Japanese PM in Beijing for visit

Japanese Prime Minister Taro Aso has arrived in Beijing for a visit expected to focus primarily on the economy.

Japan and China, the world's second and third-biggest economies respectively, are hoping to work together to combat the global downturn.

But the visit comes at a sensitive time for China-Japan relations.

Last week Mr Aso sent an offering to the controversial Yasukuni shrine, which Beijing sees as a symbol of Japan's past militarism.

China said in a statement that it expressed "serious concern and dissatisfaction" for the shrine offering.

Sensitive issue

Mr Aso was due to meet with his Chinese counterpart Wen Jiabao on Wednesday, and President Hu Jintao on Thursday.

Economic ties are expected to dominate talks, along with efforts to develop joint energy reserves and combat an outbreak of swine flu.

North Korea may also be on the agenda. Japan is keen to enlist Chinese help in persuading Pyongyang to return to six-nation talks on its nuclear programme.

North Korea walked away from the negotiating table in the wake of UN criticism over its rocket launch earlier this month.

Mr Aso's visit comes just a week after he upset China by a making an offering to Tokyo's controversial Yasukuni war shrine.

He did not actually visit the shrine, but sent a plant which he said expressed his "appreciation and respect as a Japanese national to the people who sacrificed their precious lives for the country".

Previous prime ministers have stirred regional tensions by visiting Yasukuni - which honours Japan's war dead, including 14 people convicted as Class A war criminals after World War II.

Repeated visits by Junichiro Koizumi caused anger in South Korea and China, where there remains a widely-held conviction that Japan has not atoned properly for its war-time crimes.

(BBC)

China's 1Q GDP up to 6.1% may signal worst is over

BEIJING --China said first-quarter gross domestic product rose 6.1% from a year earlier, its worst quarterly economic growth in nearly two decades. Other fresh data, however, hinted that the deepest part of the downturn may have passed amid a huge wave of government spending.

The data issued Thursday prompted heady calls from some economists declaring outright recovery in the world's third-largest economy. Beijing itself struck a more cautious note.

"The national economy is confronted with the pressure of slowdown," said Li Xiaochao, spokesman for the National Bureau of Statistics, which issued the figures. "The foundation is not firm; the task is still very arduous," Li said.

The 6.1% rise -- roughly in line with economists' median expectations of 6.0% growth -- was lower than the 6.8% expansion in the 2008 fourth quarter, and a dramatic slowdown from 2007's full-year growth of 13%.

Li cited the impact of the international financial crisis, large declines in exports, slumping corporate profitability, a worsening jobs landscape, and a decline in fiscal revenue as key factors pressuring China's economy.

Still, many economists say China's economic growth likely accelerated in the first quarter from the last quarter of 2008 - a change that isn't apparent in the headline figure as China provides only year-on-year comparisons.

Nomura economist Robert Subbaraman said the economy probably began turning around in late February or early March. "GDP is the most rear-view mirror of all the economic statistics. If you look at the March data for (fixed-asset investment), loan growth and industrial production, they have all picked up strongly from earlier in the quarter."

The government's stimulus program has been ramping up investment to counteract a steep fall in exports, which were down 19.7% in the first quarter from a year earlier. Fixed-asset investment in urban areas, China's benchmark measure of capital spending, rose 30.3% in March from the year-ago period, picking up from 26.5% growth in the first two months of this year.

March industrial production, the key driver of China's manufacturing-heavy economy, grew by 8.3% in March from a year earlier, accelerating from a 3.8% gain in January and February.

Merrill Lynch's Lu Ting went as far as to say that China is the first major economy to recover from the global downturn.

Other economists were more tempered. "So far, the recovery is quite narrow," said Macquarie Securities analyst Paul Cavey, since bank loans and spending on infrastructure are the key drivers of growth now.

UBS Securities economist Wang Tao estimated that first-quarter GDP grew around 7% from the fourth quarter on an annualized, seasonally adjusted basis.

"The stimulus policies -- both fiscal and credit expansion -- led by the government is certainly the main driver of the rebound. The full impact of those stimulus policies will be shown in the coming months," Wang said. She expects sequential growth of 12% in the second quarter, although she cautioned that the push from the stimulus may taper off toward the end of the year.

The world's third-largest economy is being closely watched by investors for signs it will recover before crisis-stricken Western nations. Demand from China could provide support to export-dependent Asian neighbors such as Singapore and Japan, whose economies are contracting sharply. Producers of iron ore, copper and oil - from Australia to Latin America to the Middle East - are looking to China's CNY4 trillion (around $585 billion) economic stimulus program to drive demand for commodities.

China appears "on track to reach - or at least get very close" to its stated target of around 8% GDP growth in 2009, said Moody's Economy.com analyst Sherman Chan. She added, however, that "export prospects won't improve until the U.S. and Europe emerge from recession."

The stimulus has been supported by consumer spending that has been surprisingly resilient during the global downturn. Car sales hit a monthly record in March, and home purchases and air travel both have been rising this year after sharp falls last year. In March, retail sales rose 14.7% from a year earlier, down only slightly from a 15.2% rise in January and February.

Still, concerns about deflation and excess capacity in manufacturing persist as prices continue to fall. China's consumer price index for March fell 1.2% from a year earlier, the statistics agency said, after dropping 1.6% in February and gaining 1.0% in January.

Li said China should prepare for possible deterioration in the economy and prepare a contingency plan for changes in the economy.

The Shanghai Composite index fell as much as 1.5% after the GDP figure was dislosed; shares later recovered somewhat and were down 0.1% at 2532.54 in midday trading.

"Beijing is more likely to unveil new stimulus measures if the GDP data were below expectations. Since the actual data offered no surprises, stocks fell as the policy hopes of some investors have been dashed," said Guotai Junan Securities analyst Xu Yinhui.

(WSJ)

China planned $10 bil invest fund at failed ASEAN summit

BEIJING - China had planned to announce a $10 billion (6.8 billion pound) infrastructure investment fund and offer credit to neighbours at a cancelled weekend summit of Asian leaders in Thailand, its foreign minister said.

Anti-government protestors forced the cancellation of the summit in Pattaya after they swarmed into the summit venue.

In an interview with state media on a flight back to China, Foreign minister Yang Jiechi avoided direct criticism of the Thai government while detailing measures that Chinese premier Wen Jiabao had planned to offer at the summit.

China plans to establish a $10 billion China-ASEAN investment cooperation fund to promote infrastructure that connects it to ASEAN nations, Yang said.

China has been active in building roads from its southern border through neighbouring Myanmar, Laos, and Vietnam, to ease trade.

It will also offer a credit of $15 billion to ASEAN countries, including preferential loans of $1.7 billion for cooperation projects, Yang said.

It plans to offer 270 million yuan ($39.51 million) in aid to Cambodia, Laos and Myanmar to help those impoverished countries combat the global financial crisis, and will inject $50 million into the China-ASEAN cooperation fund, Yang said.

While not an ASEAN member, China's growing economic clout, huge market and competitive exports make it an important participant in ASEAN summits, although tensions persist over competing claims to the South China Sea and Chinese plans for dams that are opposed by other nations along the Mekong river.

China recently appointed its first ambassador to ASEAN, after the 10-member grouping formally adopted a charter.

(Reuters)

Leaders' statement from the G20 summit in London

1. We, the Leaders of the Group of Twenty, met in London on 2 April 2009.

2. We face the greatest challenge to the world economy in modern times; a crisis which has deepened since we last met, which affects the lives of women, men, and children in every country, and which all countries must join together to resolve. A global crisis requires a global solution.
3. We start from the belief that prosperity is indivisible; that growth, to be sustained, has to be shared; and that our global plan for recovery must have at its heart the needs and jobs of hard-working families, not just in developed countries but in emerging markets and the poorest countries of the world too; and must reflect the interests, not just of today's population, but of future generations too. We believe that the only sure foundation for sustainable globalisation and rising prosperity for all is an open world economy based on market principles, effective regulation, and strong global institutions.
4. We have today therefore pledged to do whatever is necessary to:
· restore confidence, growth, and jobs;
· repair the financial system to restore lending;
· strengthen financial regulation to rebuild trust;
· fund and reform our international financial institutions to overcome this crisis and prevent future ones;
· promote global trade and investment and reject protectionism, to underpin prosperity; and
· build an inclusive, green, and sustainable recovery.
By acting together to fulfil these pledges we will bring the world economy out of recession and prevent a crisis like this from recurring in the future.
5. The agreements we have reached today, to treble resources available to the IMF to $750 billion, to support a new SDR [IMF special drawing rights] allocation of $250 billion, to support at least $100 billion of additional lending by the MDBs [Multilateral Development Banks], to ensure $250 billion of support for trade finance, and to use the additional resources from agreed IMF gold sales for concessional finance for the poorest countries, constitute an additional $1.1 trillion programme of support to restore credit, growth and jobs in the world economy. Together with the measures we have each taken nationally, this constitutes a global plan for recovery on an unprecedented scale.
Restoring growth and jobs
6. We are undertaking an unprecedented and concerted fiscal expansion, which will save or create millions of jobs which would otherwise have been destroyed, and that will, by the end of next year, amount to $5 trillion, raise output by 4 per cent, and accelerate the transition to a green economy. We are committed to deliver the scale of sustained fiscal effort necessary to restore growth.
7. Our central banks have also taken exceptional action. Interest rates have been cut aggressively in most countries, and our central banks have pledged to maintain expansionary policies for as long as needed and to use the full range of monetary policy instruments, including unconventional instruments, consistent with price stability.
8. Our actions to restore growth cannot be effective until we restore domestic lending and international capital flows. We have provided significant and comprehensive support to our banking systems to provide liquidity, recapitalise financial institutions, and address decisively the problem of impaired assets. We are committed to take all necessary actions to restore the normal flow of credit through the financial system and ensure the soundness of systemically important institutions, implementing our policies in line with the agreed G20 framework for restoring lending and repairing the financial sector.
9. Taken together, these actions will constitute the largest fiscal and monetary stimulus and the most comprehensive support programme for the financial sector in modern times. Acting together strengthens the impact and the exceptional policy actions announced so far must be implemented without delay. Today, we have further agreed over $1 trillion of additional resources for the world economy through our international financial institutions and trade finance.
10. Last month the IMF estimated that world growth in real terms would resume and rise to over 2 percent by the end of 2010. We are confident that the actions we have agreed today, and our unshakeable commitment to work together to restore growth and jobs, while preserving long-term fiscal sustainability, will accelerate the return to trend growth. We commit today to taking whatever action is necessary to secure that outcome, and we call on the IMF to assess regularly the actions taken and the global actions required.
11. We are resolved to ensure long-term fiscal sustainability and price stability and will put in place credible exit strategies from the measures that need to be taken now to support the financial sector and restore global demand. We are convinced that by implementing our agreed policies we will limit the longer-term costs to our economies, thereby reducing the scale of the fiscal consolidation necessary over the longer term.
12. We will conduct all our economic policies cooperatively and responsibly with regard to the impact on other countries and will refrain from competitive devaluation of our currencies and promote a stable and well-functioning international monetary system. We will support, now and in the future, to candid, even-handed, and independent IMF surveillance of our economies and financial sectors, of the impact of our policies on others, and of risks facing the global economy.
Strengthening financial supervision and regulation
13. Major failures in the financial sector and in financial regulation and supervision were fundamental causes of the crisis. Confidence will not be restored until we rebuild trust in our financial system. We will take action to build a stronger, more globally consistent, supervisory and regulatory framework for the future financial sector, which will support sustainable global growth and serve the needs of business and citizens.
14. We each agree to ensure our domestic regulatory systems are strong. But we also agree to establish the much greater consistency and systematic cooperation between countries, and the framework of internationally agreed high standards, that a global financial system requires. Strengthened regulation and supervision must promote propriety, integrity and transparency; guard against risk across the financial system; dampen rather than amplify the financial and economic cycle; reduce reliance on inappropriately risky sources of financing; and discourage excessive risk-taking. Regulators and supervisors must protect consumers and investors, support market discipline, avoid adverse impacts on other countries, reduce the scope for regulatory arbitrage, support competition and dynamism, and keep pace with innovation in the marketplace.
15. To this end we are implementing the Action Plan agreed at our last meeting, as set out in the attached progress report. We have today also issued a Declaration, Strengthening the Financial System. In particular we agree:
· to establish a new Financial Stability Board (FSB) with a strengthened mandate, as a successor to the Financial Stability Forum (FSF), including all G20 countries, FSF members, Spain, and the European Commission;
· that the FSB should collaborate with the IMF to provide early warning of macroeconomic and financial risks and the actions needed to address them;
· to reshape our regulatory systems so that our authorities are able to identify and take account of macro-prudential risks;
· to extend regulation and oversight to all systemically important financial institutions, instruments and markets. This will include, for the first time, systemically important hedge funds;
· to endorse and implement the FSF's tough new principles on pay and compensation and to support sustainable compensation schemes and the corporate social responsibility of all firms;
· to take action, once recovery is assured, to improve the quality, quantity, and international consistency of capital in the banking system. In future, regulation must prevent excessive leverage and require buffers of resources to be built up in good times;
· to take action against non-cooperative jurisdictions, including tax havens. We stand ready to deploy sanctions to protect our public finances and financial systems. The era of banking secrecy is over. We note that the OECD has today published a list of countries assessed by the Global Forum against the international standard for exchange of tax information;
· to call on the accounting standard setters to work urgently with supervisors and regulators to improve standards on valuation and provisioning and achieve a single set of high-quality global accounting standards; and
· to extend regulatory oversight and registration to Credit Rating Agencies to ensure they meet the international code of good practice, particularly to prevent unacceptable conflicts of interest.
16. We instruct our Finance Ministers to complete the implementation of these decisions in line with the timetable set out in the Action Plan. We have asked the FSB and the IMF to monitor progress, working with the Financial Action Taskforce and other relevant bodies, and to provide a report to the next meeting of our Finance Ministers in Scotland in November.
Strengthening our global financial institutions
17. Emerging markets and developing countries, which have been the engine of recent world growth, are also now facing challenges which are adding to the current downturn in the global economy. It is imperative for global confidence and economic recovery that capital continues to flow to them. This will require a substantial strengthening of the international financial institutions, particularly the IMF. We have therefore agreed today to make available an additional $850 billion of resources through the global financial institutions to support growth in emerging market and developing countries by helping to finance counter-cyclical spending, bank recapitalisation, infrastructure, trade finance, balance of payments support, debt rollover, and social support. To this end:
· we have agreed to increase the resources available to the IMF through immediate financing from members of $250 billion, subsequently incorporated into an expanded and more flexible New Arrangements to Borrow, increased by up to $500 billion, and to consider market borrowing if necessary; and
· we support a substantial increase in lending of at least $100 billion by the Multilateral Development Banks (MDBs), including to low income countries, and ensure that all MDBs, including have the appropriate capital.
18. It is essential that these resources can be used effectively and flexibly to support growth. We welcome in this respect the progress made by the IMF with its new Flexible Credit Line (FCL) and its reformed lending and conditionality framework which will enable the IMF to ensure that its facilities address effectively the underlying causes of countries' balance of payments financing needs, particularly the withdrawal of external capital flows to the banking and corporate sectors. We support Mexico's decision to seek an FCL arrangement.
19. We have agreed to support a general SDR allocation which will inject $250 billion into the world economy and increase global liquidity, and urgent ratification of the Fourth Amendment.
20. In order for our financial institutions to help manage the crisis and prevent future crises we must strengthen their longer term relevance, effectiveness and legitimacy. So alongside the significant increase in resources agreed today we are determined to reform and modernise the international financial institutions to ensure they can assist members and shareholders effectively in the new challenges they face. We will reform their mandates, scope and governance to reflect changes in the world economy and the new challenges of globalisation, and that emerging and developing economies, including the poorest, must have greater voice and representation. This must be accompanied by action to increase the credibility and accountability of the institutions through better strategic oversight and decision making. To this end:
· we commit to implementing the package of IMF quota and voice reforms agreed in April 2008 and call on the IMF to complete the next review of quotas by January 2011;
· we agree that, alongside this, consideration should be given to greater involvement of the Fund's Governors in providing strategic direction to the IMF and increasing its accountability;
· we commit to implementing the World Bank reforms agreed in October 2008. We look forward to further recommendations, at the next meetings, on voice and representation reforms on an accelerated timescale, to be agreed by the 2010 Spring Meetings;
· we agree that the heads and senior leadership of the international financial institutions should be appointed through an open, transparent, and merit-based selection process; and
· building on the current reviews of the IMF and World Bank we asked the Chairman, working with the G20 Finance Ministers, to consult widely in an inclusive process and report back to the next meeting with proposals for further reforms to improve the responsiveness and adaptability of the IFIs.
21. In addition to reforming our international financial institutions for the new challenges of globalisation we agreed on the desirability of a new global consensus on the key values and principles that will promote sustainable economic activity. We support discussion on such a charter for sustainable economic activity with a view to further discussion at our next meeting. We take note of the work started in other fora in this regard and look forward to further discussion of this charter for sustainable economic activity.
Resisting protectionism and promoting global trade and investment
22. World trade growth has underpinned rising prosperity for half a century. But it is now falling for the first time in 25 years. Falling demand is exacerbated by growing protectionist pressures and a withdrawal of trade credit. Reinvigorating world trade and investment is essential for restoring global growth. We will not repeat the historic mistakes of protectionism of previous eras. To this end:
· we reaffirm the commitment made in Washington: to refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organisation (WTO) inconsistent measures to stimulate exports. In addition we will rectify promptly any such measures. We extend this pledge to the end of 2010;
· we will minimise any negative impact on trade and investment of our domestic policy actions including fiscal policy and action in support of the financial sector. We will not retreat into financial protectionism, particularly measures that constrain worldwide capital flows, especially to developing countries;
· we will notify promptly the WTO of any such measures and we call on the WTO, together with other international bodies, within their respective mandates, to monitor and report publicly on our adherence to these undertakings on a quarterly basis;
· we will take, at the same time, whatever steps we can to promote and facilitate trade and investment; and
· we will ensure availability of at least $250 billion over the next two years to support trade finance through our export credit and investment agencies and through the MDBs. We also ask our regulators to make use of available flexibility in capital requirements for trade finance.
23. We remain committed to reaching an ambitious and balanced conclusion to the Doha Development Round, which is urgently needed. This could boost the global economy by at least $150 billion per annum. To achieve this we are committed to building on the progress already made, including with regard to modalities.
24. We will give renewed focus and political attention to this critical issue in the coming period and will use our continuing work and all international meetings that are relevant to drive progress.
Ensuring a fair and sustainable recovery for all
25. We are determined not only to restore growth but to lay the foundation for a fair and sustainable world economy. We recognise that the current crisis has a disproportionate impact on the vulnerable in the poorest countries and recognise our collective responsibility to mitigate the social impact of the crisis to minimise long-lasting damage to global potential. To this end:
· we reaffirm our historic commitment to meeting the Millennium Development Goals and to achieving our respective ODA [Overseas Development Agencies] pledges, including commitments on Aid for Trade, debt relief, and the Gleneagles commitments, especially to sub-Saharan Africa;
· the actions and decisions we have taken today will provide $50 billion to support social protection, boost trade and safeguard development in low income countries, as part of the significant increase in crisis support for these and other developing countries and emerging markets;
· we are making available resources for social protection for the poorest countries, including through investing in long-term food security and through voluntary bilateral contributions to the World Bank's Vulnerability Framework, including the Infrastructure Crisis Facility, and the Rapid Social Response Fund;
· we have committed, consistent with the new income model, that additional resources from agreed sales of IMF gold will be used, together with surplus income, to provide $6 billion additional concessional and flexible finance for the poorest countries over the next 2 to 3 years. We call on the IMF to come forward with concrete proposals at the Spring Meetings;
· we have agreed to review the flexibility of the Debt Sustainability Framework and call on the IMF and World Bank to report to the IMFC [International Monetary and Financial Committee] and Development Committee at the Annual Meetings; and
· we call on the UN, working with other global institutions, to establish an effective mechanism to monitor the impact of the crisis on the poorest and most vulnerable.
26. We recognise the human dimension to the crisis. We commit to support those affected by the crisis by creating employment opportunities and through income support measures. We will build a fair and family-friendly labour market for both women and men. We therefore welcome the reports of the London Jobs Conference and the Rome Social Summit and the key principles they proposed. We will support employment by stimulating growth, investing in education and training, and through active labour market policies, focusing on the most vulnerable. We call upon the ILO, working with other relevant organisations, to assess the actions taken and those required for the future.
27. We agreed to make the best possible use of investment funded by fiscal stimulus programmes towards the goal of building a resilient, sustainable, and green recovery. We will make the transition towards clean, innovative, resource efficient, low carbon technologies and infrastructure. We encourage the MDBs to contribute fully to the achievement of this objective. We will identify and work together on further measures to build sustainable economies.
28. We reaffirm our commitment to address the threat of irreversible climate change, based on the principle of common but differentiated responsibilities, and to reach agreement at the UN Climate Change conference in Copenhagen in December 2009.
Delivering our commitments
29. We have committed ourselves to work together with urgency and determination to translate these words into action. We agreed to meet again before the end of this year to review progress on our commitments.

(BBC)

At G20, China Takes Stage as Global Economic Power

BEIJING — Let the rest of the world dither over whether this week’s economic summit meeting in London will save the planet from economic collapse.

China arrives at the meeting with a sense of momentum, riding a wave of nationalism and boasting an economy that, more than any other, is surfing the trough of a crippling recession. While other major economies shrink this year, China’s is expected by some economists to pass Japan’s as the world’s second largest, if it has not already.

The most talked-about new book here, “China Is Unhappy,” combines hypernationalism with biting criticism of Western mismanagement and of China’s reluctance to grasp its place in history.

China’s normally faceless vice president, Xi Jinping, achieved cult status in late February after cameras caught him in an unguarded moment in Mexico, attacking “foreigners who had eaten their fill and had nothing better to do, pointing their fingers at our affairs.”

It has not dampened this spirit that China — and its $2 trillion in exchange reserves — are viewed around the world as the solution to a host of problems, whether by shoring up the capital base of the International Monetary Fund or by becoming a bigger engine of growth for Asian economies long dependent on the United States market.

Yet even as Presidents Hu Jintao and Obama had their first meeting on Wednesday on the sidelines of the summit proceedings, the Chinese appeared torn between seizing their moment in the geopolitical spotlight and shying from it.

Government censors quickly deleted Mr. Xi’s remarks from Chinese news reports last month. On Wednesday, the front page of China Daily, the English-language newspaper that telegraphs government positions to the outside world, warned that China “is not as strong an economy as some people think.”

“Bailing out China is our most important contribution to bail out the world,” Tang Min, an economist at the state-financed China Development Research Foundation, was quoted as saying.

Such is the quandary of a nation whose rise to power appears both inevitable and, in the view of many experts, still a bit premature.

“China is a major global economy now. That is a fundamental reality,” Chu Shulong, who directs the Institute of Strategic Studies at Tsinghua University in Beijing, said in an interview. “What China says and does has an effect on international finance, international economics and other economies.”

But just as real, Mr. Chu and others said, are the factors that hamstring China: widespread poverty, authoritarian rule, a culture shrouded by decades of isolation and poorly understood intentions. China’s global ambitions are unlikely to be realized until it resolves those issues.

Even then, China’s economic fortunes remain deeply entangled with those of the United States, its biggest customer, rival, debtor and still — by far — the world’s biggest economy.

So although Beijing may agitate for changes in the global financial structure, and relish some schadenfreude at Washington’s expense, its interests lie very much in getting America back on its economic feet.

That does not negate China’s newly enhanced status. With most of the world in financial collapse, China’s economy has suddenly become too big — and too healthy, expected to grow by at least 6.5 percent this year — for the rest of the world to ignore.

Evidence of China’s ascension is everywhere. Three years ago, China did not have a single bank among the world’s top 20, measured by market capitalization. Today the top three are Chinese. (In 2006, the United States had 7 of the top 20 banks, including the top 2; today it has 3, and the biggest, Morgan Stanley, is rated fifth.)

China’s government-owned enterprises are buying companies, technology and resources worldwide. This year they have spent $13 billion in Europe, and plan new investments in the United States. China has struck long-term oil contracts with Brazil and Russia, and is angling for a more than $20 billion stake in three Australian mining companies.

China holds $1 trillion in United States government debt, and that is but half the foreign reserves generated by its huge trade surplus and investment inflows. The rest of the West owes China money, too.

Just as clearly, China harbors global ambitions. Military spending has grown for years at a double-digit clip, though as a share of gross domestic product, it is half of the United States’ military spending. China is slowly building a blue-water navy, and in December it sent three ships to the waters off Somalia to patrol against pirates, in the first modern active deployment of its warships beyond its home waters.

Foreign analysts uniformly say they are struck by China’s new assertiveness in diplomatic and military affairs, from tart critiques of American fiscal policy to verbal sparring over control of the South China Sea.

Kenneth G. Lieberthal, a Brookings Institution scholar who oversaw White House Asia policy from 1998 to 2000, said the Chinese traditionally deferred to Washington on major economic and strategic issues, assenting or differing only after Washington made its case.

But “in meetings with the Chinese on several issues in the last two months, I’ve been quite surprised that Chinese are sitting there talking the way you would expect a major power to talk,” he said. “They are beginning to appreciate that when countries emerge from this current economic crisis, China is likely to be either the first to emerge or right after the U.S., and that China will be one of the very few countries at the end of this crisis to emerge without having high levels of government debt.”

“There is a palpable change taking place here,” Mr. Lieberthal added, “with a sense of greater confidence that China has now become an important place and needs to act that way.”

But economic importance does not automatically translate into geopolitical heft. In China’s case, most of the other components of true global power — moral sway, military clout, cultural influence, to name a few — are in the assembly stage, or missing altogether.

Even China’s unquestioned economic clout comes with an asterisk. While Chinese megacities boom and the country’s coast has become the world’s factory, 800 million of the nation’s 1.3 billion citizens remain farmers, many mired in poverty. China remains a developing nation, still vying for first-world status.

“I would be careful calling China a superpower. It is not one,” David Shambaugh, who directs the China Policy Program at George Washington University in Washington, wrote in an e-mail message. “It has no global military reach, its soft power is limited, and its diplomatic reach, while now global, is still limited in areas such as the Middle East and Latin America.”

(NYT)

Argentina, China reach currency swap agreement

MEDELLIN, Colombia, March 31- Argentina's central bank considers its recent currency swap agreement with China as a contingency measure and the South American country does not need it for now, Argentine central bank president, Martin Redrado, said on Tuesday.

"This is a standby swap. At this moment Argentina does not need it," Redrado said during an investment conference on the sidelines of the Inter-American Development Bank annual meeting.

"It could be used to do operations for monetary and currency operations," he said.

The two governments signed a memorandum of understanding, creating a framework for the 70 billion yuan ($10.2 billion) swap on Sunday. The news was distributed by the official Xinhua news agency on Monday.

Zhou Xiaochuan, Governor of the People's Bank of China said on Monday that but both sides needed to work out final details.

The swap is the sixth that the PBOC has signed with central banks since December in a drive to free up trade-finance channels that have been clogged by the global credit crunch.

"The fact that China represents such a small share of Argentina's total trade (less than 12 percent) suggests limited impact on FX, but is an important political gimmick at this time (convertibility will remain an issue)," RBS wrote in a research note issued on Tuesday.

"Indeed, we have been talking out the view that it is in the government's best interest to maintain a stable exchange rate into the elections as a strong currency has been the pinnacle of the Kirchner's economic plan and is essential for moderating capital flight," RBS said.

This is China's first currency swap line into Latin America. China's bilateral trade with the region has grown from $15 billion in 2001 to roughly $140 billion in 2008, Zhou told delegates to the IADB meeting.

The PBOC has signed six bilateral currency swaps in recent weeks, totaling 650 billion yuan ($95 billion). The other five central banks that have signed agreements with the PBOC since mid-December are South Korea, Malaysia, Indonesia, Hong Kong, and Belarus.

(Reuters)

EU says G20 not to focus on China financial calls

BEIJING - Europe is comfortable with China's growing world role but believes the G20 summit will be too early to decide on Beijing's calls for more say in global financial bodies, the EU Commissioner for External Relations said on Sunday.

European Union Commissioner Benita Ferrero-Waldner told Reuters in Beijing that the London gathering of 20 major wealthy and developing powers this week would focus on "concrete results" to revive the global economy, not more distant issues.

China caused a stir ahead of the Thursday summit when it suggested the world move to greater use of IMF Special Drawing Rights as an international reserve currency.

"I don't think that this will be the question that really will be discussed thoroughly in London," Ferrero-Waldner said after talks with Chinese Foreign Minister Yang Jiechi and Vice Premier Li Keqiang.

Likewise, she said, China's call for a bigger role in the International Monetary Fund (IMF) and other international financial bodies would not be a focus of the summit.

"I think it's too early for us to give a really concrete answer," she said of these calls. "I think it is within the IMF, it is within the international financial institutions, that these questions have to be discussed."

The idea of a new reserve currency system based on the IMF special drawing rights has not been entirely knocked down, but many G20 leaders have made clear that for now the U.S. dollar's status as the dominant reserve unit remains.

Ferrero-Waldner is seeking to smooth differences between Brussels and Beijing before the G20 meeting and a planned summit between China and the EU in May.

She said China's growing economic clout naturally meant more of an international role for Beijing.

"With the prosperity of China's economy, we of course have seen more self-assertiveness in policy and diplomacy," she said, adding that Beijing had taken a "very constructive attitude" in many international issues, such as climate change negotiations.

Chinese officials were angered by French President Nicolas Sarkozy's decision to meet the Dalai Lama, Tibet's exiled Buddhist spiritual leader, in December, when France held the six-monthly rotating EU presidency.

China condemns the Dalai Lama as a separatist for demanding high-level autonomy for his homeland.

Beijing is still giving Sarkozy the cold shoulder, but relations with the EU have improved, with Premier Wen Jiabao visiting Brussels and other capitals in February.

Ferrero-Waldner said she hoped Beijing and Brussels would seal a new framework treaty governing their ties by the end of the year.

(Reuters)

China To Actively Support IMF, Zhou said

MEDELLIN, Colombia--People's Bank of China Governor Zhou Xiaochuan said Saturday that China is ready to actively join in the international effort to enhance the results of the International Monetary Fund and other multilateral lenders.

In a speech before the Inter-American Development Bank meetings being held in Medellin, Zhou outlined the need to emphasize greater regulatory reform.

He also called for a better balance of savings on a global level and for "greater responsibility for the banking sector."

In the wide-ranging speech, Zhou also said that China is ready to boost economic, trade and other ties between his nation and those in Latin America.

"We see huge potential for economic ties and trade between Latin America and China," he said, noting that China has a free-trade pact with Chile, has concluded negotiations for such a pact with Peru and could have one with Costa Rica.

"The potential for China to make foreign direct investment in the region is huge," he said, adding that some sectors of special interest are in pharmaceuticals, computer software, aeronautics and biological products.

He added that there was also potential in the finance, tourism and transportation sectors.

"We have every reason to believe that with joint efforts we can overcome the current difficulties and bring our cooperation to a new level," he added.

(Dow Jones)

China questions Dollar's dominance

The dollar's role as the world's dominant currency is coming under intense scrutiny.

This week, China added its voice to demands for a new global currency as an alternative to the dollar in international trade and finance.

It is worried that the dollar's value is being eroded by the steps the US is taking to rescue its economy from the worst financial crisis since the 1930s.

The US currency recorded its biggest weekly slide since 1985 last week, after the Federal Reserve said it would begin buying government debt to try to boost the economy, underscoring concerns.

"Calls for a new global currency come at a time when the US dollar is probably at its most vulnerable in many years," says Mitul Kotecha, global head of foreign exchange strategy at French financial services firm Calyon.

Dangers

China's central bank governor Zhou Xiaochuan called for a new reserve currency run by the International Monetary Fund.

He said the recent crisis revealed the dangers of relying on one currency.

He echoed similar calls made by Russia, which said it would bring up the topic at next week's G20 meeting.

The US response to China's unusually frank comments confused many investors.

US Treasury Secretary Timothy Geithner said he was "quite open" to China's idea, triggering a plunge in the dollar.

But he then added that the dollar was likely to remain the world's reserve currency for a long time, helping the currency to recover.

"The machinations of currency policy between the US and China are becoming increasingly intriguing," says Neil Mellor, currency strategist at Bank of New York Mellon.

China has almost $2 trillion in foreign exchange reserves, of which 65% is believed to be in dollars.

Popularity wanes

It is not unheard of for currencies to fall from grace in the global currency league.

Sterling was the dominant reserve currency of much of the world in the 18th and 19th Centuries.

The cost of fighting World Wars I and II, as well as the primacy of the US in the world economy, resulted in the pound losing its status.

And there have been anecdotal signs that the dollar's popularity as the world's currency of choice is fading.

In 2007, Indian tourist authorities said they would no longer accept dollars for entrance to the Taj Mahal.

And at home, rapper Jay-Z waved a wad of euros in a music video.

Stable reserves

To be clear, China is not calling for the US to replace the dollar as its own currency.

It is worried that the value of its reserves, which are predominantly held in dollars, is subject to the volatility of the dollar on foreign exchanges.

It has suggested that the International Monetary Fund's Special Drawing Rights (SDR) could be used as a reserve currency.

The SDR, which as created in 1969 as a unit of account, was initially pegged to the dollar, but is now based on dollars, euros, sterling and yen.

China's proposal would broaden the basket of currencies forming the SDR to include all large economies. Its use would be expanded and the IMF itself would manage some of the reserves.

The goal is to make currency reserves more stable.

Unrealistic

It is not a new idea. Economist John Maynard Keynes made a similar proposal.

But many analysts say such a move is unrealistic, even in the long term.

The dollar's appeal as a reserve currency is the depth and liquidity of US financial markets, says Mark Williams, international economist at Capital Economics.

This is something which the little-used SDR cannot compete with.

Even the world's next most traded currency, the euro, has not emerged as a true competitor to the dollar.

According to the IMF, the dollar accounts for 65% of declared currency reserves. This is down from 73% in 2001, but the decline also reflects the euro's higher value.

"If the euro falls short, it is hard to see markets for assets denominated in a new currency ever becoming developed enough for it to have a chance of dislodging the dollar, " Mr Williams says.

Furthermore, if China were to ditch the dollar, it would have to tread carefully.

Any suggestion that it is diversifying away from the dollar would dramatically undermine the value of its own reserves.

'Massive impact'

But as the world's largest holder of dollars, China's comments cannot easily be dismissed.

Should reserve managers begin to shift away from the dollar, it would have a "massive impact" on US markets, says Mr Kotecha at Calyon.

The huge appetite for dollars from countries such as China helped keep US mortgage rates low - in part causing the crisis the US economy currently faces.

If foreign investors shy away from buying US debt, it could lead to problems financing the Obama administration's stimulus spending plans.

As such, the US is likely to keep China and other large reserve holders on side and pay lip service to China's demands, even if they are unrealistic.

"It's a pointed reminder that China holds some key cards in its game of diplomatic poker with the US," says Mr Mellor at Bank of New York Mellon.

(BBC)

PM Wen Concerns Over China's U.S. Treasurys

BEIJING -- Premier Wen Jiabao voiced confidence in China's economy, saying his government's finances give it room to spend even more to support growth if needed, but expressed concern about the outlook for the U.S. and the safety of its Treasury bonds.

The forceful comments from Mr. Wen's annual press conference -- a rare opportunity for domestic and foreign reporters to ask a top Chinese official questions directly -- helped depress the U.S. dollar and prices of U.S. Treasurys in Asian trading Friday.

The public airing of his concerns reflect how the relationship between China and the U.S. has been evolving under the pressure of the financial crisis. For years the U.S. has pressed China to change the way it runs its economy, such as by opening up its financial system. But in the last year China's government has been increasingly vocal about what it sees as U.S. economic mismanagement. And as the U.S. government's largest creditor, it has become more assertive in trying to ensure its interests receive a hearing.

"We have lent a huge amount of money to the U.S., so of course we are concerned about the safety of our assets. Frankly speaking, I do have some worries," Mr. Wen said in response to a question. He did not offer specific suggestions on economic policy to the U.S. government, but called on it to "maintain its credibility, honor its commitments and guarantee the security of Chinese assets."

Mr. Wen did indicate that China would not be rash in making changes to its $1.946 trillion stockpile of foreign reserves, much of which is in U.S. dollars. While China is naturally looking out for its own interests, it will "at the same time also take international financial stability into consideration, because the two are inter-related," he said.

In that vein, Mr. Wen also pointed out that China hasn't pushed down the value of the yuan, despite pressure on its exporters, and repeated his government's commitment to currency stability. The yuan has hovered around 6.84 to the dollar since July 2008, but Mr. Wen noted that because the dollar has risen against other Asian and European currencies, the yuan has actually become stronger overall.

He said China alone would decide where the yuan goes from here. "No country can pressure us to appreciate or depreciate" the currency, he said.

Despite the rising external challenges, Mr. Wen reaffirmed his belief that China should be able meet its traditional target of economic growth of around 8% this year. He said market expectations last week of another stimulus package were based on "rumors and misunderstandings," and that China's announced program of four trillion yuan in investments over two years will help meet "both short-term and long-term needs."

China's government is planning on an eightfold expansion of its budget deficit this year, to around 3% of gross domestic product, to fund the stimulus program. Mr. Wen said government debt remained at a manageable level and that conservative budgeting in previous years means China is well positioned to do more if necessary.

"We have already prepared plans to deal with greater difficulties, and have reserved adequate ammunition. We can introduce new stimulus policies at any time," he said.

Mr. Wen said that China is also closely watching to see the effects of the policies taken by U.S. President Barack Obama aimed at returning the world's largest economy to health. Chinese foreign minister Yang Jiechi was also in Washington this week to discuss how the two countries can cooperate on economic policy, among other issues.

A test of that cooperation is quickly approaching. U.S. Treasury Secretary Timothy Geithner this week called on the Group of 20 – a gathering of the world's largest developed and developing economies – to increase funding for the International Monetary Fund by up to $500 billion to help combat the financial crisis. Achieving that sum likely will depend on getting agreement from countries that hold large foreign exchange reserves, such as China and Saudi Arabia.

Ahead of a preparatory meeting of G-20 financial officials this weekend near London, Mr. Wen said pointedly that "increased funding for the IMF is not a question for just one country" but for all member nations. He also repeated China's desire to see reforms to the IMF that give more clout to developing nations.

The Chinese premier's annual press conference is held each March at the close of the country's legislative session. Mr. Wen was asked about a broad range of subjects, from relations with France and Russia to the possibility of political reform in China and the sensitive issue of Tibet.

Mr. Wen used harsh language against the Dalai Lama, Tibet's spiritual leader, who accused the Chinese government this week of turning the Himalayan region into a "hell on earth." He said talks between Beijing and the Dalai Lama, which took place last year without making any progress, could only resume if the Dalai Lama is "sincere."

Despite blanket security in Tibet around the 50th anniversary of the Dalai Lama's flight from Tibet, Mr. Wen said that "the situation in Tibet on the whole is stable. The Tibetan people hope to live and work in peace and stability."

China faces most difficult year

Wen Jiabao: 'We have not seen the worst of it yet'

Chinese Premier Wen Jiabao has said the current year will be the most difficult the country has faced this century because of the global economic crisis.

Addressing parliament, Mr Wen reiterated that there would be a $585bn (£413bn) investment programme to stimulate the Chinese economy.

He also declared an annual growth target of 8% and goals to boost consumption and raise consumer demand.

His address opens the annual session of the National People's Congress.

The BBC's James Reynolds in Beijing says the Communist Party fears that if annual growth slips below 8% there will be social instability.

When people cannot get jobs they start to question why the Communist Party should stay in power, our correspondent says, which is why it is so important for the Party to try to build on its stimulus package.

The premier said he hoped to create nine million new jobs in the cities and increase local government spending budgets by almost 25%.

"In China, a developing country with a population of 1.3 billion, maintaining a certain growth rate for the economy is essential for expanding employment for urban and rural residents, increasing people's incomes and ensuring social stability," he said.

Mr Wen was frank that China was suffering from the global financial crisis, and acknowledged the country lacked adequate social security provisions and health care.

As more people lose their jobs, the lack of a social safety net is becoming a glaring problem, our correspondent says.

• Chinese stock markets nose-dived amid news of no expansion to Beijing's economic stimulus plan

• Mr Wen says Beijing was ready to talk to Taiwan on political and military issues

Global impact

The increased spending talked about by Premier Wen in his keynote speech was announced last November.

There appeared to be no new money to help the ailing economy, as some had speculated.

Extra government money will be spent on infrastructure projects, such as railways, roads and irrigation schemes.

Mr Wen said the government would work to maintain social cohesion, amid fears in Beijing that job losses for millions of migrant workers could spark unrest.

"We will improve the early warning system for social stability to actively prevent and properly handle all types of mass incidents," he said.

He also pledged greater efforts to tackle corruption, the source of widespread public discontent.

But he said he was satisfied that China would cope with the unprecedented challenges.

"We are fully confident that we will overcome difficulties and challenges, and we have the conditions and ability to do so," Mr Wen told the 3,000 delegates attending the Communist Party's showpiece political event of the year.

On the eve of the meeting, which lasts nine days, China said it would increase military spending by 14.9% this year to 480.6bn yuan ($70.2bn).

(BBC)

Global stocks rise on China hopes

NEW YORK - World stocks bounced back from multiyear lows on Wednesday, buoyed by signs of economic recovery in China and plans by its government to increase fiscal spending, news that helped lift oil and metals prices.

U.S. crude oil futures jumped more than 7 percent, extending gains to top $45 a barrel after inventory of crude in the United States declined unexpectedly and demand for gasoline rose.

Euro zone and U.S. government debt prices mostly fell as the rebound in equities undermined investors' appetite for less risky fixed-income assets.

But the cost of borrowing dollars over three months nudged higher as ongoing worries over the financial sector, where counterparty risks have risen, kept banks wary about lending to each other.

A key gauge of Chinese manufacturing rose in February for the third straight month, hitting a five-month high and lifting investor optimism on hopes the data signaled that China, a major driver of global growth, may be on the brink of economic recovery. China also said it will boost spending on infrastructure and manufacturing under a second stimulus package.

The Shanghai Composite Index , the main Chinese stock index, surged 6.1 percent in its biggest gain since November.

European shares rallied, breaking three straight sessions of losses, and U.S. stocks snapped a five-day sell-off. Higher prices for oil and other commodities -- driven by China hopes -- spurred energy and natural resource stocks.

"The market is encouraged by the news from China," said Joe Arsenio, president of Arsenio Capital Management in Larkspur, California. "They believe (China) will gain traction in the second quarter."

Exxon Mobil gained 2.1 percent while miner Freeport-McMoRan Copper & Gold Inc rose 14 percent.

Shares of Caterpillar Inc , a big exporter to China and a major seller of equipment to the mining industry, rose 13.7 percent.

After 1 p.m., the Dow Jones industrial average .DJI rose 117.08 points, or 1.74 percent, at 6,843.10. The Standard & Poor's 500 Index .SPX gained 12.03 points, or 1.73 percent, at 708.36. The Nasdaq Composite Index added 27.05 points, or 2.05 percent, at 1,348.06.

The FTSEurofirst 300 .FTEU3 index of top European shares closed at 696.23 points, up 4 percent.

Miners Rio Tinto gained 14 percent and BHP Billiton rose 12.9 percent on the back of higher copper prices, while steelmaker ArcelorMittal rose 12.4 percent.

Copper jumped over 5 percent to its highest level in more than three months as investors pinned hopes on demand from China, the world's largest consumer of the red metal.

The rise in equity markets around the world overshadowed more dire economic data suggesting that the U.S. and euro zone recessions have yet to hit bottom.

U.S. private companies hemorrhaged 697,000 jobs in February and the service sector slump deepened [ID:nN04538530].

The dollar vaulted to a four-month high against the yen as another slide in the U.S. private-employer payrolls and persistent worries about the world economy boosted safe-haven flows into the U.S. currency.

But the dollar cut earlier gains against the euro and sterling as stocks rallied and investors took profits ahead of Friday's government payrolls report and interest rate decisions due Thursday from the European Central Bank and Bank of England.

The dollar rose as much as 99.48 yen, closing in on 100 for the first time since early November, as investors worried about Japan's struggling economy and the U.S. jobless data.

The dollar rose 0.97 percent at 99.25 against the yen, but it fell against a basket of major currencies, with the U.S. Dollar Index .DXY down 0.49 percent at 88.751.

The euro rose 0.40 percent at $1.2615.

U.S. government debt fell. The benchmark 10-year U.S. Treasury note fell 36/32 in price to yield 3.02 percent. The 2-year U.S. Treasury note slipped 6/32 in price to yield 0.98 percent.

U.S. light sweet crude oil rose $2.73 to $44.38 per barrel.

Gold fell in Europe, flirting with three-week lows, as the bounce in equities lured investors back into riskier assets.

Spot gold prices fell $8.40 to $906.85 an ounce.

Asian stocks rallied on Wednesday on hopes Beijing will step up efforts to support the Chinese economy,

Japan's Nikkei share average .N225 rose 0.9 percent, after sliding to a 25-year low on Tuesday. The MSCI index of Asia-Pacific shares outside Japan .MIAPJ0000PUS rose 1.3 percent.

(Reuters)

Foreign Direct Investment in China Tumbles on Crisis

Feb. 16 -- Foreign direct investment in China declined for a fourth month in January as companies cut back on spending to weather the global financial crisis.

Investment fell 32.6 percent to $7.54 billion from a year earlier, the commerce ministry said at a briefing in Beijing today. That compared with a 5.7 percent decline in December.

Motorola Inc., the second-biggest U.S. seller of mobile phones, said last week that it had eliminated jobs in China as part of cutting 4,000 workers worldwide. Weaker investment this year by both foreign and Chinese companies may add to falling exports and a sagging property market in hampering government efforts to reverse the nation’s economic slowdown.

“Foreign multinational companies still find China very attractive, but their hands are tied -- they don’t have spare money to invest,” said Sherman Chan, a Sydney-based economist with Moody’s Economy.com. “Once the global economy shows signs of recovery, China will probably see a surge in foreign direct investment again.”

The global crisis, a Chinese Lunar New Year holiday in January, and a high comparative figure a year earlier contributed to the decline, commerce ministry spokesman Yao Jian said.

Thousands of factories have closed in China on a waning world appetite for toys and electronics. The nation’s exports declined by the most in almost 13 years in January and house prices across 70 major cities fell by the most since data began in 2005.

Global Decline

Worldwide, foreign direct investment fell 21 percent last year to $1.4 trillion because of tight credit, the global recession and falling profits, the United Nations Conference on Trade and Development estimated on Jan. 19. It’s likely to decline further this year, the organization said.

In developing economies, investment rose 3.6 percent last year, UNCTAD estimated. While China reported a 23.6 percent increase in investment from abroad in 2008 to a record $92.4 billion, the inflows of cash got smaller each quarter.

A dip in investment from overseas isn’t as big a concern for the Chinese economy as the risk of a slump in spending by local companies, according to Mark Williams, a London-based economist at Capital Economics Ltd.

“In scale, foreign investment pales against investment generated domestically,” Williams said. “Most domestic investment is financed internally by firms from retained profits and with profits now contracting this source of funding is now under threat.”

Economic Slowdown

The world’s third-biggest economy may expand 6.3 percent this quarter, the weakest pace since 1999, according to the median estimate of 14 economists surveyed by Bloomberg News. The government is rolling out a 4 trillion yuan ($585 billion) package of stimulus spending to spur growth.

China’s attractions include low labor costs, an economy that’s still growing when developed nations are in what the International Monetary Fund describes as “a depression,” and a market of 1.3 billion people.

Companies switching manufacturing to China include Groupe SEB SA. The world’s largest maker of countertop kitchen appliances said Feb. 11 that it will eliminate 214 jobs at factories in France and Germany as it shifts production of irons.

In China, Intel Corp., the world’s biggest chipmaker, said Feb. 5 that it plans to close its assembly and test operations in Shanghai, laying off about 2,000 workers, and move the operations to the western city of Chengdu, where costs are cheaper. It also said it will add $110 million of registered capital to its China unit.

Motorola declined last week to say how many jobs it had eliminated in China, where it employs about 10,000 people.

Globally, foreign direct investment will rebound “sooner or later” for reasons including the opportunities created by cheap asset prices and industry restructuring, according to UNCTAD.

(Bloomberg)

PM Wen addresses China's economy at Davos

DAVOS, Switzerland - China's Premier Wen Jiabao blamed the United States' debt-financed spending binge and blind pursuit of profit for the global financial crisis in a speech at the World Economic Forum on Wednesday.

"Inappropriate macroeconomic policies in some economies and their unsustainable model of development, characterised by prolonged low savings and high consumption," was first in a list of reasons Wen cited for the crisis.

This was a clear reference to the United States, which has a savings rate below zero and relies heavily upon Chinese buying of U.S. debt to finance its huge current account deficit of 4.8 percent of GDP and growing.
But Wen chose not to address directly a brewing row over the value of its currency -- an issue closely tied to U.S. debt issuance.

The new U.S. Treasury Secretary Timothy Geithner last week surprised China by branding it a currency manipulator for depressing the value of the yuan to support its exports. Geithner was joined by the International Monetary Fund, which said the Chinese yuan was under valued.

This disappointed Beijing since the previous administration avoided the term for years, aware of U.S. dependence on China to buy its debt, and instead pursued dialogue.

In his speech, Wen also listed excessive expansion of financial institutions in the "blind pursuit of profit," the failure of regulation, lack of discipline by ratings agencies, and the spread of derivatives for the financial turmoil that has sent major economies tumbling into recession.

To tackle the crisis, Wen threw his weight behind efforts in the Group of 20 major economies to reform the financial system by tightening regulation and oversight. In particular, Wen supported strengthening the supervision of major reserve countries, a role given to the IMF but never effectively utilised.

Wen travels to Berlin to meet with German Chancellor Angela Merkel on Thursday as part of an European tour to discuss cooperation in solving the financial crisis.

MEASURED OPTIMISM ON CHINA
On the outlook for China, Wen struck a tone of measured optimism. He said there were early signs that the economy may have started to turn around in late November. He pointed to a marked increase in lending and activity at ports.

"To be honest, it will be a tall order to achieve a growth rate of 8 percent in 2009, but I still retain the conviction that we will achieve this," Wen told business and political leaders in his keynote speech at the four-day gathering.
China, the world's third-largest economy, has slowed much more abruptly than expected in the face of the financial crisis, as wilting U.S. and European demand have slammed the country's export sector.

Annual economic growth slowed to 6.8 percent in the fourth quarter of 2008, from 13 percent in all of 2007. The 9 percent pace for 2008 was the slowest in seven years; growth slowed despite five interest rate cuts in the second half of the year.

That has muted hopes that China could help pull the global economy out of the current slowdown.

(Reuters)

UBS Sells Stake in Bank of China

HONG KONG -- UBS AG said in a statement Wednesday it sold its entire 1.33% stake in Bank of China Ltd. in a placement to institutional investors, after the lockup period for its holding expired Tuesday.

The share sale is the first exit by a foreign strategic investor in a Chinese lender, following speculation that foreign investors need to cash out to replenish their depleted balance sheets.

The statement didn't specify the terms of the placement. People familiar with the situation said earlier Wednesday that UBS raised US$808 million by selling 3.38 billion shares to 15 participants at a 12% discount to Bank of China's closing price Wednesday of HK$2.12 (27 U.S. cents).

The bank acquired the stake for US$491.57 million in September 2005, according to the prospectus for Bank of China's US$11 billion initial public offering, which took place the following year.

Analysts said the proceeds are welcome, given the bank's efforts to bolster capital. The stake sale comes shortly after UBS accepted Swiss government funds, which will involve up to $60 billion in illiquid assets being transferred to a fund managed by Switzerland's central bank.

A spokesman for Zurich-based UBS declined to detail the sale's effect on the bank's capital, deferring questions on the matter until it reports its fourth-quarter earnings Feb. 10.

"UBS remains committed to its business relationship with Bank of China, and its business in China as a whole, where UBS will continue to develop its already strong client franchise," the company said, without elaborating.

The lockup period for another foreign investor in the Chinese lender, Royal Bank of Scotland Group PLC, also expired over the past two days. It holds an 8.25% stake in Bank of China and was recently bailed out by the U.K. government, which now owns 58% of the U.K. bank.

Bank of China spokesman Wang Zhaowen tried to allay concerns Tuesday that RBS would sell some or all of its shares. He said the U.K. lender pledged to notify Bank of China if it decided to sell its shares in the Chinese bank one month beforehand, and it hasn't received such a notification.

The other foreign investors in Bank of China are Temasek Holdings (Private) Ltd., whose 4.13% holding also expired over the past two days, Asian Development Bank and Bank of Tokyo-Mitsubishi UFJ Ltd., which each own a 0.2% stake.

There has been widespread speculation that Western banks with investments in China will sell down their holdings to raise capital in a tough time for the banking industry.

Earlier this month, people familiar with the situation said Bank of America Corp. had sought to sell US$3.1 billion worth of shares it owned in China Construction Bank Corp., but the deal was canceled later.

The people didn't provide a reason for the deal's cancellation, but the South China Morning Post reported that the sale was pulled after an objection from Beijing, which thought it wasn't the right time for a sale.

(WSJ)

China forex watchdog burnt by WaMu collapse

HONG KONG - China's foreign exchange watchdog, the State Administration of Foreign Exchange, will cut back on overseas equity buys next year after suffering major losses on the collapse of U.S. lender Washington Mutual, according to sources.

Earlier this year, SAFE, which controls around $2 trillion of China's foreign reserves, agreed to invest up to $2.5 billion in fund of U.S. private equity giant TPG TPG.UL -- its first foray into a foreign private equity fund, people close to the situation told Reuters.

In April, TPG, one of the world's largest private equity firms, led a $7 billion investment in Washington Mutual to help the troubled lender boost its capital.

TPG put money into WaMu through several of its funds, including one SAFE invested in, said the sources who declined to be identified due to the sensitive nature of the deal.

Just five months later, WaMu, the largest U.S. savings and loan firm, was closed by the U.S. government, making it one of the largest U.S. bank failures in history.

Its banking assets were sold to Wall Street bank JPMorgan for $1.9 billion, wiping out about $1.35 billion that TPG and its institutional investors, known as "Limited Partners" had invested.

"At that time, SAFE was certainly shocked by the news that the U.S. government decided to take over WaMu and there was almost nothing that SAFE could do to save its investment," said one of the sources.

"It's a good lesson for SAFE and you can imagine how unhappy it was, just like every other LP of TPG for the deal," he said.

TPG's losses from the WaMu deal are publicly known but the names and investment contributions of limited partners of private equity firms usually remain under wraps.

It is still unclear how much in total SAFE lost from its bet on TPG and WaMu.

One source said SAFE agreed with TPG's plan to rescue WaMu, contributing at least 10 percent of TPG's initial $2 billion investment in WaMu. Other sources confirmed TPG informed SAFE of its plan to invest in WaMu before it took the action and SAFE supported TPG's plan.

NO MORE QUICK DEAL

SAFE was not the first choice of TPG as a partner to rescue WaMu.

In China, the private equity firm is well known for its landmark investment in Shenzhen Development Bank 000001.SZ in 2004, making it the first foreign investor to own a controlling stake in a Chinese lender.

Sources said TPG initially approached China Investment Corp, lobbying the country's official sovereign wealth fund to become a major limited partner of its new private equity fund.

CIC, which was set up by the Communist government last year to earn higher returns on a $200 billion portfolio of its foreign exchange reserves, declined the offer mainly due to concerns about investment risks and poor prospects of U.S. markets, the sources said.

Instead, TPG's dealmakers contacted SAFE and the foreign exchange regulator agreed on condition that TPG would also jointly invest some of its own money in the WaMu deal, the sources said.

The big losses by SAFE in the WaMu deal through its investment in the TPG fund have drawn attention from top government leaders in Beijing, who have urged both CIC and SAFE to be more cautious on its overseas investments next year.

CIC has already attracted massive criticism at home over its deals in U.S. firms, which have been battered by the credit crisis, with its stakes in private equity house Blackstone Group (BX.N) and Morgan Stanley (MS.N) diving in value.

One of the sources said both CIC and SAFE would focus more on overseas investments in fixed income areas rather than equities deals in 2009.

(Reuters)

Slowdown In China Gets Worse, Increasing Global Woes

BEIJING -- Sudden declines in China's imports and exports show the country's economic slowdown is entering a new and more serious phase, exacerbating the global slump while jolting Chinese companies and workers used to years of soaring sales and salaries.

The surprising reversal adds to concerns over whether the Chinese economy -- on track to surpass Germany this year as the world's third-largest and the only one in the top tier still expanding -- can help support growth and stave off deeper financial pain elsewhere around the world.

Associated Press

Fervor for electronic devices is fading in China's once-dynamic market.

China's customs agency said Wednesday that November's exports fell 2.2% from a year earlier, the first decline since June 2001. That marked a major shift from a 19.2% gain in October and a nearly 26% rise in 2007.

Imports suffered an even steeper drop, down 17.9% in November from a year earlier. They had risen 15.6% in October and more than 20% last year. The import figure signals weakness in domestic consumption, bad news for companies that export to China, and also falling demand for manufacturing components -- which spells trouble for China's future exports as well.

Chinese producers of low-end goods such as toys and textiles have been struggling all year. But now, sales of higher-end machinery and electronics are declining as the U.S. economy has deteriorated sharply.

China is the third-largest export market for the U.S., and has been a major buyer of commodities. But its imports of iron ore fell 7.9% in November. Crude oil imports were down 1.8% to their lowest level this year, contributing to weakening global oil demand.

"The most striking real economic fact of the past several months is not continued U.S. economic weakness, but that China's economy has slowed much more quickly than anyone had forecast," Australia's central bank Governor Glenn Stevens said this week.

Stimulus Package

China's leaders last month announced a 4 trillion yuan ($584 billion) stimulus package, and on Wednesday wrapped up an annual economic-policy conference by reaffirming their determination to support growth by any means available. But some economists think China could be entering a sustained period of falling export orders, with the U.S., European and Japanese economies all now contracting. The World Bank expects the volume of global trade to shrink in 2009 for the first time since 1982.

That poses an especially difficult transition for Chinese firms and consumers. In the coastal city of Yuyao, Ningbo Wanglong Group says that years of rapid expansion have made it one of the world's largest producers of preservatives for food and feed. But export orders have declined rapidly since September.

"We've never experienced this before. We don't know what happened," said Zhou Hong, a sales manager. He said shipments to overseas distributors have plunged by roughly 50% to 60% in recent months. The company hasn't yet laid off any of its 1,500 employees, but has had to halve production and offer clients discounts of around 50%. "So far we don't know what else we can do," Mr. Zhou said.

China's economy is slowing particularly sharply because the export decline is combining with slackening domestic demand. Housing sales have dropped and prices are declining in most major cities. New construction has dried up, which saps demand for steel, cement and copper.

Consumers are holding off on other big purchases: Car sales dropped 10.3% from a year earlier in November, the third monthly decline this year.

Many economists are forecasting China's economic growth to slow to around 7.5% next year, which is below the government's traditional 8% target and would be the lowest since 1999. Growth this year is likely to average just over 9%, ending five straight years of double-digit gains.

Economists' worst-case scenarios for China involve a quarter or two of growth around 5% next year, far from the outright contractions typically associated with a recession in the U.S. and other advanced economies. But it does looks like China is headed for what some economists call a "growth recession," a period of weak expansion and rising unemployment.

The slowdown is translating into fewer jobs, and increasing strains between workers and employers. China doesn't publish reliable data on unemployment; few economists take seriously the official jobless rate of 4%. But there have been growing numbers of layoffs and factory closures. Hundreds of thousands of migrant workers have returned to their hometowns to wait out the slowdown. Zhou Tianyong, an economist at the Central Party School, a Communist Party institute in Beijing, estimates that the actual unemployment rate this year is around 12% and could rise to 14% next year.

AFP

China's economic slowdown is manifesting itself in fewer jobs, growing numbers of layoffs and factory closures, and concerns about widening social unrest.

For most of Geely Group's short history as an auto maker, its biggest challenge was figuring out ways to expand quickly enough to meet exploding demand from China's increasingly affluent middle class. Now Geely managers are negotiating an abrupt U-turn.

Zhang Xiaodong, a company spokesman, said Geely has suspended plans to start mass production of a sports car and halted development of two large sedans. Geely's sales were down 6% in October and up 1% for the first ten months of the year, after growing more than 40% in 2005 and 2006 and 7% last year.

Survival Rate

Yale Zhang, a Shanghai-based auto analyst with CSM Worldwide, said China's auto makers "are used to a high-growth environment. They don't know how to survive at a single-digit growth rate."

Although the slowdown is taking the sharpest toll on low-paid manufacturing workers, it's also spreading concern among prosperous white-collar families. Well-educated urbanites have been able to hop from job to job in recent years, extracting steep raises once a year or more. Average urban incomes are up 14.7% so far in 2008, the seventh straight year of double-digit gains.

Li Hua, a 31-year-old human-resources executive with a Shanghai sports retailer, says she used to get calls from headhunters almost weekly. She changed jobs twice in the last few years. But in October, the job market started to change. Her own company canceled its recruitment plans, and a friend got laid off from a new job with little severance.

"Now what I'm thinking is to just work hard. No complaints, no asking for a raise," said Ms. Li. "We should all feel lucky we still have a job and are doing fine."

(WSJ)

Facing distress, miners eye China "white knights"

HONG KONG - In metals and mining, Chinese companies are seen today as much as saviors in a time of distress as cash-rich buyers of natural resources.

Not long ago, the industry saw China more as a willing investor, ready with cash to buy minor stakes in companies and their mines ... but the image has shifted more to 'white knight' than 'strategic partner'.

A Chinese firm this week offered to buy control of struggling Australian zinc miner Perilya, and the Chinese are also pursuing another zinc miner, Oz Minerals, which is scrambling to refinance its debt. And mining giant Rio Tinto (RIO.AX: Quote, Profile, Research, Stock Buzz)(RIO.L: Quote, Profile, Research, Stock Buzz), saddled with around $30 billion in debt, is trying to find buyers for some of its assets.

All eyes are on China.

Few companies will admit to being in distress, but for mining groups across the globe, the environment looks increasingly tough. Commodity prices have slumped, costs are rising and revenues falling. Enter cashed-up, government sponsored Chinese companies that appear ready to take more control.

"It's a nice marriage between cash-strapped, mid-cap resource firms and cash-rich, state backed Chinese firms -- it's real good timing," said Larry Grace, analyst at Kim Eng Securities.

"The number of these deals in 2009 will depend on how many of them foreign governments will allow."

A 'white knight' typically rescues a company from distress, a bad deal, an agitating shareholder, or all three.

There are plenty of obstacles, however, that could prevent China from being miners' distressed asset buyer of choice.

For one, China has indicated that, while it's interested in investing abroad, it's happy to be patient in the current environment.

Chinese mining and steel companies are also feeling the economic pinch, though a state-run company has government cash if needed.

Also, any Chinese tie-up carries political baggage.

Australia has long worried that a Chinese foothold in the resource-rich country will result in wages being slashed, and there are concerns that Chinese-controlled mines would lower prices in order to sell their output more cheaply to Chinese state-owned customers.

In 2005, U.S. politicians thwarted CNOOC's (0883.HK: Quote, Profile, Research, Stock Buzz) (CEO.N: Quote, Profile, Research, Stock Buzz) acquisition of California-based Unocal.

But politics can take a back seat if a company is on the brink of collapse.

(Reuters)