China's property market
Home truths
China’s economic boom can survive a property bust
A DISCARDED toilet bowl lies on a pile of rubble in Tongzhou, a Beijing suburb which is busily remodelling itself as a “modern” and “international” city. On one side of the railway, a string of single-storey dwellings, built of brick and tile, have yet to be demolished. Their occupants make the most of the surrounding debris, loading bent window frames onto the back of bicycles to be sold as scrap. On the other side of the tracks tower new blocks of flats, more than 20 storeys high, waiting for their first residents.
Tongzhou’s new flats are one example of the property boom in China, where 1.87 billion square metres of living space were under construction in the first quarter of this year, 36% more than a year earlier. The boom has resonated widely. Banks have expanded their mortgage-books briskly; local governments are filling their coffers by selling land to developers or to the “urban investment vehicles” they sponsor. Property and construction represent about 10% of China’s GDP, not counting the consumer goods that homebuying inspires, such as the quilts and curtain rails on sale in Tongzhou’s market.
Home prices in 70 Chinese cities rose by 12.8% in the year to April, according to China’s National Bureau of Statistics. That was a record, and probably an understatement. The bureau also counts the total sales value of homes—384.6 billion yuan ($56.3 billion) in April—and the floorspace sold (72.4m square metres). Dividing one by the other gives an alternative gauge of prices, which increased by almost 18% nationally in the year to April and by over 95% in Beijing (see chart 1).
But China’s policymakers seem determined to disappoint fortune-hunters. In April they imposed new curbs on housing speculation, raising down-payment requirements and mortgage rates. In some property hotspots, out-of-towners cannot get a mortgage until they have paid local taxes for at least a year. Buyers must make at least a 50% down payment on a second home, even if it is their first mortgage. In Beijing they cannot buy a third home, even with their own money.
The measures seem to be working. Stephen Green of Standard Chartered reckons that prices of new homes fell by over 20% on average in the first week of May in Beijing, Shanghai and Shenzhen, although he cautions that this may reflect the mix of homes on offer, as developers keep their best properties off the market for now. In Tongzhou, prices have fallen by 13.4% since mid-April, according to the Beijing Times. The worry now is that a bursting property bubble might do damage to China’s lenders, ruin local exchequers and cast a pall over its economy—and the countries which sell to it.
In China’s biggest cities, such as Beijing, Shanghai, Shenzhen and Guangzhou, prices did rise too far and too fast. To buy a 100-square-metre home in the capital, the average Beijing household must now spend 17 years’ income.
Across the country as a whole, home prices are nine times the average income of urban households. But China’s property market does not yet serve the average household, as Tao Wang of UBS points out. Many city-dwellers live in dormitories provided by their companies or flats obtained from their state-owned employers after a 1998 reform, which privatised much of the housing stock. Since then, only 48m homes have been sold on the market, Ms Wang estimates, in a country with 215m urban households. If the first customers were also the richest, then China’s property market has so far served only the top 20-30% of households.
China’s homebuyers also include a younger generation who missed out on the 1998 windfall (described by Andy Rothman of CLSA, a brokerage, as the “largest one-time transfer of wealth in the history of the world”). But thanks to China’s “one-child” policy, a newly married couple can count on the undivided support of their parents to buy a new flat. That makes China’s home prices look more affordable.
Cash in hand
It is true that China’s households are increasingly turning to the banks, as well as relatives, to help them buy a home. Mortgages grew by 53% in the year to March. But the boom has not lasted long enough to leave too much debt in its wake. The ratio of housing loans to GDP is still only 15.3%, compared with a peak of 79% in America (see chart 2).
Prices would have to fall a long way to push borrowers “under water”, owing more than the value of their house. The average mortgage is for less than 50% of the value of a home, Ms Wang reckons. In Hong Kong, where regulators bar mortgages of more than 70% of a home’s value, prices fell by almost half in the three years after the Asian financial crisis, yet mortgage delinquencies peaked at 1.4%.
If mortgages did turn sour, how badly would China’s banks suffer? China Merchants Bank’s mortgage book grew by 70% in 2009. But mortgages still amounted to only 23% of its total loans. In China’s other big banks, the share is less than 20%. Loans to property developers account for another 8% or so, according to Mr Rothman.
Local governments may be more exposed. They suffer from a chronic shortfall of tax revenues, which they partly fill by expropriating land from farmers and selling it to developers at a hefty markup. Their dependence on property for income is often overstated, however. They are counting on land sales and property taxes for less than 17% of their revenues this year, according to Vincent Chan of Credit Suisse, once fiscal transfers from the central government are taken into account.
More concerning is the effect on their assets and liabilities. Local governments cannot borrow directly so they borrow through investment vehicles instead. These vehicles take loans, issue bonds or pool capital with private firms to fund infrastructure projects, including housing.
How much they have borrowed is a matter of fierce debate. The China Banking Regulatory Commission says their debts amounted to 7.4 trillion yuan at the end of last year. Victor Shih of Northwestern University, in Illinois, thinks they could already be as high as 11.4 trillion yuan (with another 12.7 trillion in untapped lines of bank credit).
The projects financed by these loans make fiscal sense as long as they add enough to the local tax base to cover their costs. A property slowdown might endanger some projects by this yardstick. It might also hurt the value of the land that local governments have offered as collateral for their borrowings.
Mr Shih’s estimate (not counting the untapped credit lines) would add another 34 percentage points to China’s ratio of public debt to GDP. But even then the burden would be little more than 50% in an economy growing at over 10% in nominal terms. China’s local governments are no doubt wasting a lot of money. But China’s government has a lot of money to waste.
Pessimists compare China to Japan in the 1990s, when a rising economic power, gaining ground on America, suffered an asset bust that has haunted it ever since. A recent study by the Bank of Japan concludes that China does indeed resemble its eastern neighbour—but in the 1970s, not the 1990s. Like Japan then, China today has a strong demand for housing, fuelled by fast growth and rapid urbanisation, and a tolerable exposure to debt.
Mr Rothman and his team surveyed over 350 middle-class households outside China’s biggest cities, where prices are at least 60% cheaper. They found a taxi driver in Zibo who had saved enough to buy his home without a mortgage, and a professor in Wuhan who owned a flat close to each of the two universities he taught at. Half of the households had paid cash, although many had borrowed from friends and family. Of the others, 86% spent less than 30% of their income on mortgage repayments. Mr Rothman reckons that three-quarters of China’s homeowners remain stuck in cramped, shoddy flats received a decade ago from the government. They are keen to cross the tracks to a new home.
Bare-knuckle in Basel
Reforming finance
Bare-knuckle in Basel
The task of sorting out banking is far from finished
ANYONE who doubts how hard it is to reform finance should consider the past fortnight. In America Congress edged towards passing the biggest reform of Wall Street since the 1930s; the heart of this is a pledge that taxpayers will never again be on the hook for failing firms. On May 24th the global banking industry’s biggest lobbying group made a similar pledge. Yet at the same time borrowing costs for banks have spiked up, reflecting fears that southern Europe’s woes might bring a big bank down. The response of investors and supervisors has not been joy at this reassertion of market discipline. It has been dry-mouthed terror, and, one suspects, a familiar thought: what can the state and central banks do to help?
The impulse to both punish and save finance reflects society’s conflicted aims. Voters want banks that can fail, just not now. Creditors must pay for failures, but when creditors get wary, the authorities rush to prop up markets. Banks must shrink and have big safety buffers, but not if that risks a double-dip recession. To reconcile these aims is a tall order.
America’s package is an important step (see article). Its best bits should cut the odds of bad stuff happening. The Federal Reserve will get powers to police almost all big firms, ending some regulatory turf wars. A new consumer-protection agency will combat dodgy lending. Many derivatives contracts will be brought into the light by being put through clearing houses and exchanges. There are some less-than-convincing bits: banning banks from proprietary trading feels good but won’t make them much safer; the package doesn’t tackle Fannie Mae and Freddie Mac, the failed housing agencies; and legislators could include some harmfully draconian prohibitions on derivatives. Still, overall, it does more good than harm.
Build up the buffers
Yet the assumption must be that crises will still happen. Hence it is vital that banks carry bigger safety buffers of capital and liquid assets. This job has been outsourced to the Basel club of regulators, which aims to finalise its proposals by the end of the year and implement them by December 2012. Behind the scenes an almighty brawl is raging (see article). Banks dislike some of the fine print and also claim that the cost of “Basel 3” will force them to raise the price of loans, devastating the economy. The French Banking Federation, for example, reckons it could eventually knock more than 6% off the euro zone’s GDP.
That is just one estimate—the Basel club will produce its own study later this year which is likely to be less alarming. But it will still face an onslaught and to do its job it will need to appeal to a wide audience, in the language of common sense. It must make clear that the timing of bigger buffers can be staggered and that their cost must be compared with the benefit of fewer meltdowns (the Bank of England reckons global GDP in 2009 would have been 6.5% higher without the crisis). And it must insist that as a bare minimum the system has enough capital and liquidity to absorb a crisis as bad as the last one.
The good news is that big banks probably now have enough capital to absorb the aggregate loss rate suffered by the system from 2007 to 2009 (although their build-up of liquidity reserves has been patchier). But buffers can be set at these pragmatic levels only if there is a credible way to deal with the outlier banks that typically lose three to five times more than the average. This is why “resolution schemes” for bad banks, that put losses onto creditors not taxpayers, are so important. They are a linchpin of reform, allowing politicians to argue that bail-outs will not happen again and regulators to resist calls for bigger safety buffers or a radical break-up of banks.
No existing proposal looks sturdy enough. America’s reform package and the industry’s plans will create the bureaucratic tools to push losses onto creditors. But will they be used? In a crisis supervisors will still be terrified that the threat of hundreds of billions of dollars of losses will fuel panic. Faced with a near collapse they are far more likely to give banks’ creditors a guarantee than to hurt them.
What may be needed is a rejigging of banks’ balance-sheets to try to contain this panic, with a clearer line between those who bear losses, including shareholders and junior creditors, and those, such as depositors, senior creditors and counterparties, who can be assured of business as usual. The Basel club is now making a stab at this task as well as trying to co-ordinate resolution schemes globally. Unless it succeeds, every time banks’ borrowing costs rise, the response will not be satisfaction that investors are discriminating against weak firms, but dread that things may spiral out of control again.
Growth on the cheap
Promoting innovation
Growth on the cheap
The OECD tells governments how to unleash business’s creative potential
WINDY talk about innovation is mind-numbingly abundant. Unusually, however, the grandees taking part in a conference in Paris this week organised by the OECD received some pointed advice. The rich-country think-tank has unveiled a thoughtful new report on how governments can do better at spurring and measuring innovation.
The grandees were also unusually attentive. Many governments are facing not only slow economic growth but also big deficits and heavy debts. At the same time, problems such as global warming and rising prices for natural resources demand their attention. Innovation, the OECD argues, offers a way out. It is already the chief engine of productivity in the rich world, and thus holds out the tantalising prospect of sustaining economic growth on the cheap. It could also provide affordable fixes to the thorniest global problems, argues John Kao, the founder of the Institute for Large Scale Innovation, which advocates the use of prizes and contests to encourage breakthroughs on social ills.
But what is the best way for governments to boost innovation? Sensibly if predictably, the OECD urges investment in education, research and “knowledge-supporting infrastructure” (such as broadband internet networks and smart electricity grids). Skimping on this while money is tight, says the agency, will cause growth to suffer in the long term.
The agency also offers several more novel prescriptions. It suggests that governments should not merely encourage the supply of innovation (for example, by funding research) but also try to stimulate demand. Economies, after all, benefit not from the invention of new products or services, but from their diffusion. In countries that are good at commercialising new ideas, such as America and Norway, even newly founded firms coin valuable intellectual property (see chart).
If governments want to see a blossoming of clean technology, therefore, they should use taxes to put a price on environmental externalities (such as carbon) rather than coddle pet technologies. Public-procurement rules that favour green products can spur this market, says Andrew Wyckoff of the OECD, but he cautions against using such rules as a cloak for “creeping protectionism”. Indeed, the report recommends opening domestic research programmes to foreign firms, to take advantage of bright ideas from abroad.
The OECD encourages governments to rethink their policies in the light of globalisation and the information economy. It notes that “intangibles” such as knowledge networks and open business models now make up much of the value of firms in rich countries and that many companies produce profitable innovations with little or no research in-house. For example, most of the research behind the iPod was done by other firms, but Apple reaped huge profits from its skill in design, systems integration and marketing.
Henry Chesbrough of the University of California, Berkeley applauds the OECD’s emphasis on intangibles and open innovation, but thinks the report still focuses “too much on product-related notions of R&D”. He notes that services make up well over half of economic activity in most rich countries, but there are no common standards for measuring their inventiveness. Yet many new processes, such as selling software as a service via the internet, have in turn enabled other innovations.
Mr Kao also thinks the OECD could go further. He wants it to measure the value created by social networks and related innovations. But he praises its findings as an improvement on the imprecise and lopsided innovation policies of the past: “This moves us closer to the day when innovation will truly be a discipline.”
Sino cure
Shorting China
Sino cure
Betting against China is not easy but plenty are trying
BEING bearish on China may not turn out to be wise, but it does require some ingenuity. Shorting domestic stocks is illegal. Futures and options markets for equities either do not exist locally or barely trade. It is possible to buy credit-default swaps (CDSs), a form of insurance against default, on China’s sovereign debt, but few think that would really go belly-up anyway. A pair of widely circulated reports on how to hedge a downturn, written in April by Goldman Sachs (stamped “highly confidential”) and Morgan Stanley respectively, spell out some of the alternatives for investors. In each, the underlying idea is similar: if shorting China is impossible, find things tied to China.
In Morgan Stanley’s view, that means starting with various financial assets—shares, credit instruments, and currencies—in South Korea and Australia (see chart), the two countries with the strongest connections to China after adjusting for re-exports. Both places offer numerous financial products, such as exchange-traded funds linked to indices, that can be shorted. The report also cites three commodities that are particularly tied to China’s growth: copper, above all; then soyabeans; and oil.
In its hedging scenarios, Goldman’s report concentrates on some different products. It looks at the value of buying CDSs on Hutchison Whampoa, a telecoms company in Hong Kong with deep ties to China; an index of Asian (excluding Japanese) CDSs; and a combined option structured to benefit from a decline in the Australian dollar, Goldman’s own commodities index and the Hang Seng China Enterprise Index, comprising Chinese companies listed on the Hong Kong stock exchange.
Such ideas can be augmented, of course, by adding other China-focused companies trading in overseas markets, or certain commodities, such as molybdenum, which is used in steel, or nickel. Deciding which to go for partly depends on costs, such as transaction fees, and market liquidity.
Data on the popularity of such bets are not widely available. But anecdotal evidence suggests plenty of people are bearish. It is a “crowded trade”, says one hedge-fund manager. As a result, when the market turns upward a “short squeeze” can develop as traders seek to cover their positions by scrambling to buy back shares. That may have happened this week when a rumoured shift in the government’s position on taxing property transactions sent shares in developers soaring. And therein lies the greatest risk of betting against China. It may do well.
The week ahead
The coming days
The week ahead
Relations with North Korea will loom large over regional elections in South Korea
• SOUTH KOREANS will get the opportunity to judge the government’s handling of fraught relations with its northern neighbour on Wednesday June 2nd. Mayoral elections in the country’s largest cities and elections for provincial governors will prove a test of the policies of President Lee Myung-bak and a measure of his popularity. Tensions are high after North Korea severed ties with the South and threatened military action over accusations that it was responsible for sinking a South Korean naval vessel. North Korea accuses Mr Lee of fabricating the incident to bolster his party’s support in the elections.
• CLIMATE experts from around the world are set to meet in Bonn for a two-week summit starting on Monday May 31st. The German city is the latest venue for difficult talks on a new international climate treaty to replace the Kyoto protocol in 2012. A UN climate conference in Copenhagen in December failed to produce anything beyond a non-binding political declaration. Hopes are low of significant progress that might end with a legally binding deal at the next important climate meeting in Cancun in November. Divisions remain between rich and developing countries over who should bear the costs and the biggest burden of reducing emissions.
• EUROPEAN leaders will escape the fiscal worries facing their countries for a couple of days when they arrive in the Russian city of Rostov-on-Don on Monday May 31st for a two-day summit. Russia’s president, Dmitry Medvedev, plays host to his EU counterpart, Herman Van Rompuy, his foreign-policy chief, Catherine Ashton, and commission president, José Manuel Barroso. Trade is likely to dominate discussions—Russia says that it is close to satisfying requirements for accession to the World Trade Organisation. Russian hopes of sealing a deal on visa-free travel to the EU have only a slim chance of success.
• PORTUGAL’S parliament is set to become the latest Europe legislature to endorse sweeping austerity measures in an effort to avoid the sort of fiscal crisis that has hit Greece. A vote on Wednesday June 2nd should see income tax rise by up to 1.5 percentage points and the implementation of a raft of other cost-cutting efforts despite huge protests against the axe-wielding. Spain’s recent austerity package squeaked through parliament by just one vote while Portugal’s measures, which have opposition backing, are destined for an easier passage. Meanwhile Greek unions are attempting to encourage workers across Europe to take more strike action against cuts and with some success. A big Italian union group has promised strikes in June after the government recently announced big budget cuts.
Sugar Daddy China.......
Sugar Daddy China Should Dock Kim’s Allowance: William Pesek
Commentary by William Pesek
May 31 (Bloomberg) -- This time things are different.
It’s odd that Greece’s debt gets more attention these days than Kim Jong Il’s nuclear weapons. It may be a sign that the latest North Korea crisis will be the one that brings real change in the world’s relationship with Pyongyang.
The only time it’s more dubious to say “this time things are different” is when characterizing a Japanese recovery. Such an argument can lead to cliche and utopian thinking.
One reason to think this Korean incident is different is China. You don’t have to be a fly on the wall in Beijing to know officials there are annoyed. Kim is a giant mosquito buzzing around their heads, threatening to attack at any moment. Merely swatting him away is no longer an option as the U.S., South Korea and United Nations demand that China rein in its ally.
This is a highly complicated dynamic for Kim’s sugar daddy. China’s key objective is to avoid a meltdown that would send millions of refugees its way. Kim also is a convenient way to preoccupy the U.S. Better ties between Washington and Pyongyang would cost China geopolitical influence in North Asia.
The benefits of triangulation are dwindling now that Kim may have thrown one tantrum too many. It began with an alleged North Korean torpedo that, according to an international report, sank the 1,200-ton Cheonan in March, killing 46 sailors.
‘Rock Solid’
South Korean President Lee Myung Bak took his case to the United Nations Security Council, halted trade with his neighbor, barred any new investment in the country and banned North Korean ships from the South’s waters. Visiting Seoul on May 26, Secretary of State Hillary Clinton said the U.S. commitment to South Korea’s security was “rock solid.”
All this puts China in an awkward position. It’s perhaps plausible for China to argue its interests in Sudan don’t afford it great influence there. It’s not possible to say the same about North Korea. It’s the main benefactor of the world’s most isolated regime, which relies on China for aid, food and oil.
China should threaten to turn off this flow. It was entertaining in 2006, for example, when George W. Bush’s administration moved to deprive Kim of his prized luxuries. No more Rolexes, Cadillacs, iPods, Harley-Davidsons or yachts. No more fur, wagyu beef, Jet Skis, cigars or Johnnie Walker scotch. It was clearly aimed at annoying the pampered tyrant.
Carrots and Sticks
It’s time for China to begin taking away Kim’s allowance. Few serious people want to see North Korea implode. The implications for the South Korean and Chinese economies would be dire. China must stop covering for Kim’s belligerence, though. It’s time for fewer carrots and more sticks.
China has plenty on its plate: clamping down on asset bubbles, riding out Europe’s debt fiasco, deflecting U.S. demands for a stronger currency and grappling with simmering social unrest. Striking workers at a Honda Motor Co. plant in Guangdong province and a rash of suicides at Foxconn Technology Group’s factory in Shenzhen show wages aren’t increasing fast enough as a proportion of gross domestic product.
There’s no time to waste. This month, China backed U.S. proposals for tougher sanctions against Iran. It was an encouraging sign of realpolitik.
Going a step further and clamping down on North Korea would win China goodwill. It would force Kim to negotiate with the world, open his economy and set the stage for a more stable Asia. It could mark progress for North Korea’s 23 million people and give Chinese officials one less thing to worry about.
China’s economic might isn’t at risk. The question is: As China’s economy races ahead of its diplomatic efforts, will it be a responsible global citizen? North Korea is a perfect place to prove it is.
We are caught on a toxic pattern. Kim misbehaves when he feels ignored, spooks the world and often gets his way. Then we return to the delusion that the so-called six-party talks can succeed. They are the diplomatic equivalent of the Doha round of World Trade Organization talks. Let’s drop the collective fiction that either is still alive.
China can help bring North Korea back from the brink. The odds it will begin doing just that may be better than ever.
Obama Faces ‘No-Win’ Dilemma........
Obama Faces ‘No-Win’ Dilemma in Taking Ownership of Oil Spill
By Edwin Chen
May 28 (Bloomberg) -- By claiming ownership of the Gulf of Mexico oil spill, President Barack Obama may stem criticism that he hasn’t been sufficiently engaged. Avoiding political fallout from what may become the nation’s worst environmental disaster will be more difficult.
“It really is a no-win situation,” said Democratic strategist Mike McCurry, who served as former President Bill Clinton’s spokesman. “The consequences environmentally could be dreadful and last for a long, long time.”
And while Obama vowed that BP Plc would “pay every dime they owe for the damage,” the consequences from an ecological catastrophe could also ripple through the economy.
In an hour-long White House news conference, Obama yesterday defended his actions so far, saying he and his administration made the spill “our highest priority” immediately after BP’s oil rig caught on fire on April 20 and collapsed.
“I had my team in the Oval Office that first day,” Obama said. “Those who think that we were either slow on our response or lacked urgency don’t know the facts.”
Obama said it’s his job to “get this fixed,” adding, “I take responsibility.”
‘In This Together’
He suspended oil exploration in two areas off Alaska; canceled pending lease sales in the Gulf of Mexico and those that were proposed off Virginia’s coast; extended by six months a moratorium on deepwater drilling permits, and suspended operations at all 33 exploratory wells being drilled in the Gulf of Mexico.
On a visit today to the Gulf region, his second to Louisiana since the disaster began, Obama took a short stroll on Fourchon Beach, accompanied by other officials. At one point, he squatted down and examined some tar balls that had washed up.
In brief remarks after a briefing by the Coast Guard, Obama told Gulf residents: “You are not alone. You will not be abandoned. You will not be left behind.” He added, “We are in this together.”
Republicans such as strategist Karl Rove have sought to draw parallels between Obama’s response and that of former President George W. Bush after Hurricane Katrina devastated the Gulf Coast in 2005.
Fending Off Enemies
The White House and Democratic allies rejected the comparison. And Representative Eliot Engel, a Democrat from New York, said Obama was likely mindful of that criticism when he faced the press yesterday.
The president “probably wanted to just catch up with it and say, ‘Look, I take full responsibility,’ because otherwise his political enemies are attacking him for not doing anything,” Engel said.
Representative Jay Inslee, a Washington Democrat, warned of the political peril ahead for the president.
“Once you have a massive blowout, there’s no good solution,” he said. “It doesn’t matter who’s president. And that’s a hard thing for people to accept.”
For now, the president’s political standing, and the damage to the Gulf, depends largely on BP’s ability to stop the leak.
‘Top Kill’
If the leak is contained, “we will probably see today as a turning point that will probably staunch Obama’s decline in public-approval ratings on his handling of this,” said Tom Mann, an analyst at the Brookings Institution in Washington.
“It would allow the government to get involved in something they have some control over, namely the cleanup,” he said.
McCurry agreed. “The important thing is to have some kind of action plan moving forward and have an accountable voice from the administration,” he said.
As a result of Obama’s appearance yesterday, McCurry said, “I think people will be saying: ‘You know, it looks like Obama is doing everything he can do.’ But it sure would help them if BP got this thing capped.”
Fed’s Evans Signals Europe’s Crisis.....
Fed’s Evans Signals Europe’s Crisis May Delay Fed Rate Rise
By Aki Ito
May 31 (Bloomberg) -- Federal Reserve Bank of Chicago President Charles Evans indicated that the European sovereign debt crisis will prompt the U.S. central bank to delay raising interest rates.
Evans told reporters in Seoul today that he “wouldn’t be surprised” if the Fed’s policy of keeping rates low “gets extended just a little bit.” Philadelphia Fed President Charles Plosser, who is attending the same event, said separately that “how the crisis in Europe ends up affecting the economy will dictate how we will respond.”
Today’s comments underscore the attention global policy makers are paying to the potential consequences of the European crisis sparked by ballooning fiscal deficits from Greece to Spain and Portugal. In Asia, central banks from Australia to Indonesia and South Korea are projected to keep rates unchanged this week as they gauge the effect on the global recovery.
“The European situation adds uncertainty to the economic outlook,” Evans said at a press briefing while attending a conference hosted by the Bank of Korea. He said lower-than- expected demand for U.S. exports because of slower growth in Europe will “dampen the recovery a little bit.”
U.S. central bankers on April 28 kept the benchmark federal funds rate in a range of zero to 0.25 percent, where it has been since December 2008, and said “subdued” inflation and high unemployment are likely to keep rates “exceptionally low.”
Low Inflation
It’s appropriate to keep an accommodative monetary policy for now because inflation is “seriously under-running” price stability and unemployment is “very high,” said Evans, who along with Plosser isn’t a voting member of the Federal Open Market Committee this year.
“But, if the situation turns rapidly, if inflation expectations were to bounce back in a way that we weren’t expecting,” the Fed “will respond more quickly,” he added.
Plosser said he will “wait and see” how events in Europe might affect Fed policy. “It’s certainly true that there are things that could change the pace of our exit strategy, but I don’t see those happening as of yet,” he said.
Fed officials to date have indicated the damage to the U.S. economy’s expansion from Europe will be limited. Richmond Fed President Jeffrey Lacker said in a Bloomberg Television interview last week that the “most likely outcome” is shaving “a tenth or two off my growth forecast for this year.”
St. Louis Fed President James Bullard said in a May 26 speech in London that the European crisis “will probably fall short of becoming a worldwide recessionary shock.”
At the same time, evidence of rising stress in bank funding markets spurred the Fed to reopen currency-swap lines with central banks from the euro region, U.K., Canada, Switzerland and Japan this month.
Stall Recovery
“A deeper contraction in Europe associated with sharp financial dislocations would have the potential to stall the recovery of the entire global economy, and this scenario would have far more serious consequences for U.S. trade and economic growth,” Fed Governor Daniel Tarullo said May 20 in testimony to House Financial Services subcommittees, making the case for the restarting of the swaps.
Bank of Korea Governor Kim Choong Soo yesterday proposed an “institutionalization” of swaps to help establish a global safety net.
Dubai Capital Returning
Dubai Capital Returning, Standard Chartered Says (Update1)
By Bloomberg News
May 31 (Bloomberg) -- Capital is gradually flowing back into Dubai after one of its main holding companies reached a debt restructuring accord with lenders, according to Standard Chartered Plc, one of Dubai World’s seven biggest creditors.
“Because of the settlement agreement, sentiment is slowly coming back to the market,” Hassan Jarrar, managing director of Standard Chartered’s United Arab Emirates unit, said in an interview in Shanghai today. “We see a lot of funds coming from different parts of the world into Dubai, trying to capitalize on emerging opportunities, especially in real estate.”
Dubai World, one of the sheikhdom’s three main state-owned business groups, roiled global markets late last year when it said it would seek to delay repaying loans. The company said May 20 it reached an accord with its main creditor group to restructure $23.5 billion of liabilities.
More than 90 banks are owed money by Dubai World, and Royal Bank of Scotland Group Plc, HSBC Holdings Plc and Standard Chartered are among its seven biggest creditors.
Access to credit in Dubai is easing in areas including mortgages, auto loans and corporate debt, according to Jarrar.
“Dubai is right now having some short-term pains, but you cannot erase the importance of that place,” he said.
Real estate prices in Dubai, the second-largest emirate in the U.A.E., have plummeted about 50 percent from their peak in late 2008. Dubai’s economy will shrink about 0.5 percent this year, according to the International Monetary Fund, marking the second year of contraction for the debt-laden emirate.
London-based Standard Chartered, which derives most of its profit from emerging markets, is “hoping” to be granted a license in Libya, and sees opportunities in countries including Saudi Arabia, Iraq, Egypt and Algeria, Jarrar said.
The lender, which generated 16 percent of pretax profit from Africa and the Middle East in 2009, wants to take advantage of rising trade and mergers and acquisitions between the oil- rich regions and other emerging markets. Standard Chartered shares slipped 1.1 percent in Hong Kong today.
Israel Intercepts Gaza-bound Aid Ships, Killing 10
Israel Intercepts Gaza-bound Aid Ships, Killing 10 (Update3)
By Jonathan Ferziger and Calev Ben-David
May 31 (Bloomberg) -- Israeli commandos killed at least 10 pro-Palestinian activists after encountering resistance while intercepting a flotilla of ships carrying humanitarian aid supplies to the Gaza Strip, the Israeli army said.
Israeli Prime Minister Benjamin Netanyahu cut short a trip to Canada to return to Israel, according to a statement from his office. Turkey’s Foreign Ministry said relations with Israel may suffer irreparable harm while German Foreign Minister Guido Westerwelle said his country was “deeply concerned.” Israel said its forces were attacked today with guns, knives and clubs after boarding a vessel and seven soldiers were wounded. The clash was in international waters, said the Free Gaza Movement, which organized the flotilla.
“What we have seen this morning is a war crime,” Saeb Erakat, the Palestinian Authority’s chief peace negotiator, said in an e-mailed statement. “The international community must take swift and appropriate action.”
The six ships in the “Freedom Flotilla” came from Sweden, Greece and Turkey on a mission aimed at breaking Israel’s blockade of Gaza that organizers pledged would be non-violent. Israel had warned it wouldn’t let the ships reach Gaza and called the mission a propaganda trick aimed at making it look bad.
Israeli stocks fell the most in four days. The benchmark TA-25 Index lost 1.6 percent, the biggest drop since May 25, to 1,082.74 at the close in Tel Aviv. The shekel fell as much as 1.5 percent to 3.8729 to the dollar and traded at 3.8652 at 5:14 p.m.
U.S. Visit
“The United States deeply regrets the loss of life and injuries sustained, and is currently working to understand the circumstances surrounding this tragedy,” White House spokesman Bill Burton said.
Israel has restricted entry of people and goods into Gaza since the territory was taken over by Hamas in 2007, allowing in only a limited range of supplies including food, clothing and medicine. Israeli Navy ships have intercepted three previous efforts by the Free Gaza Movement, formed in 2008 to deliver aid, to reach the territory by sea. The army has said that Hamas has used materials such as cement and iron pipes to build bunkers and rockets.
Aboard Ships
Aboard the ships today were more than 500 people, including European members of parliament and Swedish author Henning Mankell, according to the Free Gaza Movement, which organized the trip.
“We are sorry about those hurt, but the responsibility lies completely with the organizers of the flotilla and those participants who initiated the violence,” Defense Minister Ehud Barak said at a press conference in Tel Aviv. “During the incident, because of danger to their lives, the soldiers were forced to use methods to disperse demonstrations as well as firearms.”
He said the organizers had ties to terrorist organizations.
Turkey’s Foreign Ministry called the raid “inhuman” and said it “may cause damage to our relations that will be impossible to repair,” according to the statement e-mailed by the ministry in Ankara today. Hamas, the militant movement that controls Gaza, called on the Palestinian Authority to break off peace talks with Israel.
Opened Fire
An Israeli military official, speaking on condition of anonymity, told reporters that most of the 10 dead were Turkish and 20 people were wounded, according to a pool report provided by an Associated Press reporter. Of the soldiers wounded, one was hurt seriously.
The official said the soldiers boarded the ships after approaching on three military helicopters and several commando boats at about 4 a.m., according to the pool report.
One of the commandos, also speaking on condition of anonymity, said after descending from one of the helicopters on a rope, he was immediately attacked by a group of passengers with metal sticks and knives, the pool report said. The commando said activists grabbed soldiers, stripped them of their helmets and equipment, and threw them from the top deck to the lower deck, the report said.
Mary Hughes Thompson, a spokeswoman of the Free Gaza Movement, said Israel’s allegation that the passengers were armed was “totally ludicrous” and “we would never initiate violence.”
Bloodied Passengers
Turkey’s NTV television showed footage of helicopters dropping armed soldiers onto a ship in the dark, and of bloodied passengers being treated on board. A passenger said the ships were attacked with live ammunition and tear gas.
U.K. Foreign Secretary William Hague said he deplored “the loss of life during the interception of the Gaza flotilla” and called on Israel to give “unfettered access” for aid to Gaza.
“I think the major issue here is Europe’s policy toward Hamas,” Yitzhak Reiter a political scientist at Israel’s Ashkelon Academic College and Hebrew University, said in a telephone interview. “The clash has probably managed to achieve a greater awareness to the plight of the Gazan people.”
In Gaza, Hamas leader Ismail Haniyeh called for the suspension of peace talks. His speech was broadcast live on Al- Jazeera television today.
Hamas is considered a terrorist organization by Israel, the U.S. and the European Union. Israel fought a three-week war in Gaza starting in December 2008 that it said was meant to stop Hamas and other militant groups from firing rockets into its territory. It has been negotiating a prisoner swap with Hamas to exchange a captive Israeli soldier, Gilad Shalit, for about 1,000 jailed Palestinians.
Israeli bombing and ground operations during the war destroyed thousands of houses across Gaza and Israel’s restrictions on construction materials have prevented Palestinians from being able to rebuild.
Bernanke Says Central Banks May Differ on Timing......
Bernanke Says Central Banks May Differ on Timing of Tightening
By Scott Lanman
May 31 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said central banks around the world will probably unwind monetary expansion at different times because of differences among their economies.
“In the medium term, like the Federal Reserve and many other central banks, the Bank of Korea will have to manage its exit from accommodative policies,” Bernanke said in pre- recorded remarks to a conference hosted by South Korea’s central bank in Seoul today. The Bank of Korea “will have to weigh the risks of a premature exit against those of leaving expansionary policies in place for too long,” Bernanke said.
The Fed chief didn’t elaborate on the outlook for the U.S. economy or monetary policy. Bernanke praised South Korea’s response to the global financial crisis over the last few years, including its decisions to reduce its policy interest rate by 3.25 percentage points and to set up a fund to keep its banking system stable.
“This suite of policy responses helped stabilize Korean financial markets and promote a swift recovery of economic activity,” Bernanke told the Bank of Korea event, according to a text distributed by the Fed in Washington.
South Korea’s stock market has erased much of its losses since late 2008, and gross domestic product has “rebounded decisively” since contracting at a 17 percent pace in the fourth quarter of 2008, he said.
Asset Purchases
In the U.S., the Fed cut its benchmark interest rate to near zero in December 2008 and purchased $1.7 trillion in Treasuries and housing debt to revive growth. Officials are debating when and how fast to raise rates and sell mortgage assets. “Because economic conditions vary, the appropriate timing of the exit is likely to differ across countries,” Bernanke said.
Countries must cooperate to improve financial regulation and ensure that firms are “well capitalized, liquid and transparent,” Bernanke said. The leadership of the Group of 20 countries is “essential” for producing effective and consistent changes, Bernanke said.
In addition, central banks “must continue to place great weight on the factors that have been shown to enhance the credibility and effectiveness of monetary policy: central bank independence, accountability and transparency, and effective communication,” the Fed chief said.
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