Bond Worry: Will China Keep Buying?

By LIZ RAPPAPORT and JAMES T. AREDDY Shaky auctions of Treasury notes this week reignited concerns about whether the government can attract buyers from China and elsewhere to soak up trillions in new debt. A fuse was lit this week when traders noted China's apparent absence from direct participation in two Treasury bond auctions. While China may have bought Treasurys just before the auctions, market participants read the country's actions as a worrying sign that China and other foreign investors may be ratcheting back purchases at a time when the U.S. is seeking to fund a $1.8 trillion budget deficit. This week alone, the U.S. deluged the bond market with more than $200 billion in record-size sales. The U.S. has had little trouble finding buyers in recent months. But that demand is fading, and the Treasury market has become volatile. Many are selling in favor of riskier assets such as corporate bonds, stocks or even higher-yielding debt of other countries. This portends higher interest rates for the Treasury, and it may need to find alternative sources of cash like issuing more inflation protected Treasury bonds. Tension on Wall Street trading desks began building late last week when the Treasury surprised the market with plans for a record week of sales. A Monday sale of $90 billion in Treasury bills with maturities of as much as a year went well. But China appeared absent from the following two sales, which totaled $81 billion of debt, traders say. By Thursday morning, trading-desk heads were frantically working with clients to ensure a better fate for the $28 billion seven-year note auction. It did fare far better, allaying some concerns. "We believe by maintaining the deepest, most liquid market in the world, we will continue to attract capital from a broad array of investors," said Andrew Williams, a spokesman for the Treasury Department. The seven-year Treasury note rose after the auction, gaining 3/32 point Thursday to 99 25/32, which lowered its yield to 3.285%. The 10-year Treasury also gained in price on the day, up 6/32 to yield 3.641%. Details about the auctions aren't revealed by the government until weeks later. Overseas buyers initially are lumped together into a category known as "indirect bidders," giving little insight into the origins of demand. It may be months until more thorough data on foreign-government buying are released by the U.S. Treasury. Foreign investors had been substantial bidders in recent Treasury auctions, even though their holdings of Treasury debt had started to wane. But this week's auctions renewed worries that central banks and other buyers will start selling more aggressively. "If this trend continues, it could reflect foreign buyers' increasing concerns about the creditworthiness of the U.S.," said James Bianco, president of Bianco Research. The worries over China shine a light on the potential vulnerability of the U.S. as it tries to fund is budget hole. Last year, China led foreign investors in selling mortgage securities guaranteed by government entities Fannie Mae and Freddie Mac, according to Treasury Department data. They also sold corporate bonds as the global financial crisis ramped up. They have not dipped back into these asset classes despite a huge rally in corporate bonds and mortgage debt this year. While no one at State Administration of Foreign Exchange, which manages China's $2 trillion, would comment on the latest Treasury auctions, the government has left little doubt it fears the portfolio is at risk. Clipped comments from government officials, amplified by state media editorials, point to a worry the U.S. will ultimately address its massive debt obligations by permitting inflation to rise or letting the U.S. dollar sink -- factors that would erode the value of Treasurys owned by foreign investors such as China. View Full Image AFP/Getty Images Treasury Secretary Timothy Geithner waits to greet Chinese vice premier Wang Qishan before the opening session of the Economic Track of US-China Strategic and Economic Dialogue at the Treasury Department in Washington on July , 2009. At economic talks in Washington this week, senior Chinese officials gave their Obama administration counterparts an earful about the burgeoning U.S. budget deficit. China made clear it wants the U.S. to "protect its investment assets" for the good of the bilateral relationship, as the state-run Xinhua news agency reported. The gravity of Beijing's concern was reiterated with blanket coverage of the talks in Chinese newspapers, which generally praised Washington for treating seriously its concerns. Global Times, a nationalistic English-language paper, published a front-page photo showing U.S. Federal Reserve Board Chairman Ben Bernanke appearing anxious, perched on the edge of a chair and listening as Chinese Vice Premier Wang Qishan makes a point. The Chinese are also in a bind. If they sow doubts about the solvency of the U.S. government, they risk driving down the value of the $800 billion in U.S. Treasurys they already own. The Chinese government's Treasury strategy is a closely guarded secret, and analysts were hard-pressed to identify any evidence that might suggest an adjustment was suddenly under way. "We worry about the devaluation of the U.S. dollar, but not at this stage," said Yang Hui, a bond salesman at Citic Securities Co. in Beijing. Fed's Paper Facility Falls to $67.3 Billion The Federal Reserve's holdings in a facility set up to support the commercial-paper market fell to $67.3 billion in the week ended July 29 from about $106 billion last week, according to data released Thursday. This week, three-month paper was maturing, and companies likely took their funds out of the Fed's Commercial Paper Funding Facility. "We are seeing a significant improvement in sentiment around commercial paper, which is encouraging people to leave the Fed's protective custody," said Joseph Abate, money-markets strategist at Barclays Capital in New York. The facility held about $334 billion at the end of 2008. —Anusha Shrivastava Write to Liz Rappaport at liz.rappaport@wsj.com and James T. Areddy at james.areddy@wsj.com

Liquidity woe for high-yield Asian bonds

--fewer issuance, lack of liquidity, increasing defaults increase the risk of Asian HY bonds. Liquidity woe for high-yield Asian bonds By Lindsay Whipp in Tokyo Published: July 31 2009 03:00 Last updated: July 31 2009 03:00 Returns on Asian high-yielding corporate bonds have significantly outperformed their peers in developed markets so far this year, with non-financial companies showing returns of 53 per cent, according to the Bank of America Merrill Lynch indices. That compares with 28 per cent for the US and 34 per cent in Europe. Markit's iTraxx Asia ex-Japan high-yield credit default swap index has also narrowed significantly from its October peak of 1,500 basis points, to 600 basis points on July 28, indicating improving demand for such bonds. However, the high-yield market is a long way from its pre-crisis heyday of abundant liquidity when investors had a huge appetite for risk. Significant hurdles to regaining this point remain, analysts say. First, the dollar-denominated non-investment grade market for Asia-Pacific borrowers, an important gauge of international investor sentiment, remains moribund. The only issuance this year has been from Power Sector Assets & Liabilities Management (Psalm), which raised $1bn in May, and which Moody's rated B1, four notches below investment grade. However, Psalm is a quasi-Philippine government entity - a status that may provide investors with a level of reassurance they may not get from independent companies. By contrast, US high-yield debt sales have reached $55.4bn so far this year, an increase of more than half from 2008, according to Dealogic. Instead of raising money in dollars, companies in Asia are selling debt in local currency. There have been $16.3bn worth of such local currency high-yield bond issues this year in the Asia-Pacific region excluding Japan, the data shows. Second, the Asia ex-Japan high-yield dollar bond secondary market is severely lacking liquidity as hedge funds and investment bank proprietary trading desks reduce their participation. Brayan Lai, a credit analyst at Calyon Corporate & Investment Bank in Hong Kong, estimates that liquidity is probably still less than a quarter of what it was two years ago. This means much sharper price moves compared with more normal market conditions. "Bid-offer spreads are still pretty wide," Mr Lai said. "There are a certain number of distressed players and hedge funds who remain in Asia but it's still quite thin compared with the market four or five years ago." Mr Lai continued: "If you've invested in these issues, you have to take a much longer term view. Liquidity is very thin, so you have to treat it very much like a bank treats a loan it gives to a company, you're basically locked in for that period of time." The third hurdle relates to the upward trend in defaults that is putting off investors. According to Standard & Poor's, defaults on bonds in the Asia-Pacific region have increased to 12 cases since the beginning of the year, including subsidiaries of companies based outside the region. There were seven defaults in the whole of 2008, S&P says. Ian Thompson, chief credit officer at S&P, estimates that defaults are likely to peak this year to about 10 per cent of the speculative grade debt. That's similar to the levels seen during the Asian financial crisis in 1998. The sectors that appear to have suffered the most defaults are in the property, export-related and construction industries. Mr Thompson said: "Credit is a lagging indicator. For some [companies] they've got pressures now and maybe [there is pressure] in sectors that won't recover as quickly. By and large, there should be a spike in defaults and a spike in negative outlooks followed by improvement." Included in these default numbers is what S&P characterises as "distressed buying back" of bonds, with investors agreeing to the distressed terms as they feel they will get a better deal than going through the bankruptcy process. "It's apparent there's a loss of economic value and loss on the part of the investors, we view that as a distressed exchange and view distressed exchanges as akin to default," Mr Thompson said. Calyon's Mr Lai remains cautious about the outlook for high-yield debt in Asia. He says the economic situation remains difficult and this can have repercussions on the growth companies that largely make up the high-yield sector, as they are usually relatively leveraged and are dependent on a benign macro environment for profits. "The economic situation looks tough with no clear certainty when the tide will turn, which means high-yield credits could come under more distress," Mr Lai said. "I wholly recommend staying in Asian investment-grade credit because of above reasons, better risk/reward dynamics and also for much better liquidity, given that the market composes fewer players today."

The spend is nigh

Jul 30th 2009 HONG KONG From The Economist print edition The second article in our series on global rebalancing asks whether China can reduce its trade surplus by consuming more A REBALANCED global economy requires America to consume less and save more. That means the world’s three big surplus economies—China, Germany and Japan—will have to save less and spend more. None is under more scrutiny than China, whose vast current-account surplus has been fingered by some as the ultimate cause of the financial crisis. The case against China is exaggerated but a surplus of more than $400 billion in 2008, or 10% of GDP, was clearly too big. Can China right its trade imbalances, and if so, how will it achieve rapid growth in future? The good news is that the surplus is already shrinking. The strong rebound in China’s economy in the second quarter—pushing GDP 7.9% higher than a year ago—came entirely from domestic demand. This sucked in more imports, while exports continued to slump. China’s merchandise trade surplus narrowed to $35 billion in the same quarter, 40% down on a year earlier. Yu Song and Helen Qiao of Goldman Sachs calculate that the decline is even more impressive in real terms (adjusting for changes in export and import prices), with the surplus shrinking to less than one-third of its level a year ago (see chart 1). They even suggest that a monthly trade deficit is possible within the next year. Another way to look at the huge swing in China’s trade is that net exports (exports minus imports) contributed 2.6 percentage points of the country’s GDP growth in 2007, but shaved almost three points off its growth in the first half of this year. Most economists think that China’s trade surplus will remain large. The jump in imports in the second quarter included heavy stockpiling of commodities, which will not last; copper imports, for example, were 150% higher than a year ago. Yet the underlying surplus is clearly shrinking. Paul Cavey of Macquarie Securities forecasts that China’s current-account surplus will fall to under 6% of GDP this year and 4% in 2010, down from a peak of 11% in 2007. Exports amounted to 35% of GDP in 2007; this year, reckons Mr Cavey, that ratio will drop to 24.5%. On the surface, therefore, China is fulfilling the long-standing demand of Western governments that it shift its engine of growth from exports to domestic demand. Thanks to the biggest fiscal stimulus and loosening of credit of any large economy, China’s real domestic demand is likely to grow by at least 10% this year. In fact, the popular perception that China has always relied on export-led growth is rather misleading. Its current-account surplus did soar from 2005 onwards but until then was rather modest. And over the past ten years net exports accounted, on average, for only one-tenth of its growth. The problem is more that the mix of domestic demand between consumption and investment is unbalanced, and becoming even more so. In 2008 private consumption accounted for only 35% of GDP, down from 49% in 1990 (see chart 2). By contrast, investment had risen from 35% to 44% of GDP. This year the bulk of the government’s stimulus is going into infrastructure, further swelling investment’s share. Chinese capital spending could exceed that in America for the first time, while its consumer spending will be only one-sixth as large. This is China’s most glaring economic imbalance. Spending lots of money on building railways, roads and power grids is the most effective way for the government to prop up demand in the short term—especially since China, as a poor country, needs better infrastructure. However, the pace of investment is unsustainable. Even before this year’s infrastructure boom capital spending was too great, causing many economists to worry about excess capacity and the risk that bank loans could sour. China deserves credit for the speed with which it responded to the global downturn. Now it needs to focus on structural reforms not just to keep domestic demand growing strongly and to reduce its trade surplus further, but also to derive more of its growth from consumption and less from investment. Before exploring how China can do so, it is important first to clear up a misunderstanding. It is often argued that China runs a current-account surplus because its consumer spending has been sluggish. On the contrary, China has the world’s fastest-growing consumer market, increasing by 8% a year in real terms in the past decade. Retail sales have leapt by 17% in real terms in the past 12 months, although this figure may be inflated by government purchases. Even so, China’s consumer spending has grown more slowly than the overall economy. As a result consumption as a share of GDP has fallen and is extremely low by international standards: only 35%, compared with 50-60% in most other Asian economies and 70% in America. Economists disagree about the main reason why the consumption ratio has fallen—and hence about the best way to lift it. The most popular explanation is that Chinese households have been saving a bigger slice of their income because of an inadequate social safety net. They have squirrelled away more money to cover the future cost of health care, education and pensions. According to Eswar Prasad, an economist at Cornell University, the saving rate of urban households has jumped from 20% to 28% of their disposable income over the past decade. After exploring all the possible causes, he concludes that uncertainty about the private burden of health care and education is indeed the main culprit. The effect has been worsened by an undeveloped financial system, making it hard for households to borrow. PanosThe Beijing government is acting: it doubled spending on health care, education and social security between 2005 and 2008. But the total amount remains low at only 6% of GDP, compared with an average of around 25% in OECD countries. This year the government has increased pensions coverage and payments to low-income households. It has also pledged to provide basic health care for 90% of the population by 2011, although the new spending appears to be less than 0.5% of GDP each year. If such measures ease households’ worries about future health care, they could encourage them to save less. But it will take years for them to have much effect on consumer behaviour. Slicing up saving More to the point, an inadequate welfare state does not fully explain why consumption has fallen as a share of GDP. The first niggle is that most workers lost their state-provided health care and education almost a decade ago, after the reform of state-owned firms, so this cannot really explain why saving has continued to rise more recently. Louis Kuijs, an economist at the World Bank in Beijing, suggests that the extra saving may owe as much to greater income inequality as to the lack of a welfare state. Rich people save a lot more and their numbers have increased. A second flaw in the thesis is that although urban households have been saving more, rural households have become less thrifty over the past decade. As a result China’s average household-saving rate has risen more modestly. Mr Kuijs calculates that total household saving has risen from 21% of GDP in 1998 to 24% in 2008. Households accounted for only one-fifth of the increase in total domestic saving over the period. Most of the increase in saving came from companies (see chart 3). This matters for two reasons. First, if anyone saves too much, it is companies, not households. Second, you need to look elsewhere for the cause of China’s falling consumption ratio. The drop in consumer spending as a share of GDP over the past decade has been almost four times larger than the rise in household saving. The more important reason why consumption has fallen is that the share of national income going to households (as wages and investment income) has fallen, while the share of profits has risen. Workers’ share of the cake has dwindled because China’s rapid growth has generated surprisingly few jobs. Growth has been capital-intensive, focusing on heavy industries such as steel rather than more labour-intensive services. Profits (the return to capital) have outpaced wage income. Capital-intensive production has been encouraged by low interest rates and by the fact that most state-owned firms do not pay any dividends, allowing them to reinvest all their profits. The government has also favoured manufacturing over services by holding down the exchange rate as well as by suppressing the prices of inputs such as land and energy. Simply urging households to spend a bigger slice of their income will not be enough to shift China’s growth towards consumption. Beefing up the welfare state is important but policy also needs to focus on how to lift household income and reduce corporate saving, says Mr Kuijs. Making growth more labour-intensive will require lots of difficult reforms. China needs financial-sector liberalisation to lift the cost of capital for state-owned companies and improve access to credit for private ones, especially in services. Higher deposit rates would also boost household income. Distortions in the tax system which favour manufacturing and barriers to private-sector participation in some service industries should be scrapped. State-owned firms ought to be forced to pay bigger dividends. The prices of subsidised industrial inputs should be raised. Land reform and the removal of restrictions on migration from rural to urban areas would also help to lift incomes and thus consumption. China has barely started on these important reforms. That may be because they involve much harder political decisions than creating a welfare state. They require the government to loosen its control over the economy, something which Beijing will do slowly and reluctantly. Last but not least, China needs to allow its exchange rate to rise. This would lift consumers’ real purchasing power, discourage excessive investment in manufacturing and help to reduce the trade deficit further. It would also alleviate the risk of a protectionist backlash abroad. From July 2005 (when China abandoned its dollar peg) to February 2009, the yuan rose by 28% in real trade-weighted terms, according to the Bank for International Settlements. But alarmed by the collapse of exports, China has virtually repegged the yuan to the dollar over the past 12 months. As the greenback fell this year, it dragged the yuan down with it. Since February the yuan’s real trade-weighted value has lost 8%. Economists disagree about the extent to which the yuan is undervalued. In the IMF’s “Article IV” assessment of China, published on July 22nd, officials were split over whether the currency was “substantially undervalued”. Morris Goldstein and Nicholas Lardy, of the Peterson Institute for International Economics, have done some of the most extensive work on China’s exchange rate. In a new study, they estimate that the yuan is undervalued by 15-25%, based on the adjustment needed to eliminate the current-account surplus. The American government has softened its demands for revaluation, largely because it needs China to keep buying Treasury bonds to fund its own stimulus spending. At the Strategic and Economic Dialogue meeting between American and Chinese officials on July 27th and 28th in Washington, DC, the yuan’s exchange rate was barely discussed. However, the case for appreciation remains strong. China’s recent efforts to boost domestic spending have helped to maintain robust growth and reduce its trade surplus. But excessive levels of investment are not a recipe for sustained rapid growth. Unless it is prepared to embrace difficult structural reforms and to allow the yuan to climb, China’s commitment to rebalancing will remain half-hearted. In the long run that will be bad news for China itself as well as for the rest of the world.

Credit Thaw Is Spurring Appetite for Bank IOUs

By CARRICK MOLLENKAMP, NEIL SHAH AND STEPHEN FIDLER Investors have developed a voracious demand for short-term debt issued by U.S. and European banks, and an important global lending benchmark has fallen to an all-time low -- welcome signs that bank credit markets have improved. But beneath the demand for short-term bank debt, known as commercial paper, and a drop in the London interbank offered rate, or Libor, significant kinks remain lodged in the bank markets: Banks are using the fresh cash to repay existing debt, or simply hoarding it. That cash buildup is potentially stymieing efforts by regulators to circulate funds to borrowers and the most needy banks. In contrast to the panicked days early this year, bank commercial paper "flies off the screen," said one New York trader. The market for this short-term bank debt runs from 7 a.m. to about 2 p.m. in New York. But investor demand has been so strong that some banks are turning away buyers by late morning. Commercial paper is short-term IOUs issued to raise money for short periods. Libor reflects the rates at which banks can borrow at maturities ranging from overnight to one year. The rates are calculated daily in London when a panel of banks report their borrowing costs. In recent months, Libor has fallen sharply, reflecting a broader thaw as investors' confidence in the financial system returns. As of Wednesday, three-month dollar Libor stood at its lowest level on record: 0.4875%, down from 4.81875% at the peak of the crisis in October. Meanwhile, one measure of risk in the banking system -- the difference between three-month dollar Libor and the U.S. Federal Reserve's expected target rate -- is approaching 0.25 percentage point, a level that former U.S. Federal Reserve Chairman Alan Greenspan once said would signal the end of the financial crisis. The fact that central bankers are providing cheap money has lessened the value of Libor. 'Return in Confidence' There is the possibility that three-month dollar Libor could fall yet further. The most healthy U.S. and European banks are selling three-month commercial paper at a range of 0.3 percentage point, or nearly 0.2 percentage point below the three-month Libor, according to one New York desk that trades commercial paper. That suggests Libor might fall further if it tracked the cost of selling the short-term IOUs. "You've got a return in confidence," said Joseph Abate, money-markets strategist at Barclays Capital. That is good news for banks as well as borrowers. Libor is used as a benchmark for interbank loans as well as for borrowings for homeowners and credit-card borrowers. Separately, the gap or difference between three-month and one-month dollar Libor has shrunk, a sign banks are willing to lend to one another for more than a month. Historically, that gap has been zero. Yet Libor's fall mightn't be a sign banks have restored confidence in one another. Rather, it is that emergency central-bank programs have stabilized the markets that make up the plumbing of the global financial system. Last month, the European Central Bank lent banks in the euro zone some €442 billion ($626 billion) in one-year loans, at the ECB's key rate of 1%. Demand for the ECB's cash was heavy, a sign Europe's banks may still be having trouble funding their businesses. Euro Parking What is more, European banks are parking tens of billions of euros at a deposit facility maintained by the European Central Bank. In the past week or so, banks have deposited between €170 billion and €195 billion at the ECB, according to ECB data and Morgan Stanley. That is a clear sign "euro area financial markets are not distributing cash to the interbank and nonfinancial markets as well as they might be," Morgan Stanley interest-rate strategist Laurence Mutkin said in a report, adding, "Only a fall in use of the deposit facility would demonstrate banks' willingness to lend rather than hoard cash." An ECB spokesman declined to comment on the report. All these factors have created an odd market dynamic: Banks are increasingly flush with cash. But they are choosing not to lend it, and borrowers are opting not to seek funds. Alistair Darling On Wednesday, the Bank of England and the ECB separately reported that Europe's banks remain leery of lending despite massive government aid and pressure from officials such as U.K. Treasury chief Alistair Darling and ECB President Jean-Claude Trichet. On Monday, for example, Mr. Darling called in the heads of the U.K.'s seven largest banks and urged them to step up lending to small- and medium-size firms. In the U.S. and Europe, one problem is a lack of actual borrower demand, especially as consumers and companies themselves seek to reduce their debts. In a speech Wednesday, New York Federal Reserve President William Dudley said banks are still working through large credit losses and that the market for offloading loans to investors remains limited. "This means that credit availability will be constrained for some time to come, and this will serve to limit the pace of recovery," Mr. Dudley said. Write to Carrick Mollenkamp at carrick.mollenkamp@wsj.com

Time to stop worrying and learn to love the recovery

By Tim Bond Published: July 30 2009 03:00 Last updated: July 30 2009 03:00 Never has a bull market climbed a steeper wall of worry. In spite of a proliferation of positive economic indicators, the consensus remains gloomy. Bullish economists are rarer than hens' teeth. The average forecast for third-quarter US gross domestic product growth is a weak 0.8 per cent, which would be by far the slowest first quarter of any recovery on record. Since 1945, the average annualised real US growth rate in the first two quarters of recovery is 7 per cent. History provides abundant evidence that the deeper the recession, the stronger the bounce. Even the recovery from the Great Depression conformed to this rule, real US GDP grew 10.8 per cent in 1934 and 8.9 per cent in 1935. Yet today's consensus assumes this time things will be different. The persistence of such pessimism is striking given a strong Asian recovery is visible, with output, employment and demand all following V-shaped trajectories, and regional industrial production rapidly bouncing back above the previous peak. Yet this recovery is dismissed by western analysts, who appear unable or unwilling to believe the region is capable of endogenous growth. That 2009 will be the second year in a row in which the increase in Chinese domestic demand exceeds that of the US is a point roundly ignored. The fate of the Chinese economy is supposedly in thrall to the US consumer, in spite of clear and persistent evidence to the contrary. The US economy, which provides a home to 17 per cent of China's exports, is still seen as the arbiter of growth in Asia. This obstinate adherence to an outdated assessment of economic dependence is not the only gaping intellectual flaw. The 9.5 per cent US unemployment rate is also viewed as an obstacle to recovery. This objection ignores the many contrary examples of high unemployment rates and subsequent recoveries, not least in the US. Thus in 1982, US unemployment hit 10.8 per cent, yet GDP soared at an average annual pace of 7.7 per cent over the next six quarters. Similarly, few commentators consider the possibility that the large post-Lehman rise in US unemployment was a mistake on the part of panicky managements. Yet this is precisely what trends in labour productivity growth, not to mention common sense, tell us occurred. In the first half of 2008, labour productivity growth averaged 3.3 per cent, while the unemployment rate rose to 5.6 per cent. At that point, there was no evidence US companies were overstaffed. Thereafter, output collapsed, yet business productivity growth remained positive, registering an average yearly pace of over 2 per cent, as companies shed labour at a faster pace than they reduced output. Businesses, like markets, panicked after Lehman went under. Employment and output were both reduced far more than it turned out to be necessary, as businesses temporarily and understandably assumed a worst case scenario. Just as global output is performing a V-shaped recovery, there is a big risk US employment will do the same, with monthly payrolls showing surprising growth by the end of 2009. If unemployment is one half of the bearish consensus, de-leveraging is seen as the other main obstacle to recovery. Yet increases in private leverage never play a significant role in recoveries. Indeed, since 1950, US private sector borrowing ex-mortgages has declined an average 0.1 per cent of GDP in the first year of recovery, with non-financial business borrowing declining 0.6 per cent of GDP. A regression of the household savings rate on the wealth-to-income ratio tells us the former has made the appropriate adjustment to declines in the latter. In fact, the rally in the stock market, the low level of interest rates and the stabilisation in house prices all tend to limit the risk of a further sizeable increase in the savings rate. So over the rest of this year, the standard cyclical timing of a US economic turning point tells us pessimistic expectations are likely to collide with the economic reality of a strong recovery. The net result is almost inevitable, in the shape of an inexorable continuation of the equity rally. The writer is head of asset allocation at Barclays Capital

High-frequency trading under scrutiny

By Michael Mackenzie in New York Published: July 28 2009 18:44 Last updated: July 28 2009 18:44 The lightning fast world of high-frequency equity trading is being scrutinised by the Securities and Exchange Commission, amid concerns that this computer-dominated scene is placing less tech-savvy investors at a disadvantage. Volumes of trading generated by computers placing super-fast orders – where speed of execution is measured in microseconds – to generate business has rocketed in recent years. The Tabb Group, a consultancy, recently estimated that high-frequency trading accounts for as much as 73 per cent of US daily equity volume, up from 30 per cent in 2005. Tabb estimates these players, some of the largest of which are hedge funds such as Citadel, D.E. Shaw & Co. and Renaissance Technologies, represent about 2 per cent of the 20,000 or so trading companies operating in the US markets. It is a consequence of three trends in equity trading: the introduction of electronic platforms run by exchanges Nasdaq OMX and NYSE Euronext; the growth in “electronic communication networks”, led by Direct Edge and BATS; and the surge in anonymous trading venues, known as “dark pools”, because they trade outside the mainstream market. Electronic trading has reduced the costs of trading equities for retail and institutional investors. But with the demise of old-fashioned floor brokers and traditional market makers, new so-called high-frequency equity players, which include proprietary trading desks at investment banks, have become the main providers of liquidity for the overall US equity market. Even in Europe, ultra-fast electronic trading has gathered momentum in the wake of the Mifid reforms passed by the European Commission two years ago. This has facilitated the arrival of platforms, including Chi-X Europe, Turquoise and a European arm of BATS. High-frequency trading strategies are generally geared towards extracting fractions of profit from trading small numbers of shares in companies, between different trading platforms at hyper-fast speeds. This pace of trading is known as “latency” and requires constant upgrading of computer systems to stay ahead of the pack. “High-frequency traders are the de facto market makers now,” says Stephen Ehrlich, chief executive officer at Lightspeed Financial, which provides trading technology and brokerage services for high-frequency traders. “They are using their own capital to provide liquidity for the market.” But the growing dominance of high-frequency trading has its critics. This month, Sal Arnuk and Joseph Saluzzi at Themis Trading raised the alarm with their paper: Why Institutional Investors Should Be Concerned About High Frequency Traders. “We’re not interested in demonising any one asset class, trading strategy, market participant or firm, but rather we want to shine a light on a system and make it fair for all investors,” says Mr Arnuk. They and other critics argue that high-frequency trading, which is being actively courted by the big US exchanges, results in retail and institutional investors chasing artificial prices and enduring heightened volatility. Exchanges pay small fees to active traders, usually a quarter of a cent per share in what is termed liquidity rebates. This, says Themis, has inspired trading that merely seeks to capture a rebate from an exchange, no matter whether the actual trade makes money. That churns prices and can force other investors to pay a higher price per share, as liquidity is sucked out of the market. “The culture of the equity market has been one where providers of liquidity are paid, while takers of liquidity are charged,” said Joe Mecane, chief administrative officer for US equities markets at NYSE Euronext. “It provides an incentive for liquidity providers.” Doubts about the value of high-frequency firms, however, compelled the London Stock Exchange this month to abandon paying rebates due to concerns that it was alienating its biggest customers, the large banks that channel orders from so-called buy-side asset managers and pension funds. Beyond rebates, another key concern is the practice of flashing prices, which helps market makers or investors discover where others want to buy or sell stocks. This practice is widely used by high frequency traders and is allowed by BATS, Direct Edge and Nasdaq OMX, while NYSE Euronext has been a vocal critic against the practice. Charles Schumer, a senior Democrat on the Senate Banking committee, says flashing prices creates a two-tiered market that disadvantages retail and institutional investors and he wants the SEC to ban the practice. In response, the SEC said it was “specifically examining flash orders to ensure best execution and fair access to information for all investors”. In a letter to the SEC this week, Bob Greifeld, chief executive of Nasdaq OMX, urged the regulator to examine the practice of flash orders and other aspects of trading. Larry Tabb, chief executive officer at the Tabb Group, says: “While many of the exchanges don’t even like flash orders, you can look at them as just another way of trading in the dark.” Both BATS and Direct Edge say any investor can participate in flashing prices or receiving them on their trading venues. Any move to ban the practice, says Direct Edge, is seen as creating a two-tier market as it is likely to push business away from the main electronic platforms towards “dark pools”. Still, there are concerns that market makers, such as high-frequency traders, cancel many of their flash orders before other investors can execute a trade. This can enable the market maker to come back and offer shares for sale at a higher price, or place a buy order at a lower level. “Certain black-box models have cancellation rates as high as 99 per cent on orders,” says Paul Zubulake, senior analyst at Aite Group. Mr Arnuk believes liquidity rebates and flashing should be stopped in order to level the playing field for all investors. Mr Tabb argues institutional investors need to raise their game to compete with faster computer systems. “The markets are changing and people need to upgrade both their technology and their people to keep up.”

温家宝严重警告 中国财政已经大跳水

路透社 2009-07-29 14:16:42 　　表面上看，中国的财政策略和美国截然不同，即便是为应对金融危机需要加大支出，中共政府还是将债务维持在很低的水平.但隐形债务或意味着中国的情况比乍看之下要严重的多. 　　中国经济连续数年快速增长，政府收入以更快速度递增，去年底国家负债占国内生产总值的比重(debt-to-GDP ratio)为17.7%，比其他任何主要经济体都要低. 　　问题是上述负债不包括地方政府借款、目前受政府支持的银行天量放贷以及银行系统中已被清除的但仍在流动的不良资产. 　　若将上述各项都计算在内的话，分析师预计中国负债占GDP比重接近60%，和美国属于同等水平，去年底美国在推出大规模财政刺激方案前该比重为70%可以肯定的是，美国政府大举借债的做法是中国将来很大程度上要避免的，华府今年财政赤字预算占GDP的12.9%，而中共政府目标仅为2.9%.但中国财政状况的恶化程度远快于政府预期，助长了显性和隐性债务的增势，留给政府的馀地正在缩小. 　　渣打银行中国研究部主管王志浩说，"这很严重，其一是隐性债务太多;其次是地方政府债务翻番，这些都计入财政赤字内的话，就限制了进一步进行财政刺激的空间." 　　这可能是目前备受争议的一点.随着中国经济重新回到增长轨道以及民营资本的介入，很少有人认为政府需要在目前的4万亿元财政刺激计划上加大支出.但中国决策者仍对可供选择的措施范围缩窄感到不安.中国国务院总理温家宝上周表示，"财政工作面临的形式仍然十分严峻." 　　财政状况不乐观 　　今年上半年中共政府收入同比减少了2.4%，远低于官方原先增长8%的目标.政府开支则大幅超出预期，且下半年料进一步剧增，因需支持基础设施项目建设. 　　税收收入与经济活动密切相关，因此中国经济的复苏将使政府收入增加，然6月份税收收入的改善主要来自土地出售，这种一次性收入掩盖了未来所面临的困难. 　　法国巴黎银行经济学家孟原表示，"即便我们已经考虑到经济复苏带来的相对乐观的收入增长，未来三年的赤字仍将维持在每年5%左右."但真正的忧虑来自日益增大的非直接债务泥潭.中国财政部官员今年初曾预计，地方政府债务已达4万亿元，或GDP的16.5%，远高于原先的估计.除此之外，还有各银行手里的 4，000亿元坏账，以及被分配到各资产管理公司的至少1万亿元的帐外不良贷款.所有这些最终都将由中共政府埋单. 　　今年以来，人民币新增贷款达到创纪录规模，意味着银行债务总量也将急剧膨胀.银行大举为基础设施项目提供贷款，因後者料有政府的强力担保.王志浩表示，根据他的"保守"估计，中共政府单今年为担保这些贷款(而发行)的票据就达到1.75万亿，这足以将其2009年度赤字推高到GDP的10%. 　　“债务炸弹” 　　最令人担忧的当属各级地方政府出现"债务炸弹"的可能，因他们涉足了既不透明且杠杆率很高的金融操作. 　　法规明令禁止中资银行向地方政府提供後者为进一步获得贷款所需的投资项目股本，但地方政府和银行现在却正利用一个巨大漏洞--信托公司进行这样的操作.办法十分简单.信托公司推出特别设计的"财富产品"，银行将这些产品售予客户後，将资金交给这些信托公司，後者又将这些资金转移给地方政府，作为(地方政府投资项目的)股本. 　　简而言之，地方政府正利用债务进行借款.官方媒体最近报导称，中国银行业监管当局已开始警告信托公司和银行防范这种逐渐增大的风险. 　　就在不久之前，中国银行系统的坏账还对经济构成巨大债务威胁.过去十年最核心的解决办法是:经济保持两位数增长，令国家负债与GDP比率的分母增大，并增加税收减小分子数值. 　　中共政府已在寻找合适时机提高一些税赋--如提高烟草税，但经济回归强劲增长仍是其减少债务的主要手段.同时，中共政府需要资金弥补不断攀升的赤字.但无论如何，中共政府仍能十分自信，即使其今年的发债规模不得不超过原先计划的9，500亿元，未来数年甚至会更多. 　　瑞银中国经济学家汪涛说，"中国有庞大的储蓄存款和充沛的流动性，所以在应对赤字上肯定不会有问题."

I've been an optimist on China. But I'm starting to worry

--A macro strategy that exacerbate imbalance, in which the excession portion of stimulus went to fixed assetment investment and excessive bank loans was funnelled not to real economy but to inflat asset bubbles, is a receipe for doom --72% of stimulus went to fixed asset investment. bank lending in the first half is three times the pace of last year. Loan qualith suffered from the rash of disbursement in the first half. By Stephen Roach On the surface, China appears to be leading the world from recession to recovery. After coming to a virtual standstill in late 2008, at least as measured quarter-to-quarter, economic growth accelerated sharply in spring 2009. A back-of-the envelope calculation suggests China may have accounted for as much as 2 percentage points of annualised growth in inflation-adjusted world output in the second quarter of 2009. With contractions moderating elsewhere, China's rebound may have been enough in and of itself to allow global gross domestic product to eke out a small positive gain for the first time since last summer. That's the good news. The bad news is that China's recent growth spurt comes at a steep price. Fearful that its recent economic short- fall would deepen, Chinese policymakers have opted for quantity over quality in setting macro-strategy, the centrepiece of which is an enormous surge in infrastructure spending funded by a burst of bank lending. Sure, developing nations always need more infrastructure. But China has taken this to extremes. Infrastructure expenditure (including Sichuan earthquake reconstruction) accounts for fully 72 per cent of China's recently enacted Rmb4,000bn ($585bn) stimulus. The government urged the banks to step up and fund the package. And they did. In the first six months of 2009, bank loans totalled Rmb7,400bn - three times the pace in the first half of 2008 and the strongest six-month lending surge on record. This outsized bank-directed investment stimulus leaves little doubt as to how bad it was in China in late 2008 and early 2009. An unprecedented external demand shock, stemming from rare synchronous recessions in the developed world, devastated the export-led Chinese growth machine. That triggered sackings of more than 20m migrant workers in export-intensive Guangdong province. Long fixated on social stability, Beijing moved to arrest this deterioration. The government was determined to do whatever it took to restore rapid growth. Yet there can be no avoiding the destabilizing consequences of these actions. Surging investment accounted for an unprecedented 88 per cent of Chinese GDP growth in the first half of 2009 - double the average contribution of 43 per cent over the past decade. At the same time, the quality of Chinese bank lending most assuredly suffered from the rash of credit disbursements in the first half of this year - a trend that could sow the seeds for a new wave of non-performing bank loans. Just this week, Chinese regulators told banks that new loans must be used to bolster the real economy and not for speculation in equities and real estate. A little over two years ago, premier Wen Jiabao warned of a Chinese economy that was becoming increasingly "unstable, unbalanced, uncoordinated and ultimately unsustainable". Prescient words. Yet rather than act on those concerns by implementing a pro-consumption rebalancing, growth-hungry China was seduced by the boom in global trade and upped the ante on its most unbalanced sectors. By 2007, investment and exports accounted for about 80 per cent of Chinese GDP. And now, in the face of a severe global recession, China has compounded the very problems the premier warned of: aiming a massive liquidity-driven stimulus at its most unbalanced sector. This is not a sustainable outcome for any economy - or sustainable support for the world economy. China must redirect economic growth towards internal private consumption. This may require a compromise on the quantity dimension of its growth outcome. But to the extent that leads to improved quality in the Chinese economy, a short-term growth sacrifice is well worth the effort. Unlike most, I have been a steadfast optimist on China. Yet I am starting to worry. A macro strategy that exacerbates worrying imbalances is ultimately a recipe for failure. In many respects, that's what the global crisis and recession of 2008-09 are all about. China will not get special dispensation from the most critical lesson of this post-crisis era.

foreign vs euro vs global bonds

A foreign bond (called Yankee bond in the US, Samurai bond in Japan, Bulldog bond in the UK) is a bond issued in a country's national bond market by an issuer not domiciled in that country where those bonds are subsequently traded. Regulatory authorities in the country where the bond is issued impose rules governing the issuance of foreign bonds. Issuers of foreign bonds include national governments and their subdivisions, corporations, and supranationals (an entity that is formed by two or more central governments through international treaties). They can be denominated in any currency. They can be publicly issued or privately placed. Eurobonds have the following features: underwritten by an international syndicate. offered simultaneously to investors in a number of countries at issuance. issued outside the jurisdiction of any single country. Therefore, they are not registered through a regulatory agency. in practice they are typically registered on a national stock exchange. Why? Some institutional investors are prohibited from purchasing securities that are not registered on an exchange. The registration is mainly intended to overcome such restrictions. However, most of the Eurobond trading occurs in the over-the-counter market. Make coupon payments annually. Types of Eurobonds: There are a large variety of Eurobonds with different features. For example, deferred-coupon bonds, step-up bonds, dual currency bonds, etc. If an Eurobond is denominated in US dollars, it is called Eurodollar bond. Example: A US$ bond issued by Ford and sold in Japan. "Plain vanilla", fixed rate coupon bonds are called Euro straights, which are unsecured bonds. A global bond is a debt obligation that is issued and traded in both the USYankee bond market and the Eurobond market. Issuers of global bonds typically have high credit quality, and have large fund needs on a regular basis. The first global bond was issued by the World Bank. Example: A US$ bond issued bythe Canadian government, and sold in the US and Japan.

Real Estate Developers, Strapped for Cash, Resort to "Irregular" Tactics

By CSC staff, Shanghai,Published:July 28,2009 While the real estate market appears to be is in the midst of a boom, defaults among developers are also beginning to rise. Small and medium developers are resorting to faking sales to get bank loans to relieve their funding pressure. Statistics show that from May 1 to July 24, which seemed to be good days for Shanghai's real estate market, many housing projects were seeing over 30% cancellations, and the cancellation rate of some projects was as high as 125%. Behind the "boom" of the housing market are irregular behaviors such as getting bank loans by cheating and making fake housing purchasing contracts. Among the top ten housing projects with the highest cancellation rates, 60% are developments by small and medium real estate companies. "In fact, it is still difficult for small and medium developer to get credit support from banks," said a sales manager of a medium real estate company. Now it is common for developers to sell an apartment to an employee as a "reward" and then secure a loan from a bank with the housing purchasing contract signed by the employee. "There's a window between the sale and the issuance of housing ownership certificate, during which employees can decide whether to keep or cancel the contract," the sales manager added. In 2008, when credit was tight, many small and medium developers sought to gather money in this way. "Every developer is doing this. The only differences are scale and method," said the sales manager. The high housing contract cancellation rate has also occurred in Nanjing. July statistics show, in one housing project alone, 29 deals being cancelled. In Beijing, the cancellation rate in some housing projects has reached 40% or higher. According to figures from Centaline China Property Research, between January and June new residential housing sales in six key cities totaled 55 million square meters, up 88% over the second half of 2008. However, since May, trends for residential sales in the six cities began to diversify. In June, housing sales in Guangzhou, Shenzhen, and Tianjin all saw a decline, but Beijng and Shanghai were still seeing month-on-month growth. Housing sales in Shanghai in June reached 2.84 million square meters, up 6%, month on month, the highest among all the six cities. Yin Bocheng, director of the Real Estate Research Center of Fudan University, thinks the boom is a mirage. "This is only fake prosperity." This ploy has been used before to simulate growth in the real estate market. Developers getting bank loans with fake deals will add to credit risk in a long run.

Home Prices Rise Across U.S.

Bargain Hunting, Low Rates Drive First Gain in 3 Years; Double Dip Still Possible By NICK TIMIRAOS and KELLY EVANS Home prices in major U.S. cities registered the first monthly gain in nearly three years, according to a new report that provided fresh evidence that the severe U.S. housing downturn could be easing. Standard & Poor's Case-Shiller index, which tracks home prices in 20 metropolitan areas, rose 0.5% for the three-month period ending in May, compared with the three months ending in April. It marked the index's first increase after 34 straight months of decline, and came after a variety of housing indicators has shown glimmers of hope for the past several months. Home prices remained down about 17% from a year earlier, according to the index. According to S&P/Case-Schiller's seasonally adjusted numbers, which it began reporting only earlier this year, prices in May posted a 0.2% decline. But most Wall Street economists who discussed the survey focused on the April-to-May rise, saying it represents a significant change in direction. Home prices in 15 of the 20 areas in the survey rose or remained stable. The results were also consistent with other recent housing data, these economists said. Sales of new and existing homes rose for three consecutive months through June. Housing starts were up in June, and an index of builder sentiment rose in July, though both remained at low levels. May's uptick came in part as home prices in some areas fell enough for investors and first-time buyers to begin competing for bargains, helping to ease the backlog of unsold homes. Other likely sales spurs included mortgage rates that fell to 50-year lows, an $8,000 federal tax credit for first-time homebuyers and the ability of buyers to secure mortgages from the Federal Housing Administration with as little as 3.5% down. The latest readings don't necessarily herald a full-blown recovery for the housing market or broader economy. Consumer confidence remains near historical lows. The U.S. unemployment rate, at 9.5% in June, is expected to hit double digits before year end, making swift growth and an expanding labor force unlikely anytime soon. The home-sale numbers surprised Robert Shiller, the Yale University economist who helped create the Case-Shiller indexes. "The change in momentum here is very significant," he said. Last month, Mr. Shiller forecast sustained home-price declines into the next few years, which he said now looks less plausible. He said he expects home prices to remain near current levels for the next five years. Not All U.S. Regions Are Equal Effort to Modify Mortgages Falters House Prices in England, Wales Edge Higher Discuss: Is it the right time to buy a home? U.S. home prices have fallen by about one-third since their peak in the second quarter of 2006, according to S&P, and are roughly back at 2003 levels. Some analysts warn that the home-price uptick could reverse as rising unemployment causes more Americans to fall behind on their mortgage payments and end up in foreclosure. One factor that apparently drove the March-through-May uptick was a falling share of homes sold at distressed prices, through foreclosure and so-called short sales. Distressed sales accounted for 33% of existing home sales in May and 31% in June, down from a high of nearly 50% earlier this year, according to the National Association of Realtors. The drop in foreclosure sales was likely the product of U.S. banks' moratorium on home foreclosures, which they undertook as the government launched a round of programs to modify and refinance loans for at-risk borrowers. Most banks ended their foreclosure moratoria in March. Interest rates also hovered at or below 5% for most of the March-May period, before rising in June. "Were it not for those rate reductions and the moratorium, you'd see prices down right now," says Ronald Temple, co-Director of Research at Lazard Asset Management. He expects the index to stabilize or increase in the short-term, but forecasts another 12-15% decline in prices thereafter. Regardless, a combination of still-low interest rates and eager sellers continues to fuel competition for heavily discounted properties. Some buyers are finding that investors with all-cash offers are consistently beating them in bidding wars. Stacy Watson, a 39-year-old human-resources manager in the Riverside, Calif., area, says she has made losing bids on at least eight homes since mid-June. On Tuesday, she says, she decided to increase her offer for a five-bedroom home in Perris, Calif., to $198,000, nearly $20,000 more than the asking price. Ms. Watson and her real-estate agent say the bank-owned home has drawn more than 10 offers in less than a week on the market. "Everyone says it's such a great housing market for buyers," she says. "No. This is hard." Would-be homeowners have benefited from government programs, including one that allows buyers of properties owned by Fannie Mae to receive mortgages from the government-controlled mortgage-finance company with down payments as low as 3%. When Nelly Whiteman and her husband recently bought a house out of foreclosure from Fannie Mae, she figures they competed against at least two other buyers. The 27-year-old administrative assistant says they snagged their three-bedroom home in Orangevale, Calif., for $176,000, or about $5,000 more than the asking price. They now pay about $1,080 a month in mortgage payments, insurance and taxes. "It's an extra bedroom for around what we were paying for rent," she says. The budding housing recovery isn't being felt across the country. Prices increased in 13 of 20 surveyed markets, with the strongest gains coming in Cleveland, up 4.1% from April; Dallas, up 1.9%; and Boston, up 1.6%. Home prices were flat in the New York and Tampa, Fla., areas. The survey doesn't track condominium or cooperative apartment sales, so it doesn't take into account the majority of housing stock in New York City. Prices continue to fall in some markets, particularly overbuilt Sunbelt cities. Prices in Las Vegas declined 2.6% in May from April and were down 32% from a year ago, according to S&P/Case-Shiller. Phoenix prices declined 0.9% from April and were down 34% from May 2008. San Francisco, Miami and Detroit also continued to see year-on-year declines of about 25%. "Is this just a spring bounce that was partly related to the drop in distressed sales?" asks Thomas Lawler, an independent housing economist based in Leesburg, Va. One key question, he says, is whether another wave of foreclosures could come along to offset the home-inventory decline that has boosted many markets. In many of the hardest-hit cities, banks appear to be slow to put foreclosed homes on the market. In Las Vegas, for example, banks had taken title to 13,200 homes as of June. That surpassed the total number of homes listed for sale in Las Vegas last month, according to SalesTraq, which monitors inventory in Las Vegas. "Are the banks are intentionally holding back inventory? That's a question a lot of us have," says Larry Murphy, president of SalesTraq. Some housing analysts say they expect falling prices on mid-to high-end homes to weigh on the Case-Shiller index. The supply of these homes has swelled in recent months as borrowers struggle to obtain financing. Borrowers of "jumbo" mortgages, which are too big for government backing, face higher rates. Banks are also requiring bigger down-payments at a time when traditional "trade-up" buyers are finding that the equity in their homes has fallen. "We think [the sales index] will look like a 'W,' where prices go up until the foreclosures at the higher end translate into another leg lower," says Ivy Zelman, chief executive of Zelman & Associates, a housing-research firm. The improvement in housing likely gave a small boost to U.S. gross domestic product in the second quarter, economists said. After data showed construction of new homes was stronger than expected in June and was revised higher in April and May, Macroeconomic Advisers, a St. Louis-based forecasting group, ratcheted up its estimate of second-quarter economic growth. It now sees output shrinking at just a 0.5% annual rate in the second quarter, compared with declines of 6.3% and 5.5% in the previous two quarters. The government will report its official estimate of second-quarter growth on Friday. Write to Nick Timiraos at nick.timiraos@wsj.com and Kelly Evans at kelly.evans@wsj.com

An Incoherent Truth

PAUL KRUGMAN Published: July 26, 2009 Right now the fate of health care reform seems to rest in the hands of relatively conservative Democrats — mainly members of the Blue Dog Coalition, created in 1995. And you might be tempted to say that President Obama needs to give those Democrats what they want. But he can’t — because the Blue Dogs aren’t making sense. To grasp the problem, you need to understand the outline of the proposed reform (all of the Democratic plans on the table agree on the essentials.) Reform, if it happens, will rest on four main pillars: regulation, mandates, subsidies and competition. By regulation I mean the nationwide imposition of rules that would prevent insurance companies from denying coverage based on your medical history, or dropping your coverage when you get sick. This would stop insurers from gaming the system by covering only healthy people. On the other side, individuals would also be prevented from gaming the system: Americans would be required to buy insurance even if they’re currently healthy, rather than signing up only when they need care. And all but the smallest businesses would be required either to provide their employees with insurance, or to pay fees that help cover the cost of subsidies — subsidies that would make insurance affordable for lower-income American families. Finally, there would be a public option: a government-run insurance plan competing with private insurers, which would help hold down costs. The subsidy portion of health reform would cost around a trillion dollars over the next decade. In all the plans currently on the table, this expense would be offset with a combination of cost savings elsewhere and additional taxes, so that there would be no overall effect on the federal deficit. So what are the objections of the Blue Dogs? Well, they talk a lot about fiscal responsibility, which basically boils down to worrying about the cost of those subsidies. And it’s tempting to stop right there, and cry foul. After all, where were those concerns about fiscal responsibility back in 2001, when most conservative Democrats voted enthusiastically for that year’s big Bush tax cut — a tax cut that added $1.35 trillion to the deficit? But it’s actually much worse than that — because even as they complain about the plan’s cost, the Blue Dogs are making demands that would greatly increase that cost. There has been a lot of publicity about Blue Dog opposition to the public option, and rightly so: a plan without a public option to hold down insurance premiums would cost taxpayers more than a plan with such an option. But Blue Dogs have also been complaining about the employer mandate, which is even more at odds with their supposed concern about spending. The Congressional Budget Office has already weighed in on this issue: without an employer mandate, health care reform would be undermined as many companies dropped their existing insurance plans, forcing workers to seek federal aid — and causing the cost of subsidies to balloon. It makes no sense at all to complain about the cost of subsidies and at the same time oppose an employer mandate. So what do the Blue Dogs want? Maybe they’re just being complete hypocrites. It’s worth remembering the history of one of the Blue Dog Coalition’s founders: former Representative Billy Tauzin of Louisiana. Mr. Tauzin switched to the Republicans soon after the group’s creation; eight years later he pushed through the 2003 Medicare Modernization Act, a deeply irresponsible bill that included huge giveaways to drug and insurance companies. And then he left Congress to become, yes, the lavishly paid president of PhRMA, the pharmaceutical industry lobby. One interpretation, then, is that the Blue Dogs are basically following in Mr. Tauzin’s footsteps: if their position is incoherent, it’s because they’re nothing but corporate tools, defending special interests. And as the Center for Responsive Politics pointed out in a recent report, drug and insurance companies have lately been pouring money into Blue Dog coffers. But I guess I’m not quite that cynical. After all, today’s Blue Dogs are politicians who didn’t go the Tauzin route — they didn’t switch parties even when the G.O.P. seemed to hold all the cards and pundits were declaring the Republican majority permanent. So these are Democrats who, despite their relative conservatism, have shown some commitment to their party and its values. Now, however, they face their moment of truth. For they can’t extract major concessions on the shape of health care reform without dooming the whole project: knock away any of the four main pillars of reform, and the whole thing will collapse — and probably take the Obama presidency down with it. Is that what the Blue Dogs really want to see happen? We’ll soon find out.

Threat of Unemployment - WSJ

Are markets taking too rosy a view of unemployment? Unemployment is usually seen as a lagging rather than leading economic indicator: In the last two U.S. downturns, firms continued shedding jobs for months after the recession was officially over. Typically, companies only start hiring in earnest once a recovery is clearly under way. But this time, unemployment may play a bigger role in determining the timing and shape of recovery. True, the markets are currently betting the old orthodoxy still holds sway. Unemployment has climbed quickly. The U.S. rate hit 9.5% in June, higher than any point since 1983, and up from 5.6% a year earlier, one of the steepest annual rises on record. In the euro zone, May's 9.5% unemployment rate was the highest in 10 years. The Organization for Economic Cooperation and Development forecasts rates of 10% in the U.S. and more than 12% in the euro zone in 2010. But that has not stopped equity markets from rallying strongly, amid growing hopes of a recovery this year. That's partly because job losses and other cost cuts have provided a cushion for corporate profits: 82% of the S&P 500 companies to report so far have beaten second-quarter earnings expectations. The snag is that only 50% have beaten sales targets, as Deutsche Bank points out. For the moment, earnings are only being held up by costs shrinking faster than revenue. For a true recovery, sales need to start growing too. Rising unemployment may make that harder to achieve. First, the flipside of improved corporate profits is real financial and consumer pain. U.S. credit card bad debt, for example, is rising faster than unemployment. Annualized write-offs of securitized credit card debt hit a record 10.8% in June, according to Moody's. The agency expects that to rise to 12% to 13% in mid-2010. In Europe, Fitch's U.K. credit card charge-off index hit a record high of 9% in April. Historically, investors have assumed that a one percentage point increase in unemployment will lead to a one percentage point increase in bad credit card debt. But the pace of job losses and levels of debt means nobody is confident previous correlations will hold. Similarly, rising unemployment could also hit house prices again, causing further turmoil for mortgage-backed securities. Meanwhile, high unemployment is also likely to weigh on consumer sentiment. Nearly 60% of U.S. consumers expect high unemployment to persist over the next several years, the University of Michigan reported Friday. That could shape behavior: Federal Reserve Chairman Ben Bernanke warned last week that unemployment could weigh on consumer spending. Continued pressure on sales could be a further impetus for companies to cut costs and jobs, leading to more losses on consumer debt.

Group says accounting did not cause credit crisis

By STEPHEN BERNARD The Associated Press Tuesday, July 28, 2009; 1:40 PM NEW YORK -- An international financial advisory group said Tuesday that accounting rules were not the cause of the recent credit crisis. The Financial Crisis Advisory Group also voiced concern about recent regulatory pressure that led to the easing of guidelines about how banks value risky assets that were at the center of the crisis. In a report released Tuesday, the group said "accounting standards were not a root cause of the financial crisis," but did acknowledge that the weakness in the application of rules reduced credibility in financial reporting. At the heart of the debate over accounting standards is a rule determining how banks can value assets such as mortgage-backed securities. In a split vote in early April, the U.S. Financial Accounting Standards Board approved a change to the rule, allowing financial firms to value assets at what they would go for in an "orderly" sale, as opposed to a forced or distressed sale. The two dissenting voters on the five-member board said at that time that FASB was pressured by Congress to make the change. The advisory group said in the report Tuesday that regulators should not be able to dictate specific rules that are established by two main accounting boards that oversee standards, FASB in the U.S. and the International Accounting Standards Board overseas. "While it is appropriate for public authorities to voice their concerns and give input to standard setters, in doing so they should not seek to prescribe specific standard-setting outcomes," the group wrote in the report. Critics had contended the rule made the current financial crisis worse by forcing banks to heavily slash the value of assets such as mortgage-backed securities that were severely depressed by market conditions - conditions where the sale of those assets would only be completed at distressed prices because the market was not functioning properly. While acknowledging that market turmoil was readily apparent through the valuing of certain assets, the advisory group said the rules governing how to value those assets - known as mark-to-market, or fair value, accounting - did not intensify the credit crisis. "Proponents of fair value accounting do not deny that indeed mark-to-market accounting shows the fluctuations of the market, but they maintain that these cycles are a fact of life and that the use of fair value accounting does not exacerbate these cycles," the report said. The value of mortgage-backed securities, which are bonds backed by home loans, and other risky investment products fell sharply beginning in 2007 as the housing market deteriorated and the economy faltered. Banks were required, because of the accounting rules, to record hundreds of billions of dollars in non-cash charges to reflect the waning value of those investments sitting on their balance sheets. As their value fell, banks became more reluctant to sell the assets at a loss, only further weakening their prices and leading to more write-downs. Only recently have write-downs began to slow. An estimated $2 trillion in soured assets is sitting on banks' books. Easing or even eliminating that rule, as some industry groups and politicians have proposed, could remove transparency for investors, warned the advisory group that is co-chaired by Harvey Goldschmid, a former commissioner of the U.S. Securities and Exchange Commission and Hans Hoogervorst, chairman of the Netherlands Authority for the Financial Markets.

Traders Blamed for Oil Spike

CFTC Will Pin '08 Price Surge on Speculators, in a Reversal From Bush Findings By IANTHE JEANNE DUGAN and ALISTAIR MACDONALD The Commodity Futures Trading Commission plans to issue a report next month suggesting speculators played a significant role in driving wild swings in oil prices -- a reversal of an earlier CFTC position that augurs intensifying scrutiny on investors. In a contentious report last year, the main U.S. futures-market regulator pinned oil-price swings primarily on supply and demand. But that analysis was based on "deeply flawed data," Bart Chilton, one of four CFTC commissioners, said in an interview Monday. The CFTC's new review, due to be released in August, adds fuel to a growing debate over financial investors who bet on the direction of commodities prices by buying contracts tied to indexes. These speculators have invested hundreds of billions of dollars in contracts that were once dominated by producers and consumers who sought to hedge against oil-market volatility. The review also reflects shifting political winds. Under Chairman Gary Gensler, appointed by President Barack Obama, the CFTC is departing from the more hands-off approach it took under its previous head, a George W. Bush appointee. The agency is widely expected to adopt new rules to limit the amount of investments in commodities by big institutions betting on their direction purely for financial gain. The agency didn't make available preliminary figures from the report and declined to discuss the previous data. Speculators have been a lightning rod of criticism from politicians world-wide, who worry that rising oil prices could damp the recovery potential of their recession-hit economies. Many lawmakers and regulators say they want to ensure that speculators don't make it more costly for consumers to access heating oil, food and other essentials. These decision makers don't present a united front. The U.K.'s Financial Services Authority has found no evidence that speculators are behind big oil-price swings, people familiar with the matter said Friday. This view, made by the overseer of one of the world's biggest financial markets, contrasts with an opinion piece published in The Wall Street Journal two weeks ago, by French President Nicolas Sarkozy and U.K. Prime Minister Gordon Brown, who said governments need to act to curb "dangerously volatile" oil prices. In the U.S., the CFTC begins public hearings Tuesday to determine whether to limit speculative investments in commodities. Congress also is weighing whether to give the CFTC the authority, under a broader proposal to revamp financial regulation, to regulate commodities investments that occur off traditional exchanges. Byron Dorgan, a North Dakota Democrat, has called on the CFTC to curb "oil speculators looking for a quick buck at the expense of American consumers." The debate over speculators underscores the shifting nature of commodities trading in recent years. Before the mid-1990s, these markets were dominated by entities that had physical dealings with the underlying commodity, and "speculators" who often took the opposite position, providing liquidity to markets. But a new group of investors has emerged in recent years. Those who want to bet on commodities prices have increasingly put their money in indexes that track the value of futures contracts, in which investors promise to pay a certain amount in the future for oil and other commodities. As of July 2008, financial investors had about $300 billion riding on these indexes, roughly four times the level in January 2006, according to the International Energy Agency, a Paris-based watchdog. Separately, these investors may buy derivatives, not directly traded on futures exchanges, that let them make contrary bets to offset their risks. Crude-oil prices surged in July 2008 to a record $145 a barrel, then dropped to about $33 in December. Oil now trades at around $68 a barrel. Proponents of index speculation say these parties have added liquidity to markets. They blame price gyrations on supply and demand and say attempts to regulate speculation are foolhardy and could drive investors to less-regulated venues. CME Group, the world's largest commodities exchange, said in a statement that it hasn't seen "any empirical evidence that index funds and speculators distort prices, as has been widely alleged." The exchange's chief executive, Craig Donohue, said: "We are deeply concerned that inappropriate regulation of these markets will cause market participants to move to dark pools and other unregulated markets, causing irrevocable harm to the entire U.S. economy." Dark pools are private markets where large orders are transacted. Last year, CFTC Chief Economist Jeffrey Harris told a House Agriculture subcommittee: "The economic data shows that overall commodity price levels, including agriculture commodity and energy futures prices, are being driven by powerful fundamental economic forces and the laws of supply and demand." Mr. Harris didn't return a call to comment. The acting CFTC chairman at the time, Bush-appointee Walter Lukken, told the House Agriculture committee that CFTC's economists "did not find direct evidence that speculation was driving up prices." Mr. Lukken, now an executive at the New York Stock Exchange, declined to comment. In preparing its 2008 report, the CFTC sought information from swaps dealers about their off-exchange derivatives transactions. CFTC commissioner Mr. Chilton -- who was appointed by Mr. Bush and now awaits confirmation of his reappointment under Mr. Obama -- said the data the agency gathered was incomplete, with some players providing partial or no information. Mr. Chilton dissented from the 2008 CFTC report, saying the agency's conclusions didn't go far enough. He expressed doubt about the amount and type of data received, which he called limited and unreliable. "We didn't have all the information we should have," he said. "And we gave it to Congress anyway, and we spun it." The agency began shifting under Mr. Gensler, its new chairman. During his confirmation process earlier this year, Mr. Gensler said he believed speculation was partly behind the surge in commodity prices. Mr. Chilton said the new report will contain a more-thorough analysis of the investors in contracts tied to oil and other commodities, and reveal cases in which single traders hold massive market positions. "We now have multiple sources, and confidence from different sources," he says. He said he believes the data on trading outside exchanges is also more reliable. Meantime, the U.K.'s FSA has been examining whether speculation has driven big oil price swings in recent months. The FSA is leaning toward the conclusion that the moves have more to do with uncertainty over the direction of economic growth than speculation, according to the people familiar with the matter. The FSA has no jurisdiction over U.S. markets. But it oversees ICE Futures Europe, one of the largest global energy exchanges, which is based in London. The FSA doesn't believe that limiting the size of trading positions would be "beneficial" for the market. Still, it concedes it doesn't have a "full explanation" as to why it the market has moved as it has. —Carolyn Cui and Kara Scannell contributed to this article. Write to Ianthe Jeanne Dugan at ianthe.dugan@wsj.com and Alistair MacDonald at alistair.macdonald@wsj.com

Developing nations shine amid the crisis gloom

By David Oakley and Patti Waldmeir Published: July 28 2009 03:00 Last updated: July 28 2009 03:00 It has been a good year for emerging markets. That may seem an odd statement, given the severity of the global recession and the uncertainty - in spite of recent rallies - that still hangs over the financial markets as the second anniversary of the credit crisis approaches. But many emerging markets have had a good crisis, or at least a better one than their industrialised peers. Nowhere is this more true than in China. Its equity markets have boomed, with the Shanghai Composite index up more than 88 per cent since January 1 - making China the best performing large stock market this year. This compares with the S&P 500, the world's leading benchmark, which has risen a modest 8 per cent. China's economy is expected to grow by at least 7 per cent this year, new lending has risen sharply and there are signs from leading indicators, such as purchasing managers' surveys, that the momentum can be maintained. Risk appetite among investors also remains strong, in spite of very high price earnings multiples of more than 30 on the Shanghai Composite. Robert Buckland, global head of equity strategy at Citigroup, says: "China has shown that if you have a strong fiscal position, you can weather the storms. If it is still growing strongly by the end of the year, then it will be in a good position as the economies of the industrialised world should start to pick up by then." The turning point for China, and indeed the rest of the emerging markets, appears to have been the launch of the country's vast Rmb4,000bn ($586bn) fiscal stimulus package in November. This paved the way for a recovery in emerging market stocks across the globe, a good four months before the industrialised markets saw a turnround. India has also had a relatively good credit crisis. Like China, its equity market is one of the best performing this year - the Sensex is up 55 per cent - and its economy has had a relatively shallow downturn. Most forecasters expect the Indian economy to grow by about 5 per cent this year. Elsewhere, however, the picture is more mixed. The stock markets of the small, exporting Asian nations have continued to attract investors, helped by surging Chinese equities. South Korea's Kospi index, Singapore's FTSE Straits Times index and Malaysia's FTSE Bursa KLCI index are all up more than 30 per cent this year. But the news is not so positive for their open economies, which have been hit hard by falling exports. South Korean exports, for example, continue to plunge more than 20 per cent year-on-year. The outlook is also not as clear cut in Latin America. Brazil's economy is expected to see a mild contraction of just 1 per cent this year. It has been helped by China's continuing appetite for its commodities, particularly iron ore, its prudent fiscal policies and its relatively closed economy. In contrast, Mexico has suffered because of its links to the US, which buys 80 per cent of its exports. Meanwhile, Argentina and Venezuela remain no-go areas for most investors because of perceived economic mismanagement. The Middle East and Gulf states have also suffered. But the stabilising oil price has boosted stocks. Saudi Arabia's Tadawul All Share index has rebounded close to 40 per cent since its lows in March. However, the clear laggards in the emerging market world have been in central and eastern Europe. Russia, the regional behemoth, remains in deep trouble. Many analysts expect the economy to contract by 10 per cent this year. However, its stock markets have recovered from their recent sell-off. The RTS index has risen more than 20 per cent since July 10 and is up 60 per cent since the start of the year. Nigel Rendell, senior emerging markets strategist at RBC Capital Markets, says: "Overall, the emerging markets have done relatively well in this crisis, particularly when compared with the developed markets." Mr Buckland adds: "In a sense, the financial crisis has been the making of the emerging markets in that they are no longer some kind of super-cyclical play. "It is no longer the case that if you downgrade US GDP by 1 per cent, then emerging market GDP will be downgraded by 2 or 3 per cent. The balance sheet management of the emerging markets has been better in this crisis than the developed world." However, there are still risks, even in China, the catalyst for the stock market revival. Fraser Howie, stock market analyst and author of Privatising China: Inside China's Stock Markets , says the Chinese economy is still relatively immature compared with the industrialised west. "The banking system has been on steroids at the behest of the government," he says. "What's driving this market is a liquidity bubble of unseen proportions from the banking sector. China has a lot of work to do economically." Xu Xiaonian, Professor of Economics and Finance at China Europe International Business School (CEIBS) also warns that the continually rising market poses high risks. "Not much money went into the real economy in the first half, but to the stock markets instead, which will increase risks if inflation occurs." Mr Rendell says: "China has been a big support for the emerging world, but it is not a haven. It is a good economy to back when compared with other markets, but China is not out of the woods yet - and neither is the rest of the emerging world." Additional reporting by Shirley Chen

U.S. Issues New Rules on Short-Selling

By KARA SCANNELL The Securities and Exchange Commission issued new rules to govern short-selling, promising investors fresh information about the volume and velocity of negative bets placed against companies. But it dropped a requirement that hedge funds disclose details of short positions to regulators. Short-selling came under political attack after the market selloff last year, with the practice banned for financial stocks during 14 trading days. A number of studies showed the ban had a limited effect on the market, and regulators have struggled to determine the best way to regulate short-selling without crimping market activity. The SEC will offer more information on short-selling, but won't ban naked short-selling. Here, Chairman Mary Schapiro in Washington last week. The SEC's new rules are a middle ground. They finalize temporary rules requiring traders to complete a short sale within four days. They create more disclosure, but still delay the information by a month. They also aggregate short-position data for individual stocks but keep individual money manager positions confidential. Hedge funds fought such disclosures, saying it would be tantamount to revealing trading secrets. The SEC said self-regulatory organizations, such as the Financial Industry Regulatory Authority, will begin posting on their Web sites "in the next few weeks" more information about short sales, including something akin to a " ticker tape" that will show, on a one-month delay, the exact time at which a trader places a short-sale and the size of the position. The anonymous data would enable investors and others to determine, forensically, if traders were in some way piling on a company in an improper, coordinated way. Financial companies and several lawmakers have argued that short sellers' attacks on a company's shares can undermine its stability, citing alleged "bear raids" of financial firms that rely on broad market confidence to stay in business. Short sellers have said their trades reflect a legitimate belief that a stock is overvalued. The self-regulatory organizations, such as Finra, will also publish daily aggregate volume information of short-selling in each exchange-traded stock. The SEC also would speed up disclosure of failed short trades, when a trader never completes the trade by replacing the borrowed stock, across all companies from once a quarter to twice a month. Failed trades are an indication, but not evidence, that a stock has been manipulated. The SEC, however, is backing away from its earlier move to require hedge funds and other money managers to disclose weekly their short positions once they reach a certain concentration. The disclosure requirement for hedge-fund managers was a measure adopted on a temporary basis as markets were seizing up last fall. The SEC didn't offer any explanation for its decision to let the rule expire, but one reason may have been that money managers weren't providing material information on their positions anyway. The SEC is pushing to gain more regulatory oversight of hedge funds as part of a broader financial regulation overhaul proposed by the Obama Administration. SEC Chairman Mary Schapiro said Monday's moves showed the agency's "determination to address short-selling abuses" while increasing public disclosure of short-selling activities. "We look forward to working with the SEC as they and the self-regulatory organizations develop a public database online to better understand the role that short selling plays in our capital markets," said a spokesman for the Coalition of Private Investment Companies, a hedge-fund lobbying group. Lawmakers are concerned the SEC isn't doing enough to rein in potentially abusive short-selling, known as a naked short sale. In a naked short sale, the trader never actually borrows the stock. Some executives have argued naked short selling allows market manipulators to drive down shares artificially. Under a rule that was finalized Monday, short-sellers must complete the trade within four days by replacing the borrowed stock, or they have failed to deliver and are subject to penalties. Last week, seven senators urged the SEC to reduce the potential for abusive naked short-selling by instituting a so-called "hard locate" or preborrow requirement, essentially locking up stock so it can't be lent out to anyone else. Sen. Ted Kaufman (D.-Del.), who has prodded the SEC to take additional steps, said in a statement that he was disappointed it didn't go further to restrict naked short selling. "Instead of proposing action today to deal with the problem, the SEC apparently is content to let potential solutions sit on the shelf for another two months," he said. Last summer the SEC instituted an emergency measure requiring traders to lock in contracts to borrow stock in a limited number of financial companies before initiating a short sale. Wall Street firms and hedge funds said it amounted to a ban on short selling because it drove up the price to borrow those stocks. The SEC said on Monday it would hold a roundtable in September to discuss a hard-locate or preborrow requirement, among other issues. Write to Kara Scannell at kara.scannell@wsj.com

Obama Declares New Era Of Cooperation With China

WASHINGTON — President Obama declared a new era of “cooperation, not confrontation” with China on Monday, even though two days of high-level talks were not expected to resolve differences over the two nations’ yawning trade gap and China’s unease over soaring U.S. budget deficits. The Obama administration pledged to get control of the deficits once the economic crisis is resolved. It also pressed China to reshape its economy to rely more on domestic demand and less on exports that drive up the U.S. trade deficit. Both sides sought to underscore the importance of the revamped Strategic and Economic Dialogue with Obama delivering a major policy address to welcome a sizable Chinese delegation of 150 diplomats. “I believe that we are poised to make steady progress on some of the most important issues of our times,” the president told officials from both countries assembled in the vast atrium of the Ronald Reagan Building. “The relationship between the United States and China will shape the 21st century, which makes it as important as any bilateral relationship in the world,” Obama said. The discussions in Washington represent the continuation of talks begun by the Bush administration. While the initial talks focused on economic tensions, Obama expanded the agenda to include foreign policy issues such as America’s drive to get China’s support for more international pressure to curb North Korea’s nuclear ambitions. Secretary of State Hillary Rodham Clinton and Treasury Secretary Timothy Geithner were leading the U.S. team. The Chinese delegation was led by Chinese State Councilor Dai Bingguo and Vice Premier Wang Qishan. Geithner and Wang both spoke of hopeful signs that the global economy was beginning to emerge from its worst financial crisis since the Great Depression. Geithner said the stimulus packages put together by Beijing and Washington had made a substantial contribution to fighting the global downturn and represented a milestone in economic cooperation between the two nations. The United States, the world’s largest economy, accounts for about 22 percent of global output, and China around 7 percent. The combined impact of the massive stimulus programs should make a difference, economists said, in cushioning a recession that appears to be bottoming out in the United States and some other countries. “At present, the world economy is at a critical moment of moving out of crisis and toward recovery,” Wang said, speaking through a translator. Geithner traveled to Beijing last month to assure Chinese officials that federal budget deficits, which have ballooned because of government efforts to deal with the recession and stabilize the financial system, would be reined in once those crises have passed. He said Americans were already moving to boost their personal savings rates. Economists have long argued that is necessary to controlling U.S. trade deficits because it means Americans are not consuming as much in imports from China and other countries. “We are committed to taking measures to maintaining greater personal saving and to reducing the federal deficit to a sustainable level by 2013,” Geithner said at the opening session of the talks. Geithner did not spell out how the administration planned to accomplish those objectives. Many private economists have said the Chinese are right to worry about a U.S. budget deficit that is projected to hit $1.85 trillion this year, four-times the previous record, and under the administration’s estimates will not dip below $500 billion over the next decade. The Chinese, who have the largest foreign holdings of U.S. Treasury debt at $801.5 billion, have expressed worries that soaring deficits could spark inflation or a sudden drop in the value of the dollar, thus jeopardizing their investments. Chinese officials did not mention those concerns publicly during Monday’s opening session. The United States did not publicly raise the issue of China’s currency, the yuan, which American manufacturers contend is being kept at artificially low levels by Beijing to gain trade advantages against the United States. These omissions were seen as an effort by both sides to emphasize areas of agreement, in part to avoid upsetting global financial markets during a period of stress for the world economy. “U.S. and Chinese leaders are striving hard to emphasize their common goals and interests while downplaying substantive policy differences. Irritants in the bilateral relationship including human rights issues and China’s currency policy have been shunted aside,” said Eswar Prasad, a senior professor on trade at Cornell University. Geithner did say that it would be a “huge contribution to more rapid, balanced and sustained global growth” if China shifted toward more domestic-led growth and away from the current extensive reliance on exports. While Chinese officials have pledged to move in this direction, it was unclear that the changes would be fast enough or substantial enough to satisfy U.S. demands. In his remarks, Obama said that the United States and China have a shared interest in clean and secure energy sources. The two nations are the world’s largest emitters of the pollution blamed for global warming, but so far China has resisted calls to set specific caps on emissions or to eliminate tariffs on clean energy technology that the United States and other countries would like to sell them. The administration did praise China for its help in the nuclear standoff with North Korea. Clinton said the administration was grateful for the “close cooperation” it received from China in response to Pyongyang’s recent missile launches. While the U.S. trade deficit with China has narrowed slightly this year, it is still the largest imbalance with any country. Critics in Congress say unless China does much more in the currency area, they will seek to pass legislation to impose economic sanctions on Beijing, a move that could spark a trade war.

房地产市场：一次夭折的调整

沈明高 我们的观点 由于本轮房地产市场调整中途夭折，难以为政府部门、房地产开发商和投资者提供一个完整的风险指引，未来深幅调整的风险仍然存在。中国经济对房地产投资的依赖，货币和信贷双宽松，以及通胀防御性投资工具的缺乏，阻止了本轮房地产市场健康调整。 进入本世纪以来，中国房地产价格一路上扬。以住房私有化改革的1999年为元年，到今年上半年，就每个季度同比涨幅的简单算术平均值而言，国家统计局公布的房屋价格指数为4.6%，而同期CPI每季上涨1.8%（图一）。按照国家统计局公布的住房销售累计平均价格计算，在2000年-2008年间，平均每年上涨8.2%。需要指出的是，考虑到一些城市房价实际上涨的速度，过去十年房价涨幅远超出上述平均水平。显然，到目前为止，房地产价格上涨跑赢通货膨胀，是中国最好的通胀防御性投资之一。 数据显示，房地产市场在小幅调整之后，开始回暖。房屋价格指数的波动显示，自2000年以来，全国平均房屋价格季度正增长一直保持到去年年底。即使今年一、二季度房屋价格指数同比出现了负增长，幅度也不是很大，分别仅下降1.1%和0.5%。从月度数据来看，今年6月，全国70个大中城市房屋销售价格同比上涨0.2%，结束了从去年12月以来连续6个月的同比负增长；涨幅已经从5月下降0.6%的基础上回升了0.8个百分点，更比今年3月跌幅最大时的1.3%多了1.5个百分点。 由于缺乏可靠的环比资料，并不清楚本轮全国房地产市场最低迷时，离2007年的峰值有多远。现有有限的统计资料显示，住房销售累计平均价格并没有出现明显的周期性调整。2008年初，该价格水平为每平米3938元，到去年年底跌至3655元，下跌7.2%。今年以来，该价格一直在4000元以上，6月更上升到4460元，较去年12月的低谷上升了22%。这一统计数据显然并不能真实反映目前全国住房销售的平均价格水平，但其相对变动趋势或说明，与之前价格的大幅度上升相比，本轮房地产价格的调整较浅。比较而言，今年一季度，美国住房销售价格较2007年峰值时下跌了17%。 美国等国家的经验表明，房地产市场有明显的周期性。美国耶鲁大学教授席勒在他的专著中指出，正是房地产市场几乎可预测的周期性趋势，助长了市场的乐观情绪和投机行为，也为房地产价格泡沫的破灭埋下了伏笔。这也是为什么，从上个世纪七十年代以来，美国出现了三次规模较大的房地产价格泡沫和泡沫破灭之后的大调整。 为什么中国房地产市场的调整短而浅呢？首先，房地产的支柱产业地位，特别是现有投资拉动的增长模式对房地产投资的依赖，决定了房地产市场调整幅度不可能太深。其次，过度宽松的货币政策也刺激了房地产市场快速回暖。最后，中国居民缺少有效的投资工具，在通胀预期之下，房地产依旧是最主要的通胀防御性投资的对象。 房地产行业具有三大属性。第一，投资属性。过去一年中，中国房地产价格波动较为温和的原因有很多，有开发商对价格下调的本能抗拒，也有一些地方政府对开发商的变相保护（如通过退地或缓缴税费的方式减轻开发商的流动性压力）。但是价格粘性的必然结果是，加剧了房地产销售数量的大幅下滑。进入2008年，商品房累计销售面积出现了全年负增长，并一直持续到今年2月（图二）。 商品房销售面积的跳水，拖累了房地产投资，其累计投资的同比增速从去年7月以前的30%以上，迅速暴跌至今年初的接近零增长。房地产投资占城镇固定资产投资的比重一直稳定在20%以上，其快速下滑，再加上其较长的产业链的乘数效应，无疑直接拖累了固定资产投资增长，中国政府“扩内需”能否成功部分在于能否及时拉动房地产投资的复苏。 第二，政府收入属性。房地产投资的下降，减少了地方政府土地出让收入。房地产开发商累计购置土地面积从去年9月出现同比负增长，今年上半年同比负增长接近30%，为2000年以来的最低增速（图三）。 第三，抵押品属性。无论是房地产开发商还是购房者，均以房地产作为最有效的抵押物。房地产价格的持续下降，最终将导致银行不良贷款的上升。 总体来看，影响房地产投资的主要因素就是流动性。实际上，如果房地产价格在2007年的水平上下调幅度有限，开发商的盈利空间仍然是有保障的。但是，为什么今年年初房地产投资出现了骤停呢？从图三可以看出，近来房地产开发商累计开发土地占累计购置土地的比重虽有所提高，但仍然没有超过60%，这说明土地供给不是房地产投资下降的一个主要原因。除了开发商担心房价继续下跌而采取观望态度之外，更重要的可能还是出于对流动性管理的考虑。在价格调整有限，商品房成交量大幅下滑的情况下，减少投资显然是开发商降低流动性风险的一个主要手段。 房地产行业的三大属性，决定了中国经济复苏难以与房地产脱钩，除非中国政府能否容忍更大的经济波动。 货币和信贷政策的快速转向，是房地产市场调整幅度较浅的另外一个重要原因。去年最后一个季度以来货币和信贷政策的双宽松，从根本上缓解了房地产开发商的流动性瓶颈。另一方面，央行连续减息、房地产交易税收优惠等措施刺激了部分需求，同时充裕的流动性也阻止了房地产价格进一步下滑，带动了投资性需求。从图四可以看出，以M1增长代表的流动性是房屋价格指数一个很好的领先指数。今年6月，M1增长已经达到24.8%，创有该统计数字以来的新高。数据显示，1月-6月，投入到房地产企业的国内贷款增长32.6%；而投放的个人按揭贷款增长63.1%。如果这一政策保持不变，仍有可能继续强力拉升房地产价格。 宽松的货币政策和商品房成交量的显著回升，使开发商安然度过了流动性危机，一些开发商甚至开始捂盘惜售，加剧了供求矛盾。 目前看来，政策对开发商的捂盘现象和住房空置，还没有一套行之有效的政策措施。一些国家向开发商甚至个人征收“房屋空置税”，或不失为增加住房供应的一个办法。 其基本原理是：空置房屋占用了大量的土地和空间资源，如果不能转化为实实在在的消费，征收房屋空置税是对资源占用的一种合理补偿。 中国过去两年多来宏观调控的经验表明，政策转向是资产市场逆转的最根本原因之一，股市是这样，房市也不例外。政策调整的最大优势是，其对资产价格的影响明显，但如果政策调整力度过大或者过于频繁，却有可能损害了市场自我调整能力，结果导致市场在短期内反复振荡。 最后，投资工具单一，特别是缺乏有效的通胀防御性投资工具，也是房地产市场调整逆转的一个不可忽视的因素。宽松的货币政策对于降低市场的通缩预期功不可没，但不设上限的货币政策也助长了市场对未来通胀的预期。在通胀预期之下，企业和投资者一个自然的选择就是进行通胀防御性投资，而过去的经验表明，房地产则是不二的选择。 自中国商品房市场开放以来的十余年中，本轮调整的幅度是最大的。不过，今年以来房地产市场的迅速回暖表明，这是一次半途夭折的调整。换句话说，这次调整并不能说明，中国的房地产市场已经走过了一个完整的周期。如果泡沫进一步累积，真正重大的调整很可能还在后面。 从根本上来说，中国市场经济的发展，需要经历至少一个完整的房地产市场周期，以及能够消化这样一个调整周期的市场和政策机制。■

Videogame Makers Can't Dodge Recession

By YUKARI IWATANI KANE The tentacles of the recession have reached into the videogame industry, a business that was long considered downturn-resistant. As recently as six months ago, the videogame industry was racking up strong growth even as other businesses reported sharp declines in sales and profits. U.S. videogame sales jumped 10% in January as consumers snapped up $60 to $70 games, which can bring dozens of hours of at-home family entertainment. But last month, videogame sales plunged by a record 29% year over year, according to market-research firm NPD Group. Meanwhile, sales of consoles such as Microsoft Corp.'s Xbox 360 and Nintendo Co.'s Wii plummeted 38%. The steep drops came on top of a gradual sales decline that began in March. View Full Image Associated Press Last month, videogame sales fell 29% from a year earlier, according to NPD. Sales of consoles sank 38%. The turnabout is rippling out to companies such as online retailer Amazon.com Inc. Last week, Amazon blamed weak quarterly results from its media business on a decline in videogame sales. "You're seeing an industry slowdown in games and consoles," said Amazon finance chief Tom Szkutak in a conference call. The reversal of fortune is likely to show up further in coming weeks. When Nintendo reports earnings Thursday, some analysts expect to see weaker revenue on a decline in Wii sales and slower-than-expected software sales. Videogame retailer GameStop Corp., which reports earnings next month, is also projected to post less-robust results. Game publishers Electronic Arts Inc. and Activision Blizzard Inc. are expected to post lackluster results when they report in early August, though EA has the advantage of a stronger roster of new games like "Tiger Woods PGA Tour 10." "Initial orders for our products are tending to be lower," said Strauss Zelnick, chairman of Take-Two Interactive Software Inc., best known for its "Grand Theft Auto" action-game series. "It's not just us, but the industry as a whole." The New York company cut its annual earnings forecast earlier this month, in part because it postponed the launch of its BioShock 2 shooter game. While the videogame industry had hopes of posting double-digit revenue growth this year, analysts now predict flat to 5% growth from $11 billion in 2008. Jesse Divnich, an analyst for Carlsbad, Calif., research firm Electronic Entertainment Design and Research, said he will "be happy if the industry grows." The weakness stems from more consumers sitting on the sidelines and tightening their purse strings, especially as they wait for Nintendo, Microsoft and Sony Corp., the maker of the PlayStation 3, to cut the prices of their consoles. Many console and PC game sales are also being cannibalized by digitally downloaded games and alternative entertainment sources like Apple Inc.'s iPhone, which offers thousands of games that can cost only 99 cents or even nothing at all. The videogame industry also faces tough comparisons to last year's second quarter, which was particularly strong given the release of blockbuster games like Take-Two's "Grand Theft Auto IV" and Nintendo's "Wii Fit" and "Mario Kart Wii." But the recession has clearly exacerbated the falloff. "It's highlighting the weak months because if people don't really have a reason to go out to the store, they're not," said John Taylor, a financial analyst for Arcadia Investment Corp. in Portland, Ore., alluding to the industry's tendency to see the biggest sales during the year-end holiday season. Many videogame executives say they remain positive about the industry, pointing to coming releases of big titles. Nintendo is launching "Wii Sports Resort," a collection of resort sports games, this week. Meanwhile, MTV Games is releasing its "The Beatles: Rockband" music game in September and Activision will start selling shooter game "Call of Duty: Modern Warfare 2" in November. View Full Image Associated Press Paul McCartney appeared at the unveiling of 'The Beatles: Rockband' Xbox game June 1 in Los Angeles. Analysts expect Sony to cut the price on its PS3 by about $100 this year, leading to price cuts by Microsoft on some of its Xbox 360 models. The PS3 starts at about $400, compared with the equivalent Xbox 360, which costs about $300. Though Nintendo has said it won't cut prices on its $250 Wii this year, it is expected to do so indirectly by bundling games with the console. Representatives for Sony and Nintendo say there are no plans for a price cut at this time. Microsoft declined comment. But Tony Bartel, GameStop's merchandising and marketing chief, said the company has factored in "a price cut in at least one of the platforms" and is "anticipating a very strong third and fourth quarter." Still, videogame makers and retailers are likely to run into choosier consumers like Vaughn Forman. Mr. Forman, a 24-year-old gamer in Delray Beach, Fla., owns the latest consoles from Microsoft, Nintendo and Sony but said he is buying fewer games because he is still looking for work after graduating from college. While he wants to buy "The Beatles: Rockband" game, which will go for $250 with accessories, he said he "can't afford to buy it until I get a job." Evan Wilson, an analyst with Pacific Crest, said many people are continuing to play games they already own, particularly since many of the games can now be refreshed with updates and new features online. "Games provide so much value that you don't necessarily need to buy other stuff," he said. Write to Yukari Iwatani Kane at yukari.iwatani@wsj.com