Malaysian Exports Fall Most Since 2002 on Electronics

By Shamim Adam and Michael Munoz

Jan. 7 (Bloomberg) -- Malaysia’s exports fell the most in almost seven years in November as recession in its biggest markets eroded demand for electronics goods and commodities.

Overseas sales dropped 4.9 percent from a year earlier to 51.79 billion ringgit ($14.8 billion) after slipping 2.6 percent in October, the trade ministry said in a statement in Kuala Lumpur today. The median estimate in a Bloomberg News survey of 11 economists had been for a 5.7 percent decline.

The global economic slump is hurting orders at the Malaysian factories of companies such as Dell Inc. and Intel Corp., forcing some to shut plants and cut jobs. The government, which expects growth in 2009 to be the slowest in eight years, will introduce more measures to stimulate the economy if necessary, Prime Minister Abdullah Ahmad Badawi said Dec. 31.

“It is a concern that demand within Asia has apparently moderated,” said Gundy Cahyadi, an economist at IDEAglobal in Singapore. “Further shrinkage in exports would only add pressure to the government to react decisively on the economy.”

Singapore, Japan and the U.S., the nation’s biggest export destinations, are all in recession. Singapore’s economy may contract as much as 2 percent this year, the government said last week, and manufacturing is shrinking from China to Australia.

Malaysia’s exports to the U.S. dropped 17 percent to 6.3 billion ringgit in November from a year earlier amid a decline in electrical and electronics shipments, the ministry said today.

Electronics Slide

Japan in November overtook the U.S. as Malaysia’s second- biggest export destination. Overseas shipments to the world’s largest economy have been slipping since 2007 when the U.S. was Malaysia’s biggest export market.

Shipments of electrical and electronics goods, which made up about 40 percent of total exports in November, slid 10.6 percent from a year earlier.

Manufacturers in Malaysia are cutting jobs as demand for their products fall. Western Digital Corp., the world’s second- largest maker of hard-disk drives, last month said it may shutter or sell a plant in Malaysia. About 5,000 workers, mostly from the electronics industry, may be laid off this quarter, Human Resources Minister S. Subramaniam was cited by the Star newspaper as saying on Dec. 22.

Palm oil sales abroad fell 19.1 percent in November as prices eased from record highs reached earlier last year. Malaysia is Southeast Asia’s second-largest oil and gas producer and the world’s No. 2 palm oil seller.

Outperformer

Still, Malaysia’s economic expansion probably outperformed most other Asian nations last quarter, and may continue to do so in the coming months, said Robert Prior-Wandesforde, an economist at HSBC Group Plc in Singapore.

“We expect Malaysian GDP growth, at 2.8 percent in 2009, to be towards the top of the Asian growth league,” he wrote in a report today. That compares with the government’s forecast that gross domestic product will expand 3.5 percent this year.

Imports dropped 8.6 percent in November to 40.29 billion ringgit, leaving a trade surplus of 11.49 billion ringgit. Exports grew 12.1 percent in the first 11 months, while imports expanded 5.9 percent, leaving a trade surplus of 130.33 billion ringgit.

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net

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U.S. Apartment Rents Fall, Vacancies at 4-Year High, Reis Says

By Hui-yong Yu

Jan. 7 (Bloomberg) -- U.S. apartment rents fell in the fourth quarter from the third as the national vacancy rate climbed to a four-year high of 6.6 percent, Reis Inc. said.

Job losses and lower wages are cutting into the pool of potential renters in their twenties and thirties, defying the expectation that apartments would benefit from the housing slump, the New York-based research firm said.

Asking rents fell 0.1 percent from the previous quarter, to $1,052 on average, their first quarter-to-quarter decline in almost six years. They rose 2.4 percent from a year earlier. Effective rents, what tenants actually paid, fell to an average $996 last quarter, down 0.4 percent from the prior quarter and up 2.2 percent from a year earlier.

“The real sign of weakness spreading to the apartment sector is the fact that fourth-quarter 2008 asking and effective rent growth have both turned negative,” said Victor Calanog, director of research at Reis. It was the first time this happened since the first quarter of 2002, he said.

Landlords may be offering concessions such as free rent to avoid higher vacancies, which would account for the bigger decline in actual rents than asking rents, Calanog said.

The decline can be partly explained by the fact that demand for apartments tends to fall in the first and fourth quarters as most people move in the other quarters, he said.

Vacancy Rate

The vacancy rate rose to 6.6 percent in the fourth quarter from 6.2 percent in the third quarter and 5.7 percent at the end of 2007, Reis said. The fourth quarter matched the vacancy rate in 2005’s first quarter and was the highest since the fourth quarter of 2004, when it was 6.7 percent, according to Reis.

Vacancies increased in 66 of the 79 cities measured by Reis and effective rents fell in 54 markets.

The net change in occupied space, a measure of leasing known as absorption, shrank by 13,283 units.

Completions proceeded at a fairly steady pace throughout 2008, with 23,472 units coming to market in the fourth quarter, slightly less than the quarterly average of 23,955 units last year.

The U.S. economy, pushed into recession in December 2007, probably lost more jobs in 2008 than in any year since the end of World War II, a government report may show this week. Payrolls fell 500,000 in December, bringing last year’s decline to 2.4 million, the most since 1945, according to the median estimate of economists surveyed by Bloomberg News ahead of Labor Department figures due Jan. 9.

To contact the reporter on this story: Hui-yong Yu in Seattle at hyu@bloomberg.net

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U.S. Shopping Mall Vacancies Reach 10-Year High as Stores Fail

By Hui-yong Yu

Jan. 7 (Bloomberg) -- Vacancies at U.S. malls and shopping centers approached 10-year highs in the fourth quarter, and are set to rise further as declining retail sales put more stores out of business, research firm Reis Inc. said.

Regional mall vacancies rose to 7.1 percent last quarter from 6.6 percent in the third quarter. It was the highest vacancy rate since Reis began tracking regional malls in 2000, as well as the largest quarter-to-quarter jump in vacancies, according to New York-based Reis.

More than a dozen retailers, including Circuit City Stores Inc., Linens ‘n Things Inc. and Sharper Image Corp., filed for bankruptcy protection in 2008 as the credit squeeze and recession drained sales. Vacancies will rise further until the job market recovers, housing prices stabilize and lending resumes, restoring consumer confidence, said Reis.

“So much of consumer spending depends on the wealth effect,” said Victor Calanog, director of research at Reis. “Unfortunately, all three conditions are still in flux. Even when they stabilize we often observe anywhere from a 12- to 24- month lag until commercial retail properties begin benefiting.”

At neighborhood and community shopping centers, the vacancy rate rose to 8.9 percent from 8.4 percent in the third quarter, the highest since Reis began publishing quarterly data in 1999.

Shopping Centers Suffer

Asking rents at malls fell 0.2 percent from the previous quarter and rose 0.3 percent from a year earlier. Mall vacancies have climbed 2 percentage points from the 5.1 percent in 2005’s second quarter, the low for the last business cycle, said Reis.

Asking rents at shopping centers, which are typically anchored by a grocery store, fell 0.3 percent from the prior quarter and rose 0.4 percent from a year earlier. Effective rents fell 0.9 percent from the prior quarter and were down 1.1 percent from a year earlier, according to Reis.

At neighborhood shopping centers, tenants vacated more space than they leased, causing so-called net absorption to shrink by 4.1 million square feet, according to Reis.

“Neighborhood and community centers coming online encountered tremendous difficulties in pre-leasing retail space,” Calanog said. “This has been prevalent all throughout 2008, with new projects coming online at around 50 percent vacant, compared to the 25 percent to 30 percent vacancy levels for new projects in previous years.”

More Closing

Retailers will close 12,000 stores in 2009, after the worst holiday sales in 40 years, according to Howard Davidowitz, chairman of retail consulting and investment-banking firm Davidowitz & Associates Inc. in New York.

The Bloomberg REIT Shopping Center Index of 20 companies led by Kimco Realty Corp. lost a third of its value during the past year, about the same as the broader Standard & Poor’s 500 Index. Kimco, the largest U.S. owner of community shopping centers, cut its earnings forecast for 2008, citing the credit crisis.

The Bloomberg REIT Regional Mall Index of seven mall owners fell 57 percent. The index was dragged down by General Growth Properties Inc., the country’s second-largest regional mall landlord, whose shares tumbled 96 percent. The company took on debt for acquisitions and couldn’t refinance once the credit crisis took hold.

Simon Property Group Inc., the biggest U.S. mall owner, lost 435,000 square feet to bankruptcies last year through Sept. 30, up from 50,000 square feet in the same period a year earlier, Chief Executive Officer David Simon said in November. Simon’s multiyear leases protect the company to some extent from monthly changes in consumer spending, Simon said.

To contact the reporter on this story: Hui-yong Yu in Seattle at hyu@bloomberg.net

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Philippines Starts Dollar Bond Sale to Fund Spending

By Clarissa Batino and Tom Kohn

Jan. 7 (Bloomberg) -- The Philippines started selling dollar bonds in Asia’s first public sale of high-yield foreign- currency debt this year, giving the government funds to respond to the worst economic slump in eight years.

The sale of 10-year securities drew bids for as much as $1 billion from Philippine buyers alone as of noon in Manila, twice the minimum target of $500 million, according to two people familiar with the deal, who asked not to be identified. “This will help boost funds so the government can increase spending,” Treasurer Roberto Tan said in a phone interview today in Manila.

The Southeast Asian nation plans to raise as much as $1.5 billion selling bonds overseas this year as interest-rate cuts and pumping of cash by central banks worldwide helped lower borrowing costs and increased risk appetite. The extra yield investors demanded for Philippine dollar debt over 10-year U.S. Treasuries dropped to 5.9 percentage points from as high as 9.85 percentage points in October, prices by ING Groep NV show.

“The yields are attractive and with the strong demand, it looks like the government can complete its full-year overseas requirement already,” said Yvette Marquez, who helps manage about $6.9 billion in assets as a senior trader at BPI Asset Management in Manila. “It’s best to be over and done with before other emerging-market issues flood the market.”

Early Advantage

The Philippines’ overseas debt sale target for this year is triple last year’s total. It is aimed at supporting a stimulus plan amid forecasts growth will cool to the slowest since 2001, while boosting the supply of dollars during a global credit crunch. Getting to the market early may be an advantage because emerging-market bond sales may rise 68 percent to $65 billion this year, according to estimates by ING.

The government hired Credit Suisse Group, Deutsche Bank AG and HSBC Holdings Plc to help sell the bonds due June 2019. The securities may be sold between 8.5 percent and 8.75 percent, the two people familiar with the deal said. The pricing will be set later today in U.S. time.

“We hope it’s going to be a successful deal,” Tan said. “We think 10-years is where the demand is.”

Brazil and Colombia each sold $1 billion of bonds yesterday and Chile said it may also tap international markets. South Korea’s government plans to borrow up to $6 billion this year and Indonesia in November said it may raise about $2.1 billion in dollar-denominated debt in 2009.

‘Pump Priming’

“Everybody has the same strategy, which is to pump prime the economy,” said Rafael Algarra, treasurer at Security Banking Corp. in Manila.

Brazil sold 10-year notes to yield 6.13 percent, or 3.7 percentage points above U.S. Treasuries, while Colombia sold 10- year securities to yield 5.03 percentage points more at about 7.5 percent. Chilean Finance Minister Andres Velasco said the government plans to issue its first foreign bonds since 2004 to help fund a fiscal stimulus plan.

“A five- to six-percentage-point spread over Treasuries should still be reasonable” cost for the Philippine government, BPI’s Marquez said.

The collapse of Lehman Brothers Holdings Inc. in September and more than $1 trillion in losses linked to mortgage-related securities worldwide froze credit markets, driving up the London interbank offered rate, or Libor, for three-month dollar funds to a 10-month high of 4.82 percent on Oct. 10. The benchmark borrowing cost has since dropped to 1.41 percent, according to the British Bankers’ Association.

Difficult Environment

“It’s going to be difficult for any issuer in this kind of environment, sovereigns, banks or corporates,” said James McCormack, the head of Asia sovereign ratings at Fitch Ratings in Hong Kong. “This has nothing much to do with the credit risk of a particular country like the Philippines, where fiscal developments have been quite positive in the past years.”

Fitch rates the country’s foreign-currency debt at BB, two levels below investment grade. Standard & Poor’s rates it BB-, or three levels below investment grade.

The yield of the benchmark 9.875 percent bond jumped 54 basis points today to 8.24 percent. A basis point is 0.01 percentage point.

The Philippine government asked Congress to approve a 9 percent increase in spending, excluding interest payments, to stoke growth. It predicts the budget deficit will widen to the most in four years in 2009 as revenue collection falters.

Slowing Growth

Expansion may cool to 3.7 percent this year, which would be the slowest since 2001, according to official estimates.

The government increased its domestic borrowing plan this year by 20 percent to 386.5 billion pesos ($8.3 billion) from an earlier plan of 321.5 billion pesos, Finance Secretary Gary Teves said in November.

The overseas debt plan for 2009 is unchanged at 123.4 billion pesos ($2.6 billion), Teves had said. Lenders like the World Bank and Asian Development Bank may provide the remainder outside of the $1.5 billion in planned bond sales.

Philippine central bank Deputy Governor Diwa Guinigundo last month urged the government to borrow more in dollars to ease the pressure on the peso. The currency strengthened for a third day.

To contact the reporter on this story: Clarissa Batino in Manila at cbatino@bloomberg.net; Tom Kohn in Hong Kong at tkohn@bloomberg.net

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Fed Officials Revive Discussion of Explicit Inflation Target

By Craig Torres and Steve Matthews

Jan. 7 (Bloomberg) -- Federal Reserve officials revived the prospect of setting an explicit target for inflation to counter the risk that the worst economic slump in the postwar era will trigger a broad decline in prices.

The Federal Open Market Committee at its Dec. 15-16 meeting discussed ways to avert deflation while approving a reduction in the benchmark interest rate to as low as zero, according to minutes of the gathering released yesterday. The FOMC also considered increasing emergency loans that have doubled the Fed’s balance sheet to $2.3 trillion in the past year.

Policy makers “face considerable uncertainty about how inflation expectations could evolve,” said Brian Sack, deputy director at Macroeconomic Advisers LLC in Washington and a former Fed economist. “That enhances the argument for taking the further step and adopting an explicit inflation objective.”

By setting a goal for price increases, the central bank would adopt a measure that the U.K., Sweden and other countries have used to anchor policy and build credibility with the public. Chairman Ben S. Bernanke made a target one of his priorities when he took the helm three years ago, though a 2007 review of Fed communications stopped short of that objective. Now, with inflation retreating and the economy contracting, a target could be used to justify a more expansive policy.

One measure of inflation, the personal consumption expenditures price index, minus food and energy, could rise at less than 1 percent this year, and only 0.5 percent in 2010, according to forecasts by Sack’s firm.

‘More Explicit’

Central bank officials discussed providing “a more explicit indication of their views on what longer-run rate of inflation would best promote their goals of maximum employment and price stability,” the minutes said. Such a target may “help forestall the development of expectations that inflation would decline below desired levels, and hence keep real interest rates low.”

An inflation goal would reinforce expectations that the central bank will make a commitment to withdraw cash when the economy shows signs of a recovery.

Some policy makers last month saw “significant risks that inflation could decline and persist for a time at uncomfortably low levels,” the minutes said. Price increases will probably “continue to abate because of the emergence of substantial slack in resource utilization and diminishing pricing power.”

Fed officials saw “substantial” risks to the slumping economy last month and indicated “the economic outlook would remain weak for a time and the downside risks to economic activity would be substantial,” according to the minutes.

‘Dark Document’

“Rates are going to be low for a long time,” said Vincent Reinhart, former director of the Fed’s Division of Monetary Affairs, who is now a visiting scholar at the American Enterprise Institute in Washington. “They see the economy as extremely weak. It is a dark document.”

Economic growth declined in the third quarter at the fastest rate since 2001 as unemployment rose and home values, housing starts, auto production and consumer spending fell. Analysts downgraded forecasts last month, with economists at Morgan Stanley and JPMorgan Chase & Co. predicting a contraction in gross domestic product of about 6 percent for the fourth quarter, the biggest decline in 26 years.

“The current downturn is likely to be far longer and deeper than the ‘garden-variety’ recession,” Federal Reserve Bank of San Francisco President Janet Yellen said in a Jan. 4 speech. “It’s worth pulling out all the stops” in a fiscal stimulus.

U.S. employment fell by 500,000 jobs in December, bringing last year’s decline to 2.4 million, the most since 1945, according to the median estimate of economists surveyed by Bloomberg News ahead of Labor Department figures due Jan. 9.

Alternative Tools

Policy makers discussed an array of alternative policy tools at the meeting last month, including communicating their expectations for interest-rate changes and expanding the balance sheet by taking on more loans and bonds that private creditors refuse to hold.

The FOMC also discussed setting a target for growth in measures of money, such as the monetary base. While a “few” policy makers favored a numerical goal for money growth, most preferred a more open-ended “close cooperation and consultation” with the Fed board on how to expand assets and liabilities.

“Going forward, consideration will be given to whether various quantitative measures would be useful in calibrating and communicating the stance of monetary policy,” the minutes said.

The central bank will have difficulty scaling back its auction of loans and other emergency programs without upsetting the bond market, former St. Louis Fed President William Poole said in a Bloomberg Television interview.

‘Substantial Reaction’

“The market will take that as being a signal that monetary policy is tightening and that is going to set off substantial reaction in the bond market, maybe the equity markets too,” Poole said.

President-elect Barack Obama yesterday called for a record stimulus to prevent the recession from deepening. His plan aims to create or save 3 million jobs and may cost about $775 billion.

Policy makers discussed “possible refinements to the committee’s approach to projections,” including providing more information about individual views on “longer-run sustainable rates” of unemployment, inflation and economic growth.

The committee, after Bernanke’s urging, started publishing three-year forecasts for growth, inflation and unemployment in the minutes of the October 2007 FOMC meeting.

The third year of those projections is viewed by analysts as a signal of policy makers’ preferences for prices, unemployment and growth. The third-year projection may be less valuable in communicating goals because slack in the economy may continue to depress inflation through 2011, Sack said.

To contact the reporters on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net

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Aso Is Biggest Drag for Japan Stocks, Survey Shows

By Toru Fujioka

Jan. 7 (Bloomberg) -- Investors see Japanese Prime Minister Taro Aso’s administration as the biggest obstacle to a recovery in the nation’s stock market this year, a Nomura Securities Co. survey showed.

Some 53 percent of 1,000 investors said Aso’s government would have an adverse effect on the shares of Japanese companies in 2009, according to the survey published in Tokyo yesterday.

Aso’s popularity has plunged to about 20 percent from 50 percent when he became leader less than four months ago, on concern that he’s not doing enough to combat the recession. Parliament has yet to approve two stimulus packages as political bickering intensifies ahead of elections due by September.

“The Aso administration can’t implement economic packages when they’re needed most,” said Takahide Kiuchi, chief economist at Nomura Securities in Tokyo. “It would be better for Japan to have an election earlier than September.”

The domestic economy was investors’ second-largest concern at 27 percent, followed by problems in the U.S. financial sector, the report showed. Respondents were asked to pick five negative and five positive items out of 30 choices in the survey, which was conducted in December.

Japan’s downturn deepened in November as exports and factory production fell the most on record and unemployment rose.

Nikkei Rallies

The Nikkei 225 Stock Average lost 42 percent in 2008, its worst-ever performance. Stocks have since rallied 4.3 percent on optimism U.S. government spending will spur demand for Japanese products. The Nikkei climbed 1.7 percent today, the seventh day of gains, capping the longest winning streak since April 2006.

“Various factors” affect equity markets, Chief Cabinet Secretary Takeo Kawamura said at a regular news conference today. “If we need to find out reasons for stocks moving in the future, we have to ask the market.”

Aso on Oct. 30 pledged to pump 5 trillion yen ($53 billion) into the economy, including giving households 2 trillion yen in handouts, a policy that proved unpopular with voters and members of his ruling coalition. He postponed submitting a bill to parliament to fund the plan until January. Then on Dec. 12 he announced a second package, which hasn’t been implemented either.

Watanabe’s Threat

Lower house lawmaker Yoshimi Watanabe this week threatened to break from the ruling Liberal Democratic Party if Aso doesn’t abandon the pledge to offer cash payments to the public and dissolve parliament. The opposition Democratic Party of Japan, which has used its control of the upper house to block legislation, is also urging Aso, 68, to call an early election.

“It’s a mess. Aso is facing three political deadlocks: with the DPJ, with coalition partner Komeito and even with LDP members,” said Kyohei Morita, chief Japan economist at Barclays Capital in Tokyo. “There’s no doubt it’s very difficult for him to pass policies.”

Aso’s approval rating slid to 21 percent last month, according to a Nikkei newspaper survey published on Dec. 29. The poll was at least the fifth to show his popularity falling below that of his predecessor, Yasuo Fukuda, who resigned in September.

The Nomura survey also asked investors about what might help the stock market this year. Some 36 percent of respondents said the economy would have a positive effect, and 24 percent cited policies of the Bank of Japan.

The central bank cut the benchmark interest rate to 0.1 percent on Dec. 19 and said it would start buying commercial paper for the first time to ease borrowing costs for companies.

To contact the reporter on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net

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Taiwan Cuts Interest Rate After Record Export Decline

By Janet Ong and Yu-huay Sun

Jan. 7 (Bloomberg) -- Taiwan’s central bank cut its benchmark interest rate for a sixth time since late September after an unprecedented decline in exports threatened to push the economy into recession.

The Central Bank of the Republic of China (Taiwan) lowered the discount rate on 10-day loans to banks to 1.5 percent from 2 percent, according to a statement in Taipei today. The decision was made after an unscheduled central bank meeting today. Taiwan holds quarterly policy meetings.

Taiwanese exports fell by a record last month, a report today showed, hurting companies such as Nan Ya Plastics Corp., the world’s biggest processor of plastics for imitation leather and pipes. Indonesia also cut rates today, joining central banks across Asia in reducing borrowing costs as a global recession crimps demand for the region’s products.

The export figure was “far worse than the market expected,” said Craig Chan, a currency strategist at Nomura Singapore Ltd. in Singapore. “There will be more policy stimulus in the future. The central bank may cut rates to 1 percent or even below 1 percent. Today’s cut also highlights the central bank’s stance that it favors a weak local currency.”

The local dollar advanced 0.2 percent to close at NT$32.98 against its U.S. counterpart before the rate announcement, according to Taipei Forex Inc. The currency has fallen 0.4 percent this year.

“The central bank’s surprise rate cut means economic fundamentals are really bad,” said Ernest Lee, a bond trader at Mega Securities Co. in Taipei. “We’ll probably see more bad economic figures in the first and second quarters.”

Urging Lending

Taiwan’s central bank cited declining exports, rising job losses and a worsening economic outlook for its decision. The lower interest rate, which takes effect tomorrow, will help boost domestic demand, it said.

“Lowering rates will help reduce costs for individuals and companies, raise private consumption and willingness to invest, and boost domestic demand,” Governor Perng Fai-nan told reporters in Taipei today. The benchmark rate won’t be cut to zero, he reiterated today.

The central bank also urged local and foreign lenders in the island not to tighten credit to help support the economy, he said. Loans growth in Taiwan slowed to an estimated 3.14 percent at the end of December, from 4.22 percent in November, according to central bank data.

Inflation has slowed, though the island shows no signs of deflation, Perng said. Inflation may be about 0.37 percent this year, he estimated.

Overseas sales, equivalent to about three-quarters of Taiwan’s economy, tumbled 42 percent in December from a year earlier. That was more than the median estimate of a 30 percent decline in a Bloomberg News survey.

Growth Forecasts

Nan Ya Plastics, based in Taipei, reported a 57 percent drop in December sales, according to a filing to the Taiwan Stock Exchange today.

The Taiwanese economy probably slipped into a recession in the fourth quarter, the statistics bureau said in November. It will release fourth-quarter economic data in February.

Taiwan slashed its forecast for economic growth in 2009 to 2.12 percent from an earlier projection of 5.08 percent and said exports will fall 9.59 percent in U.S. dollar terms, the first decline in eight years.

The island’s economy probably expanded 1.87 percent last year, the central bank said today, citing a November forecast from the statistics bureau.

To contact the reporters on this story: Janet Ong in Taipei at jong3@bloomberg.netYu-huay Sun in Taipei ysun7@bloomberg.net

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Indonesia Cuts Interest Rate by Surprise Half Point

By Aloysius Unditu

Jan. 7 (Bloomberg) -- Indonesia’s central bank cut its benchmark interest rate by a “surprise” half point to boost growth, and trimmed its inflation forecast after consumer prices rose the least in six months.

Governor Boediono and his seven colleagues lowered the key rate to 8.75 percent from 9.25 percent. The magnitude of the reduction, the steepest since December 2006, was predicted by just one of 16 economists in a Bloomberg News survey.

Bank Indonesia had refrained from joining the region’s central banks in reducing rates until last month on concern a cut would push the rupiah lower and spook foreign investors. Since the Dec. 4 action, the currency has rebounded to what Finance Minister Sri Mulyani Indrawati says is a “comfortable” level for Southeast Asia’s largest economy.

“The scale of the move probably indicates that the central bank is becoming increasingly concerned about Indonesia’s growth prospects, while inflation is taking a backseat,” said Prakriti Sofat, an economist at HSBC Holdings Plc in Singapore. The “surprise move” was aided by a stable currency, which “helped create the right environment,” she said.

The rupiah has strengthened 10.4 percent since last month’s quarter-point reduction in the policy rate to 9.25 percent. The Indonesian currency pared gains after today’s decision, trading at 10,950 against the dollar from 10,880 before the rate cut.

‘Balance of Risk’

Indonesia’s benchmark stock index was 2.4 percent higher at 1:32 p.m. in Jakarta.

“The balance of risk this year requires our monetary stance to give more attention to boosting economic growth, while at the same time control inflation and financial stability in the medium term,” Boediono said at a briefing in Jakarta today.

The reduction in borrowing costs may not stop sales at carmakers including Toyota Motor Corp.’s local unit from falling.

The Indonesian Automotive Industries Association forecasts total car sales to decline by a quarter to 450,000 units this year from a record in 2008, Bambang Trisulo, chairman of the association, said in an interview in Jakarta today.

The Reserve Bank of India on Jan. 2 reduced its repurchase rate to 5.5 percent from 6.5 percent and the reverse-repurchase rate to 4 percent from 5 percent. Bangko Sentral ng Pilipinas cut its benchmark interest rate in December for the first time in 11 months.

Stimulus Package

Slower inflation has given Indonesia’s central bank scope to trim borrowing costs. Consumer prices rose 11.1 percent in December from a year earlier, after the government twice reduced domestic fuel prices that month.

Inflation is expected to ease to between 5 percent and 7 percent this year, Boediono told reporters in Jakarta today. That’s less than the central bank’s previous forecast of 6.5 percent to 7.5 percent.

Growth in the $433 billion economy may be aided by a government stimulus package and election-year spending, Sri Mulyani said in a Bloomberg News interview yesterday.

President Susilo Bambang Yudhoyono, who is eligible for re -election this year, this week announced plans to spend an extra 50 trillion rupiah ($4.5 billion) to help sustain growth as exports slow.

Growth in Indonesia’s exports, excluding oil and gas, may weaken to less than a quarter of last year’s pace, Trade Minister Mari Pangestu said yesterday. Export growth may range between 4.3 percent and 8 percent this year, compared with 18 percent last year, she said.

Lending Growth

Overseas sales of Indonesian goods fell 2 percent to $9.61 billion in November, the first monthly decline since March 2004, the Central Statistics Bureau said on Jan. 5.

“With external demand likely to remain weak, strength in domestic demand would remain crucial to avert a significant slowdown in the domestic economy,” Kit Wei Zheng, an economist with Citigroup Inc. said in a note to clients. “We expect Bank Indonesia to maintain an accommodative monetary policy stance going forward to cushion domestic spending.”

Bank Indonesia forecasts lending growth to slow to 18 percent this year, from 30.2 percent in 2008. The central bank also expects economic growth to ease to between 4 percent and 5 percent this year. Boediono yesterday said growth may exceed 5 percent on the government’s fiscal stimulus plan.

Today’s rate reduction shows Bank Indonesia wants commercial banks “to follow suit with shorter lags and with greater magnitude in terms of their loan interest rates to shore up domestic business,” said Enrico Tanuwidjaja, an economist at Oversea-Chinese Banking Corp. in Singapore. Last month’s cut was “just the beginning of their monetary policy easing cycle.”

To contact the reporters on this story: Aloysius Unditu in Jakarta at aunditu@bloomberg.net

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Asia to Have 'V-shaped' Recovery, BNP Paribas Says

By Jason Clenfield

Jan. 7 (Bloomberg) -- Asian economic growth, after slowing this year, will probably rebound in 2010 as government spending and interest rate cuts spur demand, BNP Paribas SA said today

Asia, excluding Japan and China, will grow 4.3 percent next year after a 1.4 percent expansion in 2009, Richard Iley, an economist at the bank, wrote in a report. Public spending in China, Taiwan and South Korea, combined with increasingly loose monetary policy, should help to drive a “reasonably vibrant” recovery, he said.

Asian governments are planning more measures to boost growth as a slump in global demand hurts exports, deepening the region's economic slowdown. South Korea has pledged about $30 billion in extra spending and tax cuts since September. China may follow a 4 trillion yuan ($585 billion) spending package announced November with a second plan as early as this month.

“The scale of the global policy response -- monetary and fiscal -- should ensure the recovery is more V than U-shaped,” Iley said. “In many instances, economies will experience a 6 to 7 percentage point swing in growth rates.”

The MSCI AC Asia Pacific Index rose 1.9 percent at 1:43 p.m. in Tokyo today, taking its gain since reaching a five-year low in October to 23 percent.

Iley's report, titled “Asia: Apocalypse Now,” said that before improving, Asia's economic growth would deteriorate in 2009.

“Global industrial production appears to have collapsed at a 30-40 percent annualized rate since September,” he said, referring to the “biggest demand shock since the 1930s.”

Forecast Cut

As a result of the drop in output, BNP Paribas cut its 2008 forecast for Asian economic growth to 1.4 percent from a November prediction of 3.9 percent. The region comprises Hong Kong, India, Indonesia, Malaysia, Philippines, Singapore, South Korea, Taiwan and Thailand, according to BNP Paribas.

Iley said China will grow about 7.7 percent in 2009, helped by the November fiscal package “worth an eye-popping” 14 percent of gross domestic product over two years. The economy probably expanded 9.3 percent in 2008, slowing from 11.9 percent the year before. He predicted 8.1 percent growth in 2010.

Hong Kong will grow 3.5 percent in 2010 after shrinking 3.4 percent this year, the bank predicted. Taiwan will expand 3.9 percent after contracting 3.3 percent; Singapore will grow 4.4 percent after declining 2.8 percent this year. South Korea will expand 3.2 percent, rebounding from a 2.4 percent contraction.

To contact the reporter on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net

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Iran Cuts February Crude Oil Shipments to Two Asian Refiners

By Christian Schmollinger

Jan. 7 (Bloomberg) -- Iran, OPEC’s second-largest producer, will reduce shipments of crude oil for February to two refiners in Asia as part its commitment to the group’s output cuts, said officials from the companies.

Iran will reduce supplies sold under long-term contracts by 14 percent, said the two officials at refineries in Taiwan and Singapore, who asked not to be identified because of company rules.

The Middle East country produced 3.85 million barrels a day in December, according to a Bloomberg survey of oil companies, producers and analysts.

To contact the reporter on this story: Christian Schmollinger in Singapore at christian.s@bloomberg.net.

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India’s State Oil Officers Start Strike for Wages

By Archana Chaudhary

Jan. 7 (Bloomberg) -- More than 50,000 employees of Indian Oil Corp. and other state-run oil companies started a strike for higher wages today, joining a nationwide truckers’ walkoff and potentially disrupting fuel supplies.

“The government hasn’t met our demands,” Sanjay Varshney, vice president of the Oil Sector Officers’ Association, said by telephone from New Delhi. “We are willing to talk with the government. We have close to 55,000 officers who have stayed away from work across 14 oil companies.”

The indefinite strike, which was called after the association said the wage increase announced by the government was less than expected, may compound the impact of a similar protest by truckers that entered its third day today. State-owned refiners are trying to ensure fuel supplies aren’t disrupted.

“Indian Oil is making sure that supplies to aviation services remain uninterrupted,” V.C. Agrawal, director of human resources at the country’s largest refiner, said today. “We are operating LPG plants, large depots and services.”

Oil & Natural Gas Corp., the country’s biggest exploration company, said there is some difficulty in managing large installations such as offshore units. Contingency plans are in place to ensure that work continues, ONGC said in a statement to the Bombay Stock Exchange.

“We are monitoring this and will take a decision on shutdowns accordingly if the strike continues,” A.K. Balyan, director of human resources at ONGC, said by telephone from New Delhi.

Gas Supplies

Natural gas supplies on the Hazira-Vijaipur-Jagdishpur pipeline were shut after the strike started, the Press Trust of India reported, citing Gail India Ltd. Chairman U.D. Choubey.

The 2,800-kilometer (1,740-mile) pipeline is the largest owned by Gail, India’s monopoly natural-gas distributor. It starts at Hazira in western India and can carry 33 million cubic meters of gas to the north of the country.

“We have a problem because all ONGC operations are shutting down and that is affecting our supplies,” Santosh Kumar Vajpai, director of projects at Gail, said in a telephone interview from New Delhi. “Most of the gas we supply through the Hazira- Vajaipur-Jagdishpur pipeline is from ONGC. And at the moment, we aren’t getting the 32 million standard cubic meters of natural gas we get from them everyday.”

ONGC said supplies to the Gail pipeline hadn’t been stopped.

“I’m not sure if Gail had its own staff available to man the pipe and ensure supplies,” Gail’s Balyan said. “I have no report about any disruption from our side at the moment.”

Refinery Operations

Plants owned by Hindustan Petroleum Corp., the third-largest state-owned refiner, will be fully operational, Oil Secretary R.S. Pandey said yesterday.

Three of the 17 refineries owned by the state oil companies may be affected by the strike, Pandey said, without providing more details. Efforts are on to avert a stoppage in the three refineries, he said.

The strike by oil officers comes after more than 4 million truckers who haul a majority of India’s goods started a similar protest on Jan. 5, demanding that the government reduce fuel prices and waive toll charges for six months. The nationwide truckers strike may cause shortages and hamper transportation of food and manufactured products.

To contact the reporter on this story: Archana Chaudhary in Mumbai at achaudhary2@bloomberg.net.

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Oil Traders Seek Another 10 Supertankers for Storage

By Alaric Nightingale

Jan. 7 (Bloomberg) -- Oil traders are seeking as many as 10 supertankers to store crude, potentially taking the amount hoarded at sea to almost five days of European Union demand, according to Frontline Ltd., the largest owner of the vessels.

About 25 of the carriers, each able to hold about 2 million barrels of crude, were already hired for storage. There are enquiries for 5 to 10 more, Jens Martin Jensen, Singapore-based interim chief executive officer of the company’s management unit, said by phone today.

Thirty-five supertankers represent about 7 percent of the global fleet of very large crude carriers, according to data from London-based Drewry Shipping Consultants Ltd. Storing oil in tankers may boost rental rates that fell by a record 78 percent last year as slower economic growth sapped demand for energy.

Traders are seeking to lease ships for three to nine months, Jensen said. Crude oil for December delivery traded at $61.71 a barrel as of 7:35 a.m. in London, about $14 more than the February contract. Oil companies and traders may be able to profit from storing the oil, assuming shipping, insurance and financing costs are covered.

Iran, the second-largest member of the Organization of Petroleum Exporting Countries, idled as many as 15 of its biggest ships in May to store crude. That contributed to three consecutive months of higher rental rates for ships.

EU oil consumption averaged 14.8 million barrels a day in 2007, according to data from BP Plc.

To contact the reporter on this story: Alaric Nightingale in London at Anightingal1@bloomberg.net

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Russian Gas Shipments to Europe Through Ukraine Are Halted

By Kateryna Choursina and Lyubov Pronina

Jan. 7 (Bloomberg) -- Russian natural gas exports through Ukraine to Europe halted for the first time in three years, threatening to create shortages as freezing weather spurred demand for power.

The two sides blamed each other for the disruption. OAO Gazprom, Russia’s gas-export monopoly, cut off all gas supplies to Europe through Ukraine at 7:44 a.m. Kiev time today, according to Ukrainian utility NAK Naftogaz Ukrainy. Gazprom Deputy Chief Executive Officer Alexander Medvedev said Ukraine shut off a fourth pipeline after closing three others yesterday.

The move, stopping all deliveries to Austria, the Czech Republic and Slovakia, came after a halt in supplies to the Balkans yesterday and cuts to other countries. The dispute echoed a similar conflict in 2006 which interrupted shipments to Europe.

“If Ukraine fully stops delivery of gas to the west, for consumers in central and western Europe, we do not see sense in supplying gas to the border with Ukraine,” Gazprom Chief Executive Officer Alexei Miller said at Prime Minister Vladimir Putin’s Novo-Ogarevo residence near Moscow late yesterday.

U.K. natural gas for February delivery rose 1.4 percent to 61 pence a therm as of 7:40 a.m. in London, according to prices from ICAP Plc. That’s equivalent to $9.10 a million British thermal units. A therm is 100,000 Btus. The contract traded as high as 62.75 pence a therm with ICAP yesterday.

OMV AG, Austria’s largest oil and gas company, said Russian natural gas deliveries halted completely to the country after yesterday’s reduction of about 90 percent.

Austrian Reserves

OMV will cover the cut in Russian deliveries by tapping the 1.7 billion cubic meters it has in reserves. Austria gets 51 percent of its gas from Russia, Vienna-based OMV said.

Slovensky Plynarensky Priemysel AS, Slovakia’s dominant gas company, said deliveries of Russian gas to the country were halted overnight.

The Bratislava-based company said it began restricting supplies to the largest industrial companies in the eastern European country. Households are not affected, the utility’s spokesman Lubomir Tuchser said.

Gas supplies from Ukraine to Poland were at 15 percent of normal volume, unchanged from yesterday, as of 8 a.m. in Warsaw, Malgorzata Polkowska, a spokeswoman for pipeline network operator Gaz-System SA, said today.

She said she didn’t know how long it would take before Poland was affected by the complete cutoff of Russian supplies to Ukraine.

“Gazprom risks increasing negative publicity,” said Igor Kurinnyy, an oil and gas analyst with ING Groep NA. “What matters is that European customers are facing disruption.”

Diversified Supplies

Since a similar dispute in January 2006, European nations have diversified their sources of fuel and improved inventories. They are also using more gas, the source of 24 percent of the world’s energy consumption last year, to reduce emissions linked to global warming.

Naftogaz Chief Executive Officer Oleh Dubina said he would return to Moscow tomorrow to resume talks. In 2006, Russia turned off all Ukrainian gas exports for three days, causing volumes to fall in the European Union, and also cut shipments by 50 percent last March during related debt claims.

Gazprom’s Medvedev told Bloomberg Television yesterday that “unilateral action of the Ukrainians” was causing the shortfalls. Naftogaz spokesman Valentyn Zemlyanskyi said Gazprom, Russia’s state-run gas exporter, cut shipments to Europe through Ukraine yesterday to 74 million cubic meters a day, compared with about 300 million normally.

Miller said Gazprom would hold talks with European partners in Brussels tomorrow.

Arctic Air

As the dispute intensified, Arctic air from Siberia pushed into Central Europe, northern France, Italy and parts of the U.K., bringing snow and temperatures as low as minus 25 degrees Celsius (minus 13 degrees Fahrenheit) in parts of Germany.

Russia, which supplies a quarter of Europe’s gas, cut shipments intended for Ukraine’s domestic market on Jan. 1, and accused Ukraine of siphoning off gas destined for other buyers. Gazprom has warned that Ukraine risks amassing a debt of “billions of dollars” if the conflict continues.

Gas flows to Bulgaria, Turkey, Greece and Macedonia were halted early yesterday morning at the Ukrainian-Romanian border, Bulgaria’s Energy and Economy Ministry said. Russian gas is sent through Ukraine and then Romania to the southern Balkan states. Supplies were cut to Romania and Croatia too.

Lower Supplies

“The former Soviet bloc countries are between the devil and the deep blue sea,” James Nixey, manager of the Russia and Eurasia Program at London-based foreign policy research institute Chatham House, said by phone. “They are reliant on Russian energy more than Western countries and that’s a big problem because they are desperately trying to break free, but then the reality is that they just can’t.”

Further west, Russian gas supplies to Germany’s Waidhaus transit point, near the Czech border, stopped completely at times yesterday, according to Kai Krischnak, a spokesman for the Ruhrgas unit of E.ON AG, Germany’s biggest utility.

Other utilities across Europe experienced lower gas supplies yesterday, including Austria’s OMV AG, which operates Baumgarten gas hub, near Vienna, and Poland’s Polskie Gornictwo Naftowe I Gazownictwo SA.

Czech Prime Minister Mirek Topolanek, whose country holds the revolving presidency of the EU, said the dispute between Russia and Ukraine on gas prices is becoming “more serious” and the effects are spreading across Europe.

Alternative Sources

Other countries can’t be “held hostage” by Russia over gas supplies, Topolanek told reporters in Prague yesterday. Ukraine may have to compromise on gas fees in the disagreement, he added.

Italy, Poland and other nations said they were using stockpiled gas, and alternative delivery routes from Russia where possible, to help satisfy demand. Restrictions on which customers receive gas may prove necessary in some countries, should the stoppage prove prolonged.

Turkey may also draw on more natural gas from a pipeline from Iran, Energy Minister Hilmi Guler said.

Gazprom raised its demands on Jan. 4 as Miller cited a possible price of $450 per 1,000 cubic meters for deliveries to Ukraine this month, reflecting the average price in countries bordering Russia’s neighbor. Ukraine paid $179.50 for its Russian gas last year and says $201 would be fair in 2009.

Ukraine’s political leaders, President Viktor Yushchenko and Prime Minister Yulia Timoshenko, are grappling with a financial crisis that has forced it to seek a $16.4 billion International Monetary Fund bailout.

Gazprom’s Medvedev said yesterday in London that the company is working to diversify its export routes to Europe, including two planned pipeline projects that bypass Ukraine.

The Nord Stream link, in which Gazprom owns 51 percent, is planned to run from Russia via the Baltic Sea to Germany. South Stream, where Eni SpA is a partner, will run from the Black Sea to Bulgaria, where it will split into a southern route to Italy and a northern route to Austria.

To contact the reporters on this story: Lyubov Pronina in Moscow on lpronina@bloomberg.net; Daryna Krasnolutska in Kiev on dkrasnolutsk@bloomberg.net

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UBS Says Euro-Pound Parity Would Represent a ‘Clear Overshot’

By Daniel Tilles

Jan. 7 (Bloomberg) -- Investors should avoid betting on the pound reaching parity with the euro, UBS AG said.

“Any chase for parity in euro-pound is a clear overshot and offers limited risk-reward,” Ashley Davies, a currency strategist in Singapore at UBS, wrote today in an investor report.

The pound strengthened 0.2 percent to 90.56 pence per euro as of 6:51 a.m. in London. It weakened to a record 98.03 pence on Dec. 30.

To contact the reporter on this story: Daniel Tilles in London at dtilles@bloomberg.net

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U.K. Pound Weakens Against Euro, Drops 0.5% to 91.15 Pence

By Daniel Tilles

Jan. 7 (Bloomberg) -- The British pound fell against the euro, snapping a two-day gain.

The pound weakened to 91.15 pence as of 8:04 a.m. in London, from 90.70 pence yesterday.

Against the dollar, the pound slipped 0.2 percent to $1.4889.

To contact the reporter on this story: Daniel Tilles in London at dtilles@bloomberg.net

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Dollar May Rise to 102.51 Yen, Bank of Tokyo’s Hashimoto Says

By Ron Harui

Jan. 7 (Bloomberg) -- The dollar may strengthen 9.2 percent to 102.51 yen this quarter, based on trading patterns, said Masashi Hashimoto, a currency analyst at Bank of Tokyo-Mitsubishi UFJ Ltd. in Tokyo.

The currency’s rise beyond so-called resistance at the 21- day moving average of 90.83 yen and the 14-day relative strength index’s gain above 50 indicate the greenback’s “upward momentum” has improved, Hashimoto said. Resistance is a level where sell orders may be clustered.

“There’s been a change in price action to the upside,” Hashimoto said. “The final target is the 200-day moving average of 102.51 yen, possibly by the end of March.”

The dollar rose to 93.84 yen as of 2:20 p.m. in Tokyo from 93.65 late in New York yesterday when it reached 94.63, the highest level since Dec. 1. The U.S. currency has gained 7.6 percent since reaching a 13-year low of 87.14 on Dec. 17.

Hashimoto said the U.S. currency’s resistance levels are the 65-day moving average of 95.14 yen, the 90-day moving average of 98.14 yen and the lower and upper ends of a so-called ichimoku cloud at 95.88 yen and 99.05 yen, respectively.

An ichimoku chart analyzes the midpoints of historic highs and lows. A cloud, used to indicate a resistance zone, is the area between the first and second leading span lines on the chart.

In technical analysis, investors and analysts study charts of trading patterns and prices to forecast changes in a security, commodity, currency or index.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net;

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Fed Officials Revive Discussion of Explicit Inflation Target

By Craig Torres and Steve Matthews

Jan. 7 (Bloomberg) -- Federal Reserve officials revived the prospect of setting an explicit target for inflation to counter the risk that the worst economic slump in the postwar era will trigger a broad decline in prices.

The Federal Open Market Committee at its Dec. 15-16 meeting discussed ways to avert deflation while approving a reduction in the benchmark interest rate to as low as zero, according to minutes of the gathering released yesterday. The FOMC also considered increasing emergency loans that have doubled the Fed’s balance sheet to $2.3 trillion in the past year.

Policy makers “face considerable uncertainty about how inflation expectations could evolve,” said Brian Sack, deputy director at Macroeconomic Advisers LLC in Washington and a former Fed economist. “That enhances the argument for taking the further step and adopting an explicit inflation objective.”

By setting a goal for price increases, the central bank would adopt a measure that the U.K., Sweden and other countries have used to anchor policy and build credibility with the public. Chairman Ben S. Bernanke made a target one of his priorities when he took the helm three years ago, though a 2007 review of Fed communications stopped short of that objective. Now, with inflation retreating and the economy contracting, a target could be used to justify a more expansive policy.

One measure of inflation, the personal consumption expenditures price index, minus food and energy, could rise at less than 1 percent this year, and only 0.5 percent in 2010, according to forecasts by Sack’s firm.

‘More Explicit’

Central bank officials discussed providing “a more explicit indication of their views on what longer-run rate of inflation would best promote their goals of maximum employment and price stability,” the minutes said. Such a target may “help forestall the development of expectations that inflation would decline below desired levels, and hence keep real interest rates low.”

An inflation goal would reinforce expectations that the central bank will make a commitment to withdraw cash when the economy shows signs of a recovery.

Some policy makers last month saw “significant risks that inflation could decline and persist for a time at uncomfortably low levels,” the minutes said. Price increases will probably “continue to abate because of the emergence of substantial slack in resource utilization and diminishing pricing power.”

Fed officials saw “substantial” risks to the slumping economy last month and indicated “the economic outlook would remain weak for a time and the downside risks to economic activity would be substantial,” according to the minutes.

‘Dark Document’

“Rates are going to be low for a long time,” said Vincent Reinhart, former director of the Fed’s Division of Monetary Affairs, who is now a visiting scholar at the American Enterprise Institute in Washington. “They see the economy as extremely weak. It is a dark document.”

Economic growth declined in the third quarter at the fastest rate since 2001 as unemployment rose and home values, housing starts, auto production and consumer spending fell. Analysts downgraded forecasts last month, with economists at Morgan Stanley and JPMorgan Chase & Co. predicting a contraction in gross domestic product of about 6 percent for the fourth quarter, the biggest decline in 26 years.

“The current downturn is likely to be far longer and deeper than the ‘garden-variety’ recession,” Federal Reserve Bank of San Francisco President Janet Yellen said in a Jan. 4 speech. “It’s worth pulling out all the stops” in a fiscal stimulus.

U.S. employment fell by 500,000 jobs in December, bringing last year’s decline to 2.4 million, the most since 1945, according to the median estimate of economists surveyed by Bloomberg News ahead of Labor Department figures due Jan. 9.

Alternative Tools

Policy makers discussed an array of alternative policy tools at the meeting last month, including communicating their expectations for interest-rate changes and expanding the balance sheet by taking on more loans and bonds that private creditors refuse to hold.

The FOMC also discussed setting a target for growth in measures of money, such as the monetary base. While a “few” policy makers favored a numerical goal for money growth, most preferred a more open-ended “close cooperation and consultation” with the Fed board on how to expand assets and liabilities.

“Going forward, consideration will be given to whether various quantitative measures would be useful in calibrating and communicating the stance of monetary policy,” the minutes said.

The central bank will have difficulty scaling back its auction of loans and other emergency programs without upsetting the bond market, former St. Louis Fed President William Poole said in a Bloomberg Television interview.

‘Substantial Reaction’

“The market will take that as being a signal that monetary policy is tightening and that is going to set off substantial reaction in the bond market, maybe the equity markets too,” Poole said.

President-elect Barack Obama yesterday called for a record stimulus to prevent the recession from deepening. His plan aims to create or save 3 million jobs and may cost about $775 billion.

Policy makers discussed “possible refinements to the committee’s approach to projections,” including providing more information about individual views on “longer-run sustainable rates” of unemployment, inflation and economic growth.

The committee, after Bernanke’s urging, started publishing three-year forecasts for growth, inflation and unemployment in the minutes of the October 2007 FOMC meeting.

The third year of those projections is viewed by analysts as a signal of policy makers’ preferences for prices, unemployment and growth. The third-year projection may be less valuable in communicating goals because slack in the economy may continue to depress inflation through 2011, Sack said.

To contact the reporters on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net

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South Koreans Quit China as Yuan’s Gain Raises Cost of Living

By Kim Kyoungwha

Jan. 7 (Bloomberg) -- Kim So Hyun came to China to study medicine in 2004. Now, she may join the tens of thousands of South Koreans who went home last year as the yuan strengthened against the won, raising the cost of living.

“I want to stay but may have to return,” said Kim, 27, who attends Beijing Chinese-Medicine College. “The won’s drop greatly increased the financial burden on my parents, who wire money for school fees and rents.”

One in five of an estimated 700,000 South Koreans living in China at the start of 2007 have left, according to the consulate in Beijing. The won slid 31 percent against the yuan last year, making college fees and living costs more expensive for those paid in the Korean currency. Companies like Seoul-based LG Electronics Co. have cut benefits for expatriates and smaller exporters have closed Chinese factories and brought workers home.

China overtook the U.S. as the biggest export market for South Korea in 2003, prompting companies to move plants to China. Now, the repatriation of workers is hollowing out South Korean enclaves such as Wangjing, a 60,000-strong expat community in northeast Beijing, famous for its Korean restaurants and shops.

“This is the worst year during my five-year career in home brokering,” said Jin Yong Shan, a manager with real estate agency Jiajia Shiji Fangdi Chan Co. in Wangjing. “There’s an exodus of Koreans out of China and there are so many empty houses now.”

LG Electronics Co. is reducing subsidy on rents for employees in China by 20 to 30 percent, according to a Beijing- based company official who declined to be identified.

Exporters

“The yuan’s strength is taking a direct toll on smaller companies in China, especially those who export to Europe,” said Hwang Jae Won, deputy head of Korea Business Centre in Qingdao where about 5,000 Korean companies operate. “Some are pulling out of China to move to cheaper Indonesia or Vietnam.”

MiSung Polytech Co., a maker of mobile phone parts for LG Electronics, Motorola Inc. and Nokia Oyj, will cut 35 percent of its 1,700 workers in China this year, said Kim Sung Dae, a manager of the Qingdao-based plant. About 300 businesses failed in Qingdao last year, he said.

C-Mart, a chain of Korean supermarkets in downtown Beijing, stopped operating on Dec. 18, according to the Beijing Times.

The Korean won, Asia’s worst-performing currency last year, slumped as low as 222.94 against the yuan on Nov. 21 and traded at 189.09 today, compared with 129.50 a year ago, according to a data compiled by Bloomberg News.

Last month, China and South Korea swapped $28 billion of currency as part of their economic cooperation.

Jin of Jiajia Shiji in Beijing said he has made only one or two transactions a month compared with 20 a year ago. A three- bedroom apartment that previously rented for 20,000 yuan a month is unlikely to fetch 13,000 yuan now, he said.

Home Sales

Cao Hong, a real estate agent at Shanghai Centaline Property Consultants Ltd., said some Koreans are taking advantage of the won’s fall to sell homes and repatriate the money.

“Most of the foreigner-owned apartments sold in Lianyang neighborhood are from Koreans,” said Cao. “Koreans are selling housing at below market price because they need cash.” Lianyang is a middle-class community in east Shanghai.

Chang Sun Young, a 48-year-old housewife and mother of two kids, is preparing for a more frugal future in Beijing.

“I don’t play golf that often and may stop going out to the course because it’s not as cheap as before,” Chang said. “I buy stuff on the Internet and get it delivered from Korea because I get a better price and quality.” She relies on money sent by her husband in Seoul.

Tightening Belt

The won’s decline and falling global consumption is hurting smaller companies that moved to China in the past few years when labor costs and the yuan were lower.

“There is a growing number of smaller exporters from Korea, Hong Kong and Taiwan that are shutting down,” said Hwang Kyu Gwang, head of Korea International Trade Association’s Beijing branch. “The yuan’s strength, regulations on processed trade and labor costs that rise 15 percent annually are culprits.”

Some 20,000 companies from South Korea operate in Chinese cities such as Tianjin, Shenyang, Qingdao and Dandong, he said. China’s export orders and output shrank in November by the most since records began.

The Korean currency’s slump has also deterred many Chinese from heading to South Korea to find jobs with Korean companies because the salaries have dropped in yuan terms.

Not Alone

“I lost the reason for going to Korea,” said Kim Hye Ja, 52, a Chinese of Korean descent who took a test last summer in Beijing to qualify for a job in South Korea. “I’m not alone. Many friends of mine changed their minds to stay at home and those working in Seoul plan to return.”

Yu Hui Fen, 28, who teaches Chinese at a language institute in Wudakou, Beijing where Koreans are the largest foreign student community, said her income halved after a lack of students led to cancellation of her classes.

Still, some Korean students are hanging on, hoping that a Chinese education will offer better prospects in the long term.

“I persuaded my parents to let me stay here to complete my studies,” said Kim Dong Woo, 19, during a break between classes at the Wudakou institute. “I think China holds a better future for me.”

To contact the reporters on this story: Kim Kyoungwha in Beijing at kkim19@bloomberg.net;

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