Bush Burnishes China Card for Obama, McCain in Taiwan's Shadow

By Michael Forsythe and Dune Lawrence

Aug. 4 (Bloomberg) -- When Barack Obama or John McCain takes over the presidency in January, he will inherit a stable U.S.-China relationship. Part of the credit will belong to someone who gets few kudos for his foreign-policy initiatives: George W. Bush.

The president, who travels to China for the fourth and last time of his presidency this week to attend the Olympic Games in Beijing, ``leaves a relationship that is basically in good shape,'' says Kenneth Lieberthal, who was director for Asia on the White House National Security Council during Bill Clinton's presidency.

Since taking office 7 1/2 years ago, Bush has personally eased tensions over Taiwan. Henry Paulson, his Treasury secretary, stopped Congress from escalating trade disputes; Robert Zoellick, his former No. 2 diplomat, invited China to play a bigger role internationally. Meanwhile, the administration enlisted China's support to fight terrorism and persuade North Korea to begin dismantling its nuclear program.

China's leaders ``will miss him after he steps down,'' says Shen Dingli, director of the Center for American Studies at Fudan University in Shanghai.

Bush will bequeath his successor a base to work from in dealing with a country that owns more than $500 billion in Treasuries, is the top source of U.S. imports and is on track to become the world's second-biggest economy in a decade.

Explosive Issues

To be sure, Bush, 62, will hand some potentially explosive issues to the new president as well. Both Democrats and Republicans have criticized him for not putting enough pressure on China to improve its human-rights record. The U.S. trade deficit with China -- a record $256 billion last year -- may increase calls in Congress to impose tariffs. And the U.S. will have to goad China into doing more to combat global warming.

When he took office in 2001, Bush signaled he was ready to take a hard line, labeling China a ``strategic competitor'' in contrast to the Clinton presidency's description of a ``strategic partnership.'' He also vowed to defend Taiwan if it were threatened. In April that year, China held the crew of a U.S. spy plane for 11 days on its southern Hainan island after a midair collision with a Chinese fighter jet forced the aircraft to make an emergency landing.

The Sept. 11 terrorist attacks forced Bush to engage China more closely. The U.S. needed Chinese influence with Pakistan to help push that country to cooperate in rooting out al-Qaeda from Afghanistan and overthrowing the Taliban government there. In 2002 the U.S. declared a separatist group in China's Xinjiang region to be terrorists, a move China supported.

Minimizing Tensions

Once engaged in Afghanistan and then Iraq, the administration worked to minimize tensions elsewhere, including in the Taiwan Strait and North Korea.

Sept. 11 was ``a turning point,'' says Yan Xuetong, director of the Institute of International Studies at Tsinghua University in Beijing. Bush learned ``to deal with China.''

Bush brought then-Chinese President Jiang Zemin to his Texas ranch in October 2002, where they discussed Iraq and North Korea. He later called Jiang to request help in defusing the Korean crisis.

By April 2003, the U.S. and China were holding discussions with North Korea in Beijing, and China helped persuade Pyongyang to participate in the so-called six-party talks, also including Japan, Russia and South Korea. When Kim Jong Il's regime conducted a nuclear test in October 2006, China stepped up the pressure.

Personal Diplomacy

In December 2003 Bush altered U.S. policy toward Taiwan, telling Chinese Premier Wen Jiabao at an Oval Office meeting the U.S. was opposed to Taiwan's planned referendum on its independence and to ``any unilateral decision by either China or Taiwan to change the status quo.''

A president doesn't normally announce changes in Taiwan policy personally, ``and certainly doesn't articulate it with the Chinese premier sitting next to him in the Oval Office,'' Lieberthal says.

The policy change came over the opposition of some in the Bush administration. It was ``a policy based on fear,'' says John Bolton, who headed the State Department's arms-control efforts and later served as ambassador to the United Nations. ``It is a fear that if we upset China it will do bad things with respect to the six-party talks.''

Taiwan Arms Sales

The closer ties with China are coinciding with a slowdown in arms sales to Taiwan. In May, Deputy Secretary of State John Negroponte said the U.S. wouldn't sell new F-16 fighter jets to Taiwan, rejecting a request by newly elected President Ma Ying- jeou. Admiral Timothy Keating, head of the U.S. Pacific Command, told a forum in Taiwan last month there's ``no pressing, compelling need'' for arms sales to Taiwan.

That remark prompted speculation that the U.S. has frozen arms sales, something the Bush administration denies.

``I don't think the government has come out and said it is a freeze, but if it looks like a duck and walks like a duck,'' it may be one, says Taylor Fravel, a political science professor at the Massachusetts Institute of Technology.

The administration's engagement with China has had reverberations beyond Asia. In a September 2005 speech in New York, Zoellick urged China to be a ``responsible stakeholder'' globally. That challenged China and flattered its sense of stepping into the role of world power.

Zoellick's speech suggested that ``China is an insider now,'' says Huang Jing, a senior research fellow at the National University of Singapore's East Asian Institute.

Zoellick, who left the administration in 2006 and now heads the World Bank, and Treasury's Paulson expanded communication between the governments through initiatives such as the Strategic Economic Dialogue.

Damage Control

That can help limit the damage of gaffes, such as when a Falun Gong activist disrupted a welcoming ceremony during President Hu Jintao's April 2006 visit to Washington. At that ceremony, an announcer said the band would play the anthem of the Republic of China -- the official name of Taiwan.

The communication can also smooth over more serious incidents.

Bush invoked the increased exchanges and ``good personal relations'' with Chinese leaders as one of his main legacies, in a July 30 interview with Asian journalists in Washington. Regular talks have helped create mutual trust, in contrast to the tense standoff over the spy plane in 2001, Bush says.

``Frankly, it took a while to get phone calls returned and we were just trying to get information,'' Bush says of the incident. If ``that happened now, there would be a much more immediate response because there's more trust.''

Fending Off Tariffs

Paulson, who logged four trips a year to China as head of Goldman Sachs Group Inc., fended off congressional calls for punitive legislation against Chinese exports.

The Treasury also declined to label China a currency manipulator amid anger in Washington over Chinese reluctance to let the yuan rise faster. The currency has gained 21 percent against the dollar in three years.

Those actions leave some lawmakers arguing that Bush's policy is a failure.

``His corporate backers and interests, time and time again, trump our communities' interests, trump our workers' interests, trump our small manufacturers' interests,'' says Senator Sherrod Brown, an Ohio Democrat. ``Except for the Iraq War, there's no bigger failure of the Bush administration than his China policy.''

Dissidents

Senator Sam Brownback, a Kansas Republican, says Bush hasn't pressed China hard enough to improve its treatment of political dissidents and expand religious freedom.

``I don't think the president ought to go to the opening of the Olympics,'' Brownback says. ``I think we should push them more aggressively.''

Dennis Wilder, the senior director for Asian affairs on the White House National Security Council, says attending the Olympics will build goodwill and increase U.S. leverage.

``People want us to have influence on the Chinese government,'' Wilder told reporters at the White House. ``If you don't have a good working relationship with the Chinese government, how do you do that?''

To contact the reporters on this story: Mike Forsythe in Washington at mforsythe@bloomberg.net; Dune Lawrence in Beijing at dlawrence6@bloomberg.net

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Fewest Treasury Traders Since 1960 Hit Taxpayers

By Sandra Hernandez

Aug. 4 (Bloomberg) -- For the first time since 1960, when it created the network of securities firms obligated to buy and sell Treasury bonds, the U.S. government has the fewest bond traders making markets in its debt and a bigger burden for American taxpayers financing record federal deficits.

The number of so-called primary government securities dealers declined to 19 last month when Bank of America Corp., based in Charlotte, North Carolina, acquired the troubled Countrywide Financial Corp. The sale was the climax of dozens of bank failures, triggered by the biggest decline in residential real estate since the Great Depression and the seizing up of credit markets from New York to London. The Federal Reserve Bank of New York, the agent of the U.S. Treasury, plans to shrink the dealers again when JPMorgan Chase & Co. completes its takeover of Bear Stearns Cos.

Fewer firms bidding for U.S. bonds means ``you're going to have sloppier auctions,'' said Mark MacQueen, a money manager in Austin, Texas, at Sage Advisory Services, who traded Treasuries at dealer Merrill Lynch & Co. in the 1980s. ``The taxpayer and the government are paying more no matter what happens.''

The paucity of primary dealers coincides with the largest borrowing requirement in American history and the acknowledgment by the administration of President George W. Bush that the U.S. will finance a budget deficit totaling a record $482 billion next year. When the dealer system began 48 years ago with 18 firms, the U.S. had a $300 million surplus. The group has shrunk from a peak of 46 in 1988.

Auction Tail

While the interest rate on the benchmark 10-year Treasury note today is less than half the 9.14 percent yield of 20 years ago, the dwindling number of dealers and contraction of credit markets means that yields on 10-year notes sold this year have averaged 1 basis point higher than in pre-auction trading, compared with no difference in 2007, data from Stone & McCarthy Research Associates in Skillman, New Jersey, show. In the three years before 2007, such sales drew a yield just below the pre- auction rate. One basis point, or 0.01 percentage point, spread over $171 billion -- the amount of debt the Treasury said it may sell this quarter -- represents $17.1 million in interest.

Traders refer to yields that are higher at auction than typically forecast as a tail. The Treasury's July 22 sale of 20- year Treasury Inflation Protected Securities, for example, drew a tail of 5 basis points, or 0.05 percentage point, according to RBS Greenwich Capital in Greenwich, Connecticut.

Credit Market Losses

Taxpayers already are reeling from the highest unemployment rate since 2004 and the worst economy since 2001, a slump that was caused partly by the collapse of confidence in the fixed- income market. Bond investors who readily provided financing for everything from subprime mortgages to high-yield, high-risk companies 18 months ago, cut their credit lines last summer in a relentless reduction of money lending.

Four of the five firms reporting the biggest credit-market losses since the start of 2007 -- Citigroup Inc., Merrill Lynch, UBS AG, and Bank of America -- are dealers. Sixteen have lost a total of $266.9 billion as the U.S. housing slump roiled financial markets, according to data compiled by Bloomberg.

Yields on the current benchmark 10-year note fell 17 basis points last week to 3.93 percent, the most since the week ended June 27, according to New York-based BGCantor Market Data. The 3.875 percent security due in May 2018 gained 1 10/32, or $13.13 per $1,000 face amount, to 99 17/32.

Almost all of the firms that were dealers when the Fed formalized rules in 1960 have changed their names, been acquired by other securities companies or gone out of business. First Boston is now part of Zurich-based Credit Suisse Group; Salomon Brothers is now owned by Citigroup in New York; and PaineWebber Inc. is owned by UBS AG, also in Zurich.

Opportunity or Headache

A common way for traders to profit is to sell the securities before the auction -- a strategy made possible by the government, which allows trading of bonds as if they were already sold. If the auction draws a yield higher than in the so-called when- issued market, traders can buy the new debt at a lower price, pocketing the difference as profit. Bond prices move inversely to yields.

``Larger auctions simply mean that each primary dealer probably has to buy and distribute more,'' said Raymond Remy, 48, the head of fixed income in New York at Daiwa Securities America Inc., one of the dealers. ``And that could be an opportunity or that could be a giant, giant headache.''

The Treasury this week will sell $17 billion of 10-year notes in its quarterly sale of the securities, the most since 2003. It will also auction $10 billion of 30-year bonds, the most in two years. The government said July 30 that it's considering more frequent auctions of both securities, and will announce a decision in November.

Indirect Bidders

Dealers are just one category of participants at auction and a smaller number doesn't automatically doom the government to higher rates or guarantee profits for firms.

Indirect bidders, a class of investors that includes foreign central banks, bought 27 percent of the two-year notes that sold in the past year. That compares with an average of 34 percent in the preceding 12 months.

Indicators of economic growth and world events have a bigger impact on demand at auctions than the number of dealers, said Craig Coats Jr., who co-headed Salomon's fixed-income desk during the 1980s, when it was the world's biggest bond trader.

``The auction process is really going to be dependent upon what is going on in the market at the time,'' said Coats, who began trading bonds in 1969.

So far this year, four dealers traded at least 41 percent of Treasury bills and notes, while the least active four traded as little as 0.8 percent, according to Fed data.

Good For Dealers

While more than 800 financial institutions were set up to bid directly in Treasury auctions, dealers bought 71 percent of the bonds in the 576 sales between May 2003 and December 2005, according to a 2007 paper by Michael Fleming, a researcher at the Federal Reserve Bank of New York.

``The Fed and the Treasury will be nervous if the dealer community fell to too-low of a number because somebody's got to underwrite more of this debt,'' said Charles Comiskey, the head of Treasury trading in New York at dealer HSBC Securities USA Inc. ``It's pretty obvious it would be good for the dealers. If there's less competitors, it's more of a share of the pie for less people.''

To contact the reporters on this story: Sandra Hernandez in New York at Shernandez4@bloomberg.net.



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Australian House Prices Fall for First Time in Three Years

By Jacob Greber

Aug. 4 (Bloomberg) -- Australian house prices fell in the second quarter for the first time in almost three years as the highest borrowing costs since 1996 deterred home buyers.

An index measuring the weighted average of prices for established houses in the nation's eight capital cities fell 0.3 percent from the March quarter, when it rose a revised 0.4 percent, the Australian Bureau of Statistics said in Sydney today. The median estimate of 18 economists surveyed by Bloomberg News was for a 1.3 percent drop.

Falling house prices support central bank Governor Glenn Steven's view that Australia's $1 trillion economy will slow enough to cool inflation that has accelerated above his target range of 2 percent to 3 percent. Stevens raised the benchmark borrowing cost to 7.25 percent in March, the fourth increase since August last year.

``House prices have hit a wall since the start of 2008,'' Bill Evans, Westpac Banking Corp.'s chief economist in Sydney, said ahead of today's report. ``Interest rates are now the dominant force for housing markets.''

While ``strong population growth and housing shortages will give some base support to demand and firm job markets mean there is less risk of significant forced selling affecting prices, there is more weakness ahead,'' Evans said.

Annual Gain

Second-quarter house prices rose 8.2 percent from a year earlier, after climbing a revised 13.2 percent in the first quarter, today's report showed. Economists forecast an 8 percent increase.

The nation's five largest lenders, including Commonwealth Bank of Australia Ltd., have added an average 105 basis points to mortgage rates in 2008 as the global credit squeeze drove up funding costs. The central bank has added a total of 50 basis points this year.

The increases have added A$250 to monthly payments on an average A$250,000 ($232,563) home loan, according to the Real Estate Institute. Households spent 38 percent of their incomes on mortgage payments in the March quarter, the most in the 22 years the institute has measured affordability.

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net

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Australian Job Advertisements Declined for Third Month in July

By Jacob Greber

Aug. 4 (Bloomberg) -- Australian job-vacancy advertisements fell for a third month in July, adding to signs employers will pare hiring as economic growth slows.

Jobs advertised in newspapers and on the Internet dropped 0.3 percent from June to an average of 261,936 a week, following a 3 percent decline in June, which was the biggest fall since November 2006, according to an Australia & New Zealand Banking Group Ltd. report released in Melbourne today.

Central bank Governor Glenn Stevens will probably leave the benchmark interest rate at a 12-year-high 7.25 percent tomorrow amid signs rising unemployment will cool inflation that has surged above the bank's target range. Employment growth probably slowed to 5,000 jobs in July from 29,800 in June, according to the median estimate of economists surveyed by Bloomberg News.

``The overall trend in job advertisements continues to weaken, indicative of a softening in hiring intentions across Australia,'' said Warren Hogan, head of economics at ANZ Bank in Sydney.

Today's report suggest ``that we will see an easing of employment growth in coming quarters, consistent with the slowing in domestic economic conditions in Australia over the first half of 2008,'' he said.

The jobless rate, which fell to a 34-year low of 3.9 percent in February, probably rose to 4.3 percent last month from 4.2 percent in June, according to the median estimate of 24 economists surveyed by Bloomberg News. The government will publish the jobs report at 11:30 a.m. in Sydney on Aug. 7.

Qantas Firing

Qantas Airways Ltd., Australia's largest airline, said last month it will sack 1,500 workers, and meat processing company Don Smallgoods will cut 640 at factories in Perth and Melbourne.

Starbucks Corp., the world's largest chain of coffee shops, said July 29 it will close three-quarters of its 84 Australian stores, part of a plan to cut at least 12,000 jobs globally.

``The job advertisements series provides further evidence that the current level of interest rates is achieving the Reserve Bank's desired slowing in domestic economic growth,'' said Hogan. ``We expect the central bank to maintain a steady monetary policy in the short-term, monitoring the extent of the slowing in economic activity versus the risks of on-going inflation pressure.''

All 24 economists surveyed by Bloomberg last week predict Stevens and his board will leave the benchmark rate at 7.25 percent tomorrow. Policy makers last raised borrowing costs in March, the fourth increase since August, 2007. Their decision will be announced at 2:30 p.m. in Sydney tomorrow.

The number of jobs advertised in newspapers fell 5.1 percent in July, today's report showed. Vacancies on the Internet were unchanged.

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net



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New Zealand Annual Wages Rise Less-Than-Expected 3.5%

By Tracy Withers

Aug. 4 (Bloomberg) -- New Zealand wages rose less than economists forecast in the year ended June 30, adding to signs that companies are resisting union demands for pay increases.

Wages for non-government workers, excluding overtime, increased 3.5 percent in the 12 months to June, according to Statistics New Zealand's labor cost index released in Wellington today. Wages rose 0.8 percent from the first quarter.

New Zealand's economy stalled in the first half of 2008, reducing profits and making companies less willing to meet wage demands from workers who face soaring food and fuel costs. Reserve Bank Governor Alan Bollard said last month he expects wage growth will slow from next year, combating inflation.

``Firms are struggling to deal with rising costs and slowing demand, with falling profitability likely to keep a cap on wage growth,'' said Nick Tuffley, chief economist at ASB Bank Ltd. in Auckland. ``The Reserve Bank is betting on lower demand keeping wage pressures in check.''

Annual wage inflation matched the previous two quarters, which is the fastest pace since the series began in the fourth quarter of 1992. Economists expected 3.6 percent, according to the median estimate of 11 economists surveyed by Bloomberg News.

New Zealand's dollar bought 72.83 U.S. cents at 12:05 p.m. in Wellington from 72.79 cents before the report.

Union Demands

The economy contracted in the first quarter and eight of 13 economists forecast it also shrank in the three months to June, putting New Zealand in its first recession since 1998.

Bollard cut the benchmark interest rate a quarter point to 8 percent on July 24, the first reduction in five years, saying slowing economic growth will ease inflation to less than 3 percent by mid-2010.

New Zealand's biggest union said this month it will seek higher wages for its 50,000 members after a report showed gasoline prices rose 13 percent in the second quarter.

``Every time our members fill up their cars or fill their supermarket trolleys, they're feeling the pinch and the only answer to that is to ensure that they're getting high enough wages to keep ahead of the game,'' said Andrew Little, national secretary of the Engineering, Printing and Manufacturing Union.

Forty three percent of employers cited the need to match increases in the cost of living as reasons to increase wages, the statistics agency said today. Thirty percent cited the need to match market rates.

Overtime Rates

Including overtime, wages for non-government workers rose 0.8 percent from the first quarter, for an annual increase of 3.4 percent, today's report showed.

A separate series based on reported salary and ordinary- time wage rates of non-government workers rose 1.2 percent in the second quarter and 5.5 percent from a year earlier, Statistics New Zealand said.

A separate report today showed average hourly ordinary time wages of non-government workers climbed 2 percent in the second quarter for an annual gain of 5.4 percent.

Statistics New Zealand also released indicators showing the demand for labor rose in the second quarter after an unexpected slump in the first three months of the year.

The number of full-time equivalent employees gained 0.8 percent from the first quarter when it fell 1 percent. The number of total filled jobs increased 1.7 percent after dropping g 2.3 percent in the first quarter.

Total paid hours rose 0.5 percent, seasonally adjusted, from the first quarter, the statistics agency said.

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net.

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Australia to Leave Benchmark Rate at 7.25 Percent

By Jacob Greber

Aug. 4 (Bloomberg) -- Australia's central bank will probably leave its benchmark interest rate at a 12-year high amid signs rising unemployment will cool inflation that has surged above its target range.

Governor Glenn Stevens will keep the overnight cash rate target at 7.25 percent tomorrow in Sydney, according to all 24 economists surveyed by Bloomberg News. A separate survey shows employment growth probably slowed to 5,000 extra jobs in July from 29,800 in June.

Slower jobs growth adds to signs four interest-rate increases in 12 months are cooling Australia's $1 trillion economy. Record gasoline prices and declining stock values also are prompting consumers and companies to slash spending, offsetting a surge in income from iron ore and coal exports.

``Reserve Bank policy makers aren't ready to cut yet, but when they do, it's likely to be 50 basis points,'' said Rory Robertson, an economist at Macquarie Group Ltd. in Sydney. ``The economy is seriously slowing.''

The Reserve Bank of Australia will announce its decision at 2:30 p.m. tomorrow in Sydney.

Policy makers have left borrowing costs unchanged since March, when they raised the benchmark rate for a second straight month to curb inflation.

Consumer prices jumped 4.5 percent in the second quarter from a year earlier as gasoline costs rose, a report showed last month. The central bank aims to keep annual inflation between 2 percent and 3 percent on average.

Consumer Confidence

Stevens said last month that the chances of keeping inflation ``low over the medium term are good.'' There is ``pretty clear evidence'' consumers and businesses are cutting expenditure, the governor said on July 16.

Since the bank's last meeting on July 1, reports show consumer confidence slumped in July to the lowest level in 16 years, retail sales fell in June by the most in six years, and lending to consumers and businesses rose at the slowest annual pace since 2002.

Home-loan approvals, which fell 7.9 percent in May, the most in eight years, probably dropped 2 percent in June, according to the median estimate of 21 economists surveyed by Bloomberg News. The government publishes its home-loan report at 11:30 a.m. on Aug. 6 in Sydney.

Rate Outlook

``It looks more likely now than it did a couple of months ago that this more moderate track for demand will continue,'' Stevens said on July 16. That will ``in due course begin to exert downward'' pressure on inflation, he said.

Investors have increased bets that the central bank will cut interest rates, according to a Credit Suisse Group index based on trading in interest-rate swaps.

Stevens will lower the benchmark rate by 68 basis points, or 0.68 percentage point, in the next 12 months, the index showed at 8:02 a.m. in Sydney. At the start of July, traders forecast 19 basis points of gains.

The Reserve Bank may cut its benchmark by as much as 3 percentage points by the end of 2009, said Stephen Koukoulas, a senior economist at TD Securities Ltd. in London.

``The collapse in the domestic economy appears to have gained breadth and momentum in recent months,'' Koukoulas said.

Job Losses

Qantas Airways Ltd., Australia's largest airline, said last month it will sack 1,500 workers, and meat processing company Don Smallgoods will cut 640 at factories in Perth and Melbourne.

Starbucks Corp., the world's largest chain of coffee shops, said July 29 it will close three-quarters of its 84 Australian stores, part of a plan to cut at least 12,000 jobs globally.

The jobless rate, which fell to a 34-year low of 3.9 percent in February, probably rose to 4.3 percent last month from 4.2 percent in June, according to the median estimate of 24 economists surveyed by Bloomberg News.

The government will publish the jobs report at 11:30 a.m. in Sydney on Aug. 7.

``The risk of recession is now very high,'' said Shane Oliver, senior economist at AMP Capital Investors in Sydney. ``The Reserve Bank should be cutting rates.''

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net

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China Wins Financial Olympics as Credit Losses Hit U.S., Europe

By Cathy Chan
Enlarge Image/Details

Aug. 4 (Bloomberg) -- China already has won most of the medals in the financial Olympics by avoiding the toxic debt investments that devastated banks in the U.S. and Europe.

Chinese banks hold three of top six spots among the world's largest financial companies based on market value, even though their shares fell more than 20 percent in Hong Kong trading since October. London-based HSBC Holdings Plc, the biggest non-Chinese bank, is No. 3, trailing Beijing-based Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp.

The Chinese banks owe their rankings in part to having avoided almost all of the $480 billion in writedowns and credit- market losses that have sent bank stocks tumbling worldwide, data compiled by Bloomberg show. Only two years ago, the world's biggest banks were led by Citigroup Inc. and Bank of America Corp. of the U.S. and UBS AG in Europe.

``Compared with the continuing writedowns at Citigroup and Merrill Lynch, Chinese banks are definitely winning the financial medals,'' said Shao Chingxiao, managing partner of SMC China Fund in Shanghai, which owns shares of China Construction Bank and Bank of China Ltd., the world's fifth-largest bank.

ICBC's unaudited figures released July 3 show first-half profit rose more than 50 percent. Three days later, Beijing-based China Citic Bank Co. said earnings jumped more than 150 percent in the same period. China Construction Bank followed, saying net income may have advanced more than 50 percent.

ICBC and China Construction Bank are the most expensive among the 15 largest global banks by market value, trading at 3.2 times and 3.4 times book value, respectively, according to data compiled by Bloomberg. That compares with New York-based Citigroup, which trades at less than 1 times book value. Bank of America in Charlotte, North Carolina, the world's fourth-biggest bank by market value, is at 1.07 times book value.

Morgan Stanley

China's success in growing its state-owned domestic banks hasn't been matched by its investments in overseas financial firms. Chinese funds and companies spent $19.3 billion buying stakes in Blackstone Group LP, Morgan Stanley, Barclays Plc, Fortis and Johannesburg-based Standard Bank Group Ltd. since May 2007 that are now worth $7 billion less on paper.

The sprint into overseas financial stocks culminated Dec. 19 with Beijing-based China Investment Corp.'s $5 billion purchase of a 9 percent stake in New York-based Morgan Stanley, the second-biggest U.S. securities firm.

Morgan Stanley has declined 18 percent in New York trading since then. The $200 billion sovereign wealth fund also invested $3 billion in shares of New York-based Blackstone, manager of the world's largest buyout fund, only to see their value decline 41 percent since the firm's initial public offering in June 2007.

Paper Profits

The losses may have deterred China from making further investments in overseas banks rocked by credit-market turmoil, said Howard Wang, who oversees $10 billion at JF Asset Management in Hong Kong.

``The whole world is so uncertain right now,'' Wang said. ``And the Chinese government is so afraid of a misstep that will draw criticism that it doesn't want to play.''

By contrast, foreign banks' investments in Chinese financial firms have fared much better, showing $50 billion of paper profits, according to Bloomberg data.

The biggest winner is HSBC, which traces its origins to 1865, when it was incorporated in Hong Kong as Hong Kong & Shanghai Banking Co. It bought 19.9 percent of Shanghai-based Bank of Communications Co. in 2004, the country's fifth-largest lender, and 10 percent of Shenzhen-based Ping An Insurance (Group) Co., China's second-largest insurer, in 2002, later increasing that stake to 17 percent. HSBC is sitting on a $16 billion gain from those investments.

`A Marathon'

Bank of America, which bought 9 percent of China Construction Bank for $3 billion in 2005, has a $14 billion paper profit, Bloomberg data show.

For both China and non-Chinese banks, the value of their investments isn't measured only by stock price. Foreign banks are positioning themselves to sell services into the world's most populous country, where economic growth is above 10 percent.

Chinese banks and sovereign wealth funds, flush with cash, are eager to build their portfolios overseas and prove that China can compete on a global stage, said Richard Gibb, Asia head of financial-service investment banking at Merrill Lynch & Co. in Hong Kong.

``This is a marathon, not a 20-yard dash,'' Gibb said. ``The trend of Chinese institutions investing overseas will continue.''

Charles-Everard de T'Serclaes, who heads New York-based JPMorgan Chase & Co.'s insurance business in Asia, also said China has a long investment horizon.

Merrill's Slump

``They are now significant strategic investors in global financial institutions,'' de T'Serclaes said. ``This is a major shift from four to five years ago, when they were mostly recipients of international capital.''

While the Hang Seng China Enterprise Index, comprising 42 Chinese companies traded in Hong Kong, fell 22 percent this year, bank stocks outperformed. Of the four companies on the index that gained since Dec. 31, three are banks. ICBC climbed 5.4 percent, China Construction Bank rose 5.6 percent and China Citic Bank advanced 2.3 percent.

By contrast, Merrill Lynch, the third-biggest U.S. securities firm by market value, has slumped 50 percent in 2008 in New York Stock Exchange composite trading. Merrill raised $8.5 billion on July 29 by selling shares to investors including Temasek Holdings Pte., following almost $19 billion of losses in the past 12 months.

Temasek, Singapore's sovereign wealth fund, agreed to buy an additional $3.4 billion of Merrill shares, cementing its status as the firm's biggest stockholder. It also received a $2.5 billion payment from New York-based Merrill to offset losses on an earlier investment.

Slowdown in Investing

China, unlike Singapore, has slowed its investments in overseas financial companies. China Development Bank's and Ping An's purchases of additional shares in London-based Barclays and Fortis, Belgium's biggest financial-services company, were the only such investments this year.

The government blocked plans by Beijing-based China Development Bank to invest in Citigroup because of the U.S. bank's mortgage-related losses, a person with knowledge of the decision said in January. At almost $103 billion, Citigroup's market value is less than half of China Construction Bank's.

``They, like anyone else, are scared,'' said Glenn Henricksen, chief financial officer of Vestasia Ltd., a financial advisory firm in Shenzhen, China. ``Look at what's going on with financial institutions around the globe.''

Olympic Moves

Chinese banks may not be as well off as they seem, according to Henricksen. A drop in real estate prices in Shenzhen and other cities, along with the government's decision to raise reserve ratios, don't bode well, he said.

``I expect the credit quality of the banks' portfolios to deteriorate significantly,'' he said. ``They're going to find they have a lot of questionable assets on the balance sheet.''

Henricksen said he doesn't expect Chinese banks to announce any bad news until after the Olympics.

Bank of China, the only lender that's an official sponsor of the Summer Games, which begin Aug. 8, has set up five temporary outlets in Beijing, four in Qingdao and one in Hong Kong. It installed 2,500 point-of-sales terminals in Olympic venues, hotels and athletes' residential areas, and its outlets can now handle conversions for 14 foreign currencies, compared with the usual eight.

ICBC, which has a market value of almost $250 billion, has 4,613 automatic teller machines in the six co-host cities and has set up a task force of 60 managers to handle calls from customers in six foreign languages.

The Olympics aren't ``just a strict test to the quality of Chinese banks' internationalized services,'' ICBC said in a July 28 statement, ``but a stage to project their brand images.''

To contact the reporter on this story: Cathy Chan in Hong Kong at kchan14@bloomberg.net



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Daily Technical Analysis

Daily Forex Technicals | Written by FX Instructor | Aug 04 08 02:05 GMT |

EURUSD Outlook Friday the EURUSD attempted to continued it's bearish momentum on a better than expected US NFP. The pair bottomed at 1.5515 but the bearish momentum seems limited as the pair made an upside correction and closed at 1.5564. Although I believe the US Dollar positive view is going to continue in days ahead, we might see another upside correctional movement today as the pair already oversold. Immediate resistance is seen at 1.5610 followed by 1.5690. Initial support seen at 1.5515 (Friday's low). CCI in oversold area on daily chart. EURUSD Daily Supports and Resistances: S1= 1.5520 S2= 1.5476 S3= 1.5437 R1= 1.5603 R2= 1.5642 R3= 1.5686 GBPUSD Outlook The Sterling suffered losses against Greenback on a better than expected US NFP. The pair bottomed at 1.9726 and closed at 1.9751. I am expecting this bearish momentum continue today. My model goes short targeting 1.9665. Immediate resistance is seen at 1.9790 followed by 1.9820. CCI just cross -100 line on daily chart, suggesting a potential bearish view. GBPUSD Daily Supports and Resistances: S1= 1.9704 S2= 1.9658 S3= 1.9590 R1= 1.9818 R2= 1.9886 R3= 1.9932 USDJPY Outlook The bearish momentum of USDJPY continued on Friday although the bearish power was less than I had expected. The pair only moved 62 pips, bottomed at 107.27 and closed at 107.67. My model remains mixed with downside bias. Immediate resistance is seen at 107.75. Initial support is seen at 107.27 (Friday's low) followed by 106.50. CCI in neutral area on daily chart. USDJPY Daily Supports and Resistances: S1= 107.33 S2= 106.99 S3= 106.71 R1= 107.95 R2= 108.23 R3= 108.57 USDCHF Outlook Friday, The Swiss Franc was traded lower against Greenback on a better than expected US NFP. The pair topped at 1.0516 and closed at 1.0495, but this bullish momentum also seems limited right now. My model is mixed with neutral bias. Immediate resistance is seen at 1.0516 (Friday's low). Initial support at 1.0440. CCI in overbought area on daily chart. USDCHF Daily Supports and Resistances: S1= 1.0464 S2= 1.0433 S3= 1.0407 R1= 1.0521 R2= 1.0547 R3= 1.0578 FX Instructor LLC www.fxinstructor.com The information has been prepared for information purposes only. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. This information contained herein is derived from sources we believe to be reliable, but of which we have not independently verified. FXInstructor LLC assumes no responsibilities for errors, inaccuracies or omissions in these materials, nor shall it be liable for damages arising out of any person's reliance upon this information. FXInstructor LLC does not warrant the accuracy or completeness of the information, text, graphics, links or other items contained within these materials. FXInstructor LLC shall not be liable for any indirect, incidental, or consequential damages including without limitation losses, lost revenues or lost profits that may result from these materials. Opinions and estimates constitute our judgment and are subject to change without notice. Past performance is not indicative of future results

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Forex Exchange Morning Report

Daily Forex Fundamentals | Written by Westpac Institutional Bank | Aug 04 08 01:34 GMT |

News And Views USD bounced on the milder than expected fall in employment in July (-51K) but struggled to maintain its positive tone, with equities weaker, oil higher and focus on the higher than expected unemployment rate (5.7%, highest since Jan 2004). General Motors dragged down the DJIA with its -7.6% after reporting a hefty $15.5bn Q2 loss. NYMEX crude oil jumped about $4.50/bbl to highs above $128 on assorted opinion pieces on Israel-Iran tensions and short-covering but closed around $125. The New Zealand dollar fell about 40 pips to its intra-day low of 0.7246 but overall closed little changed vs USD. The Australian dollar was firmly out of favour as RBA rate cut fever continued to rage, with the US payrolls number accounting for only about 20-25pts of AUD/USD's 70 pip loss vs the local close, to lows not seen since 2 May. The euro dropped from 1.5580/85 vs USD to a (fleeting) 1.5514 low on the payrolls headlines but late recovered as oil bounced and closed around 1.5565. USD/JPY was choppy but mostly bid, despite the US equity losses. US payrolls down 51k in July. The payrolls decline was, after upward revisions worth 26k to May and June, broadly in line with the 3 month average decline of 50k, compared to an average loss of 79k in the three months to April. That slower pace of job loss is consistent with the modest pick-up in GDP growth in Q2. Note that the upward revisions were to government jobs (+37k); private sector payrolls were revised down by 11k in May-June. The report included the normally volatile household survey which showed its third consecutive jobs decline which, coupled with a bounce in labour force participation, was enough to push the jobless rate from 5.5% to 5.7%. The industry detail in the report showed broad-based job losses. US ISM came in at exactly 50 in July which indicates stalled but not weaker factory activity. There was a further rise in output and a probably rogue jump in the jobs measure, but these were offset by sharply lower new orders and a steeper than usual fall in the July exports number (which is not seasonally adjusted). These last two factors are not helpful for the growth outlook. US construction spending continues to weaken, falling 0.4% in June due to ongoing decline in the residential sector. The Euroland factory PMI was revised down by 0.1 to 47.4 in July, confirming that Euroland industry entered the second half of 2008 in weaker shape than earlier in the year. Similarly, the steep 1.4% fall in German retail sales in June points to weaker consumer spending in Euroland's largest member economy; in annual terms, sales are down 3.9% yr. UK factory PMI 44.3 in July. The factory PMI slumped to its lowest since late 1998 in July, adding to the mountain of evidence that suggests the UK economy is entering recession. Outlook We continue to like NZD lower multi week especially on a TWI basis. Rate cutting cycles from the US Federal Reserve, Bank of England and Bank of Canada over the past 12 months have shown that currencies typically continue to decline through the cycle, despite a market already expecting the future cuts to come Events Today Country Release Last Forecast NZ Q2 Labour Cost Index Private Ord Time 0.70% 0.90% Q2 QES Private Sector Ord Time 1.10% 1.60% Aus NSW Bank Holiday Q2 House Prices 1.10% –1.5% Jul ANZ Job Ads –3.0% – US Jul Layoff Announcements Jun Core PCE Deflator 0.10% 0.30% Jun Personal Income/Spending 1.9%/0.8% flat/0.3% Jun Factory Orders 0.60% 1.20% Eur Aug Sentix Investor Confidence –9.3 –8.0 Jun PPI %yr 7.10% 7.60% UK Jul House Prices %yr –6.1% –8.0% Jul PMI Construction 38.8 35 Westpac Institutional Bank http://www.wib.westpac.co.nz/ Disclaimer All customers please note that this information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs. Australian customers can obtain Westpac's financial services guide by calling +612 9284 8372, visiting www.westpac.com.au or visiting any Westpac Branch. The information may contain material provided directly by third parties, and while such material is published with permission, Westpac accepts no responsibility for the accuracy or completeness of any such material. Except where contrary to law, Westpac intends by this notice to exclude liability for the information. The information is subject to change without notice and Westpac is under no obligation to update the information or correct any inaccuracy which may become apparent at a later date. Westpac Banking Corporation is regulated for the conduct of investment business in the United Kingdom by the Financial Services Authority. © 2004 Westpac Banking Corporation. Past performance is not a reliable indicator of future performance. The forecasts given in this document are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The ultimate outcomes may differ substantially from these forecasts.

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US Payrolls Data Mixed, Greenback Finding Support

Daily Forex Fundamentals | Written by Easy Forex | Aug 04 08 01:36 GMT |

U.S. Dollar Trading (USD) the much anticipated July Nonfarm Payrolls failed to impact the markets as the data came in mixed. Employment change of -51K was better than the -75K expected but the Unemployment rate notched up to 5.7% from 5.6% in June. Also released the July Manufacturing ISM beating expectations at 50 vs. 49.3 forecast. The USD on the whole was slightly better bid even as stocks weakened and Oil gained. In the U.S. share markets, the NASDAQ was down 14 points (-0.65%) and the Dow Jones was down -51 points (-0.45%). Crude Oil closed up $1.02 ending the New York session at $125.10 per barrel. Looking ahead, June Core PCE m/m expected at 0.2% and June Factory Orders seen at 0.7%. The Euro (EUR) was initially sold after US Jobs data but recovered as Oil moved higher. Also hurting sentiment was the June German Retail Sales down 1.4% vs. expectations of -0.5%. Overall the EUR/USD traded with a low of 1.5514 and a high of 1.5604 before closing the day at 1.5544 in the New York session. Looking ahead, June PPI forecast at 0.8% m/m and 7.9% y/y. The Japanese Yen (JPY) gained against most currencies as carry trades were unwound with only the USD remaining near opening levels. AUD/JPY and NZD/JPY continued to make new lows. Overall the USDJPY traded with a low of 107.28 and a high of 107.89 before closing the day around 107.69 in the New York session. The Sterling (GBP) was on the back foot as Manufacturing PMI fell to 44.3 in July and the USD was broadly bid. Ongoing concern about the UK economy heading into the MPC meeting weighed. Overall the GBP/USD traded with a low of 1.9729 and a high of 1.9841 before closing the day at 1.9735 in the New York session. The Australian Dollar (AUD) extended falls as the market speculation of rate cuts hit fever pitch. The RBA meets on Tuesday and is expected to hold rates at 7.25%. Overall the AUD/USD traded with a low 0.9293 and a high of 0.9417 before closing the US session at 0.9296. Gold (XAU) continued to fall as the USD strengthened, unable to sustain gains on the back of a rally in Oil. Overall trading with a low of USD$902.90 and high of USD$916.90 ending the New York session at USD$910 an ounce. Easy Forex http://www.easy-forex.com Easy-Forex makes no recommendations as to the merits of any financial product referred to in this website, emails or its related websites and the information contained does not take into account your personal objectives, financial situation and needs. Therefore you should consider whether these products are appropriate in view of your objectives, financial situation and needs as well as considering the risks associated in dealing with those products

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China's Inflation Is Harder to Control Than Web: William Pesek

Commentary by William Pesek

Aug. 4 (Bloomberg) -- Suddenly, the new China is looking a lot like the old China.

The most obvious sign is the security clampdown before the Olympics' opening ceremony on Aug. 8. The Beijing Games were meant to showcase the new China, yet the International Olympic Committee finds itself pressuring officials to allow journalists to view Web sites previously barred in the nation's capital.

The most important reminder that China isn't evolving as hoped concerns economic policy.

The yuan last week had its biggest weekly loss since China scrapped its dollar peg in 2005. On July 25, the Politburo, the Communist Party's top decision-making body, left little doubt that the currency gains of recent years are over for now. It said China will focus on ``steady'' growth after the economy expanded at the slowest pace since 2005 in the second quarter.

The politics of such a shift are clear enough; the economics of it are less persuasive.

Part of China's rationale is reducing so-called hot-money flows. As the yuan appreciates, it can attract capital inflows that pump up the money supply. That has increased risks for Asia's second-largest economy.

If China expects to control things, it will have to make its monetary policy consistent with exchange-rate policy. That means lower domestic interest rates, which could cause new problems.

Dangerous Dynamic

``Ending appreciation, cutting rates and relaxing lending curbs would certainly support growth,'' says Council on Foreign Relations economist Brad Setser in New York. ``It also would risk pushing Chinese inflation up to the levels seen in the Gulf.''

Gulf states, including Saudi Arabia and the United Arab Emirates, are under pressure to revalue currencies or drop their pegs to the U.S. dollar. Inflation is running at more than 10 percent in five of the six Gulf Cooperation Council states as oil-fueled growth creates shortages of real estate and services, while the weaker dollar and surging global food prices increase import costs.

It's a dangerous dynamic even for governments awash in petrodollars. While they can afford to help low-income families, the risk of losing economic control has to be considered. If you are China, home to the biggest population and run by a single party obsessed with keeping things that way, imported inflation is a bigger problem.

Bewildering Risks

Setser is among a sizeable group of economists who would prefer to see the yuan strengthen further. It would keep China from importing some inflation and increase the international purchasing power of many of the nation's 1.3 billion people. China also is enjoying the fastest growth among major economies and the largest current-account surplus of all major oil- importing nations.

Considering the bewildering number of risks facing Chinese officials -- a global credit crunch, social instability, the widening gap between rich and poor, worsening environmental conditions -- the focus on currency policy is predictable.

There are many risks to this approach. One is how global growth is slowing and imperiling China's outlook. Realistically, Setser says, China can't rely as heavily on exports for growth in the future as it has in the past.

``It has the policy tools available to shift the basis of its growth,'' he says. ``The political will to do so, though, seems lacking -- at least for now.''

Growth Obstacles

JPMorgan Chase & Co. is advising investors to close three- month bets on a stronger yuan, an investment it first recommended in May. Increasing growth impediments are expected to slow yuan appreciation this year, says Claudio Piron, a Singapore-based currency strategist at the bank.

China has been more willing to tolerate a stronger yuan than many investors expected just a year ago. The Chinese currency, after all, is the best performer among the 10 most-active Asian currencies, excluding the yen, over the past year.

Yet a few stubborn facts are worth considering. One is how daunting China's balancing act really is. The People's Bank of China says controlling inflation is taking a ``prominent position'' in decisions. With inflation advancing at a 7.1 percent rate in June, a stronger yuan would help.

The other side of China's balancing act is economic growth, something that would be aided by a weaker yuan. The key is deciding which is the greater risk. China appears to be siding with U.S. Federal Reserve Chairman Ben Bernanke, whose policies are putting recession risks ahead of the inflation threat.

Internet Is Easier

China will find that controlling the Internet is easier than taming price pressures. Officials in Beijing have compliant executives at Google Inc. and Yahoo! Inc. helping them censor cyberspace. Even after employing all of the conventional tools of economic policy, cooling inflation is easier said than done.

The second fact is the nature of China's economy. The country has yet to develop a private sector that can jumpstart a viable domestic economy. The longer that China subsidizes its companies with a weaker currency, the longer it will take for them to become globally competitive.

Governments sitting atop massive oil reserves often put off diversifying economies. Gulf states may feel they have that luxury; China doesn't. Halting the yuan's gains may not be in China's best interest.

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net



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Optique's Fitzpatrick Says Crude Oil May Fall Below $100: Video

Aug. 4 (Bloomberg) -- William Fitzpatrick, who helps manage $1.5 billion at Optique Capital Management, talks with Bloomberg's Bernard Lo from Chicago about the outlook for U.S. stocks, oil prices, and Fitzpatrick's investment strategy. (Source: Bloomberg)




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TRUenergy to Spend A$57 Million on Geothermal Venture

By Angela Macdonald-Smith

Aug. 4 (Bloomberg) -- TRUenergy Pty, the Australian power and gas supplier owned by CLP Holdings Ltd., will invest A$57 million ($53 million) in a geothermal energy project as it seeks to cut emissions blamed for global warming.

TRUenergy will take as much as 30 percent of Petratherm Ltd.'s Paralana project in South Australia state, which seeks to tap underground heat resources for conversion into electricity, the Melbourne-based company said today in an e-mailed statement.

Australia's government has a target to generate 20 percent of the nation's power from renewable sources such as the sun and wind by 2020 as it seeks to tackle greenhouse gas emissions. Hong Kong-based CLP, producer of electricity in six Asian economies, has a target to cut carbon emissions per unit of generation by 75 percent by 2050 and has invested in wind energy projects in China and India, and in an Australian solar venture.

``We certainly believe that this technology has a very major part to play in reducing the overall carbon footprint of the Australian energy sector,'' TRUenergy Managing Director Richard McIndoe said in a telephone interview. ``We felt we really needed to get a foothold in the geothermal and hot rock technology sector.''

Petratherm, based in Adelaide, gained 19 cents, or 29 percent, to 84 cents in Sydney trading at 10:40 a.m. local time, its biggest advance since November 2006.

Heat From Granites

TRUenergy has committed about A$1 billion in renewable and clean energy generation projects and expects to add more, McIndoe said.

TRUenergy, the nation's fourth-biggest electricity and gas retailer, will contribute skills in power generation, transmission and marketing to the venture, Petratherm Managing Director Terry Kallis said by telephone. Beach Petroleum Ltd., the Adelaide-based oil and gas producer, also has a stake in the Paralana project, which aims to convert heat from underground granites into steam that will drive power turbines.

Petratherm and Beach are in the ``advanced stages'' of negotiating a contract to start drilling wells at Paralana, Petratherm said in a separate statement to the exchange.

To contact the reporter on this story: Angela Macdonald-Smith in Sydney at amacdonaldsm@bloomberg.net



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China's Shandong Power Shortage Worsens, Evening News Says

By Wang Ying

Aug. 4 (Bloomberg) -- China's Shandong province is facing its worst electricity shortage in a decade and a third of the region's power demand couldn't be met, the Qilu Evening News reported, citing Shandong Electric Power Corp.

Electricity shortage reached 10,220 megawatts, compared with a total peak demand estimated at 37,000 megawatts, the Chinese-language newspaper reported, citing Shandong Electric, a unit of the State Grid Corp. of China. Coal stockpiles in Shandong province are falling and the power shortages may worsen this month, it said.

The Shandong provincial government will ``resolutely'' restrict power supplies to industrial users and ensure household demand will be met, the report said. The capital city of Jinan plans to shut half of the power supplies on the shortage, the newspaper said in a separate report.

To contact the reporter on this story: Wang Ying in Beijing at wang30@bloomberg.net.



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Crude Oil Rises as Storm Edouard Strengthens in Gulf of Mexico

By Gavin Evans and Catherine Yang

Aug. 4 (Bloomberg) -- Crude oil rose for a second day as a storm threatened U.S. output in the Gulf of Mexico, and Israeli and U.S. officials sought additional sanctions against Iran.

Tropical Storm Edouard lies about 90 miles (145 kilometers) southeast of the Mississippi River mouth and may strengthen to a hurricane as it heads west toward Texas, the National Hurricane Center said. Oil rose from an 11-week low last week as U.S. fuel stockpiles fell and Iran ignored a deadline in its dispute with the United Nations over its nuclear research.

``Those wildcat factors'' are holding up prices today, Gavin Wendt, senior resources analyst at Fat Prophets Funds Management in Sydney, said in a Bloomberg Television interview. ``Prices should be a lot stronger than they were a week ago,'' given the risks from the storm and Iran, he said.

Crude oil for September delivery rose as much as $1.21, or 1 percent, to $126.31 a barrel in after-hours electronic trading on the New York Mercantile Exchange and traded at $125.93 at 9:15 a.m. in Singapore.

The contract gained 0.8 percent on Aug. 1 on speculation the odds of a military strike against nuclear research facilities in Iran, the world's fourth-largest oil producer, were increasing.

Iran didn't respond by an Aug. 2 deadline to an offer from the U.S., Russia, China, France, the U.K. and Germany of economic and diplomatic incentives in exchange for the suspension of its uranium-enrichment program.

Extra sanctions are needed, Tzipi Livni, Israel's foreign minister, said yesterday on CNN's ``Late Edition'' program.

Brent, Edouard

Brent crude oil for September settlement climbed as much as $1.12, or 0.9 percent, to $125.30 a barrel on London's ICE Futures Europe exchange, and traded at $125 at 9:09 a.m. in Singapore.

Tropical storm Edouard, with maximum wind speeds of 50 miles an hour, is likely to strengthen as it moves west parallel to the Louisiana coast before making land on the upper Texas coast Aug. 5, the Miami-based hurricane center said at 7 p.m. local time. There is a 24 percent chance it will strengthen to a hurricane, with winds of more than 74 miles an hour, before striking land.

``Keep a close eye on the storm,'' Rebecca Waddington, a meteorologist with the center, said in an interview. ``The industry knows better than we do how to safeguard their installations. I'd advise them to act early.''

New York oil futures have slipped more than $21 a barrel, or 14 percent, from the record $147.27 on July 11 as U.S. gasoline demand slowed, and a firming of the dollar reduced the attraction of commodities as an investment.

Speculators

Hedge fund managers and other large speculators last week reduced their bets on falling prices, according to Commodity Futures Trading Commission data.

Net-short positions, the difference between orders to buy and sell the commodity, fell to 660 contracts at July 29, 82 percent less than a week earlier.

While the U.S. economy may be heading toward recession, demand in India and China remains strong and global production is straining to keep up, Fat Prophets' Wendt said. He expects oil to reach $175 a barrel before the end of the year.

An Institute for Supply Management report tomorrow will probably show U.S. service industries shrank for a second month in July, based on a Bloomberg survey of economists. Futures trading on the Chicago Board of Trade suggests less than a 7 percent chance the U.S. Federal Reserve will raise interest rates after it meets the same day.

``It's likely that we're going to see further weakness in the dollar,'' Wendt said. ``We can't see it bouncing back and sustaining any gains so we're looking towards further increases in the price of crude oil.''

To contact the reporters on this story: Gavin Evans in Wellington at gavinevans@bloomberg.net; Catherine Yang in Hong Kong at cyyang@bloomberg.net

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PetroChina Parent First-Half Sales Rise 39%, Business News Says

By Winnie Zhu

Aug. 4 (Bloomberg) -- China National Petroleum Corp.'s sales rose 39 percent as output gained in the first six months, China Business News said, citing an unnamed company official.

Revenue rose to a record 658.2 billion yuan ($96.2 billion), the newspaper said. China National boosted crude oil output to more than 54 million metric tons and natural gas output to over 30 billion cubic meters, it said.

Spokesman Liu Weijiang wasn't immediately available to comment on the newspaper report when contacted by Bloomberg News. China National, the nation's largest oil company, is the parent of Hong Kong-listed PetroChina Co.

To contact the reporter on the story: Winnie Zhu in Shanghai at wzhu4@bloomberg.net;



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Australian Dollar Trades Near 3-Month Low as Yield Gap Shrinks

By Chris Young

Aug. 4 (Bloomberg) -- The Australian dollar traded near its lowest in three months as the yield advantage of the nation's two-year government bonds over similar-dated U.S. Treasury notes shrank to the lowest level this year.

The currency, known as the Aussie, has slid 5.6 percent since reaching a 25-year high on July 16, as signs the economy is slowing prompted traders to bet the central bank will cut interest rates by a half percentage point in the next 12 months. Australia's dollar fell before a government report that economists estimate will show house prices dropped last quarter for the first time in almost three years.

``Talk of rate cuts will cost the Aussie dearly,'' Peter Pontikis, a treasury strategist at Suncorp-Metway Ltd. in Brisbane, Australia, wrote in a note to clients. ``The pressure is on the Australian dollar to fall to earth and back to more reasonable support at just below 90 U.S. cents.''

The Australian dollar traded at 93.01 U.S. cents as of 8:48 a.m. in Sydney, compared with 92.93 cents late last week in New York. It reached 92.86 cents, matching the three-month low touched Aug. 1. Trading volumes may be reduced because of a bank holiday in New South Wales, Australia's most populous state.

House prices dropped 1.3 percent last quarter compared with a 1.1 percent increase in the first three months of the year, according to the median estimate of economists surveyed by Bloomberg News. The Australian Bureau of Statistics will release the report at 11:30 a.m. in Sydney.

Rate Outlook

The Reserve Bank of Australia raised its overnight cash- rate target twice this year to a 12-year high of 7.25 percent to slow inflation. Reports last week showed retail sales fell by the most in six years in June and lending to consumers and businesses rose at the slowest annual pace since 2002.

Investors expect the central bank will cut borrowing costs by 68 basis points in the next year, according to a Credit Suisse Group index based on trading in interest-rate swaps. Investors were betting on higher rates as recently as July 14.

The difference in yield between Australian and U.S. government bonds with a two-year maturity narrowed to 3.67 percentage points, from 3.84 points a week ago, the least since Dec. 26.

Australian government bonds gained for fourth day, pushing the yield on the 10-year bond down 2 basis points to 6.10 percent, the lowest since April 15. The price of the 5.25 percent bond maturing in March 2019 rose 0.15, or A$1.50 per A$1,000 face amount, to 93.411. Bond yields move inversely to prices and a basis point is 0.01 percentage point.

To contact the reporter on this story: Chris Young in Sydney at cyoung12@bloomberg.net.



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Loonie Loses Currency Wings as Canada Reels From U.S. Slump

By Liz Capo McCormick

Aug. 4 (Bloomberg) -- Currency traders are beginning to realize that for all its riches in oil, copper and lumber, Canada's economy may not be so different than the U.S. after all.

While Canadians celebrated last year as the country's dollar reached parity with its U.S. counterpart for the first time since 1976, traders now predict the currency will fall as much as 17 percent through 2009.

After soaring 17 percent in 2007, the loonie, as the currency is known because of the aquatic bird on the one-dollar coin, is down 2.8 percent in 2008 amid a shrinking economy and an 18 percent drop in oil prices the past month. It's one of five of the 16 most-widely traded currencies to drop against the U.S. greenback, joining the New Zealand dollar, South Korean won, South African rand and British pound.

``The way energy prices and certain commodities have boomed, many thought we would weather the downturn better,'' said Steve Butler, director of foreign-exchange trading in Toronto at Scotia Capital Inc., a unit of Canada's third-largest bank. ``You've got a pessimistic look at the economy by the market. It's forced a lot of people to rethink that view.''

Canada's economy shrank 0.1 percent in May, as the extraction of natural gas slowed and car production dropped, Statistics Canada said last week in Ottawa. Economists surveyed by Bloomberg predicted a 0.2 percent expansion, according to the median of 24 estimates.

Forecast Cut

The Bank of Canada cut its 2008 growth forecast on July 15 to 1 percent from 1.4 percent. That's even less than the U.S., where the economy is likely to expand 1.5 percent, according to the median estimate of 81 analysts in a separate poll.

Canada's currency closed last week at C$1.0272 per U.S. dollar, depreciating 13 percent since it reached 90.58 Canadian cents on Nov. 7, the strongest since 1950.

The loonie will slide to C$1.05 by the end of December, and to C$1.09 by the start of 2010, according to the median estimate of 30 strategists surveyed by Bloomberg. New York-based Lehman Brothers Holdings Inc. is the biggest bear, predicting the currency will weaken to C$1.15 this year and C$1.20 in 2009. Paris-based BNP Paribas, the most accurate foreign-exchange forecaster in a 2007 Bloomberg survey, predicts C$1.12 this year.

``The Canadian dollar is extremely overvalued at these levels,'' said Momtchil Pojarliev, head of currencies at London- based Hermes Pension Management Ltd, which has about $70 billion under management. ``Oil prices have come down quite a lot from their peak but the Canadian dollar still hasn't moved at all. The currency should also weaken due to the weaker economic data.''

Export Driven

Commodities such as gold and crude oil account for 54 percent of Canada's exports. As the price of crude oil soared 57 percent in 2007 to $95.83 a barrel, Canada's economy expanded 2.54 percent, compared with 2 percent in the U.S.

And though oil surged 53 percent this year to a record of $147.27 a barrel on July 11, it has since slid to $125.10 on speculation that high prices may cut demand for fuel in the U.S., the world's largest energy consumer. U.S. motorists drove less for a seventh consecutive month in May, pointing toward the first annual drop in road travel since 1980, the Federal Highway Administration said in a report last week.

``From a technical and fundamental perspective, we are looking for the Canadian dollar to weaken,'' said George Davis, chief technical analyst in Toronto at RBC Capital Markets, a unit of the Royal Bank of Canada, the country's biggest bank. `Continued contraction in global growth, would be negative for the Canadian dollar.''

Buy Orders

If the currency weakens past C$1.0343, a so-called level of resistance where strategists say orders to buy the loonie may be clustered based on past trading patterns, then it may depreciate to about C$1.0460, Davis said.

The downturn in the Canadian economy is already largely priced into the currency, said Bettina Mueller, a fund manager at Deutsche Bank AG's DWS Investments unit in Frankfurt, which manages $398 billion.

``Commodities are still a positive story, as the strategic direction is upward,'' said Mueller. ``The Canadian dollar is underpinned from this point of view.''

Canada's fixed-income securities are losing their interest- rate advantage over the U.S., further weighing on the currency.

Three-month deposit rates in Canada exceed those in the U.S. by 0.55 percentage point, compared with 0.91 percent in the first quarter. By year-end, the gap will shrink to 0.09 percentage point, according the median estimate of 47 strategists surveyed by Bloomberg News.

Story `Over'

``Canada's own sluggish domestic fundamentals suggest their interest rate cycle will lag'' behind an increase in U.S. rates, said Peter Pontikis, a treasury strategist at Brisbane, Australia-based Suncorp-Metway Ltd., the country's third-largest general insurer. ``Like many good stories, as the Canadian dollar had been, it is over. We are targeting a retracement back to more comfortable levels at C$1.14 per U.S. dollar, if not higher into end 2008.''

Interest-rate futures show traders no longer expect the Bank of Canada will raise borrowing costs this year.

Policymakers kept the overnight lending rate at 3 percent on July 15 for a second straight meeting, after lowering it four times from 4.5 percent at the beginning of December. Futures on the Chicago Board of Trade show speculators assign a 31 percent chance that the Federal Reserve will raise its target rate, which has been unchanged at 2 percent since April 30, in September.

Interest rates ``will take a back seat to another catalyst: the end of the oil rally,'' said Kathy Lien, chief strategist at currency dealer DailyFX.com in New York. ``The exchange rate will push higher as the rally in oil prices reverses'' with the Canadian dollar weakening, she said.

To contact the reporter on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net;



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Dollar Trades Near 1-Month High Before Federal Reserve Meeting

By Stanley White

Aug. 4 (Bloomberg) -- The dollar traded near a one-month high against the euro before a Federal Reserve meeting tomorrow at which policy makers may leave interest rates on hold and signal that prices are rising too quickly.

The U.S. currency was also near a one-month high against the yen before data today that is forecast by economists to show the Fed's preferred measure of prices rose in June by the most in six months, backing the case for higher borrowing costs. The New Zealand dollar traded near a 10-month low on speculation the yield advantage of the nation's bonds will shrink as a slowing economy prompts more rate cuts.

``The dollar should remain firm as we're moving away from a weak trend,'' said Akio Shimizu, chief manager of foreign- exchange trading at Mitsubishi UFJ Trust & Banking Corp. in Tokyo. ``The Fed is slowly inching toward raising rates. I expect them to confirm their slightly more hawkish stance.''

The dollar traded at $1.5575 per euro at 10:06 a.m. in Tokyo from $1.5564 late in New York on Aug. 1 when it reached $1.5515, the highest since June 24. The dollar bought 107.55 yen from 107.71 yen at the end of last week. It touched a one-month high of 108.38 on July 31. The euro traded at 167.52 yen from 167.55 yen. The dollar may rise to $1.5520 versus the euro and 107.90 yen today, Shimizu forecast.

New Zealand's currency bought 72.80 U.S. cents from 72.73 cents late last week in New York, when it fell to 72.47 cents, the lowest since Sept. 19, 2007.

Investors expect the Reserve Bank of New Zealand to lower borrowing costs by 1.5 percentage points over the next year, according to a Credit Suisse Group index based on trading of interest-rate swaps. The RBNZ lowered rates by a quarter point to 8 percent on July 24, saying more cuts may be necessary.

The Fed

The Fed will keep its target lending rate at 2 percent tomorrow, according to the median estimate of economists surveyed by Bloomberg News. The U.S. central bank should raise rates ``sooner rather than later'' to contain inflation expectations, Philadelphia Fed President Charles Plosser said on July 22.

The personal consumption expenditure index, the Fed's preferred price gauge, rose 2.2 percent in June after excluding food and fuel, according to economists surveyed by Bloomberg. It climbed 2.1 percent the previous month.

Futures contracts on the Chicago Board of Trade showed a 53 percent chance the Fed will raise its target rate by at least a quarter-percentage point on Oct. 29, up from 51 percent a day earlier.

Net Shorts

Currency traders reversed their bets that the yen will gain against the U.S. dollar, data based on futures contracts from the Washington-based Commodity Futures Trading Commission show.

The difference in the number of wagers by hedge funds and other large speculators on a decline in the yen compared with those on a gain -- so-called net shorts -- was 6,280 on July 29, compared with net longs of 10,524 a week earlier.

Gains in the dollar may be limited by speculation data this week will show the U.S. services industry contracted for a second month and home sales declined, casting doubt on the strength of the U.S. economy.

The Institute for Supply Management's non-manufacturing index, which covers almost 90 percent of the economy, rose to 48.8 from 48.2 in June, according to a Bloomberg News survey. A reading below 50 indicates contraction. The Tempe, Arizona - based purchasing managers' group will release the data tomorrow.

Pending home resales fell 1 percent in June, the fourth decline in six months, economists project a report from the National Association of Realtors will show on Aug. 7.

Consumers are trimming spending as gasoline prices remain near $4 a gallon, home values fall, credit becomes more difficult to obtain and the job market weakens.

``The ISM data may pose some downside risks to the dollar,'' said Kimihiko Tomita, head of foreign exchange in Tokyo at State Street Bank & Trust Co., a unit of the world's largest money manager. ``There's still quite a lot of uncertainty about whether the Fed can actually deliver an increase in rates given the state of the economy.''

To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.net



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Gold Holds Over $900 in Asia as Crude Oil Gains, Dollar Steady

By Glenys Sim

Aug. 4 (Bloomberg) -- Gold traded little changed above $900 in Asia as the dollar held near a one-month high against the euro and yen, while crude oil prices rose, boosting demand for haven investments.

The precious metal tends to rise in tandem with oil as demand for an inflation hedge increases. Oil rose for a second day as a storm threatened U.S. output in the Gulf of Mexico and on geopolitical tension in then Middle East.

``Gold may be settling into a modest trading range for the near term,'' said James Steel, an analyst at HSBC Securities in New York. ``A combination of influences from the U.S. dollar, the credit markets and oil prices are likely to determine gold prices going forward.''

Bullion for immediate delivery rose as much as 0.4 percent to $914.40 an ounce, and traded at $910.02 at 7:57 a.m. in Singapore. Silver for immediate delivery gained 0.2 percent to $17.5125 an ounce at the same time.

Dollar-denominated gold tends to move in the opposite direction to the U.S. currency. The dollar traded near a one- month high against the euro and yen ahead of a Federal Reserve meeting tomorrow at which policy makers decide on interest rates.

The dollar was at $1.5570 against the euro, compared with $1.5564 at the end of last week. It traded at 107.58 yen from 107.71 yen.

Gold for June delivery on the Tokyo Commodity Exchange climbed 10 yen to 3,173 yen a gram ($917 an ounce) at 8:15 a.m. Singapore time.

Gold for December delivery on the Comex division of the New York Mercantile Exchange was little changed at $918.30 an ounce in after-hours electronic trading.

To contact the reporter on this story: Glenys Sim in Singapore at gsim4@bloomberg.net



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Platinum Futures in Tokyo Fall by Limit on Car Demand Concern

By Aya Takada

Aug. 4 (Bloomberg) -- Platinum futures in Tokyo fell by the daily price limit of 300 yen per gram to the lowest in more than six months on concern slowing auto sales may curb demand for the metal used in car catalysts.

Platinum for June delivery fell 300 yen, or 5.1 percent, to 5,567 yen a gram ($1,610 an ounce) on the Tokyo Commodity Exchange at 10:29 a.m. local time.

To contact the reporter on this story: Aya Takada in Tokyo atakada2@bloomberg.net



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