China GDP Growth May Cool to Slowest Pace in 7 Years

By Kevin Hamlin

Jan. 19 (Bloomberg) -- China’s economy may have expanded at the slowest pace in seven years in the fourth quarter as exports collapsed, adding to pressure for more stimulus measures and undermining growth across Asia.

Gross domestic product grew 6.8 percent from a year earlier, according to the median estimate of 12 economists surveyed by Bloomberg News, down from 9 percent in the previous three months. The data is due to be released this week.

Premier Wen Jiabao has pledged more measures after unveiling a 4 trillion yuan ($585 billion) package in November and the central bank may add to five interest-rate cuts since September. Plummeting Chinese demand for parts and materials for exports is reverberating across Asia, driving Taiwan and South Korea closer to recessions and worsening Japan’s economic slump.

“China’s era of hyper-growth is coming to a sudden, very disruptive end,” said Kevin Lai, an economist with the Daiwa Institute of Research in Hong Kong. “China’s imports are slumping dramatically and the rest of Asia relies on it very significantly.”

Lai expects the key one-year lending rate to decline to 4.50 percent from 5.31 percent by the middle of the year. He also sees reduced reserve requirements for banks.

After vaulting past Germany to become the world’s third- biggest economy in 2007, China may this year face its first drop in shipments since at least 1990.

Sharper Slowdown

The slowdown from the previous three months would be the sharpest since quarterly data began in 1994. The pace compares with 13 percent growth in 2007. Morgan Stanley cut yesterday its forecast for this year’s expansion to 5.5 percent.

Easing inflation gives room for more rate reductions.

Consumer-price inflation may have cooled to 1.6 percent in December from a 12-year high of 8.7 percent in February, a second survey showed. Producer prices fell 0.1 percent, the first drop since 2002, economists estimated.

Besides the export slowdown, slumps in stocks and property are undermining consumer confidence and growth.

“Exports are not going to recover any time soon and the property market is struggling,” said Ben Simpfendorfer, an economist with Royal Bank of Scotland in Hong Kong. “More easing is needed because demand won’t return in a hurry.”

Exports will decline 6 percent this year, down from a 17.2 percent gain in 2008, Fitch Ratings said Jan. 16. The central bank has helped exporters by halting the yuan’s gains against the dollar over the past six months.

Asia’s Losers

Among the biggest losers from China’s waning demand are Taiwan, which shipped almost 36 percent of its exports to China in 2007; South Korea, which sent 25 percent; and Japan, which shipped 19 percent, according to UBS AG.

Goldman Sachs Group Inc. forecasts the South Korean economy will contract this year, its first recession since the 1997-1998 Asian financial crisis. Taiwan probably slipped into a recession in the fourth quarter, its government said.

China’s imports from Taiwan fell 44.3 percent in December. Shipments from Korea declined 30 percent and those from Japan dropped by 15.4 percent. Exports were 2.8 percent lower, the biggest decline in almost a decade.

At home, as many as 4 million migrant workers lost their jobs last year as factories closed and that figure is likely to jump another 5 million in 2009, Credit Suisse AG estimates.

Social Stability

Social stability “is clearly an issue,” James McCormack, the Hong Kong-based head of Asian sovereign ratings for Fitch, said Jan. 16. “There is a question of how easy it is to redeploy millions or tens of millions of unemployed factory workers to infrastructure construction products that may be located elsewhere in the country.”

The CSI 300 Index of stocks has fallen 62 percent since the beginning of last year. House prices across 70 cities dropped for the first time on record in December and construction will contract 30 percent this year, according to an estimate by Hong Kong-based Macquarie Securities property analyst Eva Lee.

China Vanke Co., the nation’s biggest real-estate developer, said last year that the housing market was “in recession” as sales and profits fell.

The economy may grow 6 percent this year, the least since 1990, according to Fitch.

Still, there are signs that a revival is possible. Bank lending and money supply jumped more than economists estimated in December as money flowed into infrastructure projects.

The nation’s arsenal for fighting the global recession spans a world-record $1.95 trillion of currency reserves and state control of the biggest banks.

To contact the reporter on this story: Kevin Hamlin in Beijing on khamlin@bloomberg.net;

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Obama Takes On Michael Jackson of World Leaders: William Pesek

Commentary by William Pesek

Jan. 19 (Bloomberg) -- North Korea has been silent of late. Officials in Pyongyang in recent weeks have resisted their oft- expressed tirades against the U.S. To many observers, that suggests the world’s most reclusive nation is awaiting new leadership in Washington. Even better, it may mean the government of Kim Jong Il wants to start afresh.

When Barack Obama is sworn in as U.S. president on Jan. 20, he will inherit what is among his predecessor’s biggest foreign- policy failures. While George W. Bush did engage North Korea in the waning months of his administration, the gesture came too late and with little hope for success.

Facts are inconvenient and the fact is North Korea isn’t going to give up its nuclear-weapons program anytime soon. A statement this week by North Korea’s Foreign Ministry reiterated that point. Its gist was that North Korea won’t scrap its nukes until the U.S. normalizes relations with officials in Pyongyang.

Bush stubbornly demanded the opposite, putting the cart before the proverbial horse. It should be no surprise that North Korea went nuclear on Bush’s watch. Call it a side effect of singling out three countries as the “Axis of Evil” and invading one. The other two raced to build nukes to avoid the same fate.

As Obama comes to office, his administration should keep three things in mind. One, North Korea won’t easily give up its deterrence against an Iraq-like invasion. Two, the Kim family dynasty isn’t about to collapse as hoped. Three, economic conditions may play to the U.S.’s advantage.

Michael Jackson

This isn’t a pro-Kim column. Kim’s reign has been a devastating failure for North Korea’s 23 million people. And history shows Kim’s pledges can’t be taken at face value.

Kim is also pretty, well, out there. In March 2003, Time magazine columnist Joe Klein coined a phase for Kim that one increasingly hears bandied about in Asia: “The Michael Jackson of world leaders.”

Yet at what point does the U.S. realize its policy on the Korean peninsula is a complete dud? Ronald Reagan, while running for president in 1980, asked Americans if they felt better off than they did four years earlier. By that measure, Bush flopped badly on North Korea over eight years.

Obama has gotten considerable grief for signaling that he would meet the leader of North Korea “without preconditions.” While that’s not going to happen, the U.S. needs to put the horse back before the cart. Only through dialogue and closer ties can the U.S. expect to disarm North Korea.

Trust, but Verify

That very idea is anathema to conservatives in Washington. And yet their hero, Reagan, talked to Soviet officials. Over time, those discussions widened and led to summit meetings and disarmament negotiations. It was always an uneasy relationship, one summed up by Reagan’s famous comment: “Trust, but verify.”

North Korea isn’t the Soviet Union, yet its experience with the U.S. demonstrates the merit of speaking with your enemies. For all the hopes that Kim’s regime would crumble, the Dear Leader is still around, failing health and all. It’s in the U.S.’s best interest to stop banking on this scenario. After all, how well did it work with Fidel Castro in Cuba?

Economic matters may offer Obama and his nominee for secretary of state, Hillary Clinton, a key opening.

North Korean media reports detail a Cabinet shakeup aimed at stabilizing a floundering economy. International aid is sure to dwindle as financial turmoil squeezes budgets and shifts priorities. Falling commodity prices also haven’t helped exports of minerals such as iron ore.

Fresh Opportunity

It’s conceivable, if not likely, that Kim’s government will see Obama as a fresh opportunity to increase U.S. aid and economic ties. The U.S. is, after all, all carrots at the moment.

Bogged down in Iraq and Afghanistan, the U.S. has few sticks to complement its money. Carrots may be more important with North Korea in 2009 as the global crisis worsens.

Of course, doing that will take serious courage on Obama’s part. The outcry in Washington would be rapid and harsh. And it’s certainly possible that speaking regularly with North Korea will achieve very little.

Still, who takes the “six-party talks” seriously anymore?

The U.S., for example, is focused on forcing North Korea to disarm; Japan is preoccupied with the Japanese nationals abducted in the 1970s and 1980s; and China is obsessed with keeping a fragile economy on its border from collapsing. Good luck making any headway within that framework. It’s time for a new approach.

Imagine for a second what could be if North Korea were reined in. South Korea’s credit rating would take less of a hit from geopolitical concerns. Officials in Seoul and Tokyo would spend less time and money drawing up plans in case turmoil in North Korea led to military confrontation. North Asian nations could get along better.

North Korea appears to realize this is a unique and pivotal moment for its future. Let’s hope Obama does, too.

(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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Taipower May Boost Bond Sales 50% for Plants as Rivals Stalled

By Yu-huay Sun

Jan. 19 (Bloomberg) -- Taiwan Power Co., the island’s biggest electricity producer, plans to increase bond sales to pay for new generators while the government stalls expansion by rivals Formosa Plastics Group and J-Power.

The biggest issuer of corporate debt in Taiwan plans to sell as much as NT$100 billion ($3 billion) of bonds this year, almost 50 percent more than the NT$67 billion in 2008, Chief Engineer Tu Yueh-yuan said in a telephone interview from Taipower’s Taipei headquarters.

The utility is taking advantage of the lowest interest rates since 2004 and government decisions to delay new power projects by private producers to raise money for plants that will increase generating capacity by 38 percent over the next decade. The securities are backed by the state and yield about one percentage point more than sovereign debt.

“Taipower’s bonds will definitely be very hot,” said Simon Yu, vice president for fixed income at President Investment Trust Corp. in Taipei, which manages NT$50 billion of assets.

Interest rates on Taipower’s five-year bonds fell to 2.15 percent at an auction in November, from 2.6 percent at a March sale, according to the company’s Web site.

The yield on the company’s debt maturing Dec. 30, 2013, declined to 2.1 percent on Jan. 8 from 2.15 percent on Dec. 31, according to Gretai Securities Market, Taiwan’s biggest exchange for bonds. The yield was one percentage point higher than on government bonds of comparable maturity.

‘Very Smart’

Taipower “is very smart” to sell more bonds this year and fix borrowing costs instead of paying a floating rate on bank loans, said Ernest Lee, a Taipei-based debt trader at Mega Securities Co.

The utility needs to borrow NT$200 billion this year to fund spending, including NT$158 billion of investments in power plants and transmission lines, Tu said Jan. 14.

Taipower’s local currency debt is rated Aaa.tw by Moody’s Investors Service, the highest among Taiwanese companies, based on the agency’s local rating scale. Shares of Taipower, 97 percent owned by the government, aren’t publicly traded.

Taiwan’s central bank cut its benchmark interest rate six times since late September to buoy an economy poised to slide into recession. Taiwan’s economy probably grew 1.87 percent in 2008, the slowest since 2001, the statistics bureau said in November.

Falling Demand

The island’s electricity consumption fell 0.6 percent last year, the first decline on record, Taipower’s Tu said. Demand for computer chips and consumer electronics slumped because of the global recession, reducing power use by factories.

The government, which scrapped plans to award permits for new power plants last year, won’t seek fresh bids in 2009, Wang Yunn-ming, the Bureau of Energy’s deputy director-general, said in a Jan. 13 interview. Ventures of Formosa and J-Power, as Japan’s Electric Power Development Co. is known, participated in the canceled auction and had expected bidding to be revived.

The government chose not to award the permits as bidders asked for prices higher than Taipower had planned to pay, the utility said in March.

Mai-liao Power Corp. is controlled by Formosa Plastics Group, the island’s biggest diversified industrial company. Chiahui Power Corp. is 40 percent owned by J-Power, Japan’s largest electricity wholesaler. The ventures are among eight independent thermal generators in Taiwan.

Monopoly Ended

The government awarded rights to build power plants in 1995, ending Taipower’s monopoly, after shortages forced rationing. The utility remains the sole energy retailer.

Independent power producers probably won’t need to add new capacity before 2017 as consumption growth slows, Wang said. Taipower, which accounts for about 80 percent of the island’s generation capacity, can meet demand until then, he said.

Taiwan’s peak electricity demand in summer will probably increase 2.7 percent annually from 2008 to 2017, compared with 3.8 percent in the 2002-2007 period, according to Wang.

“We are now adopting a wait-and-see stance as we believe it’s a matter of time before demand recovers and new plants are required,” Masashi Yamazaki, a J-Power spokesman said by telephone from Tokyo on Jan. 6. “Taiwan seems to have a conservative outlook on electricity demand in years ahead.”

Mai-liao plans to add one generator and “will bid when the government has a tender,” company President Hong Fu-yuan said by phone from Taipei on Jan. 5. “We can only wait now.”

Atomic Plant

Taipower is testing the newest generator at the six-unit gas-fired Tatan plant, which produces about 10 percent of the island’s total capacity. An atomic power station may start commercial operations in 2010, the Department of Nuclear Regulation said in October. The utility may account for 84 percent of the island’s capacity by 2017, Taipower said in a report last month.

The company expects lower fuel costs to help narrow its net loss to NT$35.8 billion this year from about NT$100 billion in 2008, Taipower spokesman Clint Chou said by telephone.

The cost of importing liquefied natural gas fell 10 percent in November from the previous month and power-station coal dropped 5.9 percent, according to the energy bureau.

Falling electricity demand will also help Taipower save money because the company buys power from non-state generators at prices higher than the utility’s retail tariffs.

The utility paid independent thermal producers NT$3.33 per kilowatt-hour for electricity last year, according a Taipower report. That’s higher than the company’s average selling price of NT$2.6 per kilowatt-hour. Taipower has signed 25-year agreements that guarantee earnings for the generators.

“Dwindling business may be a good thing for Taipower,” said Lee of Mega Securities. “They lose money for every kilowatt-hour they sell.”

To contact the reporter on the story: Yu-huay Sun in Taipei ysun7@bloomberg.net

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BG Shares Poised to Fall as Demand, Prices for Spot LNG Decline

By Dinakar Sethuraman and Ben Farey

Jan. 19 (Bloomberg) -- BG Group Plc, the liquefied natural gas market’s seller of last resort and the biggest winner when long-term contracts couldn’t meet demand last year, is poised for a fall.

The LNG market is growing at its slowest pace in 28 years as the global economy slows. Forward contracts show prices may slump about 70 percent, and rivals plan to increase supplies by 33 percent, according to Citigroup Inc.

“Spot LNG prices and sales will suffer,” Kenan Najafov, a London-based analyst at BNP Paribas SA, said in a phone interview. “BG maximized exposure to spot LNG prices, contrary to companies like Royal Dutch Shell Plc, BP Plc and Total SA who favor long- term contracts with lower risk and lower value.” Najafov, who is second on the Bloomberg Absolute Return Rank for his recommendations, rates BG as “underperform.”

Earnings at BG, which 19 of 25 analysts rate a buy, may decline 27 percent to $2.1 billion pounds ($3.1 billion) in 2009, assuming crude oil at $60 a barrel and U.S. natural gas at $6 per million British thermal units, said Jason Kenney, an analyst with ING Wholesale Banking, which rates BG as hold. Crude has tumbled more than 70 percent to $36.35 a barrel from a July record and U.S. gas have plunged 66 percent to $4.72 per million Btu.

Recessions in the U.S., U.K. and Japan and more than $1 trillion in writedowns and credit losses since the start of last year may send crude oil as low as $30 a barrel in the first quarter, Goldman Sachs Group Inc. said. U.S. gas prices are estimated at $5.35 per million Btu in summer 2009, down 61 percent from July 2008, the bank said.

Buyers to Gain

BG, the biggest supplier of spot LNG cargoes to Asia, stands to lose profits as Korea Gas Corp. and Tokyo Electric Power Co., the world’s biggest buyers of the fuel, gain because of lower costs.

UBS AG downgraded BG to “neutral” from “buy” because of concerns on the “short-term state of the global natural gas market,” according to a note on Jan. 14.

The utilities may save more than $5 billion a year for every $1 per million Btu drop in LNG prices, according to data compiled by Bloomberg based on annual purchases in BP’s Statistical Review of World Energy 2008. LNG, which is natural gas chilled into liquid so it can be transported by ships, generates about 24 percent of Japan’s power and burns cleaner than coal or fuel oil.

Spot supplies, sought by buyers to meet seasonal or emergency needs, aren’t part of multiyear agreements.

‘Huge Profits’ Gone

“Huge profits from diverting LNG cargoes to Asia are no longer there and the buyer’s appetite for LNG imports in Asia has been tempered by slower demand growth and worries about future economic growth,” said Fereidun Fesharaki, the head of Honolulu, Hawaii-based consultant Facts Global Energy.

Forward prices of gas in the U.K. and U.S. indicate LNG cargoes will be sold into Asia, the U.S. and U.K. markets in a range of $5 to $7 per million Btu from $18 per million Btu paid by Japanese utilities in October, said Andy Flower, an LNG consultant and former executive at BP’s LNG business.

Imports from the Atlantic Ocean area by Japan, South Korea, India and Taiwan may have dropped to at least seven cargoes compared with about 25 a year earlier, according to AISLive, which tracks radio transmissions from vessels. The global economic slowdown and a cooler summer reduced demand in Asia and increased inventories at utilities.

BG’s operating profits from LNG in the first nine months of 2008 rose more than threefold from a year earlier and accounted for about 27 percent of operating profits. By contrast, BP’s gas, power and renewable energy sources accounted for 2 percent of operating profits last year while Shell derived 9 percent of its net income from gas and power.

Shares Decline

BG shares fell 36 percent from a high of 1,415 pence in May to 905 pence on Jan. 15, snapping five years of gains. The 12- month target price for BG is 1,175 pence, according to the average of eight analysts’ estimates who updated their reports in the last two months, in a Bloomberg survey. There were two downgrades in that period. The shares have surged more than fourfold in the past five years as LNG prices gained on rising Asian demand.

BG expects its LNG operating profit for 2009 to be about 1.3 billion pounds, Jo Thethi, a spokesman for the Reading, England- based company, said in an e-mail on Dec. 4. The company estimated profits of 1.4 billion pounds from LNG in 2008.

“This guidance was based on having sold 50 percent of production forward at a fixed margin,” Thethi said, without providing the margin.

Forecast ‘Ambitious’

“Guidance given by BG that operating profit may be 7 percent lower is ambitious,” said BNP Paribas’s Najafov, who was ranked second among analysts who cover BG by Institutional Investor magazine.

LNG supplies are rising as new plants from Russia to Yemen may add 33 percent in additional supplies by the end of this year, Citigroup’s New-York based analyst Gil Yang said in a report on Dec. 8.

BG’s strategy “worked while demand was high and supply was limited,” Najafov said, who was ranked first among 25 analysts covering BG for his recommendations on companies he covered.

Shipments from the Atlantic Ocean area to Asia slowed to 2.5 million tons in the fourth quarter of 2008 from 4.1 million tons in the first quarter, said Flower, who has more than 20 years experience in the industry.

With slumping Asia demand, the excess LNG must go to the U.S. or U.K. at local prices, Citigroup said. U.S. gas futures for June are trading at $5.15 per million Btu, while U.K. gas is quoted at about $6.50 in the same period. That compares with $20 sellers such as BG secured from Asia last year.

In the first nine months of last year, Asian utilities tripled LNG purchases from the Atlantic, Flower said.

The closure of Tokyo Electric’s Kashiwazaki-Kariwa nuclear plant after an earthquake in July 2007 also pushed up the use of oil- and gas-fired generation units.

To contact the reporter of this story: Dinakar Sethuraman in Singapore at dinakar@bloomberg.net; Ben Farey in London at bfarey@bloomberg.net

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Russia and Ukraine to Sign Contracts Today to End Gas Dispute

By Kateryna Choursina and Lyubov Pronina

Jan. 19 (Bloomberg) -- Russia and Ukraine are putting the finishing touches to new natural-gas contracts after a price dispute cut shipments to Europe for almost two weeks and cast doubt over their reliability as energy suppliers.

Ukrainian Prime Minister Yulia Timoshenko is returning to Moscow today after hammering out the broad outlines of a deal during weekend talks with her Russian counterpart, Vladimir Putin. The contracts will be signed by OAO Gazprom, Russia’s gas exporter, and NAK Naftogaz Ukrainy, the state energy supplier.

“This crisis is off the scale of anything that has ever happened before,” Jonathan Stern, director of gas research at the Oxford Institute for Energy Studies, said yesterday. “The idea that Russian gas supplies to Europe can be turned off for 12 days was unthinkable.”

Ukraine will pay higher European prices for Russian gas from 2010, after a 20 percent discount this year. In return, 2009 transit fees for Russia will remain at last year’s level. The European Union said it would reserve judgment on the settlement until gas starts flowing again to the 27-nation bloc.

Russian gas flows via Ukraine were halted Jan. 7 after Gazprom accused Ukraine of siphoning off transit flows for its own needs, a charge the country denies. The crisis has left parts of eastern Europe without fuel during sub-freezing temperatures. Europe relies on Russia for a quarter of its gas, 80 percent of which is carried through Ukraine.

‘Soon’

Gazprom spokesman Sergei Kupriyanov said the deal would pave the way for the resumption of Russian transit flows through Ukraine. Supplies to Europe should start “soon,” Putin said after holding all-night talks with Timoshenko on Jan. 17.

The agreement “is a major step forward,” Bernhard Jeggle, an analyst at Landesbank Baden-Wuerttemberg in Stuttgart, said yesterday. The 20 percent discount for Ukraine “makes it easier to transfer to world market price levels.”

Gazprom and Naftogaz will use direct contracts in future, a Russian government official said yesterday. In the past, they’ve employed RosUkrEnergo AG, the Swiss-based trader half-owned by Gazprom, as an intermediary.

Naftogaz said yesterday it’s not clear what price Ukraine will be paying for Russian gas. The company is “working on preparing the contract,” spokesman Dmytro Marunych said by telephone from Kiev. Once flows are restarted from Russia, it will take 36 hours for the gas to arrive at Ukraine’s western borders, he said.

EU Caution

Czech Industry Minister Martin Riman, whose nation holds the rotating presidency of the EU, said he remained “realistic” in light of previous attempts to break the deadlock between the two sides.

“The only thing that counts for the EU is the resumption of gas supplies,” Riman said in a statement yesterday. “For the time being, it is not clear when this resumption takes place.”

The disagreement pushed up gas prices on the continent, forced factories to be shut down and led to gas rationing in some nations. German inventories have slid to “unusually” low levels, while Slovenia said supplies may last less than a month and Croatia has sought emergency imports.

Dutch gas for day-ahead delivery closed at its highest since March 2006 on Jan. 8, according to broker ICAP Plc. Prices at the so-called Title Transfer Facility jumped 26 percent that day to 32 euros ($42.44) a megawatt hour. They closed at 25.50 euros on Jan. 16.

‘Test case’

Yesterday’s breakthrough came after EU officials said they may urge companies in the bloc to seek legal redress if fuel supplies remain halted.

The EU had labeled the weekend talks a “test case” for the reliability of Russia and Ukraine as energy providers. The supply cutoff has already prompted renewed calls for the region to diversify energy supply away from Russia.

European alternatives to supplies from Gazprom are limited and no final decision has been made on financing the planned Nabucco pipeline, a rival route intended to carry central Asian gas to Europe by 2013.

Earlier this month, Gazprom cited a possible price of $450 per 1,000 cubic meters for deliveries to Ukraine in January, reflecting the average price in countries bordering Russia’s neighbor. It made the offer after saying Ukraine had rejected a gas price of $250. Ukraine had said $201 would be fair.

Gazprom’s prices to European customers under long-term contracts typically lag prices for crude and oil products by about six to nine months. Crude has fallen by more than 70 percent since reaching a record in July. Ukraine paid Russia $179.50 per 1,000 cubic meters for gas last year.

‘High Price’

A 20 percent discount to European prices will still weigh heavily on the Ukrainian economy, said Stern.

“This strikes me as a very high price for Ukraine,” he said in a phone interview. “The Ukrainian economy is in rather worse shape than Europe.”

Ukraine’s economy grew by 2.1 percent last year, the slowest annual pace since 1999. The country, shaken by the global financial crisis, has already been forced to seek a $16.4 billion International Monetary Fund bailout.

Putin had suggested that EU utilities, including GDF Suez SA, E.ON Ruhrgas AG and Eni SpA, pay for “technical gas” needed to operate Ukraine’s gas pipeline system, one of the main sticking points in the dispute.

Russian President Dmitry Medvedev put forward an alternative proposal, whereby a European bank would provide a “letter of credit” for as much as $1 billion for Ukraine, guaranteeing the country’s gas payments.

Relations between Ukraine and Russia have become strained over efforts by the former Soviet republic to join the EU and the NATO. The gas dispute has come as Timoshenko and President Viktor Yushchenko, who have clashed over economic policy, are facing a financial crisis that has forced them to seek a $16.4 billion International Monetary Fund bailout.

In 2006, Russia turned off all gas exports to Ukraine for three days, causing volumes to fall in the EU, and also cut shipments by 50 percent last March during a debt spat.

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Crude Oil Falls on Forecast Global Growth to Cut Fuel Demand

By Gavin Evans

Jan. 19 (Bloomberg) -- Crude oil fell in New York on forecast faltering global economic growth will drive down fuel demand for a second year.

A report this week in the U.S., the world’s largest oil consumer, will probably show housing starts last month fell to the lowest annual rate since at least 1959, according to a Bloomberg News survey of economists. Global oil demand will shrink 0.6 percent to 85.3 million barrels a day this year, the first two-year decline since 1983, the International Energy Agency said Jan. 16.

“The near-term economic news and data are going to remain extremely weak and that’s just going to continue to test sentiment in energy and metals markets,” David Moore, commodity strategist at Commonwealth Bank of Australia Ltd., said by phone from Sydney today.

Crude oil for February delivery fell as much as 60 cents, or 1.6 percent, to $35.91 a barrel in after-hours electronic trading on the New York Mercantile Exchange, and traded at $36.22 at 9:47 a.m. in Singapore. There will be no floor trading in New York today because of the Martin Luther King Day holiday.

The contract, which expires tomorrow, rose 3.1 percent to $36.51 on Jan. 16 as investors who had expected further declines in February crude bought oil back to limit losses ahead of today’s holiday. Oil fell 11 percent last week as U.S. stockpiles rose and OPEC forecast a decline in demand.

The more-actively traded March contract dropped 27 cents to $42.30. It fell 2.2 percent to $42.57 on Jan. 16.

Crude futures have fallen 19 percent this year, after tumbling 54 percent in 2008.

‘Out of Synch’

Brent crude oil for March settlement fell as much as 62 cents, or 1.3 percent, to $45.95 a barrel. The contract dropped 2.3 percent on London’s ICE Futures Europe exchange on Jan. 16.

The Nymex February contract “is out of sync with the rest of the world, not just Brent,” Commonwealth’s Moore said.

The margin between the Nymex February and March contracts was at $5.95, having reached $8.14 at the Jan. 15 settlement. The spread between the January and February contracts reached a record $8.49 on Dec. 19. Oil for June delivery settled at $51.35 last week.

The steep rise in near-term prices is encouraging investors to buy and store oil, boosting inventories. That, coupled with weak economic data and the lag before production cuts by the Organization of Petroleum Exporting Countries are felt, may put March prices under the same selling pressure, Moore said.

OPEC produces about 40 percent of the world’s oil. The group agreed to cut output by 9 percent starting this month to prevent a glut and stem a six-month decline in prices.

Saudi Arabia, China

Saudi Arabia, the group’s biggest producer, last week said it will reduce output further in February. Ministers should agree fresh cuts at the group’s March 15 meeting if prices continue to slide, Algerian Oil Minister Chakib Khelil said on Jan. 17.

The IEA’s latest forecast assumes global economic growth of 1.2 percent in 2009, half its previous estimate. It lowered projected daily demand in industrial nations by 530,000 barrels and consumption in developing nations by 480,000, including a 300,000 barrel-a-day reduction in China.

A report last week showed industrial production in Europe in November was down 7.7 percent from a year earlier with new orders also “incredibly low,” Commonwealth’s Moore said. Data due from China, the world’s second-largest oil user, will likely be the most significant news for the market this week, he said.

“If there’s evidence the Chinese economy is continuing to weaken, that would be extremely negative news for commodity markets,” he said.

To contact the reporter on this story: Gavin Evans in Wellington at gavinevans@bloomberg.net

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India’s Rupee Will Rise as Imports Cool, Bank of America Says

By Anoop Agrawal

Jan. 19 (Bloomberg) -- India’s rupee is likely to strengthen 6 percent this quarter as slower economic growth and cheaper oil reduce the nation’s imports, helping narrow the current-account deficit, Bank of America Corp. said.

The currency will climb to 46 per dollar by March 31 and reach 45 toward the end of the year as demand for foreign exchange eases, said Yeo Han Sia, strategist for the largest U.S. bank by market value. The currency last year dropped 19 percent, its worst performance since 1991, and so far in 2009 has slipped 0.1 percent to 48.72 as overseas investors reduced their holdings of the nation’s equities.

“The current-account position will look a lot stronger this year than it has been before because demand from the external sector will be much weaker,” Singapore-based Sia said in an interview. “India remains more of a domestic-demand- driven economy and on that parameter the currency will tend to gain.”

India’s oil imports fell for a third month in November as a global recession helped push crude oil prices below $50 a barrel for the first time in more than three years. Growth in Asia’s third-largest economy may slow to 7 percent in the year ending March 31, Foreign Minister Pranab Mukherjee said on Jan. 12, compared with 9 percent or more in the previous three years.

Oil Costs

India’s current-account deficit, which includes trade and investment flows, widened to a record $12.54 billion in the three months ended Sept. 30 as a weaker currency and higher oil prices boosted the nation’s import bill. The rupee dropped 8.4 percent during the quarter, its worst performance since 1992, and the cost of crude oil reached an all-time high of $147.27 a barrel on July 11.

Crude last month reached a five-year low of $32.40 on the New York Mercantile Exchange and was recently $36.15 in after- hours trading.

The rupee will slip to 49 per dollar this quarter, before climbing to 47.45 by the end of the year, according to the median estimates of analysts surveyed by Bloomberg News. Traders are betting the currency will fall to 49.33 in three months and 50.66 in a year, non-deliverable forward contracts show.

To contact the reporter on this story: Anoop Agrawal in Mumbai at aagrawal8@bloomberg.net.

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Asian Debt Is Still Attractive After Rally, Lion Global Says

By Patricia Lui

Jan. 19 (Bloomberg) -- Asia’s dollar bonds are still attractive after a three-month rally because regional economies are stronger than those of the U.S. and Europe, said Lion Global Investors Ltd.

The extra yield investors demand to own emerging-market debt instead of U.S. Treasuries was 6.79 percentage points on Jan. 16, down from October’s six-year high of 8.65 percentage points, according to JPMorgan Chase & Co.’s EMBI+ Index. The spread averaged 3 percentage points in the five years prior to the collapse of Lehman Brothers Holdings Inc. in September.

“Asian credit spreads have come off a bit but there is still some value out there,” said Daniel Chan, chief executive officer of the Singapore-based fund management company that overseas the equivalent of $18 billion in assets. He said in an interview he favors government and corporate dollar-denominated debt in South Korea, Malaysia and the Philippines.

Lehman’s bankruptcy prompted U.S. and European investors to raise cash by selling emerging-market assets, causing the MSCI Asia Pacific Index excluding Japan to drop 53 percent last year, compared with the 34 percent decline in the Dow Jones Industrial Average. Asian banks avoided the worst of the credit losses after regulators tightened lending rules following the regional currency collapse in 1997.

“Asian markets have been sold off far more than the U.S. and Europe even though the fundamentals here are better,” said Chan. “Banks and corporations in Asia are far healthier after the 1997 crisis.”

Financial companies in Asia have reported $31 billion in credit-market losses since the start of 2007, compared with $1.04 trillion worldwide, according to data compiled by Bloomberg. The World Bank predicted on Dec. 9 growth in developing economies will slow to 4.5 percent in 2009 from 6.3 percent last year, faster than global expansion of 0.9 percent.

Currency Outlook

Asian currencies have extended last year’s losses with nine out of the 10 most active currencies excluding the yen down against the dollar since the start of the year. The Korean won fell 6.6 percent in 2009 after dropping 26 percent last year.

“Asian currencies won’t weaken much from current levels as Asia’s economic fundamentals are relatively strong,” Chan said. “Currently, the weakness is from repatriation to the U.S. which I see as temporary. They should bottom out soon, maybe by the middle of the year.”

South Korean bonds are attractive as falling oil prices and support to exporters from a weaker won improve the nation’s trade balance, Chan said. Lion Global on Jan. 7 started marketing its LionGlobal Opportunities Fund, aimed at global equities and fixed income.

Chan also favors bonds linked to Malaysian state-owned investment arm Khazanah Nasional Bhd., Russian oil-company debt and securities from Middle-Eastern countries like Abu Dhabi.

The investment climate will be “challenging” as risk aversion is still the dominant theme this year, Chan said. “Most of the pension funds and institutional investors are still not clear on what they want to do,” he said.

To contact the reporter on this story: Patricia Lui in Singapore at plui4@bloomberg.net

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Korean Won Falls, Reversing Earlier Gains, on Slowdown Concerns

By Judy Chen

Jan. 19 (Bloomberg) -- South Korea’s won fell, reversing earlier gains, on concern the worsening global slowdown will prevent the government from achieving its economic growth target.

The currency has plunged 25 percent in the past six months, making it the worst performer among the 10 most-active currencies in Asia outside Japan. South Korea’s President Lee Myung Bak may reshuffle his Cabinet as early as today to replace Finance Minister Kang Man Soo, the Dong-a Ilbo reported, without saying where it obtained the information.

“Sentiment is currently very weak over the economic outlook for the first half of 2009,” said David Mann, senior foreign-exchange strategist at Standard Chartered Plc. But “we expect a wide range for the won rather than a weakening trend.”

The won dropped 0.5 percent to 1,364.55 per dollar as of 11:08 a.m. in Seoul, according to Seoul Money Brokerage Services Ltd.

Economic growth this year is likely to be less than the 2 percent forecast by Bank of Korea, Vice Finance Minister Bae Kook Hwan said in Seoul on Jan. 15.

To contact the reporters on this story: Judy Chen in Shanghai at xchen45@bloomberg.net

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Yen Falls to 1-Week Low Versus Euro as U.S. Plan May Help Banks

By Ron Harui

Jan. 19 (Bloomberg) -- The yen fell to the lowest in more than a week against the euro on speculation U.S. President-elect Barack Obama will back an increased financial-rescue effort that injects capital into banks.

Japan’s currency weakened for a third day against Australia’s dollar and a second versus New Zealand’s as the measures to bolster the world’s biggest economy give investors more confidence to borrow in yen and invest in riskier assets elsewhere. The yen declined against 15 of 16 most-active currencies as Obama’s team say they will use part of the $350 billion remaining from the Troubled Asset Relief Program to help stem foreclosures, according to people familiar with the matter.

“Hopes over the Obama administration are improving risk- taking appetite,” said Yuji Saito, head of the foreign-exchange group in Tokyo at Societe Generale SA, France’s second-largest bank by market value. “The yen is being sold.”

The yen declined to 120.90 per euro as of 10:40 a.m. in Tokyo from 120.37 late in New York on Jan. 16. It reached 122.17, the lowest level since Jan. 9. Japan’s currency traded at 90.83 against the dollar from 90.72 last week. It touched 91.30, the least in more than a week.

Against the dollar, the euro advanced to $1.3334 from $1.3267 in New York at the end of last week. The British pound climbed to $1.4823 from $1.4733 and the Swiss franc strengthened to 1.1161 from 1.1197. Trading may be more subdued than usual because of the U.S. public holiday today, Saito said.

The Nikkei 225 Stock Average rose 0.6 percent and the MSCI Asia-Pacific Index of regional shares advanced 0.7 percent.

‘Aggregator Bank’

Japan’s currency weakened the most against Norway’s krone, New Zealand’s dollar and Australia’s dollar as U.S. policy makers signaled the government will create a government-backed “bad” or “aggregator” bank to acquire hundreds of billions of dollars of troubled securities held by lenders.

“A lot of work has been done on an aggregator bank” and other ways of using the $700 billion financial-rescue fund “to let it go further when it comes to dealing with illiquid assets,” Treasury Secretary Henry Paulson told reporters on Jan. 16 in Washington.

The yen slid 1.1 percent to 13.2108 versus the krone, 1.1 percent to 50.09 against New Zealand’s dollar and 1 percent to 61.67 versus Australia’s dollar from late in New York on Jan. 16.

“We’re going to see Obama coming out with some new stimulus-type packages and a lot of measures to support the economy in the U.S.,” Jim Vrondas, manager of corporate business at online foreign-exchange dealer OzForex Ltd. in Sydney, said in an interview with Bloomberg Television. “Risk appetite at the moment is looking pretty good. In the short term, the yen is going to remain a little bit weak.”

Benchmark Rates

Benchmark interest rates are 3 percent in Norway, 2 percent in Sweden and 5 percent in New Zealand, compared with 0.1 percent in Japan, encouraging investors to borrow in yen and buy higher-yielding assets elsewhere.

In a carry trade, investors get funds in a country with low borrowing costs and invest in one with higher rates. The risk is currency market moves erase those profits.

Losses in the yen may be curbed on speculation more than $1 trillion of asset writedowns worldwide and rising credit losses will hurt earnings at companies and deter investors from buying riskier assets.

U.S. companies reporting results this week after the Jan. 19 Martin Luther King Day holiday include International Business Machines Corp., Johnson & Johnson, United Technologies Corp., Microsoft Corp. and General Electric Co. Bank of America Corp. posted a fourth-quarter loss of $1.79 billion on Jan. 16, its first since 1991.

‘Likely Be Bad’

“A lot of firms will release results this week and their fourth-quarter earnings will likely be bad,” said Masashi Kurabe, head of currency sales and trading in Hong Kong at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan’s largest publicly traded bank by assets. “These worries are probably causing the yen to recover.”

The pound gained for a fourth day against the yen and the dollar after U.K. Prime Minister Gordon Brown said yesterday the government will announce a package of measures to encourage bank lending today.

“There’s some optimism about the U.K. government’s plan,” said Lee Wai Tuck, a currency strategist at Forecast Pte in Singapore. “This is positive for the pound,” which may rise to 137.00 yen and $1.50 today, he said.

The measures are aimed at “getting lending moving in the economy” and will include banks declaring bad debts and losses, Brown said in Egypt. The government is also due to unveil plans to guarantee lending in for households and companies.

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

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Australian, New Zealand Dollars Advance on Bailout Speculation

By Candice Zachariahs

Jan. 19 (Bloomberg) -- The Australian and New Zealand dollars advanced as equities gained on speculation that the U.S. will expand plans to aid the financial system.

The currencies rose after people familiar with the matter said U.S. President-elect Barack Obama’s team will use part of the $350 billion remaining from the Troubled Asset Relief Program to help stem foreclosures. In Australia, an index measuring inflation slipped a third month to the slowest since May 2005, raising speculation the central bank will extend its most aggressive cycle of interest-rate cuts in two decades.

“Bailout talk tends to buoy the stock markets, which has a trickle-down effect on other risky assets,” said Imre Speizer, a market strategist in Wellington with Westpac Banking Corp. New Zealand’s dollar may rise toward 55.70 cents and Australia’s may advance to 68.20 cents in the next few days, he said.

Australia’s currency rose 1 percent to 67.97 U.S. cents as of 11:29 a.m. in Sydney from 67.32 cents in New York late last week. The currency advanced 1.4 percent to 61.91 yen.

New Zealand’s dollar gained 1 percent to 55.24 U.S. cents from 54.67 in New York. It bought 50.32 yen from 49.56.

Trading will be thin today because of Wellington Anniversary day in New Zealand and the Martin Luther King Day holiday in the U.S., Speizer said.

Consumer prices rose 2.2 percent from a year earlier, after climbing an annual 3 percent in November, according to a monthly gauge released by TD Securities Ltd. and the Melbourne Institute in Sydney today.

Rate Cuts ‘Inevitable’

“The mix of recessed economic conditions and sharply falling inflation suggests more interest-rate reductions are inevitable,” said Joshua Williamson, a senior strategist at TD Securities in Sydney.

Traders raised bets that the Reserve Bank of Australia will add to last year’s interest-rate cuts when it meets on Feb. 2. Governor Glenn Stevens will reduce the benchmark rate at least 75 basis points, with a 33 percent chance of a bigger cut, according to a Credit Suisse index based on overnight swaps trading. The Reserve Bank of New Zealand will lower rates by 100 basis points when it meets on Jan. 29, according to a separate Credit Suisse index.

Australia is headed for a recession because of slowing global growth, and the central bank will reduce the cash rate to 2.5 percent soon, Canberra-based research company Access Economics said in a quarterly report today. The Australian dollar will fall to 56 U.S. cents, the report said.

New Zealand Prices

Gains in New Zealand’s currency may be limited this week ahead of data on consumer prices for the fourth quarter that economists expect will show a 0.4 percent decline from the previous three months. Retail data on Jan. 21 will show sales in November fell 0.9 percent from the previous month, according to seven economists surveyed by Bloomberg News.

“We’re calling for a low during the year of 2.5 percent” in New Zealand, Speizer said.

Benchmark interest rates are 5 percent in New Zealand and 4.25 percent in Australia, compared with 0.1 percent in Japan and as low as zero percent in the U.S., attracting investors to the South Pacific nations’ higher-yielding assets. The risk in such trades is that currency-market moves will erase profits.

Futures traders reversed their bets that the Australian dollar will gain against the U.S. dollar, figures 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 Australian dollar compared with bets on a gain -- so-called net shorts -- stood at 4,476 on Jan. 13, compared with net longs of 595 a week earlier.

Australian government bonds fell. The yield on the 10-year note rose 10 basis points, or 0.1 percentage point, to 4.07 percent, according to data compiled by Bloomberg. The price of the 5.25 percent security due March 2019 slipped 0.787, or A$7.87 per A$1,000 face amount, to 109.765.

New Zealand’s two-year swap rate, a fixed payment made to receive floating rates, was little changed at 3.82 percent.

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

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Gold May Rebound on Speculation Dollar to Slide, Survey Says

By Pham-Duy Nguyen

Jan. 19 (Bloomberg) -- Gold may rebound this week on speculation that the dollar will slide, boosting the appeal of the precious metal as an alternative investment.

Eighteen of 32 traders, investors and analysts surveyed from Mumbai to Chicago on Jan. 15 and Jan. 16 advised buying gold, which fell 1.8 percent last week to $$839.90 an ounce in New York. Ten said to sell, and four were neutral.

Gold climbed 5.5 percent in 2008, the smallest gain since 2004, as the dollar advanced against a weighted basket of six major currencies for the first time in three years. Low interest rates and government bailouts may drive the greenback lower, analysts said.

Gold’s decline last week surprised most analysts responding on Jan. 8 and Jan. 9. The survey has forecast prices accurately in 145 of 246 weeks, or 59 percent of the time.

Last week’s survey results: Bullish: 18 Bearish: 10 Neutral: 4

To contact the reporter on this story: Pham-Duy Nguyen in Seattle at pnguyen@bloomberg.net.

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Crude Oil Falls on Forecast Global Growth to Cut Fuel Demand

By Gavin Evans

Jan. 19 (Bloomberg) -- Crude oil fell in New York on forecast faltering global economic growth will drive down fuel demand for a second year.

A report this week in the U.S., the world’s largest oil consumer, will probably show housing starts last month fell to the lowest annual rate since at least 1959, according to a Bloomberg News survey of economists. Global oil demand will shrink 0.6 percent to 85.3 million barrels a day this year, the first two-year decline since 1983, the International Energy Agency said Jan. 16.

“The near-term economic news and data are going to remain extremely weak and that’s just going to continue to test sentiment in energy and metals markets,” David Moore, commodity strategist at Commonwealth Bank of Australia Ltd., said by phone from Sydney today.

Crude oil for February delivery fell as much as 60 cents, or 1.6 percent, to $35.91 a barrel in after-hours electronic trading on the New York Mercantile Exchange, and traded at $36.22 at 9:47 a.m. in Singapore. There will be no floor trading in New York today because of the Martin Luther King Day holiday.

The contract, which expires tomorrow, rose 3.1 percent to $36.51 on Jan. 16 as investors who had expected further declines in February crude bought oil back to limit losses ahead of today’s holiday. Oil fell 11 percent last week as U.S. stockpiles rose and OPEC forecast a decline in demand.

The more-actively traded March contract dropped 27 cents to $42.30. It fell 2.2 percent to $42.57 on Jan. 16.

Crude futures have fallen 19 percent this year, after tumbling 54 percent in 2008.

‘Out of Synch’

Brent crude oil for March settlement fell as much as 62 cents, or 1.3 percent, to $45.95 a barrel. The contract dropped 2.3 percent on London’s ICE Futures Europe exchange on Jan. 16.

The Nymex February contract “is out of sync with the rest of the world, not just Brent,” Commonwealth’s Moore said.

The margin between the Nymex February and March contracts was at $5.95, having reached $8.14 at the Jan. 15 settlement. The spread between the January and February contracts reached a record $8.49 on Dec. 19. Oil for June delivery settled at $51.35 last week.

The steep rise in near-term prices is encouraging investors to buy and store oil, boosting inventories. That, coupled with weak economic data and the lag before production cuts by the Organization of Petroleum Exporting Countries are felt, may put March prices under the same selling pressure, Moore said.

OPEC produces about 40 percent of the world’s oil. The group agreed to cut output by 9 percent starting this month to prevent a glut and stem a six-month decline in prices.

Saudi Arabia, China

Saudi Arabia, the group’s biggest producer, last week said it will reduce output further in February. Ministers should agree fresh cuts at the group’s March 15 meeting if prices continue to slide, Algerian Oil Minister Chakib Khelil said on Jan. 17.

The IEA’s latest forecast assumes global economic growth of 1.2 percent in 2009, half its previous estimate. It lowered projected daily demand in industrial nations by 530,000 barrels and consumption in developing nations by 480,000, including a 300,000 barrel-a-day reduction in China.

A report last week showed industrial production in Europe in November was down 7.7 percent from a year earlier with new orders also “incredibly low,” Commonwealth’s Moore said. Data due from China, the world’s second-largest oil user, will likely be the most significant news for the market this week, he said.

“If there’s evidence the Chinese economy is continuing to weaken, that would be extremely negative news for commodity markets,” he said.

To contact the reporter on this story: Gavin Evans in Wellington at gavinevans@bloomberg.net

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Gold Drops in Asia as Falling Crude Oil, Cost of Living Weighs

By Glenys Sim

Jan. 19 (Bloomberg) -- Gold declined in Asia as crude oil weakened and the cost of living in the U.S. fell, dimming the appeal of the metal as an inflation hedge. Platinum gained.

The U.S. consumer price index fell 0.7 percent in December, capping the smallest annual increase since 1954, the Labor Department said Jan. 16, as a record slide in retail sales destroyed companies' pricing power.

``All the talk is on deflation at the moment, which is negative for gold,'' Lin Yuhui, research manager at China International Futures Co., said from Shenzhen. ``Perhaps in the later part of the year, when inflation starts to pick up again, gold will once again find favor with investors.''

Bullion for immediate delivery fell as much as 0.6 percent to $838.29 an ounce, and traded at that level at 9:41 a.m. in Singapore. Gold for February delivery was little changed at $838.10 in after-hours electronic trading on the Comex division of the New York Mercantile Exchange.

Crude oil slid on speculation recession in the world's largest developed economies would cut demand for fuel and energy this year. Global oil demand will shrink 0.6 percent to 85.3 million barrels a day this year, the first two-year decline since 1983, the International Energy Agency said Jan. 16.

Dollar Weakens

Helping limit gold's losses was a weaker dollar. The Dollar Index on ICE futures, which tracks the greenback versus six major U.S. trading partners, slid for a second day as measures to stabilize banks cut demand for the currencies as havens. Gold dropped 1.3 percent last week as the index climbed 1.9 percent.

Bullion may rebound this week on speculation that the dollar will slide, boosting the appeal of the precious metal as an alternative investment.

Eighteen of 32 traders, investors and analysts surveyed from Mumbai to Chicago advised buying gold. Ten said to sell, and four were neutral.

Among other precious metals for immediate delivery, silver was down 0.7 percent at $11.19 an ounce, platinum added 1 percent to $958.50 an ounce, and palladium was little changed at $186 an ounce as of 9:50 a.m. in Singapore.

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

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Japan Stocks Rise as Higher Oil Lifts Resource Firms, Traders

By Masaki Kondo

Jan. 19 (Bloomberg) -- Japan’s stocks rose for a second day as higher commodities prices lifted resources shares, while the weaker yen boosted the earnings outlook for electronics makers.

Inpex Corp., the nation’s largest oil and gas explorer, advanced 3 percent after the oil price climbed on Jan. 16. Mitsubishi Corp., a Japanese trading company that gets more than half its profit from commodities, rose 4.9 percent after prices of metals also gained. Funai Electric Co., which counts North America as its biggest market by sales, added 4.3 percent after the local currency depreciated to the weakest level in 10 days. Toshiba Corp. leapt 6 percent on a newspaper report it will build two nuclear-power plants for U.S.-based NRG Energy Inc.

“The weaker yen and the resilience of the U.S. market will likely prompt investors to snap up exporters,” Seiji Arai, a strategist at Mitsubishi UFJ Securities Co., said in an interview with Bloomberg Television. “As the U.S. market will be closed on Monday, most people in Tokyo will stay on the sideline today.”

The Nikkei 225 Stock Average climbed 56.37, or 0.7 percent, to 8,286.52 as of 9:55 a.m. in Tokyo. The broader Topix index rose 4.52, or 0.6 percent, to 822.41, with 24 of its 33 industry groups advancing. In New York, the Standard & Poor’s 500 Index advanced for a second day on Jan. 16, gaining 0.8 percent.

Crude oil for February delivery jumped 3.1 percent, the most since Jan. 5, to $36.51 a barrel in New York on Jan. 16. Copper futures climbed 5.1 percent, the sharpest gain in seven days, while gold advanced 4 percent, breaking a four-day losing streak. Oil fell as much as 1.4 percent today.

Dividend Yields

Inpex gained 3 percent to 715,000 yen. Mitsubishi, Japan’s largest trading company by market value, leapt 4.9 percent to 1,318 yen, while closest competitor Mitsui & Co. rose 4.2 percent to 941 yen. Mining companies were the second-biggest winners among the Topix groups after insurers.

The Nikkei had fallen 7.1 percent from the beginning of this year through Jan. 16, after posting a record 42 percent tumble in 2008. The benchmark’s members pay annual dividends worth 2.67 percent of their share prices, more than twice the returns on 10-year government bonds.

“The dividend yield is still attractive,” Shoji Hirakawa, Tokyo-based chief strategist at UBS AG, wrote in a report dated Jan. 16. “Even if profit falls sharply, dividend growth is often maintained in the initial year of an earnings deterioration phase.”

Funai jumped 4.3 percent to 2,195 yen in Osaka trading, while Honda Motor Co., which gets more than half of its profit from North America, gained 3 percent to 2,070 yen.

Nuclear Reactors

The yen depreciated to as much as 91.30, the weakest level since Jan. 9, from 90.46 at the close of stock trading on Jan. 16. A weaker yen boosts the value of overseas sales for Japanese companies when converted into local currency.

Toshiba, Japan’s biggest supplier of nuclear reactors, leapt 6 percent to 409 yen. The company will build two nuclear- power plants in Texas worth as much as 800 billion yen ($8.8 billion) for Princeton, New Jersey-based NRG Energy, the Yomiuri said today.

Mitsui Sumitomo Insurance Group Holdings Inc. jumped 3.4 percent to 2,580 yen, and Aioi Insurance Co. surged 5.3 percent to 435 yen. Nissay Dowa General Insurance Co. was unchanged at 488 yen. The insurers will announce a merger as early as this week, the Nikkei said today. The merger would create the nation’s biggest casualty insurer with annual sales of 2.7 trillion yen, the report said.

Nikkei futures expiring in March added 0.5 percent to 8,280 in Osaka and Singapore.

To contact the reporter for this story: Masaki Kondo in Tokyo at mkondo3@bloomberg.net.

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China Stocks to Rise Less Than Forecast, UBS Says

By Chen Shiyin

Jan. 19 (Bloomberg) -- China stocks will rise less than forecast this year because of a drop in earnings, UBS AG said.

The Shanghai Composite Index, which tracks the bigger of China’s two stock exchanges, may climb to 2,400 by the end of the year, less than an earlier forecast of 2,600, UBS analyst Li Chen wrote in a report. Earnings will probably shrink 14 percent this year, compared with an earlier estimate of growth of 0.5 percent, the report said.

The Shanghai Composite added 1.8 percent to 1,954.44 on Jan. 16. The measure has gained 7.3 percent this year, the second-best performer in Asia after Sri Lanka, following a record 65 percent decline in 2008.

“A-share earnings growth rate might be lower than consensus because of the earnings declines in energy, industrials, materials, consumer discretionary and financials,” the analyst wrote in the report, dated Jan. 16.

China’s economy grew 9 percent in the third quarter of 2008, the least in five years. The fourth-quarter expansion, due to be announced this week, was 6.8 percent, the weakest since 2001, according to the median estimate of 12 economists surveyed by Bloomberg News.

Earnings of non-financial companies will probably contract 25 percent, more than an earlier estimate of a 7 percent decline, the analyst said. Raw materials, steel and other metal suppliers may face “inventory pressures” as companies fail to cut their output, increasing the risk to earnings, according to the report.

China Merchants, Vanke

Companies in the electrical equipment, railway infrastructure, health care, food and beverage, and retail industries may be among the best performers this year, UBS said.

The brokerage added shares of China Merchants Bank Co., the nation’s fifth-biggest bank by value, and China Vanke Co., the largest publicly traded real-estate developer, to its list of recommended companies, replacing ZTE Corp. and Daqin Railway Co.

Kweichow Moutai Co., China’s biggest liquor maker by market value, and Gree Electric Appliances Inc., a maker of home air conditioners, are also among UBS’s top picks, the report said.

In 2009, valuations of Chinese stocks are likely to increase as the government eases its monetary policy and as commercial banks start making more loans, UBS said.

The central bank has cut interest rates five times since September to bolster growth, while Premier Wen Jiabao pledged this month to increase a 4 trillion yuan ($585 billion) stimulus package to create employment and support the nation’s industries.

The Shanghai Composite is valued at about 15 times reported earnings, down from a high of about 50 times in January 2008, according to data tracked by Bloomberg. The benchmark index could end 2009 at a multiple of 22 times, UBS said.

“Reinflation can push up A-share valuations,” the analyst said. “The low valuation of the equity market appears attractive.”

To contact the reporter on this story: Chen Shiyin in Singapore at schen37@bloomberg.net

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Asian Stocks Rally on Commodity Prices, Yen; BHP, Honda Gain

By Shani Raja

Jan. 19 (Bloomberg) -- Asian stocks rose as higher commodity prices, U.S. proposals to shore up the world’s largest economy, and a weaker yen boosted the outlook for earnings.

BHP Billiton Ltd., the world’s biggest mining company, added 1.6 percent in Sydney, while Mitsubishi Corp., which gets more than half its profit from trading commodities, climbed 3.3 percent in Tokyo. Honda Motor Co., which derives 51 percent of its earnings from North America, rallied 2.2 percent as Barack Obama’s top economic adviser said the U.S. president-elect will focus the second half of a rescue fund on consumers, local governments and businesses.

“A lot of the data is still bad, but the markets are trying to find something positive,” said Prasad Patkar, who helps manage $800 million at Platypus Asset Management in Sydney. “If authorities are able to stem job losses by alleviating the impact of the credit crunch on businesses, it will be healthy for the U.S. economy as a whole.”

The MSCI Asia Pacific Index added 0.6 percent to 85.21 as of 10:31 a.m. in Tokyo, with two stocks advancing for each that fell. Gauges of raw materials and energy shares posted the biggest gains of 10 industry groups. Japan’s Nikkei 225 Stock Average rose 0.7 percent to 8,286.42. Australia’s S&P/ASX 200 Index increased 0.9 percent.

U.S. markets are closed today for a holiday. In New York, the Standard & Poor’s 500 Index rose for a second day on Jan. 16, adding 0.8 percent.

Copper, Oil Prices

BHP rose 1.6 percent to A$30.35. Rio Tinto Group, the world’s third-biggest mining company, surged 4.5 percent to A$40.08. Newcrest Mining Ltd., Australia’s largest gold producer, rallied 7.1 percent to A$30.99.

Copper futures climbed 5.1 percent, the sharpest gain in seven days, while gold advanced 4 percent, breaking a four-day losing streak.

Inpex Corp., Japan’s largest energy explorer, rose 3.3 percent to 717,000 in Tokyo. Woodside Petroleum Ltd., Australia’s No. 2 oil and gas producer, advanced 2.3 percent to A$34.30. Oil futures in New York jumped 3.1 percent on Jan. 16, the most since Jan. 5, to $36.51 a barrel.

Honda gained 2.2 percent to 2,055 yen, while TDK Corp. jumped 3.8 percent to 3,520 yen. TDK, the world’s largest maker of magnetic heads used in disk drives, gets 11 percent of its revenue from the Americas.

Obama’s administration will deploy the second half of the $700 billion Troubled Asset Relief Program “in a very different way,” said Lawrence Summers, the president-elect’s top economic adviser. The TARP may be directed to housing, automobile loans, consumer credits, small business and municipalities rather than banks, he said.

Weaker Yen

Shares of Japanese exporters also advanced as a weaker yen boosted the value of overseas sales when converted into local currency. The yen depreciated to as much as 91.03, the weakest level in 10 days, from 90.46 at the close of stock trading in Tokyo on Jan. 16.

Mitsubishi UFJ Financial Group Inc. rose 1.3 percent to 530 yen. The company is considering acquiring Citigroup Inc.’s Japanese units, the Yomiuri newspaper reported on Jan. 17, after the U.S. bank said it will spin off its “non-core” business.

Citigroup may sell Tokyo-based Nikko Asset Management Co. and Nikko Cordial Securities Inc., both of which are recognized as non-core assets, the newspaper said.

To contact the reporter for this story: Masaki Kondo in Tokyo at mkondo3@bloomberg.net.

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