China’s May Exports Fall More Than Expected

Not good for the world’s manufacturers

By Bloomberg News

June 11 (Bloomberg) — China’s key stock index fell from a 10-month high, led by transport and commodity companies, as a record slump in the nation’s exports spurred concern that equity gains have outpaced prospects for a rebound in the economy.

Air China Ltd. and China Cosco Holdings Co., the world’s largest operator of dry-bulk ships, lost more than 3 percent as government reports showed exports dropped 26.4 percent in May from a year earlier. Aluminum Corp. of China Ltd. sank 3.9 percent after doubling this year. Poly Real Estate Group Co. fell 3.7 percent after media reports linked the company to an investigation into a top government official. Poly Real denied the allegations.

“The export figure is a bit worse than expected and that’s a blow to those who had high hopes of a quick economic recovery,” said Larry Wan, Shanghai-based deputy chief investment officer at KBC-Goldstate Fund Management Co., which oversees about $583 million in assets.

The Shanghai Composite Index, which tracks the bigger of China’s exchanges, fell 18.93, or 0.7 percent, to 2,797.32 at the close, after gaining as much as 0.4 percent earlier. The CSI 300 Index, measuring exchanges in Shanghai and Shenzhen, lost 0.9 percent to 2,961.63.

China’s equities have rallied 54 percent in 2009 on optimism Premier Wen Jiabao’s 4 trillion yuan ($586 billion) stimulus spending will avert a slump in the world’s third- largest economy. Shares on the index trade at 28.21 times earnings, more than double the 12.87 they fetched in November.

Exports tumbled as the global recession cut demand for China’s products. The drop in outbound shipments in May was wider than both the estimate of a 23 percent decline in a Bloomberg economist survey and April’s 22.6 percent contraction.

Investment Spending

The news outweighed the impact of economic data today that showed spending on factories, property and roads rose more than expected. Urban fixed-asset investment climbed 32.9 percent for the first five months of 2009, compared with the 31 percent median estimate of 16 economists surveyed by Bloomberg News.

Air China, the nation’s largest international carrier, lost 3.9 percent to 6.61 yuan. China Cosco dropped 3.3 percent to 13.22 yuan. Aluminum Corp. of China, the nation’s biggest maker of the lightweight metal and also called Chalco, fell 3.9 percent to 12.18 yuan.

Transport companies also declined on concern costs will rise after crude oil rose for a third day climbing above $72 a barrel for the first time in seven months.

Poly Real, China’s second-largest developer by market value, dropped 3.7 percent to 23.41 yuan, capping its biggest two-day decline this year. The company, based in Guangzhou, the capital of southern Guangdong province, denied allegations that the company’s management was connected to the probe into a top Guangdong government official.

Vanke, Gemdale

Chen Shaoji, former chairman of the Guangdong committee of the Chinese People’s Political Consultative Conference, was stripped of his seat in the provincial legislature last month as part of a corruption investigation against him, the state-run Xinhua News Agency said.

The mayor of Shenzhen, the city in Guangdong that borders Hong Kong, is also under investigation, according to official media. The central government removed Xu Zongheng from his position as mayor for “severe violations of discipline,” Xinhua reported today.

Shares of developers based in Shenzhen dropped. China Vanke Co., the nation’s largest publicly traded builder, fell 2.9 percent to 10.89 yuan, the biggest decline in two weeks. Gemdale Corp., the fourth largest, dropped 6.1 percent to 13.43 yuan. It’s the second-biggest decline among the 896 members of the Shanghai Composite.

“Big developers have very close relations with local governments,” KBC-Goldstate’s Wan said. “Investors are getting a bit worried about Shenzhen-based developers because of the ongoing probe.”

The following companies were among the most active in China’s markets. Stock symbols are in brackets after companies’ names.

Sinopec Shanghai Petrochemical Co. (600688 CH), China’s largest maker of ethylene, added 2.1 percent to 8.39 yuan. The company said it expects to post a profit for the first half of 2009, compared with a net loss for the same period last year, because of lower oil prices and changed tax and pricing rules.

ZTE Corp. (000063 CH), China’s second-biggest phone- equipment maker, rose 2.7 percent to 27.51 yuan, the most since May 4. The stock’s rating was lifted to “buy” from “outperform,” because of the potential growth of ZTE’s overseas sales, analyst Fang Lu at Shenyin & Wanguo Securities Co. wrote in a report today.

Other countries follow Russia into IMF bond purchases

By Lester Pimentel and Valerie Rota

June 11 (Bloomberg) — Brazil, Russia, India and China’s plan to shift some foreign reserves into International Monetary Fund bonds may be more a signal of their growing financial clout than a lack of demand for U.S. assets.

“They’re saying they are part of the big leagues,” Alberto Ramos, an economist at Goldman Sachs Group Inc., said in a telephone interview from New York. “They’re not buying IMF bonds to diversify reserves. They want to be seen as having a large voice” in global markets, he said.

Russia and Brazil announced plans yesterday to buy $20 billion of bonds from the IMF and diversify foreign-currency reserves. China will purchase $50 billion and India may announce similar funding, Brazil’s Finance Minister Guido Mantega said. The countries are seeking a stronger voice in international financial institutions such as the IMF, according to He Yafei, a vice foreign minister at China’s Ministry of Foreign Affairs.

Treasuries declined yesterday, pushing benchmark 10-year yields to the highest since October, after the government sold $19 billion of the securities and Russia said it may move out of U.S. debt to buy the IMF bonds. The so-called BRICs, an acronym coined by Goldman Chief Economist Jim O’Neill in 2001 for the biggest emerging markets, have combined reserves of $2.8 trillion and are among the largest holders of Treasuries.

‘Much Bigger’

“If this was the beginning of something much bigger, then the market would front-run that,” said Dominic Konstam, head of interest-rate strategy at Credit Suisse Securities USA LLC, in an interview from New York. “It wouldn’t be in the interests of Russia or China to watch the value of their assets go down.”

The 10-year yield climbed to as high as 3.99 percent yesterday from 3.86 percent, according to BGCantor Market Data. It was at 3.92 percent at 7:30 a.m. in London. The yield has surged from 2.21 percent on Dec. 31 as the U.S. steps up debt sales to finance a record budget deficit and pull the economy out of the deepest recession since the 1930s.

Treasuries slid yesterday in part because the announcement by Russia and Brazil was a “sudden shock,” said David Spegel, head of emerging-market strategy at ING Groep NV in New York.

China has 3.66 percent of votes in the IMF, Russia 2.69 percent, India 1.89 percent and Brazil 1.38 percent, according to the fund’s Web site. The U.S. has a 16.77 percent.

“We are asking to increase the voice and representation of emerging economies,” China’s He said at a June 9 briefing ahead of a BRIC summit next week in Russia.

Selling Treasuries

Alexei Ulyukayev, first deputy chairman of Bank Rossii, said Russia would sell some of its $140 billion of Treasuries to make room for the purchase of the IMF bonds. Mantega said Brazil’s central bank would decide which assets to sell from its reserves portfolio for the transaction.

China’s State Administration of Foreign Exchange said last week that it’s “actively” considering buying as much as $50 billion of the IMF bonds.

India would be “perfectly capable of contributing” to the IMF’s bond program, Montek Singh Ahluwalia, deputy chairman of the nation’s Planning Commission, said in April. The nation may buy IMF bonds worth as much as $10 billion using part of its reserves, India’s Financial Express newspaper reported in April.

BRIC nations can’t pull out of the Treasury market because there “aren’t a lot of alternatives out there that are AAA rated,” Spegel said. “With their reserve levels so high — $2 trillion from China — where are they going to put their money?”

Russia Meeting

The IMF board may consider late this month or in July the proposal to sell the notes, which would be the fund’s first issue, IMF spokeswoman Conny Lotze said today by e-mail. The plan will likely determine other aspects regarding use of the securities, such as whether they can be traded among countries much like U.S. Treasury bonds.

The debt will pay a yield similar to U.S. Treasuries and will be denominated in the fund’s basket of currencies, known as Special Drawing Rights, Mantega said yesterday in Brasilia. The IMF calculates the value of SDRs daily, with 44 percent weighted toward the dollar, 34 percent to the euro and the remainder split between the yen and the pound, according to its Web site.

Officials from the BRIC nations are scheduled to meet June 16 in Yekaterinburg, Russia, where they plan to discuss the status of the dollar as the world’s reserve currency. Ulyukayev said Russia will sell Treasuries “because a window of opportunity for working with other instruments is opening,” according to Interfax news wire. The remarks were confirmed by a Bank Rossii official who declined to be named, citing bank policy.

Geithner Trip

Treasury Secretary Timothy Geithner said in Beijing on June 2 there will be enough demand for record sales of U.S. debt. The U.S. budget deficit is projected to reach $1.75 trillion in the year ending Sept. 30 from last year’s $455 billion, the Congressional Budget Office says.

The spread between 2- and 10-year Treasuries, which reached a record 2.81 percentage points this month, averaged 0.69 percentage points during the fiscal year 2001. During the four- year period of government budget surpluses from 1998 through 2001, the spread averaged 0.22 percentage points.

Geithner met with Chinese officials after Premier Wen Jiabao called in March for the U.S. “to guarantee the safety of China’s assets” and central bank Governor Zhou Xiaochuan proposed a new global currency to reduce reliance on the dollar.

BRIC nations have been adding to their foreign reserves over the past month to stem currency rallies sparked by speculation that the developing nations will help lead the world out of recession. The Brazilian real is up 20 percent against the dollar the past three months. Russia’s ruble has gained 13 percent and the Indian rupee has climbed 10 percent.

The four countries increased international holdings by more than $60 billion last month, according to data compiled by central banks and strategists.

“They want to be seen as good citizens of the IMF,” Goldman’s Ramos said. “It’s an investment that can empower them in the institution.”

First raise in nearly a year

By Grant Smith

June 11 (Bloomberg) — The International Energy Agency raised its global oil-demand forecast for the first time in 10 months on signs that the economic slowdown is abating.

The adviser to 28 nations increased its global oil demand estimate for this year by 120,000 barrels a day to 83.3 million barrels a day, driven by consumption in U.S. and China. Consumption worldwide will contract by 2.9 percent from last year, the biggest drop since 1981, the agency said in its monthly report today.

“These revisions do not necessarily imply the beginnings of a global economic recovery, and may only signal the bottoming out of the recession,” the Paris-based agency said. “It’s a fairly modest uptick. Underlying demand levels remain weak.”

Oil prices have climbed 61 percent this year. They traded above $72 a barrel in New York today for the first time in seven months on growing optimism about an economic recovery and as a weaker dollar drives investors toward commodities. Futures in New York rebounded to a seven-month high of $72.30 after the release of the report from as low as $71.32 earlier in the day.

Confidence in the world economy rose for a third month as U.S. job losses slowed and global production improved, a Bloomberg survey of users showed yesterday. A U.S. Labor Department report on June 5 showed the country lost the fewest number of jobs since September last month.

Tighter Fundamentals

Rallying crude prices have been driven by both tighter supply-demand fundamentals and “short-term flows” of speculative capital, David Fyfe, head of the IEA’s oil industry and markets division, said in a phone interview from Paris.

Analysts expect prices to average $61 a barrel in the fourth quarter of this year, according to the median of forecasts compiled by Bloomberg. Goldman Sachs Group Inc. said this month it expects oil to reach $85 by the end of the year,

The outlook for 2009 consumption in the most industrialized countries, the Organization for Economic Cooperation and Development, was raised “marginally” to 45.2 million barrels a day. Inventories of crude and refined products in these nations amounted to 62 days of demand as of the end of April.

The forecast change in demand was countered by expectations for higher output from outside the Organization of Petroleum Exporting Countries.

Russia, Colombia

The IEA increased its 2009 forecast for non-OPEC supply by 170,000 barrels a day from last month because of higher-than- expected growth in Russia and Colombia, and improved performance in the North Sea. Still, Non-OPEC output will fall by 100,000 barrels a day this year to about 50.5 million barrels a day.

OPEC boosted output for a second month in May, according to the IEA, even as the group pledged to fully enact record supply cuts announced last year.

The 11 OPEC nations bound by production quotas pumped 25.96 million barrels of crude oil a day last month, 110,000 a day more than in April, the IEA said. The group’s official limit is 24.845 million a day. That means OPEC completed 74 percent of its promised reduction, compared with 76 percent in April.

OPEC will meet Sept. 9 in Vienna to review production quotas. It agreed in March to keep supply unchanged as members continue to implement reductions agreed last year, totaling 4.2 million barrels a day, to stem plunging prices.

All 12 OPEC members, including Iraq, will need to supply about 27.7 million barrels of crude a day this year to meet global demand, the IEA report showed. That’s a reduction of 200,000 barrels a day from last month’s assessment because of stronger non-OPEC output.

Saudi Output

Those same 12 OPEC members pumped 28.38 million barrels a day in May, 160,000 barrels a day more than the previous month, according to the IEA. Crude output in Saudi Arabia, OPEC’s biggest producer, rose to 8.05 million barrels a day in May, from 8 million a day in April.

Oil stored on tankers globally declined by about 27 percent to 85 million barrels in May as higher prices reduced the incentive to keep crude, the agency said.

That gentlemen would be Jim O’Neill

By Guy Faulconbridge and Michael Stott

MOSCOW (Reuters) – The global crisis means China and other emerging market powers will overtake developed world economies even more quickly, the Goldman Sachs economist who coined the BRIC concept told Reuters.

Goldman Chief Economist Jim O’Neill said China’s economy was now likely to overtake the United States in less than 20 years time and the four BRIC countries combined — Brazil, Russia, India and China — could dwarf the G7 over the same period.

“Their relative rise appears to be stronger despite the rather pitifully thought out views by some a few months ago that the BRIC ‘dream’ could be shattered by the crisis,” he said in a telephone interview from London.

O’Neill invented the term BRIC in 2001 when he forecast that Brazil, Russia, India and China would overtake some of the world’s top economies in the first half of the 21st century, becoming building blocks of a new world order.

“We now conceive of China challenging the U.S. for number one slot by 2027 and … the combined GDP of the four BRICs being potentially bigger than that of the G7 within the next 20 years,” he added. “This is around 10 years earlier than when we first looked at the issue.”

Goldman is forecasting that the world economy will contract by 1.1 percent this year while BRIC economies will grow by an average of 4.8 percent, O’Neill added.

“They are dominating the world growth picture even more than when the world was booming, and this is despite a revised very weak forecast for Russia in 2009,” he said.

“China has had a good crisis. In terms of China’s role in the world the crisis has arguably been very helpful because it has forced China to realize that the next stage of their development cannot be led by export growth.”

Goldman is forecasting Chinese growth of 8.3 percent in 2009 and 10.9 percent in 2010, while it sees the world economy growing by just 3.3 percent next year.

India is predicted to grow at an average rate of 6.3 percent from 2011 to 2050, China 5.2 percent, Brazil 4.3 percent and Russia — constrained by forecasts of a declining population — just 2.8 percent.

BRIC POWER?

The four BRIC countries have been trying to form a political club to convert their growing economic power into greater geopolitical clout. But is unclear how such different countries will work together.

The leaders of Brazil, Russia, India and China will meet in the Russian city of Yekaterinburg on June 16 for the first summit since the international downturn struck their economies.

“Arguably because China is the biggest of the four in terms of its current size and potential, they are the ones who are most disinterested in the BRIC grouping,” O’Neill said.

“It is primarily Russia, but also Brazil, that is interested in having these get-togethers and meetings.”

O’Neill said BRIC was unlikely to become a powerful political institution on the world stage but could serve a temporary purpose — to prompt reforms.

“I think BRIC as an institution is a very useful threat and inter-temporal political grouping to force more realistic change of global institutions,” O’Neill said.

He said the G8 should be reformed, with China, India and Brazil taking the places of eurozone members Germany, France and Italy, which he said should be represented by the EU and European Central Bank. Russia is already a member of the G8.

O’Neill said the idea floated by Zhou Xiaochuan, governor of the People’s Bank of China, to make the International Monetary Fund’s Special Drawing Rights (SDR) the basis of a new supranational currency was a fascinating idea.

He said he thought the idea meant that China would have to allow more convertibility of the yuan and that the idea of including yuan in the SDR in six years’ time was conceivable.

It’s all about The China Energy Drink

The world’s proved oil reserves fell by 3 billion barrels between from 2007 to 2008, according to BP’s world energy guide which came out this morning. The report, which we’ve embedded below, is loaded with pretty charts and enough data to drown Nate Silver.

While reserves are down, we’ve got enough oil to last us for many more years, says BP CEO Tony Hayward in the intro the report. “The challenges the world faces in growing supplies to meet future demand are not below ground, they are above ground. They are human, not geological.”

primary consumption.gif

Also of note in the report, coal is the fastest growing fuel for the sixth straight year driven by China’s surging demand. Coal consumption rose by 3.1%, but if you strip out China’s 6.8% growth in demand, and it’s only .6%. China accounted for 43% of the world’s consumption of coal.

Other Highlights:

* Oil consumption fell by .6%, or by 420,000 barrels per day (b/d) in 2008, while oil production rose by .4% or 380,000 b/d.
* Oil production outside of OPEC fell 1.4% or 610,000 b/d.
* Global natural gas consumption grew by 2.5%, with production growing by 3.8%.
* Nuclear output dropped by .7%

Come on now, buy some homes

By Dawn Kopecki

June 10 (Bloomberg) — Lawmakers are pushing to revive legislation in the Senate that would almost double an $8,000 tax credit for first-time homebuyers and expand the program to all borrowers.

Senator Johnny Isakson, a Georgia Republican, introduced a bill today that would increase the tax credit to $15,000 and remove income and other restrictions on who can qualify, according to his spokeswoman, Sheridan Watson. The Treasury Department declined to comment on the proposal.

The legislation, co-sponsored by Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, would extend the homebuyer credit to multifamily properties used as the borrower’s primary residence. It would also eliminate income caps of $75,000 and $150,000 on individuals and couples seeking to claim the credit.

“The housing market continues to be a drag on the economy, John Castellani, president of the Washington-based Business Roundtable, said in a telephone interview today. “We believe that if we don’t stabilize this vital sector, we can’t turn the tide on the recession.”

The Business Roundtable represents more than 100 chief executive officers including General Electric Co.’s Jeffrey Immelt and Exxon Mobil Corp.’s Rex Tillerson. The group and the National Association of Realtors are pushing to expand the tax credit and to lower mortgage rates to revive the housing market.

For All Borrowers

“One of the biggest problems facing the American people today is an illiquid housing market, a decline in their equity, a decline in their net worth and a depression in the housing market that we are obligated to correct if we possibly can,” Isakson said in a statement. Isakson said his legislation would spur demand in the housing market by giving homeowners the incentive to trade up to a more expensive home.

The bill would extend the tax credit, which now applies to homes purchased from Jan. 1 to Dec. 1, 2009, to one year after the new measure is signed into law, according to Watson. Isakson’s bill would make the credit available to all borrowers, not only borrowers who haven’t owned a home in the previous three years as is the case under current law. It would also let borrowers divide the credit over two years. The legislation wouldn’t be applied retroactively to purchases completed before the date of enactment, Watson said.

The bill is co-sponsored by Republican Senators Lamar Alexander of Tennessee, Saxby Chambliss of Georgia, David Vitter of Louisiana, James Risch of Idaho, Lisa Murkowski of Alaska, John Ensign of Nevada and Jim Bunning of Kentucky, according to a statement from Isakson.

Senator Joseph Lieberman, a Connecticut independent, has also signed on to the bill, according to the statement.

Mortgage Rates

The Business Roundtable and Realtors group also recommended the Federal Reserve continue to purchase mortgage securities guaranteed by Fannie Mae, Freddie Mac and government mortgage bond insurer Ginnie Mae to drive down mortgage rates to less than 5 percent.

The Fed is about a third of the way through its $1.25 trillion commitment, holding $427.6 billion of mortgage debt backed by the government-sponsored enterprises as of June 3, according to the New York Federal Reserve.

The average rate on a 30-year fixed-rate U.S. mortgage jumped last week to the highest level since November, rising to 5.57 percent from 5.25 percent the prior week, according to data released today by the Mortgage Bankers Association.