲击要更大一些。中国移动在国内电信市场的占有率达三分之二。 中国移动目前的扩张机会主要是在中国的农村地区，在这里并不能推行与城镇地区同样高的服务收费标准。据BDA Connect提供的数据显示，中国农村地区的移动电话普及率仅为25%，远低于城镇地区的77%。 而与此同时，中国移动主要竞争对手们的用户数却有加速增长之势，其中，中国电信(China Telecom)的表现尤为突出。中国电信和中国联通(China Unicom)去年均从中国政府重组电信业及分配3G技术牌照中获益良多。 然而，对中国移动来说，在第一季度每用户平均收入下降的同时，一项主要成本支出也有所下降，这是该公司到目前为止表现比较好的地方，其当季利润率也因此得以维持稳定。 而且中国移动仍在国内电信市场中占主导地位。据里昂证券亚太区市场(CLSA Asia-Pacific Markets)的数据显示，中国3月份的新增移动用户中约有62%为中国移动用户。 这种情况有可能会引发中国政府采取更多措施削弱中国移动的绝对竞争优势，去年的电信业重组也正是出于这一目的。非对称管制可能是手段之一，该办法或为手机用户在保留原号码的基础上从中国移动转向新的运营商提供更多方便。 有鉴于此，能维持平稳增长可能是中国移动的最高希望，对它来说，国内市场已经不再是过去那方充满机会的乐土。

Earnings Test Awaits Rally in Tech Stocks

By MARK GONGLOFF as of 04 20 2008 This U.S. market rally has been led by the darlings of a decade ago: technology stocks. Their leadership will be tested this week, with a burst of big-name tech earnings, including International Business Machines and Texas Instruments on Monday, Yahoo on Tuesday, Apple on Wednesday, and Amazon.com and Microsoft on Thursday. Except for Microsoft, each of these stocks is up at least 16% on the year. During the same period, the tech-heavy Nasdaq Composite Index has outpaced other market barometers, with its 6% rise trouncing the Dow Jones Industrial Average, down 7%. The tech rally could be a good omen for the broader market, suggesting investors are getting hungrier for riskier assets. According to a Banc of America Securities-Merrill Lynch survey released last week, technology is the most-loved sector among global fund managers, with 27% professing to be "overweight" tech stocks -- jargon for backing up the truck for a heaping helping. Nevertheless, fund managers are hedging their tech bets. The survey showed that the second-favorite sector is pharmaceuticals, traditionally a defensive play. Still at the bottom of fund managers' shopping lists: banking, the rotten root of the financial crisis. Investors want risk, but only so much, suggests BAS-ML strategist Michael Hartnett, and tech companies have filled that niche. They typically have clean balance sheets, meaning investors don't have to lie awake nights worrying about toxic assets. Technology also has little connection to energy and materials, which were last year's darlings but collapsed under the weight of global recession and are still seen as expensive, according to the survey. In another sign of defensiveness, the biggest tech names have outshined the rest. The Nasdaq 100 index of its biggest stocks by market capitalization is up about 12% this year, tugged higher by goliaths Google and Apple, up 28% and 45%, respectively. The index would be even higher if not for Microsoft's 1% decline. Microsoft has suffered because its January earnings report missed expectations and it declined to offer guidance for the rest of the year. Last week, analysts cut estimates for its fiscal third quarter, ended in March, after reports from Gartner and IDC that global personal-computer shipments fell 6.5% to 7% in the first quarter from a year earlier. Analysts raised their forecasts for Apple's quarter despite the same reports, mainly because Apple's numbers weren't as horrible as expected. Like Google, Apple has a record of blowing earnings expectations out of the water with eye-poppingly good reports. Google held up its end last week, and the market needs Apple to deliver, too. Tech is still vulnerable to what will likely be a new trend of hesitant spending by consumers still burdened with debt, lost wealth and increasing unemployment. The gap between haves and have-nots could keep growing, keeping the Googles and Apples of the world afloat, but wreaking havoc in tech's lower ranks. Email to tape@wsj.com