China’s CPI Drops to 1% Signaling Deflation

China’s CPI fell 1.2% to 1% since December

The National Bureau of Statistics released new economic figures this morning. China’s annual consumer price index has fallen for nine consecutive months, triggering deflation concerns that may add to economic woes facing the nation.

China’s annual consumer price index slowed to one percent in January, down from 1.2 percent in December. This is its ninth consecutive monthly drop.

Meanwhile the producer price index, a measure of inflation at wholesale level, fell 3.3 percent in the same period. The rate of decline accelerated from the 1.1 percent drop as of December. Experts say both figures signal increasing deflationary pressure ahead for the Chinese economy.

Ha Jiming, Chief Economist of China Int’l Capital Corp. said “What we would like to see is relatively stable prices with inflation below 2 percent. That’s the ideal situation. Unfortunately we are going to experience some deflation. When deflation occurs, it hits different segments of the economy in different ways. For example, for firms, it’s definitely bad news because their debt will not be deflated, their assets will be. So you will see a deterioration in firms’ balance sheets. Also, households which invest in certain categories of assets will see them deflate whereas their borrowing will remain unchanged. But for some segments of the population, deflation may not be too bad. For example retirees, their consumption is relatively simple. So when food prices start to fall, they may even benefit from deflation. But for the economy as a whole, the impact is negative.”

The CICC economist predicts the CPI for the whole year to be minus 1 percent, while PPI to be minus 6 percent. Despite the deflationary pressure, Dr. Ha says it may not be necessary for the central bank to further reduce the interest rates at this moment as massive expansion of bank credits since December may show its effects gradually. He suggests the government focuses on resolving the long-term problem of the economy by stimulating consumption through improving the social safety net and reducing taxes.

Economists say a deflationary trend is inevitable for both China and the world economy in the short term. As for China, it’s the result of massive economic expansion in previous years and the ongoing global economic slowdown. Some predict prices may pick up in the next year or the year 2011.

Stocks on the move this morning

Stocks on the move after yesterday’s bell

Today’s Earnings

Commodities Board

Asia / Pacific Exchanges

European Exchanges

The World is waiting on Geithner

WASHINGTON (Reuters) – The Obama administration on Monday was nailing down details of a bank rescue plan expected to offer incentives to lure private investors into buying bad debts undermining the financial system and the economy.

U.S. Treasury officials were expected to brief congressional committee staffers on the plan on Monday evening, with Treasury Secretary Timothy Geithner scheduled to outline it publicly at 11 a.m. on Tuesday.

The plan and the administration’s economic stimulus program are pillars of President Barack Obama’s strategy for tackling the deepest U.S. financial crisis since the Great Depression.

A top White House aide said the administration will push private investors to buy compromised mortgage-related assets that are clogging bank balance sheets.

“Government capital is a last resort, and wherever possible, we want to catalyze the private sector to take responsibility for a situation that in many ways was created in the private sector,” National Economic Council Director Lawrence Summers said on CNN.

Stocks fall

Feb. 10 (Bloomberg) — Stocks in Europe and Asia dropped and U.S. index futures retreated, led by companies most tied to the economy on concern U.S. plans to increase spending and shore up banks won’t be enough to revive growth.

Vedanta Resources Plc sank 4 percent, leading commodity producers lower, as base metals slid and President Barack Obama said the world’s largest economy faces a “full-blown crisis.” Samsung Electronics Co., which gets 14 percent of its sales from the Americas, slipped 1.3 percent in Seoul. Nordea Bank AB tumbled 4.7 percent after the biggest Nordic lender by market value said it would raise capital after loan losses jumped.

The MSCI World Index fell for the first time in six days, losing 0.6 percent to 871.76 at 10:64 a.m. in London. The gauge of 23 developed nations has climbed 3.9 percent this month amid speculation the deteriorating U.S. economy would force Congress to reach a compromise on Obama’s stimulus package.

As reported by a Japanese paper Russian banks have asked for $400 billion to restructure debt.

Feb. 10 (Bloomberg) — Russian regional lenders asked the government to moderate talks initiated by foreign financial firms concerned that banks and companies will struggle to repay some of the $400 billion of debt due in the next four years.

“Several western banks asked about holding discussions,” said Anatoly Aksakov, head of the Russian Association of Regional Banks, whose 450 members include Citigroup Inc.’s Russia unit, Alfa Bank and VTB Group. “It was their initiative to have talks on this topic to look at restructuring the debts of several companies, so that everyone can be calm.”

The government “isn’t planning to consider” restructuring foreign corporate debt and isn’t in talks with foreign banks on restructuring, said a Finance Ministry official, who declined to be named in line with ministry rules. Russian companies may need to restructure as much as $100 billion of foreign debt, of which less than $15 billion is due this year, Aksakov said.

Speculation of European bank losses on Russian loans drove declines in the euro against the dollar and yen today. Russia has pledged more than $200 billion in emergency funding as plunging oil prices push the world’s biggest energy supplier into its worst economic crisis since Boris Yeltsin’s government defaulted on $40 billion of domestic debt in 1998.

“I think that so far it is nothing more than just an idea that this Association of Russian banks came up with,” said Mikhail Galkin, head of fixed-income and credit research at MDM Bank in Moscow. “I don’t think that many borrowers themselves have intentions to restructure and are aware of this idea.”

The “water down approach”

Attempts by the International Monetary Fund to warn of risks posed by large countries’ financial systems have been frustrated by governments wat­ering down the criticism, says the head of the UK’s financial regulator.

Lord Turner, chairman of the Financial Services Authority, said that powerful nations would have to avoid meddling with reports they did not like if they were serious about creating a better early warning system for the global economy.

“One of the problems the IMF has had in the past is that, when it tries to issue warnings, those warnings are watered down under political pressure from large, powerful countries who don’t like the commentary about their financial system,” he said.

“There has, for instance, never been one of the reports on the financial system that the IMF produces, on the US financial system because the US didn’t want there to be one.”

The US, which had resisted having a so-called “financial sector assessment programme” (FSAP), finally agreed to undergo the analysis last year.

IMF officials say the UK has, over the past decade, been one of the countries that has sought to influence the fund’s analysis of its economy and dismissed warnings about the risks from fiscal deficits.

The IMF declined to comment on Lord Turner’s remarks. Last November, Dominique Strauss-Kahn, IMF managing director, told the Financial Times: “Should FSAPs be compulsory? My answer is ‘yes’, in many countries.”

The comments come before a series of reports ahead of April’s meeting of the Group of 20 leading economies in London.

UBS posted a wider loss than expected.

Feb. 10 (Bloomberg) — UBS AG, Switzerland’s largest bank, reported a fourth-quarter loss of 8.1 billion Swiss francs ($6.9 billion) on trading losses and leveraged loan impairments, and said it plans to cut more investment banking jobs this year.

The net loss compares with a deficit of 13 billion francs in the year-earlier period, Zurich-based UBS said in a statement today. The loss was wider than the 7.5 billion-franc median estimate of 11 analysts surveyed by Bloomberg. For the full-year, UBS recorded a record loss of 19.7 billion francs.

Chief Executive Officer Marcel Rohner reiterated today that UBS will return to profitability this year after receiving a lifeline from the Swiss government to split off toxic assets. The bank is scaling back risk at the securities division, where most of the losses occurred, and seeking to stem defections by money management clients, who withdrew a net 85.8 billion francs in the fourth quarter.