PetroChina Sees ‘Severe Challenges’ in 2009 After Profit Slumps

By Wang Ying and John Duce

March 26 (Bloomberg) -- PetroChina Co., the world’s second- largest company by market value, said it faces “severe challenges” this year after refining losses and a slump in crude oil prices led to its first annual profit drop since 2001.

“Production and operations will be confronted with huge difficulties amid the uncertainties and unexpected risks of the external environment,” Beijing-based PetroChina said in a statement in Hong Kong yesterday. Net income fell 22 percent to 114 billion yuan ($16.7 billion) in 2008, it said.

PetroChina’s losses from processing crude widened fourfold to 83 billion yuan as government curbs on fuel prices prevented it from passing on higher costs to consumers. China’s biggest oil producer and second-largest refiner said it plans to cut output this year because the global financial crisis may further curb economic growth and energy demand.

“Fortunes of the company will depend on oil prices and government policy in the near term,” said Larry Grace, an independent energy analyst based in Hong Kong.

Fourth-quarter profit dropped 39 percent to 20.9 billion yuan from a year earlier, according to Bloomberg calculations made by subtracting earnings for the first nine months from full-year figures released yesterday. A PetroChina spokesman declined to confirm the derived figure.

PetroChina joins BP Plc and Royal Dutch Shell Plc in reporting lower earnings after crude ended the year 70 percent lower than a record in July. While crude oil futures in New York have gained 19 percent this year, prices are 48 percent lower than a year earlier.

‘Slowdown Continues’

PetroChina’s shares have declined 34 percent in a year in Hong Kong, compared with a 39 percent drop in the Hang Seng Index. Exxon Mobil Corp, the world’s most valuable company, has fallen 19 percent in the same period.

China’s economy expanded 6.8 percent in the fourth quarter, the weakest pace in seven years. Growth for the full year was 9 percent, down from 13 percent in 2007.

“The economic slowdown still continues,” PetroChina President Zhou Jiping said in Hong Kong yesterday. “It will take more time to see a rebound. That applies to both the global and Chinese economies.”

PetroChina said it plans to cut oil production by 4.4 percent to 833 million barrels this year and crude processing may decline 1.4 percent.

Profit this year will be “worse” than 2008, Chairman Jiang Jiemin said on March 5 in Beijing. Net income may fall 24 percent this year to 87 billion yuan, according to the median of 22 analysts’ estimates compiled by Bloomberg.

Fuel Pricing

China’s revised fuel pricing system that took effect in December may help to partly offset weaker demand.

Gasoline and diesel prices will be adjusted when global crude-oil costs change by more than 4 percent over 22 straight working days, and Chinese refiners will be allowed a profit margin of at least 5 percent, Zhou said.

The government in December replaced a guidance band for retail fuel prices with a market-based ceiling that includes the cost of crude oil, taxes and an “appropriate profit” for refiners.

China raised fuel prices by as much as 5 percent from yesterday to reflect the gain in global oil prices this year. The increase will boost PetroChina’s monthly revenue by 1.26 billion yuan, President Zhou said.

The country had slashed fuel prices in January after crude fell more than $100 a barrel from its peak.

“The pricing mechanism will benefit PetroChina,” said Grace Liu, an analyst at Guotai Junan Securities based in Shenzhen. “The company can be sure to make a profit in refining from this year.”

Windfall Tax

PetroChina will also pay a lower windfall tax this year, Liu said. Chinese oil producers pay a tax on revenue from crude sold above $40 a barrel under a levy introduced in March 2006.

Windfall tax payments rose 91 percent to 85.29 billion yuan last year, according to President Zhou.

Capital expenditure rose 27 percent to 232.2 billion yuan last year and will be little changed at 233.2 billion yuan in 2009, PetroChina said. Exploration and production spending will be cut by 15 percent to 133.8 billion yuan, while expenditure on refining operations will rise 36 percent to 27.5 billion yuan.

“The refining business will be a major contributor to our profits this year and in the future,” Zhou said.

The company will also take advantage of low oil prices to expand overseas, Zhou said. PetroChina will “improve cooperation” with Russia, Venezuela, Iraq and Qatar, he said without elaborating.

Acquisitions

Chairman Jiang said last year PetroChina plans to buy energy companies made vulnerable by the global credit crisis. China’s state-owned firms announced plans in February to invest $22 billion in mining companies, securing iron ore, copper and zinc assets from debt-laden entities unable to secure funding amid the global recession.

Chinese companies are boosting acquisitions overseas to take advantage of low commodity prices. According to the nation’s energy plan for the three years ending 2011, the government may tap its $1.95 trillion foreign exchange reserves and set up an oil fund to help companies expand abroad, China National Petroleum Corp. said last month.

Eighteen out of 23 analysts have a “buy” or “hold” rating on PetroChina’s shares, according to recommendations compiled by Bloomberg. The stock is among the top holdings of Mark Mobius’s Templeton Emerging Markets Trust.

PetroChina almost tripled on its first day of trading in Shanghai on Nov. 5, 2007, becoming the world’s first company to be valued at $1 trillion. The oil producer and refiner was valued at $297 billion on March 24, behind Exxon at $343 billion.

To contact the reporters on this story: Wang Ying in Hong Kongt . ywang@bloomberg.net; John Duce in Hong Kongt . yduce1@bloomberg.net

Read more...

BHP, Hynix, PetroChina, Powerchip: Asia Ex-Japan Equity Preview

By Berni Moestafa

March 26 (Bloomberg) -- The following companies may have unusual price changes today in Asia trading, excluding Japan. Stock symbols are in parentheses, and share prices are from the previous close, unless noted otherwise.

Alliance Global Group Inc. (AGI PM): The owner of almost half of McDonald’s Corp.’s Philippine franchise said it bought back 400,000 shares in the open market at 1.32 pesos each. The stock was unchanged at 1.34 pesos.

Arafura Resources Ltd. (ARU AU): The company building a rare-earth plant in Australia may seek to acquire copper projects after securing an investment from a Chinese government- backed company this month. Arafura and the mining investment arm of the Jiangsu provincial government are seeking approval from Australia’s Foreign Investment Review Board for the deal, Alistair Stephens, Arafura’s managing director, said. Arafura fell 6.2 percent to 30.5 Australian cents.

BHP Billiton Ltd. (BHP AU): BHP Billiton Finance Ltd., the finance arm of the world’s largest mining company, sold 2.25 billion euros ($3 billion) of bonds due in three and seven years. BHP lost 1.6 percent to A$33.26.

China Steel Corp. (2002 TT): Taiwan’s largest maker of the metal swung to a loss in the fourth quarter as the global recession sapped demand for its products. The mill posted a net loss of NT$15.5 billion ($457 million), in the three months ended Dec. 31, after a profit of NT$12.9 billion a year earlier, according to calculations by Bloomberg based on the company’s full-year results announced yesterday. China Steel added 1.1 percent to NT$24.1.

Hynix Semiconductor Inc. (000660 KS): The world’s second- largest computer-memory maker said it has delayed plans to build a new plant because of the global recession and a downturn in the chip industry. The company said it had previously planned to build a plant in Ichon, South Korea. Hynix dropped 1.9 percent to 10,200 won.

Jaya Tiasa Holdings Bhd. (JT MK): The Malaysian timber producer said profit in the fiscal third quarter ended Jan. 31 dropped 98 percent to 152,000 ringgit ($41,838) from a year earlier because of lower selling prices and volume. Jaya lost 0.6 percent to 1.70 ringgit.

PetroChina Co. (857 HK): The world’s second-largest company by market value posted the first drop in full-year profit since 2001 after crude oil prices slumped and refining losses widened. Net income fell 22 percent to 114 billion yuan ($16.7 billion), the Beijing-based company said. PetroChina fell 0.3 percent to HK$6.47.

Powerchip Semiconductor Corp. (5346 TT): Taiwan’s biggest computer-memory chipmaker said it expects the glut of computer- memory chips to ease this year and that there will be a shortage of the semiconductors by the third quarter. Powerchip rose 6.8 percent to NT$3.76.

Rio Tinto Group (RIO AU): The world’s third-largest mining company said it reopened the final rail line connecting its Western Australian mines to ports after a shutdown caused by heavy rains in February. Rio rose 1.1 percent to A$53.93.

To contact the reporter on this story: Berni Moestafa in Jakarta at bmoestafa@bloomberg.net

Read more...

Asian Currencies: Taiwan Dollar, Won Decline on Export Slump

By David Yong

March 25 (Bloomberg) -- Asian currencies dropped after a Japanese government report showed exports slumped by a record in February, increasing speculation demand for regional goods will be muted until the global economy starts to emerge from recession.

Asian currencies are headed for a quarterly loss as a deepening financial crisis slows world growth and deters investors from emerging-market assets. Taiwan’s dollar fell by the most in three weeks after a report yesterday showed export orders tumbled for a fifth month in February, the longest stretch since 2001, and as a technical indicator signaled the currency would reverse direction. South Korea’s won declined from near a six-week high as consumer confidence dropped.

“The trade outlook remains dire and this shows that any recovery is unlikely to be meaningful in the first half of the year,” said Wan Suhaimi Saidi, an economist at Kenanga Investment Bank Bhd. in Kuala Lumpur. “We should see a pullback in regional stock and currency markets today.”

Taiwan’s currency weakened 0.4 percent to NT$33.930 as of 12 p.m. local time, according to Taipei Forex Inc. The won fell 0.2 percent to 1,386.65 per dollar in Seoul and Indonesia’s rupiah dropped 1 percent to 11,563. Malaysia’s ringgit traded at 3.6305 versus 3.6275 yesterday.

The MSCI Asia Pacific Index of regional stocks fell 0.4 percent after rising yesterday to the highest level since Feb. 10. The gauge is down 6 percent this year and is headed for a sixth quarterly loss.

Export Slump

Nine of Asia’s 10 most-traded currencies excluding the yen weakened against the greenback this year. Korea’s currency has slipped 9.2 percent, headed for a sixth quarter of declines. The rupiah and ringgit were both poised for a fourth quarter of losses while India’s rupee is set for a fifth.

Japan’s exports slumped 49.4 percent in February from a year earlier, the most since at least 1980 when the government started compiling the data, a Finance Ministry report showed in Tokyo. Orders for overseas shipments in Taiwan declined 22.3 percent in the same month, the government said late yesterday.

The Japanese yen traded at 131.95 per euro in Tokyo versus 131.81 late in New York yesterday. It was at 97.84 against the dollar from 97.86. The greenback was little changed at $1.3487 per euro.

Technical Indicator

Taiwan’s dollar weakened as a technical indicator signaled a three-week rally in the currency would end. The currency’s 14-day relative strength index against the greenback fell below 30 in the last two days for the first time this year. A level above 70 or below 30 suggests a currency will change direction.

“The Taiwan dollar would still be bearish in the coming three to six months because its economy is in a deep recession,” said Thomas Harr, a senior currency strategist at Standard Chartered Bank in Singapore. “Lots of Asian currencies have been strengthening perhaps too much last week on optimism even when the market is still in fear.”

Korea’s won also slipped after a Bank of Korea report today showed consumer confidence in Asia’s fourth-largest economy waned in March for the first time since December as unemployment rose.

“The moves we’ve had in all these currencies and equities have been extremely sharp, an extremely rapid reversal,” of the previous declines, said Dwyfor Evans, a strategist at State Street Global Markets LLC in Hong Kong. “A lot of the high-risk currencies look as if they’ve taken a pause here.”

Elsewhere, Singapore’s dollar dropped 0.1 percent to S$1.5139 and the Thai baht declined 0.4 percent to 35.53 against the U.S. currency. The Philippine peso traded at 48.250 from 48.165 yesterday and China’s yuan eased 0.03 percent to 6.8319.

To contact the reporter on this story: David Yong in Singapore at dyong@bloomberg.net.

Read more...

Sell Euro for Australian Dollar on Possible ECB Policy, RBS Says

By Justin Carrigan

March 25 (Bloomberg) -- Investors should sell the euro for the Australian dollar because the European Central Bank is nearer to buying government bonds than the Reserve Bank of Australia, according to Royal Bank of Scotland Group Plc.

“Quantitative easing and steady policy measures taken in the major countries continue to provide a recovery in investor confidence near term,” Greg Gibbs, a foreign-exchange strategist in Sydney at RBS, wrote in a research note today. “But the ECB is seen much closer to the quantitative easers” than the RBA.

To contact the reporter on this story: Justin Carrigan in London at jcarrigan@bloomberg.net

Read more...

Australian Dollar Drops on Bets Recent Gains Came Too Quickly

By Candice Zachariahs

March 25 (Bloomberg) -- The Australian dollar slipped below 70 U.S. cents and New Zealand’s fell for a second day as investors bet the currencies’ longest winning streaks since 2007 may have been overdone.

New Zealand’s currency also slid before a government report tomorrow that economists say will show the nation’s current- account deficit widened to record 9 percent. The shortfall is “uncomfortably large,” Finance Minister Bill English said today.

The South Pacific nations’ currencies weakened as Japan’s exports dropped by a record 49.4 percent in February.

“The falls don’t imply that we’re out of this rally; it’s a retracement from what was a very big move up,” said Amy Auster, head of foreign-exchange and international economics research at Australia & New Zealand Banking Group Ltd. in Melbourne. “The fall below 69.95 this morning suggests a retracement back to 68.55” for the Australian dollar, while New Zealand’s currency may slip toward 55.55 cents, she said.

Australia’s currency bought 69.59 U.S. cents as of 4:46 p.m. in Sydney from 69.55 cents late in New York yesterday. The currency slid 0.2 percent to 67.93 yen.

New Zealand’s dollar declined 0.7 percent to 55.90 U.S. cents from 56.30 in New York yesterday. It was at 54.55 yen from 55.11 yen.

The Australian and New Zealand dollars rose for 10 days through March 23, the longest stretch of gains since at least October 2007. The 14-day relative strength index for both held above 70 on March 23, suggesting a change in price direction was imminent.

Quarterly Decline

The Aussie has declined 0.8 percent this quarter against the dollar, after dropping 11 percent in the three months ending Dec. 31. New Zealand’s currency has weakened 3.4 percent, set for a fourth quarterly decline versus the greenback.

The currencies may rally further in the near-term, said Jonathan Cavenagh, a foreign exchange strategist at Westpac Banking Corp. in Sydney, with the Australian dollar likely to advance toward 72.50 cents over the next month.

“Data, while it’s remained at very depressed levels, on balance has not been shockingly weak,” he said. “We are starting to see some modest upward surprises.”

Purchases of previously owned homes in the U.S. unexpectedly increased 5.1 percent last month, the National Association of Realtors said yesterday.

Up Against Yen

Australia’s dollar has strengthened 6.9 percent versus the yen and is headed for its first quarterly increase in three quarters. The currency slid 24 percent in the final three months of 2008, accelerating from a 17 percent drop in the quarter ended Sept. 30, after the Reserve Bank of Australia slashed interest rates to a 45-year low, cutting 4 percentage points from early September.

“We’ll ultimately see the RBA cut rates to 2 percent or maybe even below because I would anticipate that we have some more serious economic weakness to come, particularly given how much our major trading partners are struggling,” said Stephen Miller, who oversees $2.5 billion of Australian dollar debt at BlackRock Inc. in Sydney.

New Zealand’s dollar, set for a 4 percent increase this quarter against the yen, may pare gains before a report March 27 that will show the nation’s economy shrank 1.1 percent in the fourth quarter, according to economists surveyed by Bloomberg.

Benchmark interest rates are 3.25 percent in Australia and 3 percent in New Zealand, compared with 0.1 percent in Japan and as low as zero percent in the U.S., highlighting the relative attraction of the South Pacific nations’ higher-yielding assets.

Buy Aussie

Investors should buy the Australian dollar versus the euro as the currency may advance to A$1.90 per euro, Greg Gibbs, a currency strategist at RBS Group Australia, wrote in a note to clients today. The currency traded at A$1.9334 from A$1.9365.

“Policy measures taken in the major countries continue to provide a recovery in investor confidence,” wrote Gibbs. At the same time the European Central Bank is “much closer” than the RBA to following the Federal Reserve and Bank of Japan in flooding the economy with funds to keep borrowing costs low, he said. RBA Governor Glenn Stevens will speak on ‘Public Policy and the Payments System’ in Melbourne at 6:30 p.m. today.

Australian government bonds fell for a fourth day. The yield on 10-year notes rose nine basis points, or 0.09 percentage point, to 4.45 percent, according to data compiled by Bloomberg. The price of the 5.25 percent security due March 2019 slipped 0.73, or A$7.3 per A$1,000 face amount, to 106.35.

New Zealand’s two-year swap rate, a fixed payment made to receive floating rates, rose to 3.82 percent from 3.69 yesterday.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net

Read more...

Czech Koruna Rally Halted as Topolanek Loses No-Confidence Vote

By Bo Nielsen, Yon Pulkrabek and Michael Patterson

March 25 (Bloomberg) -- The rally in the Czech koruna, Europe’s best performing currency in the past month, may crumble after Prime Minister Mirek Topolanek lost a vote in Parliament, ousting his government.

The koruna weakened as much as 0.6 percent to 27.300 per euro today, eroding its 5.8 percent gain in the month since Feb. 24, and dropped 3.1 percent against the dollar in the past two days, the biggest decline in emerging-market currencies.

Topolanek, who leads a three-party coalition government, lost a no-confidence vote over his handling of the economy as it heads for a recession. The koruna, which fell to a 3 1/2-year low against the euro on Feb. 17, strengthened after central bank policy makers signaled possible interest-rate increases, world finance chiefs pledged to double International Monetary Fund reserves and the EU agreed to boost a credit line for member countries in financial distress.

“I see a risk of short-term reversal at least until the visibility on the political front clears up,” Benoit Anne, an emerging-market strategist at Banc of America Securities-Merrill Lynch in London, said in an interview late yesterday. “It will create some political uncertainty.”

Analysts had already concluded that the rally was over even before the no-confidence vote. Merrill Lynch forecast an 8.7 percent slide to 29.25 per euro by the end of September. Zurich- based UBS AG, the world’s second-biggest currency dealer, told investors on Feb. 16 to sell the koruna, with a one-year target of 29.5 per euro.

Thanos Papasavvas, head of foreign exchange in London at Investec, said he’s waiting for the koruna to fall a further 11.4 percent to 30 per euro before buying. Poland’s zloty, Europe’s second best performer in the past month, may drop 9.8 percent to about 5 per euro, he said.

Supporting Rally

“I would love to say we’ve seen the bottom in these currencies but I’m not sure we’re there yet,” said Papasavvas, who helps manage more than $4 billion of currency assets. “I certainly don’t want to buy here.”

The koruna’s rally has been supported by a U.S. plan to remove up to $1 trillion of toxic debt from banks, stoking risk appetite and erasing 2009 losses in emerging market equities. The benchmark MSCI Emerging-Markets Index of stocks is headed for a 16 percent gain in March, the best monthly advance since 1989, according to data on Bloomberg.

“You have to take into account the fact that the global backdrop is now supportive and currencies in emerging markets might actually continue to rally,” said Merrill’s Anne. “It’s more a case of the Czech currency will underperform.”

Resignations, Riots

Eastern Europe’s economies have been hurt by a slowdown in the euro region, the main market for their goods. The Czech economy may contract as much as 2 percent this year, Finance Minister Miroslav Kalousek said this month. Gross domestic product will shrink by 3.4 percent in 2009, according to Deutsche Bank AG.

Czech unemployment rose to 7.4 percent in February from 5.2 percent in October.

The economic turmoil caused Hungarian Prime Minister Ferenc Gyurcsany to announce March 22 he would step down in favor of a premier capable of gaining “wider political support” for moves to fight the recession. Latvia’s government resigned last month as the contraction sparked rioting.

Topolanek’s coalition has struggled to govern as it relied on independent or opposition lawmakers for a majority. The government has been “reluctant” to take steps needed to tackle the impact of the global financial crisis, Czech Social Democratic leader Jiri Paroubek told lawmakers.

The opposition Social Democrats and Communists got 101 out of 197 votes in the motion yesterday in the lower house of parliament.

Power Weakened

The government will remain in power until President Vaclav Klaus appoints a new administration or early elections are held. Klaus said in an e-mailed statement yesterday that it was “premature” to talk about the situation.

Topolanek is the current head of the EU’s rotating presidency and the no-confidence vote may weaken the Czech Republic’s negotiating powers within the 27-member bloc, he said.

The past month’s rally pared an 11.2 percent plunge in the koruna against the euro in the previous three months.

Any further selloff in central and eastern European currencies may strain government finances and trigger $300 billion in losses for local banks as rising repayment costs on foreign-denominated loans spark defaults, Deutsche Bank said in a March 13 note. It may also weaken the euro because of concern banks in the 16-member euro zone will be forced to write off some of their $1.3 trillion of loans to the region, according to an ING Groep NV report last month.

Loan Defaults

The euro on Feb. 17 weakened 1.7 percent against the dollar, the most in more than six weeks, after Moody’s Investors Service said that some eastern and central European banks may face credit-rating downgrades as loan default rates rise in the region.

“Eastern and central Europe could be the catalyst for another rout in risky assets,” said Lutz Karpowitz, a Frankfurt-based currency strategist at Commerzbank AG, Germany’s second-biggest lender. “A credit event there could create a horrible snowball effect spreading to the global markets.”

To contact the reporters on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net; Yon Pulkrabek in Prague on ypulkrabek@bloomberg.net

Read more...

Calderon’s Looming Defeat May Hurt Mexico Rating, Moody’s Says

By Valerie Rota

March 25 (Bloomberg) -- Mexico’s credit rating could be hurt by a defeat for President Felipe Calderon’s National Action Party in mid-term congressional elections, said Mauro Leos, a sovereign analyst at Moody’s Investors Service.

A loss of seats for Calderon’s party in the July elections would hamper his ability to push through legislation needed to boost tax revenue and stem a decline in oil production, Leos said. A March 7 poll by Mexico City-based Consulta Mitofsky showed Calderon’s party would take 26 percent of the lower house seats in the vote, down from its current 41 percent.

“It would almost guarantee that it’ll be very difficult” to get legislation passed, Leos said in a telephone interview from New York. “The fundamentals will erode away at a faster pace. It raises the risk of a change in the credit profile.”

The looming congressional defeat adds to concerns that Mexico’s economic growth will keep lagging its peers. Mexico averaged annual growth of 3 percent over the past six years, 2 percentage points below the rest of the region, Moody’s said in a report yesterday.

Latin America’s second-biggest economy shrank 1.6 percent in the fourth quarter, its first quarterly contraction in more than five years, as the deepening U.S. slump curbed demand for Mexican exports and trimmed foreign direct investment and remittances from migrant workers. Growing drug-related violence is also curbing growth, Finance Minister Agustin Carstens said last week. The government estimates that crime shaves 1 percentage point off of gross domestic product per year.

Region’s Deepest Slump

Moody’s rates Mexico’s foreign debt Baa1, its third-lowest investment-grade rating, in line with South Africa and Latvia. Standard and Poor’s and Fitch Ratings rate Mexico BBB+, also three levels above junk. Fitch lowered the rating outlook to negative from stable in November and said on March 23 that Mexico’s economy will contract 2.5 percent this year, the most in the region.

There will be a “significant” slump in Mexico’s economy this year that may extend into 2010, Leos said on a conference call with investors yesterday. He didn’t provide forecasts.

The Mitofsky poll shows that the opposition Institutional Revolutionary Party, or PRI, will take 34 percent of lower house seats in the July elections while the opposition Party of the Democratic Revolution wins 13 percent. Mitofsky surveyed 1,000 people between Feb. 20-23 for the poll, which has a margin of error of 3.1 percentage points.

‘Complicate Things’

“Until now, preliminary information indicates” a victory for the PRI, Leos said in the interview. That “would complicate things further. We wouldn’t be surprised if there were no more significant reforms the rest of the year.”

There are no senate seats up for vote in the elections.

Legislation approved last year allowing state-run oil monopoly Petroleos Mexicanos to hire private and foreign companies won’t be enough to shore up growth, Leos said.

Production of oil, Mexico’s biggest export and the source of about 37 percent of government revenue, fell last year at the fastest pace since 1942. More legislation is needed to stem that slide, Leos said. Mexico’s tax revenue equaled 20.5 percent of GDP in 2007, the lowest among the members of the Organization for Economic Cooperation and Development, an October study from the OECD showed.

Mexico’s currency and bonds have slumped amid the economic slowdown. The peso plunged 24 percent over the past six months, the worst performance among the world’s 16 most-traded currencies against the dollar. The yield on the government’s dollar bonds maturing in 2034 climbed to 7.18 percent from 6.65 percent six months ago and 5.89 percent a year ago, according to JPMorgan Chase & Co. The bonds’ price fell to 95 cents on the dollar from 111.5 cents a year earlier.

To contact the reporter on this story: Valerie Rota in Mexico City at vrota1@bloomberg.net.

Read more...

Euro Stays Lower After German Confidence Declines to 26-Year Low

By Gavin Finch

March 25 (Bloomberg) -- The euro stayed lower against the dollar and the yen after German business confidence fell to a 26-year low in March.

The 16-nation currency traded at $1.3458 as of 9:05 a.m. in London, from $1.3468 yesterday in New York. The euro also weakened to 131.46 yen from 131.81 yen.

The Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, dropped to 82.1 from 82.6 in February. Economists expected a decline to 82.2, according to the median of 37 forecasts in a Bloomberg survey.

To contact the reporter on this story: Gavin Finch in London at gfinch@bloomberg.net

Read more...

Chinalco Cleared by Australian Regulator for Rio Deal

By Rebecca Keenan and Madelene Pearson

March 25 (Bloomberg) -- Aluminum Corp. of China won approval from Australia’s competition regulator, clearing a hurdle for the Chinese state-controlled company’s proposed $19.5 billion investment in Rio Tinto Group.

The proposal wasn’t likely to affect the iron ore, copper, alumina and bauxite markets, the Australian Consumer and Competition Commission said today in a statement lodged with the Australian stock exchange by London-based Rio.

Australian lawmakers have begun an inquiry into foreign investment laws amid a backlash from politicians and shareholders over Chinalco’s planned investment. The proposal won’t influence annual talks to set contract iron ore prices, Rio, the world’s second-largest producer, said yesterday.

“The Chinese are not getting control of Rio Tinto, they are not getting control of their operations,” said Gavin Wendt, senior resources analyst at Fat Prophets Funds Management in Sydney, who said he doesn’t “have any issues with the deal”. Chinalco “are not going to be party to any iron ore discussions, or any commodity discussions,” he said.

Rio’s shares rose 1.1 percent to A$53.93 at the 4:10 p.m. Sydney time close on the exchange. The benchmark index rose 0.8 percent and BHP Billiton Ltd., the world’s largest mining company, declined 1.6 percent.

More Approvals

Chinalco agreed on Feb. 12 to buy $7.2 billion of convertible bonds and spend $12.3 billion on stakes in Rio Tinto mines. Chinalco’s investment requires approval from the Australian government and Rio Tinto shareholders.

Chinalco “looked forward to moving ahead with the transaction,” the Beijing-based company said in an e-mailed statement welcoming the commission’s decision.

The commission is an independent authority that administers the Trade Practices Act and promotes competition and fair trade, according to its Web site.

Australia’s Foreign Investment Review Board is also reviewing the proposed deal and last week extended its investigation by 90 days. It will provide a recommendation to Treasurer Wayne Swan, who will make a final decision whether the deal is in Australia’s national interest.

Chinalco’s investment in Rio will bolster China’s bargaining power to set iron ore prices, the China Iron and Steel Association said last month. Chinalco would take 15 percent of Rio’s Hamersley iron ore unit and jointly sell 30 percent of output in China.

The potential for integration between Rio’s Australian iron ore operations and Chinese steelmakers was subject to study, the commission said. This was “based on the assumption that Chinalco and various steelmakers are subsidiaries of the same parent entity and therefore have common commercial interests,” it said.

Global Ore

“Chinalco and Rio Tinto would be unlikely to have the ability to unilaterally decrease global iron ore prices below competitive levels,” the commission said in the statement.

Contract iron ore prices will drop for two years, undermined by a “whopping oversupply” of the steelmaking raw material, Citigroup Inc. said yesterday. Producers including Rio and Melbourne-based BHP, negotiate annual benchmark contract prices with steelmakers for the year starting April 1.

There is limited direct competitive overlap of the operations of the two companies in Australia to affect the supply of bauxite, copper and alumina, the commission said.

To contact the reporters on this story: Rebecca Keenan in Melbourne at rkeenan5@bloomberg.net; Madelene Pearson in Melbourne on mpearson1@bloomberg.net

Read more...

Kubota Forecasts U.S. Tractor Market to Contract

By Masumi Suga and Masatsugu Horie

March 25 (Bloomberg) -- Kubota Corp., Asia’s largest tractor maker, expects the U.S. market for the machinery will shrink 15 percent in 2009 as a recession saps demand.

The tractor market “may deteriorate further” unless a slump in sales stabilizes in the second half, Managing Director Tetsuji Tomita said in an interview. A 50 percent drop in demand for mini excavators in the U.S. and Europe may continue for the next six months, he said.

Farmers and consumers in the U.S., Kubota’s largest overseas market, have delayed buying tractors used in agricultural production and to mow lawns. The company is reducing product lines, freezing hiring and shifting its focus to China and other emerging markets as the deepening recession reduces sales in North America and Europe, Tomita said.

“We’re being hurt by both declines in demand and the increased value of the yen,” Tomita, in charge of the farm and industrial machinery division, said yesterday in an interview at the company’s headquarters in Osaka.

Kubota plans to cut output of tractors at a rate of 6 percent to 9 percent in 2009, compared with last year, less than the drop in overall demand, as it gains market share, Tomita said. The company and Moline, Illinois-based Deere & Co. are tied as the top sellers of tractors of less than 110 horse power in the U.S., Tomita said. Kubota sold about 102,000 tractors in the U.S., about 34 percent of the market, in 2008.

Kubota fell 1.4 percent to 562 yen as of 1:34 p.m. on the Tokyo Stock Exchange. The stock has dropped 11 percent this year, compared with a 4.2 percent slide in Japan’s benchmark Nikkei 225 Stock Average.

Profit Decline

Profits at Kubota’s farm and industrial machinery division will be “severely affected” in the year starting April 1, though the business won’t incur a loss, Tomita said. Kubota forecast last month overall net income will fall 27 percent to 50 billion yen ($511 million) for the year ending this month.

Tokyo-based Komatsu Ltd. and Hitachi Construction Machinery Co., Asia’s two largest makers of excavators and other earthmovers, forecast a loss in the January to March quarter as the financial crisis damps global construction demand. Kubota holds the top market share for mini excavators weighing less than seven tons.

“Demand for mini construction machinery has collapsed” except in China, Tomita said.

The U.S. economy shrank 6.2 percent last quarter, the most since 1982. Economics surveyed by Bloomberg News this month forecast gross domestic product will contract at a 5.2 percent pace from January through March.

Asian Markets

Emerging Asian markets are less vulnerable to the deepening financial crisis with sustained growth in sales volumes of farm tractors and construction equipment, Tomita said. Kubota plans to triple annual sales from machinery in Asia outside Japan to 300 billion yen by March 2014.

The company forecasts unit sales of tractors will exceed 40,000 this year in Thailand, the world’s largest rice exporter. Kubota, which dominates the rice-growing machinery market in Thailand, sold 37,000 tractors last year, surpassing its home market for the first time.

“We expect long-term grown in the Asian region,” Tomita said. “The business opportunity there is quite huge.”

In China, Kubota is searching for land to start assembling mini excavators in the second half of 2009 and plans to double unit sales in the country this year, Tomita said, without specifying the target.

To contact the reporters on this story: Masumi Suga in Tokyo at msuga@bloomberg.net; Masatsugu Horie in Osaka at mhorie3@bloomberg.net

Read more...

Investors Should Buy China’s H Shares, JPMorgan Says

By Chua Kong Ho

March 25 (Bloomberg) -- Investors should buy China stocks traded in Hong Kong, or H shares, because they have not factored in the outlook for the country’s economic growth, according to JPMorgan Chase & Co.

The Hang Seng China Enterprises Index, which includes shares of mainland companies traded in Hong Kong, has risen 3.4 percent this year, trailing the 28 percent gain in the Shanghai Composite Index, the world’s best performer among 89 benchmark measures tracked by Bloomberg.

“The A-share market has priced in a good amount of the economic recovery, H shares have not,” said Jing Ulrich, chairwoman of China equities at JPMorgan at a briefing in Shanghai today. “Buy H shares.”

China’s so-called A shares, or those denominated in the local currency and largely off-limits to foreigners, have gained on the expectation that the country’s 4 trillion yuan ($585 billion) stimulus package will help reverse an economic slump.

China’s new loans more than quadrupled in February from a year earlier, according to central bank figures. Property sales in Beijing jumped 28 percent in February while those in the southern Chinese city of Xiamen surged fourfold in the first two months as declining prices spurred home purchases, according to property agency DTZ.

Investors should buy Chinese banks and developers that are traded in Hong Kong to gain from the recovery as they offer more value, Ulrich said. Stocks on the Shanghai Composite Index trade at 18.1 times earnings, compared with 10.6 times for the Hong Kong gauge, according to Bloomberg data.

Valuation Gap

The Shanghai-traded shares of PetroChina Co., the nation’s biggest company, fetch twice the valuation in Hong Kong. The last time the difference in multiples was this wide, the Chinese shares lost 19 percent in 30 days.

BNP Paribas SA, which said it turned “bullish” on China in November, today advised investors to cash out some of their gains for other north Asian markets.

“We still remain positive on China over the next 12 months,” said Clive McDonnell, Asian equity strategist at BNP Paribas, in a Bloomberg Television interview. “Short term, China has been the leader and there’s likely to be some rotation.”

Investors should expect a “meaningful rebound” in China’s economic indicators such as the purchasing managers’ index and industrial production for the month of March and April, Ulrich said. The nation has the “amazing ability to pump prime its economy till the results are shown,” she added, which can’t be said of other major countries.

Economic Recovery

Fan Gang, an adviser to China’s central bank, said today in Hong Kong that the world’s third-largest economy will recover strongly in the second and third quarters as the government stimulus package takes effect. The country’s growth slid to the weakest pace in seven years in the fourth quarter as trade slumped due to the global recession.

“Overseas investors don’t believe me when I say the economy has bottomed,” Ulrich said. “I now feel more optimistic than at any time in the past six months.”

JPMorgan’s team of analysts was top-ranked for China research in Institutional Investor’s annual fund manager poll last year.

The brokerage has an “overweight” recommendation on the Hong Kong-traded shares of the nation’s three lenders, Industrial & Commercial Bank of China Ltd., China Construction Bank Corp. and Bank of China Ltd., as well as real-estate builder Guangzhou R&F Properties Co.

To contact the reporter on this story: Chua Kong Ho in Shanghai at kchua6@bloomberg.net

Read more...

China Stocks Drop, Ending Seven-Day Gain; China Shipping Falls

By Zhang Shidong

March 25 (Bloomberg) -- China’s stocks fell, snapping a seven-day rally, as a measure of shipping costs for commodities extended its longest losing stretch since December and Bank of China Ltd. reported its weakest earnings growth in three years.

China Shipping Development Co. and China Cosco Holdings Co. dropped more than 4 percent as lower rates may damp earnings. Bank of China, the country’s third-largest, lost 2.3 percent. Kweichow Moutai Co., the biggest liquor maker, retreated 3.9 percent after 2008 profit missed some analysts’ estimates.

“The first-quarter earnings will still be ugly and we won’t see an immediate recovery of quarterly earnings going forward,” said Zhang Ling, a fund manager at ICBC Credit Suisse Asset Management Co. in Beijing, which oversees the equivalent of $7.21 billion.

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, lost 46.87, or 2 percent, to 2,291.56 at the close, ending a 9.8 percent gain in the past seven days. The CSI 300 Index, measuring the Shanghai and Shenzhen exchanges, dropped 2.1 percent to 2,401.33.

The decline pared the Shanghai Composite’s gain this year to 26 percent, which still makes it the best performer among 89 benchmark measures tracked worldwide by Bloomberg. The gauge is set for its best first-quarter performance in nine years.

Stocks have rallied on optimism the government’s 4 trillion yuan ($585 billion) stimulus package will reverse a slump in the world’s third-largest economy, after fourth-quarter growth slowed to the weakest pace in seven years.

‘Some Recovery’

China’s economy will recover strongly in the second and third quarters as the stimulus plan takes effect, central-bank adviser Fan Gang said at a conference in Hong Kong today, adding that the economy has “already seen some recovery.”

China Shipping, the nation’s biggest oil carrier, dropped 5 percent to 10.98 yuan. China Cosco, the world’s largest operator of dry-bulk ships, fell 4.9 percent to 11.16 yuan. Cosco Shipping Co., a unit of China’s biggest shipping company, lost 3.5 percent to 9.51 yuan.

The Baltic Dry Index yesterday dropped 0.9 percent to 1,758 points, the Baltic Exchange said. The gauge has fallen for 10 straight days, its longest run of losses since the 13 trading sessions to Dec. 5.

Bank of China dropped 2.3 percent to 3.39 yuan. Net income for the world’s third-biggest bank by market value rose 14 percent from a year earlier to 63.36 billion yuan, it said yesterday. That fell short of the average 67.5 billion yuan estimate among 26 analysts surveyed by Bloomberg.

‘Aren’t as Good’

The growth is the slowest pace in three years on writedowns of U.S. mortgage investments and a contraction in loan profitability.

“Bank of China’s earnings are disappointing and below the market’s estimate,” said Zhang Xiuqi, a strategist at Guotai Junan Securities Co. in Shanghai. “That’s probably an indication that overall earnings for Chinese banks in 2008 aren’t as good as previously expected.”

Other banks also fell. Industrial & Commercial Bank of China Ltd., the nation’s biggest listed lender, slid 1.6 percent to 3.77 yuan. China Construction Bank Corp., the No. 2, lost 1.9 percent to 4.20 yuan.

Moutai lost 3.9 percent to 114.20 yuan. Net income rose 34 percent to 3.8 billion yuan after it raised prices and output.

“We believe demand for premium spirits, with a more discretionary spending nature, will see more negative impact from the macro slowdown than other consumer staples,” Goldman Sachs Group Inc. analysts Yifan Deng and Joey Zeng wrote in a report today. Moutai’s 2008 earnings were 14 percent lower than Goldman Sachs estimates, the report said.

Gold producers fell after the precious metal had the biggest decline in a week on concern an economic revival will reduce its appeal.

Zhongjin Gold Corp., the country’s second-largest by market value, dropped 1.5 percent to 58.51 yuan. Shandong Gold Mining Co., the third largest, fell 1.3 percent to 79.41 yuan.

Gold futures for April delivery declined 3 percent to $923.80 an ounce in New York, the biggest drop for a most-active contract since March 18.

To contact the reporter on this story: Zhang Shidong in Shanghai at szhang5@bloomberg.net

Read more...

Japan Topix Index Rises in Longest Streak in 4 Years on Payouts

By Masaki Kondo and Patrick Rial

March 25 (Bloomberg) -- Japan’s Topix index rose in its longest winning streak in four years, as investor appetite for corporate dividends overshadowed a record plunge in exports.

KDDI Corp., Japan’s No. 2 mobile-phone operator, surged 6 percent before the shares trade without rights to an estimated 5,500 yen dividend tomorrow. JFE Holdings Inc., Japan’s No. 2 steelmaker, gained 4.4 percent as its dividend return is almost three times the yield on government bonds. Panasonic Corp., the world’s largest electronics maker, sank 3.5 percent as slumping demand caused Japan’s shipments to plunge by half last month.

The Topix rose 5.77, or 0.7 percent, to close at 818.49 in Tokyo, extending gains for an eighth day, the longest winning streak since March 2005. The Nikkei 225 Stock Average dipped 8.31, or 0.1 percent, to 8,479.99 after swinging between gains and losses at least 12 times.

“Because they have been underweighting equities or have too much cash, some investors are forced to buy because the market is unexpectedly strong,” said Masayuki Kubota, a senior fund manager who helps oversee $1.7 billion at Tokyo-based Daiwa SB Investments Ltd. “The defensive high-yielders are very attractive, and it’s good to buy before the ex-dividend date.”

Through yesterday, the Nikkei gained 20 percent since reaching a 26-year low on March 10, meeting the technical definition of a bull market. The gauge is poised for a 4.3 percent drop for the first three months of 2009, compared with a 21 percent plunge in the last quarter of 2008.

Dividend Rights

Japan’s exports tumbled 49.4 percent last month from a year earlier as a global recession damped demand for the nation’s cars and electronics. The decline, reported today by the Ministry of Finance, was the sharpest since at least 1980, when the government started to keep comparable data. Economists had estimated a 47.6 percent drop.

Today was the last day investors can get dividend rights from companies whose business year ends on March 31, Hiroichi Nishi, an equities manager at Nikko Cordial Securities Inc., said in an interview with Bloomberg Television. Tomorrow, more than 2,800 Japanese companies will trade without rights to a dividend, based on Bloomberg data.

KDDI surged 6 percent to 478,000 yen, the steepest advance since Nov. 25. Tokyo Electric Power Co., Asia’s biggest utility, leapt 4.2 percent to 2,620 yen. KDDI is expected to pay a dividend equivalent to 2.3 percent of its share price, and Tokyo Electric’s dividend yield is forecast at 2.3 percent. JFE, whose dividend yield is estimated at 3.4 percent, climbed 4.4 percent to 2,370 yen. By comparison, the yield on 10-year Japanese government bonds is 1.255 percent.

Defensive Returns

Utilities and telecommunications companies were the biggest winners among 33 industry groups on the Topix. Steelmakers and shipping lines, the third- and fourth-biggest gainers, have an estimated dividend yield of 2.8 percent and 4.4 percent respectively.

“Utilities are typical of so-called defensive stocks that offer comparatively good dividend returns,” Tsuyoshi Nomaguchi, strategist at Daiwa Securities Group Inc., said in an interview with Bloomberg Television.

Panasonic, which is expecting its first loss in six years, slid 3.5 percent to 1,149 yen. Closest rival Sony Corp., which forecast a record operating loss for the year to March 31, lost 2.4 percent to 2,075 yen. Fanuc Ltd., Japan’s top maker of industrial robots, sank 5.4 percent to 6,860 yen.

‘Deep Restructuring’

“We’ll likely see much bigger losses at some electronics makers amid deep restructuring,” said Mitsushige Akino, who oversees the equivalent of $615 million at Tokyo-based Ichiyoshi Investment Management Co. “These companies see the current recession as a chance to pursue long-delayed changes, because few observers will complain even if they stop factories or release workers.”

Central Japan Railway Co. climbed 8.8 percent to 592,000 yen, its largest gain since Aug. 1999. Japan’s largest operator of bullet trains said declines in high-speed rail passengers slowed in March after falling by the most in 14 years last month.

Takeda Pharmaceutical Co. gained 3.3 percent to 3,770 yen after Japan’s largest drugmaker said combination treatment of its diabetes drug Actos and insulin product was approved by Japan’s health ministry.

Nikkei futures expiring in June added 0.4 percent to 8,430 in Osaka and rose 0.3 percent to 8,430 in Singapore.

-- With reporting by Motoko Kakizaki, Yuichi Kato and Kazue Somiya in Tokyo. Editors: Rocky Swift, Sam Waite

To contact the reporters for this story: Masaki Kondo in Tokyo at mkondo3@bloomberg.net; Patrick Rial in Tokyo at prial@bloomberg.net.

Read more...

Asian Stocks Advance on Policy Optimism; Panasonic Declines

By Hanny Wan and Shani Raja

March 25 (Bloomberg) -- Asian stocks rose, with the regional benchmark index set for its biggest monthly gain in ten years, amid optimism governments worldwide will succeed in reviving lending and global growth.

Commonwealth Bank of Australia climbed 2.9 percent in Sydney as the government offered to guarantee as much as $27 billion of state bonds. Tokyo Electric Power Co., Japan’s largest power company, rose 4.2 percent a day before its shares trade without the right to its latest dividend. Panasonic Corp., the world’s biggest maker of consumer electronics, slid 3.5 percent in Tokyo as Japan’s exports sank by a record last month and Sanyo Electric Co. forecast a loss.

“When you consider how much money governments have thrown at the crisis to get liquidity going, you’d think it’ll have some effect,” said Chris Hall, who helps oversee about $2 billion at Adelaide, South Australia-based Argo Investments. “It’ll take a bit of time to all come through.”

Five stocks advanced for every four that declined on the MSCI Asia Pacific Index, which rose 0.4 percent to 84.20 at 5:49 p.m. in Tokyo. The gauge rallied 19 percent through yesterday from a five-year low on March 9 amid speculation the worst of the financial crisis is over.

Japan’s Topix Index gained 0.7 percent, while Hong Kong’s Hang Seng Index dropped 2.1 percent. All other stock markets in the region rose except China, Indonesia, New Zealand, Singapore, Thailand and Malaysia.

New Powers

Mitsubishi Tanabe Pharma Corp. plunged 14 percent in Tokyo after the drugmaker said it will recall a product. Brambles Ltd., which makes wooden pallets for transporting goods, slumped 12 percent in Sydney after customer PepsiCo Inc. changed suppliers. Little Sheep Group Ltd., which runs hot-pot restaurants in China, surged 14 percent in Hong Kong after Yum! Brands Inc. said it will buy a stake.

Futures on the Standard & Poor’s 500 Index gained 0.5 percent as President Barack Obama said in a televised news conference late yesterday there are “signs of progress” in efforts to revive the U.S. economy. The stock gauge fell 2 percent yesterday as Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Timothy Geithner called for new powers to take over and dismantle failing financial firms.

The U.S. two days ago announced plans to rid banks of toxic-real estate assets, following government pledges last week to purchase debt from lenders.

The new measures, along with reports of strong starts to the year from Barclays Plc and Standard Chartered Plc, helped the MSCI Asia Pacific Index jump 12 percent this month, putting it on course for its biggest monthly advance since March 1999.

The average valuation of companies on the gauge climbed yesterday to 16.1 times reported profit, the highest level since Dec. 28, 2007, data compiled by Bloomberg show.

Government Guarantee

Commonwealth Bank, Australia’s second-largest by market value, climbed 2.9 percent to A$35.38 in Sydney. Westpac Banking Corp., the biggest by market value, rose 2.5 percent to A$19.62. National Australia Bank Ltd., the country’s biggest by assets, added 2.8 percent to A$20.37.

Australian Federal Treasurer Wayne Swan offered to guarantee as much as A$39 billion ($27 billion) in state bonds, the latest government measure to help alleviate the global financial crisis.

Among stocks in Japan that are ex-dividend tomorrow, Tokyo Electric rose 4.2 percent to 2,620 yen. Mitsui & Co., Japan’s No. 2 trading company, jumped 5.2 percent to 1,071 yen.

Hunting For Dividends

Takeda Pharmaceutical Co., Japan’s largest drugmaker, rose 3.3 percent to 3,770 yen. More than 2,800 Japanese companies trade without rights to a dividend, according to data compiled by Bloomberg.

“Investors hunting for dividends are supporting the market,” said Hiroshi Chano, who helps manage the equivalent of $7.3 billion at Yasuda Asset Management Co.

Panasonic, which is acquiring Sanyo, dropped 3.5 percent to 1,149 yen. Sony Corp., which gets 77 percent of its sales outside Japan, sank 2.4 percent to 2,075 yen.

The Finance Ministry said Japan’s overseas shipments plummeted 49.4 percent from a year earlier, the sharpest decline since at least 1980, when the government started to keep comparable data. Economists predicted a 47.6 percent drop.

The deepening global recession has put the MSCI Asia Pacific and the MSCI World Index on course for their sixth- straight quarterly declines. The Asian gauge has lost 6 percent since the start of the year, while the MSCI World Index slumped 10 percent.

Little Sheep

Sanyo dropped 1.4 percent to 137 yen. Sanyo, the world’s largest producer of rechargeable batteries used in electronics, yesterday forecast a net loss of 90 billion ($921 million) for the year to March 31, because of deteriorating chip and electric-parts operations.

The company predicted in January that it would break even.

Mitsubishi Tanabe plunged 14 percent to 983 yen, its sharpest slump since October 1987. The company said it will recall its genetically modified Medway plasma product because of manipulated data.

Brambles slumped 12 percent to A$4.99. The company said it lost a contract to supply pallets to a unit of Pepsico Inc. Little Sheep rallied 14 percent to HK$2.98. Yum! said it has agreed to buy 20 percent of Inner Mongolia’s Little Sheep for $63 million.

China Petroleum & Chemical Corp., the nation’s largest oil refiner, jumped 5.5 percent to HK$4.64 in Hong Kong after the mainland government unexpectedly raised fuel prices by as much as 5 percent starting today.

To contact the reporters for this story: Hanny Wan in Hong Kong at hwan3@bloomberg.net; Shani Raja in Sydney at sraja4@bloomberg.net.

Read more...

Brown, Fillon Seek Tougher Oversight of Hedge Funds Before G-20

By Simon Kennedy

March 25 (Bloomberg) -- European leaders called for greater regulation of hedge funds as they embarked on a round of diplomacy ahead of next week’s Group of 20 summit.

“We must distinguish the most risky activities of hedge funds so that hedge funds are not a way for conventional financial institutions to escape regulation,” French Prime Minister Francois Fillon said after meeting with U.S. officials in Washington yesterday. U.K. Prime Minister Gordon Brown told the European Parliament in Strasbourg, France, that increased oversight should allow “no opt-out for shadow bankers.”

How far the $1.4 trillion hedge-fund industry is reined in will ultimately depend on President Barack Obama. While Fillon said the U.S. agrees “on the idea that hedge funds must be regulated,” Obama yesterday declined to commit to a particular approach, saying it is “important for us to have a regulatory framework for various flows of capital and financial instruments that could pose a systemic risk.”

G-20 leaders convene in London April 2 to find ways of strengthening international regulation in the aftermath of the worst financial crisis since the 1930s. The group’s finance ministers and central bankers said in a March 14 statement that hedge funds should be “registered and disclose appropriate information to assess the risks they pose.”

Call for Crackdown

Some European governments have long said they want to go further and subject hedge funds to oversight resembling that imposed on banks. German Chancellor Angela Merkel called for a crackdown even before the credit crisis began in August 2007, only to run into opposition from the U.S. and U.K.

Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets, bet on falling as well as rising prices and participate substantially in profits from money invested.

Hedge-fund managers have said their industry is being made a scapegoat and isn’t to blame for last year’s collapse in stock markets, which saw a 38 percent drop in the Standard & Poor’s 500 Index, the biggest annual decline in seven decades.

Paul Marshall, co-founder of $6.6 billion investment firm Marshall Wace LLP, told the British Parliament in January that hedge-fund leverage was reduced to 1.4 times assets in 2008 from 1.7 times, compared with banks’ leverage of 40 to 50 times. Billionaire investor George Soros cautioned U.S. lawmakers in November against “ill-considered” rules.

Prime Brokers

Seeking to head off the politicians, the London-based Alternative Investment Management Association, the hedge fund industry’s largest trade group, said last month that prime brokers could help collect data to show regulators when risks are becoming concentrated enough to threaten overall market stability.

Obama’s administration is this week outlining its plan for a regulatory overhaul before next week’s G-20 meeting. Former Federal Reserve Chairman Paul Volcker, an adviser to Obama, said Feb. 26 that there should be “strong restrictions” on hedge funds.

U.S. Treasury Secretary Timothy Geithner said during his Senate confirmation hearing in January that the U.S. “should consider requiring registration of hedge funds.” Many hedge funds are already registered and some of the biggest managers support it.

Geithner yesterday joined Fed Chairman Ben S. Bernanke in calling for stronger rules to constrain the type of risk-taking that could endanger the financial system. House Financial Services Committee Chairman Barney Frank said in response that such a systemic-risk regulator should have “the capacity to intervene with any kind of activity, including hedge funds.”

To contact the reporter on this story: Simon Kennedy in Paris at skennedy4@bloomberg.net

Read more...