China ’Ready’ to Let Foreign Firms Sell Shares

By Bloomberg News - Nov 14, 2011 1:27 PM GMT+0700

The Shanghai Stock Exchange said it’s “basically ready” to let foreign issuers sell stock, paving the way for companies from HSBC Holdings Plc (HSBA) to Coca-Cola Co. (KO) to list in the world’s second-biggest equity market.

Trading should start “as soon as possible when the time is ripe,” Xu Ming, executive vice president in charge of the international stocks board, said in a Nov. 11 interview at the exchange. While there’s no timetable, the exchange has finished work on technological and regulatory requirements, Xu said.

The trading of foreign equities will mark the biggest change for China’s stock market in more than five years and add impetus to Shanghai’s drive to become a global financial center by 2020. It will broaden options for the nation’s 85 million individual investors who are restricted from buying shares abroad by China’s capital controls, with HSBC, Coca-Cola and NYSE Euronext among companies expressing interest in selling stock in Shanghai.

“The internationalization of the securities market will benefit the whole nation and overseas companies are highly motivated,” Xu said.

Listing in China would let foreign companies benefit from higher valuations and give them access to Chinese currency to fund their expansion in the world’s second-biggest economy, Arjuna Mahendran, Singapore-based head of investment strategy for Asia at HSBC Private Bank, overseeing $460 billion globally, said in a June interview.

Asset Bubbles

China’s currency has appreciated as the nation’s economy, which grew 10.4 percent last year, attracted inflows of capital. The yuan reached 6.3370 per dollar on Nov. 4, the strongest level since the country unified the official and market exchange rates at the end of 1993.

China is also seeking to revive investor interest in an equities market that has slumped the past two years as the government raised interest rates and imposed curbs on property transactions to tame inflation and prevent asset bubbles. Overseas companies are barred from selling stock in China, though are allowed to do so in Hong Kong, a former British colony that reverted to mainland sovereignty in 1997.

Shanghai, the nation’s financial hub and home to one of China’s two stock exchanges, has been contacted by foreign companies in the finance, telecommunications, consumer goods and manufacturing industries, Fang Xinghai, head of the city’s financial services office, said in a May 2010 interview. The international board has been slowed by issues such as legal jurisdiction, accounting standards and regulatory approvals, said Hubert Tse, a partner at law firm Boss & Young in Shanghai.

Coca-Cola

Coca-Cola, the world’s largest soft-drink maker, plans to invest $4 billion in China over three years from 2012 and announced in June that it’s in talks to list in Shanghai. NYSE Euronext (NYX)’s chief operating officer said in June of last year it was “very interested” in selling shares.

HSBC Chief Executive Officer Stuart Gulliver said in May it was his “desire” that Europe’s biggest bank be the first foreign financial institution to be listed on the Shanghai exchange. Paul Harris, a London-based spokesman for HSBC, said the company’s position is unchanged. HSBC’s origins date back to 1865 when it operated as the Hongkong and Shanghai Banking Corp. to finance trade in opium, silk and tea.

“They are all big companies and most of them are from the Fortune 500,” Xu said. “Many of the companies are already listed and some have multi-listings such as HSBC.”

Investor Protection

He said the exchange is looking for companies that already have operations in China, an earnings history and strong corporate governance. Companies seeking to list on the international board should have a market value of more than 30 billion yuan ($4.7 billion) and combined three-year net income of more than 3 billion yuan, the 21st Century Business Herald reported in April, citing a draft plan.

“We favor companies of good quality, that are stable and are of fairly large scale,” Xu said. “We need to consider the protection of small investors and see if the operations of the companies carry risks.”

Xu said the Shanghai bourse has set no priority on which foreign companies can list first, refuting media reports that so-called red-chips, or overseas-incorporated Chinese businesses listed in Hong Kong, would be first. Hong Kong-listed Cnooc Ltd. (883), China’s largest offshore energy producer, would sell stock if it received regulatory clearance, Chairman Fu Chengyu said in March.

Hong Kong Exchanges

“We have no plan for the first batch of companies to be listed or how many there will be in the first batch,” Xu said. “We don’t give priority to whether foreign companies or red- chip companies should be listed first. Whoever is ripe will get listed first.”

Ronald Arculli, chairman of Hong Kong Exchanges & Clearing Ltd., said China opening itself to foreign listings will stimulate greater interest in the Greater China region, including Hong Kong.

“We don’t see the competition that will come about that’s going to be bad for anyone,” Arculli said in an interview with Bloomberg Television today. “That would mean China is gradually opening up and relaxing some of the controls, and that would create more activity.”

The China Securities Regulatory Commission is working on rules for share issuance on the international board, Xu said. A change in leadership at the regulatory body won’t hinder progress, he said.

National Strategy

The central government last month appointed Guo Shuqing, chairman of China Construction Bank Corp., as head of the CSRC as part of the biggest reshuffle of financial officials in a decade. Guo replaces Shang Fulin, who succeeds as chairman of the China Banking Regulatory Commission. The international board is “coming closer,” Shang said at a financial forum in Shanghai on May 2.

The international board is part of “a national strategy, not a strategy of a certain government department,” Xu said. “Whichever leader comes to power, the strategy won’t change.”

China’s benchmark Shanghai Composite Index has fallen 10 percent this year, adding to a 14 percent drop last year after the central bank raised interest rates three times and lifted the reserve-requirement ratio to curb inflation. China has the world’s second-biggest stock market with a combined market value of $3.6 trillion for the Shanghai and Shenzhen bourses as of Nov. 11, according to data compiled by Bloomberg. The U.S. is the largest with a market value of $15.2 trillion.

There are about 104 million investors in China, including mutual funds, institutional investors and 85 million individuals, the Shanghai exchange said.

“China and its capital markets don’t lack money,” Xu said. “Once the companies are listed, it will have a huge advertisement effect.”

--Allen Wan, Stephanie Wong and Zhang Shidong in Shanghai. With assistance from Howard Mustoe in London, Chitra Somayaji, Kana Nishizawa and Rishaad Salamat in Hong Kong. Editors: Darren Boey, Jim McDonald.

To contact Bloomberg News staff for this story: Allen Wan at +86-21-6104-3041 or awan3@bloomberg.net; Zhang Shidong in Shanghai at +86-21-6104-3040 or szhang5@bloomberg.net; Stephanie Wong at +86-21-6104-3042 or swong139@bloomberg.net

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net

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APEC Leaders Say Global Economy Has ‘Significant Downside Risks’ on Europe

By Shamim Adam - Nov 14, 2011 10:27 AM GMT+0700

The world economy is facing “significant downside risks” stemming in part from the European debt crisis, leaders at the Asia-Pacific Economic Cooperation forum said.

Growth and job creation have weakened in many countries and further trade liberalization is “essential” to boost economic expansion, the leaders said in a statement in Honolulu today. A series of natural disasters in the region has also threatened growth, they said, without elaborating.

Europe’s sovereign-debt crisis was a frequent topic at the summit aimed at improving economic ties in the Asia-Pacific region. While the appointments of new governments in Greece and Italy have eased concerns the crisis will deteriorate, APEC officials have said they are bracing for more turmoil in the euro zone that may push the global economy into a recession and increase volatility in financial markets.

“We meet at a time of uncertainty for the global economy,” the leaders said in the statement. “Significant downside risks remain, including those arising from the financial challenges in Europe. APEC’s core mission continues to be further integration of our economies and expansion of trade among us.”

Interest Rates

Emerging-market nations from Brazil to China to Indonesia have started to cut interest rates or increase fiscal measures to shield growth. Federal Reserve Chairman Ben S. Bernanke said this month a U.S. recovery may be “frustratingly slow” while International Monetary Fund Deputy Managing Director Zhu Min and China’s National Economic Research Institute Director Fan Gang told business leaders at an APEC forum yesterday that the Chinese economy was heading for a “soft landing” as growth eases.

Europe is battling a debt crisis that so far has cost five leaders their jobs, including Italian Prime Minister Silvio Berlusconi. In Greece, a unity government led by Lucas Papademos was sworn in Nov. 11 with a mandate to implement budget measures and decisions related to a 130 billion-euro bailout agreed on Oct. 26.

The euro region’s rescue plan “needs to be put in place with the speed that markets require and with the force necessary to restore confidence,” U.S. Treasury Secretary Timothy F. Geithner said Nov. 10 after meeting with other APEC finance ministers.

Italian Yields

Investors this month pushed Italian bond yields passed the 7 percent level that drove Greece, Ireland and Portugal to seek bailouts. Spain risks seeing its borrowing costs rise closer to those of Italy as European Central Bank buying fails to cap yields and slowing growth threatens to make its deficit- reduction targets unachievable.

“Without a solution to the eurozone crisis, the world economy could be swept into a downward spiral of collapsing confidence, weaker growth, and fewer jobs,” IMF Managing Director Christine Lagarde said at the APEC summit today. “This would affect all nations and so we all have a stake in resolving that crisis.”

APEC leaders have pushed for more trade and services liberalization in the economic grouping that represents more than 40 percent of world commerce.

The euro maintained gains today following a two-day rally on prospects investor confidence in Italy’s ability to contain its debt will be revived after Mario Monti, a former European Union competition commissioner, takes over as prime minister.

The euro traded at $1.3767 as of 12:23 p.m. in Tokyo from $1.3750 on Nov. 11 in New York. Europe’s shared currency bought 106.25 yen from 106.10.

TPP Framework

The U.S. and eight other Asia-Pacific nations at the meetings outlined a framework for a free trade accord and agreed to accelerate negotiations with the aim of completing an agreement within the next year. Japan, Canada and Mexico have expressed interest in joining discussions on the Trans-Pacific Partnership.

Some nations are seeking their own free-trade agreements as the World Trade Organization’s Doha round of global talks remains unfinished after a decade.

“We recognize that further trade liberalization is essential to achieving a sustainable global recovery in the aftermath of the global recession of 2008-2009,” the leaders said today. “We have deep concerns regarding the impasse confronting the Doha Development Agenda, and the reality is that a conclusion of all elements of the Doha agenda is unlikely in the near future.”

Currency Policies

Currency policies were also the focus of discussions at the meetings in Honolulu. President Barack Obama pressured China on its exchange-rate, telling President Hu Jintao that the American public and businesses are growing “increasingly impatient and frustrated” with the pace of progress in relations between the two nations.

APEC finance ministers said in a statement they are committed to moving “more rapidly” toward market-determined exchange rate systems and will increase currency flexibility to reflect their economic fundamentals. Officials from the 21- member grouping also said they will avoid persistent exchange- rate misalignments and refrain from competitive currency devaluations.

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

To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net

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Asian Stocks Rise on New Leaders in Europe, China ‘Soft Landing’

By Yoshiaki Nohara and Kana Nishizawa - Nov 14, 2011 3:04 PM GMT+0700

Play Video

Nov. 14 (Bloomberg) -- Marc Faber, publisher of the Gloom, Boom and Doom Report," talks about the outlook for global stock markets. Faber also discusses Europe's sovereign debt crisis, the U.S. economy and Federal Reserve monetary policy. He speaks from Ho Chi Minh City, Vietnam, with Susan Li on Bloomberg Television's "First Up."(Source: Bloomberg)

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Nov. 14 (Bloomberg) -- Stephen Davies, chief executive officer of Javelin Wealth Management Ltd. in Singapore, talks about Europe's sovereign debt crisis and its implications for Asian markets and his asset allocation. Davies speaks with Rishaad Salamat on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)

Asian stocks rose, paring two weeks of losses, amid optimism new governments in Greece and Italy will help contain Europe’s debt crisis and after top economists said China will have a “soft landing.”

Nissan Motor Co., Japan’s third-largest carmaker by market value, increased 2 percent after the nation’s economy expanded for the first time in four quarters. China Overseas Land & Investment Ltd. advanced 6.8 percent after two of China’s best- known economists said the economy was responding to policies to reduce lending, slow inflation and curb property prices. BYD Co., the Chinese carmaker partially owned by billionaire Warren Buffett, jumped 24 percent after a report new-energy cars will be exempted from some local registration restrictions.

“Italy’s government got into shape for now, easing investor concern the country will default,” said Naoki Fujiwara, who helps oversee $6 billion at Shinkin Asset Management Co. in Tokyo. “People were worried financial reforms won’t go through without enough government support. But the outlook of whether European countries can actually reduce debt remains uncertain.”

The MSCI Asia Pacific Index gained 1.4 percent to 118.99 as of 4:42 p.m. in Tokyo, with about five stocks rising for each that fell. All 10 industry groups on the gauge advanced. The measure fell 5.9 percent in the last two weeks.

Futures on the Standard & Poor’s 500 Index gained 0.5 percent today. The U.S. benchmark index added 2 percent on Nov. 11 in New York after Italy approved debt-reduction plans.

Japan’s Nikkei 225 (NKY) Stock Average added 1.1 percent after the government said gross domestic product grew at an annualized 6 percent in the three months ending Sept. 30, the fastest pace in a year and a half. Australia’s S&P/ASX 200 rose 0.2 percent. South Korea’s Kospi Index added 2.1 percent

Hang Seng Jumps

Hong Kong’s Hang Seng Index advanced 2.2 percent and Shanghai’s Composite Index increased 1.9 percent.

Mario Monti, former European Union competition commissioner, was asked to become Italy’s new prime minister over the weekend after the region’s debt crisis led to the unraveling of a coalition led by Prime Minister Silvio Berlusconi.

Greek Prime Minister Lucas Papademos, who was sworn in on Nov. 11, said the country’s new government must implement agreements from last month’s European summit to receive more loans and avoid default.

Japan’s exporters rose, with Nissan advancing 2 percent to 719 yen. Fanuc Corp. (6954), a maker of factory robots that gets 75 percent of its sales abroad, rose 3.6 percent to 12,810 yen.

‘Soft Landing’

Stocks advanced in Hong Kong after two of China’s best- known economists said the world’s second-largest economy was heading for a “soft landing.” Zhu Min, deputy managing director at the International Monetary Fund, and Fan Gang, director at the National Economic Research Institute, spoke yesterday at the Asia-Pacific Economic Cooperation forum in Honolulu, hosted by U.S. President Barack Obama.

Chinese President Hu Jintao on Nov. 12 pushed for increased imports as a means to balance the economy and foster global growth.

“The government has started to make one or two positive moves,” said Angus Gluskie, who manages more than $350 million at White Funds Management in Sydney. “There are some areas where possible loosening in monetary policy is starting. Collectively it means that if we see a credit issue improving in China, it’s going to take risk off the table.”

China Overseas Land & Investment rose 6.8 percent to HK$14.20, and Bank of Communications Co., a provider of commercial banking services, rose 1.4 percent to HK$5.73 in Hong Kong. Komatsu Ltd. (6301), a Japanese machinery maker that gets 23 percent of its sales in China, climbed 3.8 percent to 1,978 yen.

BYD Jumps

BYD, a maker of electric cars, rose 24 percent, the biggest increase since September 2008, to HK$20.55. New-energy vehicles will be exempted from new-car registration restrictions in place in some cities, according to a Nov. 12 report by official news agency Xinhua.

Want Want China Holdings Ltd. (151), the country’s biggest producer of rice cakes, surged 6 percent to HK$7.43 after Hang Seng Indexes Co. said the company will be added to Hong Kong’s benchmark index.

Hynix Semiconductor Inc. (000660) gained in Seoul after its shareholders accepted SK Telecom Co.’s bid to buy 20 percent of the chipmaker. The world’s second-largest maker of computer- memory chips added 3.5 percent to 22,300 won.

Tosoh Fire

The MSCI Asia Pacific Index fell 15 percent this year through last week, compared with a 0.5 percent gain by the S&P 500 and a 13 percent loss by the Stoxx Europe 600 Index. Stocks in the Asian benchmark are valued at about 12.9 times estimated earnings on average, compared with 12.7 times for the S&P 500 and 10.4 times for the Stoxx 600.

Hanwha Chemical Corp. gained the most in five weeks in Seoul after a chemical plant operated by Japan’s Tosoh Corp. (4042) caught fire, triggering speculation the South Korean rival may benefit. Hanwha climbed 9.5 percent to 29,900 won.

Tosoh expects “severe damage” to equipment after the fire at its plant in western Japan, Managing Director Yasuyuki Koie said. The fire at the plant in Yamaguchi prefecture is “almost extinguished,” he said. The plant produces vinyl chloride monomer, a raw material for polyvinyl chloride or PVC. The stock fell 4.4 percent to 219 yen.

To contact the reporters on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net; Kana Nishizawa in Hong Kong at knishizawa5@bloomberg.net

To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net

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‘Enough’s Enough’ on Undervalued Yuan: Obama

By Julianna Goldman and Margaret Talev - Nov 14, 2011 2:55 PM GMT+0700

President Barack Obama kept up his pressure on China's foreign-exhange policy and trade practices, saying “enough’s enough” on what the U.S. views as a too-slow appreciation of the yuan.

While there's been a “slight improvement,” China’s exporters “like the system the way it is” and are resistant to any moves to loosen the reins on the yuan, Obama said.

“Changes are difficult for them politically, I get it,” Obama said at a news conference concluding a summit with Asia- Pacific leaders in Hawaii yesterday. “But the United States and other countries, I think understandably, feel that enough’s enough.”

As he seeks to reassert U.S. interests in Asia, Obama is using increasingly strong language on China’s trade, currency and intellectual property policies. The U.S. contends China’s currency is kept artificially low, putting American businesses at a disadvantage and driving up Chinese trade surpluses.

Obama, who met Nov. 12 with China’s President Hu Jintao in Honolulu, said that as China’s influence rises, leaders of the world’s second-largest economy must take more responsibility for making sure trade is fair and that intellectual property rights are respected. Hu and Obama were in the Hawaiian capital to attend the annual Asia Pacific Economic Cooperation summit.

China’s Response

China has pushed back against the pressure. After Obama told Hu that the U.S. public and businesses were losing patience with China’s policies, the Chinese Foreign Ministry released a statement saying the U.S. trade deficit and unemployment are not caused by the yuan exchange rate and a large appreciation in the currency won’t solve U.S. problems.

“China’s foreign exchange policy is a responsible one,” Hu told Obama, according to the statement. The country will “continue reforming its exchange rate mechanism.”

The yuan has gained about 8 percent against the dollar in nominal terms since the country ended a two-year peg to the U.S. currency in June 2010, and 30 percent since July 2005. In real, or inflation-adjusted, terms the gain has been more than 10 percent, because consumer prices have risen faster in China than in the U.S.

The yuan rose 0.04 percent to 6.3400 per dollar as of 10:30 a.m. in Shanghai, according to the China Foreign Exchange Trade System.

“We recognize they may not be able to do it overnight,” Obama said about the currency valuation, “but they can do it much more quickly than they’ve done it so far.”

Companies ‘Wary’

Obama said that he’s consistently raising concerns with the Chinese about currency, intellectual property and market access because U.S. companies “are wary” that they will be restricted in doing business in China if they raise complaints.

Two-way trade between the U.S. and China was $457 billion last year and the U.S. deficit was $273 billion. Still Obama and U.S. businesses regard China as a growing market for American goods; of the 2.3 million vehicles General Motors Co. (GM) delivered in the second quarter, 588,000 were sold in China, where the Detroit-based company is No. 1 in market share.

A March survey by the American Chamber of Commerce in China found 78 percent of member companies in the country said their China operations in 2010 were very profitable or profitable. At the same time, 24 percent of respondents said China’s economic reforms had done nothing to improve the environment for U.S. businesses in the country, up from 9 percent who said the same an earlier poll.

Iran Sanctions

During the news conference, Obama also said the U.S. is examining stronger sanctions on Iran over its nuclear program. He said U.S. Russia and China “agree on the objective” that Iran must not be allowed to develop a nuclear weapon. He declined to say whether Hu and Russian President Dmitry Medvedev indicated they would support a new round of penalties.

Russia and China have resisted efforts to impose tighter sanctions on Iran at the United Nations. The International Atomic Energy Agency has concluded that Iran, the second-largest oil producer in the Organization of Petroleum Exporting Countries after Saudi Arabia, has continued working on nuclear weapons capability until at least last year.

Obama said the sanctions that have already been imposed have “enormous bite.”

While Obama’s focus during the 55-minute press conference was on Asia, he couldn’t escape domestic politics. He was asked at several points to respond to criticisms raised by Republican presidential candidates at a Nov. 12 debate.

Republican Criticism

Former Massachusetts governor Mitt Romney said Obama’s “greatest failing” as president was not preventing Iran from making progress toward a nuclear weapon and that “if we reelect Barack Obama, Iran will have a nuclear weapon.”

Obama said he’s “going to make a practice of not commenting on whatever is said in Republican debates until they’ve got an actual nominee.” Still, he defended his administration’s efforts to hold Iran accountable and indirectly hit back at Romney.

“Now, is this an easy issue? No,” he said. “Anybody who claims it is, is either politicking or doesn’t know what they’re talking about.”

On domestic issues, Obama said the bipartisan congressional supercommittee working to narrow the U.S. budget deficit must “bite the bullet” and come up with a plan that includes both cutting spending and increasing revenue.

“Prudent cuts need to be matched with prudent revenue,” Obama said. “There are no magic beans that you can toss in the ground and suddenly a bunch of money grows on trees.”

To contact the reporters on this story: Julianna Goldman in Honolulu at jgoldman6@bloomberg.net; Margaret Talev in Honolulu at mtalev@bloomberg.net;

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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Euro Gains as New Governments in Italy, Greece Boost Investor Confidence

By Candice Zachariahs and Masaki Kondo - Nov 14, 2011 9:34 AM GMT+0700

The euro remained higher following a two-day rally on prospects investor confidence in Italy’s ability to contain its debt will be revived after Mario Monti, a former European Union competition commissioner, takes over as prime minister.

The 17-nation currency maintained its gain against the yen after Greece’s finance minister said his priority is to ensure the country receives a sixth loan under an EU-led bailout after Prime Minister Lucas Papademos took charge as head of an interim government. Australia’s dollar climbed as rising Asian stocks boosted demand for higher-yielding assets. The New Zealand dollar strengthened against most major peers after a report showed retail sales increased by the most since 2006.

“We’ve seen a more positive start to the week with the new technocrat governments in Italy and Greece, but there’s still a lot of uncertainty,” said Emma Lawson, a currency strategist at National Australia Bank Ltd. in Sydney. “We’ll try and test to the upside for the euro and the Aussie.”

The euro traded at $1.3761 as of 11:31 a.m. in Tokyo from $1.3750 on Nov. 11 in New York. Europe’s shared currency bought 106.21 yen from 106.10. The dollar was little changed from last week at 77.18 yen. The Australian dollar rose 0.2 percent to $1.0295 and 79.45 yen.

Italy’s President Giorgio Napolitano offered Monti the post of prime minister after sounding out the country’s political parties for their support in consultations yesterday.

Monti Government

Monti must present the names of his Cabinet ministers to Napolitano before he can be sworn in. He will then face confidence votes in both houses of parliament. Leaders of outgoing Premier Silvio Berlusconi’s People of Liberty party earlier told Napolitano that they’ll support a Monti government, virtually ensuring his confirmation in parliament, which may come this week.

New Zealand’s dollar, known as the kiwi, rose for a second day against its U.S. peer after the statistics bureau said sales adjusted for inflation surged 2.2 percent in the third quarter, the largest increase since the fourth quarter of 2006. That compared with the median estimate in a Bloomberg News survey of economists of a 0.6 percent advance.

The New Zealand dollar climbed 0.3 percent to 78.79 U.S. cents and 60.81 yen.

“New Zealand data this morning was very much on the strong side,” said Grant Turley, a senior currency strategist at Australia & New Zealand Banking Group Ltd. in Sydney. “Political stability in Europe and better data out of New Zealand are going to buoy appetite for Aussie and kiwi.”

The dollar weakened against 11 of its 16 major peers as the MSCI Asia Pacific Index of shares climbed 1.4 percent, sapping demand for the U.S. currency as a haven.

Japanese Growth

Japan’s Nikkei 225 Stock Average gained 1.2 percent after government data showed the nation’s gross domestic product grew at an annualized rate of 6 percent in the three months ended Sept. 30, the fastest pace since March 2010. The first expansion after three quarters of economic contraction added to evidence the country is recovering from a record earthquake in March.

The Bank of Japan will start a two-day policy meeting tomorrow. The central bank will leave the benchmark interest rate unchanged at a range of zero to 0.1 percent, according to economists surveyed by Bloomberg News.

Greek Exit

Gains in the euro were limited after Spiegel magazine reported the German government assumes that the consequences of an exit of Greece from the euro area can strengthen the single- currency region in the long term, without saying where it got the information.

Lawmakers are preparing for Greece’s departure from the common currency in case the debt-strapped country’s new government doesn’t commit to carrying forward reforms, the magazine said.

“That takes a little bit of the gloss off the euro and there’s also an Italian bond auction today and a Spanish one later this week,” said Tim Kelleher, Auckland-based head of institutional foreign-exchange sales at ASB Institutional, a unit of Commonwealth Bank of Australia. “My bias is to sell rallies in currencies like the euro, kiwi and Aussie.”

Italy will auction as much as 3 billion euros ($4.1 billion) of five-year notes maturing in September 2016 today, Germany will sell as much as 6 billion euros of two-year notes on Nov. 16 and Spain will sell bonds maturing in January 2022 on Nov. 17.

Merkel Speaks

German Chancellor Angela Merkel will address her party today after weeks of crisis fighting during which she raised the prospect of ejecting Greece from the euro and joined with French President Nicolas Sarkozy to call on Italy to hold to its budget pledges. She is now turning her attention to shaping the future of the euro and EU.

“I believe this is important for those who buy government bonds: that we make it clear that we want more Europe step by step, that is that the European Union, and the euro area in particular, grows together,” Merkel said in an interview with ZDF television late yesterday. “Otherwise people won’t believe that we can really get a handle on the problems.”

The euro has declined 0.8 percent over the past six months, according to Bloomberg Correlation-Weighted Indexes that track 10 developed market currencies.

To contact the reporters on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net; Masaki Kondo in Singapore at mkondo3@bloomberg.net

To contact the editor responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net

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N.Z. Dollar Gains as Retail Sales Rise; Aussie Rallies on Europe Optimism

By Mariko Ishikawa - Nov 14, 2011 9:03 AM GMT+0700

The New Zealand dollar rose for a second day after a government report showed retail sales increased by the most since 2006, adding to signs the domestic economy remains resilient.

The currencies of Australia and New Zealand gained against the greenback and the yen on speculation new leadership in Italy and Greece will help contain Europe’s debt crisis. Demand for the so-called Aussie and kiwi was also supported as Asian stocks rallied.

“New Zealand data this morning was very much on the strong side,” said Grant Turley, a senior currency strategist at Australia & New Zealand Banking Group Ltd. in Sydney. “In the short term, political stability in Europe and better data out of New Zealand are going to buoy appetite for Aussie and kiwi.”

The New Zealand dollar strengthened 0.4 percent to 78.82 U.S. cents at 1:01 p.m. in Sydney. The kiwi gained 0.4 percent to 60.83 yen. Australia’s dollar strengthened 0.2 percent to $1.0294 and 79.45 yen.

The MSCI Asia Pacific Index of stocks rose 1.4 percent after the MSCI World Index rallied 2.3 percent on Nov. 11.

New Zealand’s retail sales adjusted for inflation surged 2.2 percent in the third quarter, compared with the three months ended June 30, the government statistics office said today. The gain is more than three times the 0.6 percent median estimate of 12 economists in a Bloomberg News survey and is the largest since the fourth quarter of 2006.

New Zealand’s two-year two-year swap rate, a fixed payment made to receive floating rates based on three-month bill rates, rose four basis points to 2.98 percent after dropping as low as 2.93 percent last week, the lowest since at least 1993 when Bloomberg started collecting the data. Swaps are often used to speculate on changes in interest rates.

Australia’s government bonds declined, with 10-year yields rising six basis points to 4.19 percent.

Monti Government

Mario Monti, a former European Union competition commissioner, will lead a new government in Italy after contagion from the euro region’s debt crisis led to the unraveling of Silvio Berlusconi’s ruling coalition. President Giorgio Napolitano offered Monti the post of prime minister after sounding out political parties for their support.

Gains in the Australian and New Zealand dollars were limited before Italy auctions as much as 3 billion euros ($4.1 billion) of notes maturing in September 2016 today.

“The growth dynamics and debt dynamics in Italy remain challenging,” said Callum Henderson, global head of foreign- exchange research in Singapore at Standard Chartered Plc. “The situation in Italy and in Europe in general remains relatively fluid. I would expect this rally to be short lived.”

The Reserve Bank of Australia will tomorrow release minutes of its Nov. 1 meeting when the central bank cut the benchmark interest rate by 25 basis points to 4.5 percent.

“The RBA very rarely just cuts once in a cycle, so further easing is expected,” said Henderson. “The question is the pace. The market is going to be looking for the tone of the minutes in terms of further easing.”

To contact the reporter responsible for this story: Mariko Ishikawa in Tokyo at mishikawa9@bloomberg.net

To contact the editor responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net

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Obama Meets Gillard as Embattled First Leaders Shadowed by China Resources

By Jason Scott and Margaret Talev - Nov 14, 2011 8:21 AM GMT+0700

President Barack Obama arrives this week in an Australia whose economy is reliant on billions of dollars in mineral and energy contracts from emerging superpower China and whose security depends on an alliance with the U.S. -- China’s biggest rival.

Personal ties between Obama and Prime Minister Julia Gillard, born within two months of each other, underscore the nations’ political bonds as China expands its security interests toward southeast Asia. Obama, the first black U.S. president, and Gillard, Australia’s first woman prime minister, share a struggle to overcome resistance to their agendas -- from universal health care in the U.S. to a mining tax in Australia.

“This relationship between Obama and Gillard has some warm, fuzzy atmospherics -- their interests are congruent,” said Michael McKinley, a lecturer in international relations at the Australian National University in Canberra. “China is the elephant in the room for Obama and Gillard,” said McKinley, whose analysis has been used in parliamentary testimony.

While Obama will stop at the non-commercial cities of Canberra and Darwin in a visit commemorating 60 years of postwar ties, the most recent trip by China’s premier focused on business. Wen Jiabao signed a long-term contract for A$100 billion ($101 billion) in uranium during a 2006 visit, while then-Prime Minister John Howard came away from Shenzhen in southern China after witnessing the first Australian delivery of liquefied natural gas worth A$25 billion over 25 years.

Trading Partners

China has risen to become Australia’s top trading partner, surpassing Japan and the U.S., which is now third, compared with second in 1988. Two-way trade with the U.S. has risen 4.4 percent on average in Australian Bureau of Statistics data that go back to 1988, outpaced by 20 percent for the nation’s commerce with China, and 16 percent for India.

By contrast, the U.S. defense relationship with Australia is tightening, with Obama’s visit likely to feature an agreement on enhanced security cooperation. The two sides have discussed an accord allowing the pre-positioning of U.S. military vessels, aircraft and personnel at Australian bases and ports, a defense official said in September.

“The U.S. is deeply engaged in our region and that will continue,” Gillard said on Nov. 12 in Honolulu, where she was attending Asia-Pacific Economic Cooperation summit. “It’s possible for us to have an ally in Washington and a friend in Beijing.”

Football and Vegemite

Obama and Gillard, both 50, have a warm relationship, illustrated most recently when the pair passed an Australian football back and forth in the Oval Office during a Gillard visit to the White House in March. The president joked that she “almost broke a bust of Lincoln.”

They visited a high school in Arlington, Virginia, where Obama ribbed Gillard in front of students about the Australian spread Vegemite, saying, “It’s horrible” and told the students it was a “quasi-vegetable-byproduct paste that you smear on your toast for breakfast. Sounds good, doesn’t it?” The president said the U.S. has no stronger ally than Australia.

“They just clicked,” said Ben Rhodes, the White House deputy national security adviser. “They enjoy being around each other. Her personality meshes well with the president’s. She’s fundamentally like the president.”

The leaders have been battling sinking poll numbers as they deal with the backlash against unpopular domestic programs and a dimming outlook for the global economy. Obama’s signature initiative, an overhaul of the U.S. health-care system, is under challenge in court and the nation’s unemployment rate has been stuck at about 9 percent for more than two years.

Majority Disapproval

With a vote on his re-election a year away, Obama’s approval rating was 44 percent in a Washington Post/ABC News poll from Oct. 31 to Nov. 3. Fifty-three percent of those polled disapproved of the way he’s handling the presidency. It sampled 1,004 adults and had a margin of error of plus or minus 3.5 percentage points.

While Gillard gained a victory on Nov. 8, when the government passed laws to make polluters pay for their carbon emissions, her Labor Party got 32 percent support in a Newspoll survey of 1,158 people from Nov. 3 to Nov. 6, against 44 percent for the opposition Liberal-National coalition. The poll had a margin of error of plus or minus three percentage points.

A separate Herald/Nielsen poll published today showed Labor at 30 percent and the coalition at 45 percent. The survey of 1,400 voters was conducted Nov. 10 to Nov. 12 with a margin of error of 2.6 percentage points.

Culture of Blokes?

Gillard’s government, facing an election in 2013, is encountering opposition to its plan for a 30 percent tax on iron ore and coal profits, forecast to raise A$7.7 billion in the first two years should it be approved by parliament.

Hawaii-born Obama was dogged through the 2008 election and afterward by questions from some political opponents about whether he was born outside the U.S., and therefore constitutionally ineligible to hold the presidency.

Wales-born Gillard, who with her family migrated to the city of Adelaide after contracting bronchial pneumonia when she was four, faces what she herself calls the nation’s “blokey” culture. The first Australian prime minister who isn’t married, Gillard has no children and lives in the national capital of Canberra with her partner, hairdresser Tim Mathieson.

‘Family’ Values

A former labor lawyer, Gillard ran against an opposition leader who repeatedly told voters he was a supporter of “family” values in a 2010 election campaign. In one speech, Tony Abbott, leader of the Liberal-National coalition, said “the most conservative instinct of all” is to have a family. She was shown in a 2005 Sydney Morning Herald photograph in her “eerily stark” kitchen, adorned only with an empty fruit bowl seen by some as a symbol of her life-choice as a professional.

“The opposition leader’s hints at a more proper domestic position for women say more about him than they do about the prime minister, and they do him more harm than good,” said James Clad, a former deputy assistant secretary of defense who had responsibility for relations with Australia until 2009 and lived there and in New Zealand as a young man, in an e-mail.

The prime minister has signaled strong affinity with the U.S., choking back tears during a Washington visit this year when she recounted, during an address to Congress, her childhood feelings of amazement upon seeing an American land on the moon. She used the image to urge the U.S. to be bold and get back on its feet economically.

Sports Fans

Obama and Gillard are dedicated sports fans. The president plays golf on weekends and basketball on occasion, and supports the Chicago White Sox baseball franchise. Gillard roots for the Western Bulldogs, a working-class team in western Melbourne that plays in the Australian Football League, the nation’s most popular spectator sport. She is a regular at Bulldog games, where she wears the team’s red, white and blue colors.

Less than a month before she ousted former Prime Minister Kevin Rudd in June 2010, Gillard downplayed her then-rising popularity by saying: “There’s more chance of me becoming the full-forward for the Dogs than there is any chance of a change in the Labor Party.”

Americans and Australians have a “similar sort of open frontier spirit” that places a “premium on individualism,” Obama said during Gillard’s March visit. He visited Australia as a boy when he passed through Sydney from Indonesia, where he lived with his mother for four years, during trips to visit his grandparents in Hawaii.

‘Strong’ Relationship

“The relationship is a strong one between the prime minister and Obama and that will only be reinforced with the visit,” said Stephen Koukoulas, Gillard’s former macroeconomic policy adviser.

Gillard’s unpopularity with voters comes even as the country had economic growth of 1.4 percent in the three months to June 30, fueled by China’s appetite for its iron ore, coking coal and gold. That helped Australia escape a recession during the 2008-2009 global economic slump.

Two-way trade between the nations in the 12 months ending Sept. 30 reached A$110 billion, up 22 percent from the year before, according to the Australian Bureau of Statistics. Since overtaking Japan as the biggest buyer of Australia’s iron ore in 2004, China now purchases an amount of the steel-making material from Australia that’s more than four times than its Asian rival.

For the U.S., China is a source of imports, resulting in a trade deficit with the Asian nation last year of $273 billion, while also generating concern about its currency policy and strategic intentions.

Trade War Risk?

“Australia is basically a Western country in Asia with a strong history and alliance with the U.S. and massive trade ties with China,” said Peter Kenyon, professor of economic policy at Curtin University’s Graduate School of Business in Perth. Australia “can act as a conduit for ideas from the U.S. and China, and discretely report back to each side through diplomatic relationships.”

In Congress, the Senate adopted legislation Oct. 11 that would let U.S. companies seek duties to compensate for what lawmakers say is an undervalued Chinese currency. The measure risks stalling in the Republican-controlled House, where Speaker John Boehner of Ohio has called it “dangerous” and said it “poses a very severe risk of a trade war.”

The Obama administration, while continuing to criticize China over its currency valuation, has raised concerns that the bill would violate U.S. obligations under international law.

Security issues are a concern. Defense Secretary Leon Panetta said in a visit to Japan last month that China is expanding its military with “a troubling lack of transparency.”

Military Attack

“The Americans, every now and again, let Australia know that they don’t want to see a close strategic relationship between China and Australia,” Australian National University’s McKinley said. “Australia is very reliable and very useful, because it’s geographically situated in the right place. It supports the U.S. global strategy uncritically. Australia can provide real estate for their military bases.”

Obama will travel to Canberra to address a joint session of parliament, and then north to Darwin, site of the first foreign military attack on Australian soil, when the Japanese bombed the city in 1942. Announcements of major trade deals aren’t expected, Kenyon said.

China bought $2.32 billion worth of uranium from Australia from 2006 to 2010, according to the Department of Foreign Affairs and Trade, as part of the contract signed during Wen’s April 2006 visit. The natural-gas contract Howard agreed has so far reaped $166 million in sales, according to DFAT.

‘Dangerous President’

Obama’s Nov. 17 address is likely to be less controversial than visits by his predecessor, George W. Bush. In October 2003, Green Party leader Bob Brown was suspended from parliament for interjecting during Bush’s speech. Earlier that year in parliament Mark Latham, then a member of the Labor front bench and a former close colleague of Gillard’s, called Bush “the most incompetent and dangerous president in living memory.”

Obama is in Australia to mark the 60th anniversary of the alliance between the two nations early in the Cold War. The relationship began a decade earlier when Australia turned to the U.S. for protection against the Japanese in World War II after its founder and traditional ally, the U.K., which was battling Germany, failed to aid the isolated Pacific nation.

The U.S. shouldn’t feel slighted by Australia’s strengthening relationship with China, Curtin University’s Kenyon said.

“The U.S. is still a very important trading partner,” he said. “Australia won’t suddenly chuck out its relationship with the U.S. and throw in its lot with China. The U.S. is still the most important economy in the world and it will eventually get out of its current malaise. Australia knows that.”

To contact the reporters for this story: Jason Scott in Perth at jscott14@bloomberg.net Margaret Talev in Washington at mtalev@bloomberg.net

To contact the editor responsible for this story: Edward Johnson at ejohnson28@bloomberg.net

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Orascom Telecom Third-Quarter Net Profit Drops to $10.3 Million

By Ahmed A. Namatalla - Nov 14, 2011 4:24 AM GMT+0700

Orascom Telecom Holding SAE (ORTE), North Africa’s biggest mobile phone company, said its third-quarter profit plunged as it accounted for the so-called fair value of its investments in two companies last year.

Net income for the period ended Sept. 30 was $10.3 million compared with $934.3 million a year earlier, the Cairo-based company said in a statement on its website today. Last year’s profit included $822 million related to the recognition of the fair value of its investments in Mobinil and Egyptian Co. for Mobile Services, it said.

The company’s revenue reached $1.01 billion, a 3.5 percent increase from last year. Djezzy, Orascom’s Algerian unit and biggest revenue generator, had a 9.5 percent increase in revenue to $486.7 million in the quarter from a year-earlier. Orascom’s subscriber base gained 12 percent to 108.9 million users from last year.

“OTH remains committed to unlocking the value of its operations on all fronts to its shareholders,” Khaled Bichara, Orascom’s Executive Chairman said in the statement. The company didn’t address the status of its dispute with the Algerian government regarding the latter’s announced intention to buy Djezzy.

Orascom’s shareholders last month approved the company’s division into two parts, Orascom Telecom Holding SAE and Orascom Telecom Media and Technology Holding SAE. The split facilitates a merger of its parent company Weather Investments SpA with Russia’s VimpelCom Ltd. (VIP) The $6.5 billion merger, which was completed in April, created the world’s sixth-largest phone company by subscribers.

Shares of Orascom Telecom fell 1.2 percent to 3.20 Egyptian pounds at the close in Cairo, the lowest level in more than two weeks. They are down 26 percent this year, compared with a 40- percent drop for the benchmark EGX 30 Index (EGX30) over the corresponding period a year earlier.

To contact the reporter on this story: Ahmed A Namatalla in Cairo at anamatalla@bloomberg.net

To contact the editor responsible for this story: Claudia Maedler at cmaedler@bloomberg.net

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Merkel: EU Must Move Toward Closer Union

By Tony Czuczka and Brian Parkin - Nov 14, 2011 6:00 AM GMT+0700

German Chancellor Angela Merkel said it’s time to move toward closer political union in Europe to send a message to bondholders that euro-area leaders are serious about ending the sovereign debt crisis.

Speaking on the eve of her Christian Democratic Union party’s annual congress in the eastern German city of Leipzig, Merkel said that she wants to preserve the euro with all current 17 members. “But that requires a fundamental change in our whole policy,” she said.

“I believe this is important for those who buy government bonds: that we make it clear that we want more Europe step by step, that is that the European Union, and the euro area in particular, grows together,” Merkel said in an interview with ZDF television late yesterday. “Otherwise people won’t believe that we can really get a handle on the problems.”

Merkel will address her party at about 11 a.m. today after weeks of crisis fighting during which she raised the prospect of ejecting Greece from the euro and joined with French President Nicolas Sarkozy to call on Italy to hold to its budget pledges. After leadership changes in Italy and Greece, the chancellor is turning her attention to shaping the euro and EU’s future.

‘Sweeping Through’

“Big political changes are now sweeping through the euro zone, putting -- at least for now -- the many skeptical political observers to shame,” said Erik Nielsen, chief global economist at UniCredit SpA in London. “But will the market appreciate it?” he said. “I am not completely sure that it’ll get it quite yet.”

Bond yields in Italy soared to a euro-era record last week as political uncertainty in the euro region rocked financial markets globally. The euro rose from a one-month low of $1.3484 on Nov. 10 as Greece resolved a political impasse to close at $1.3750 on Nov. 11. The Stoxx Europe 600 index gained 2.4 percent, closing the week at the highest level in nine business days.

In her interview, Merkel said that the next step to bolster investor confidence means what was begun by the euro’s founders must be completed with “a fiscal union, and then turn it step by step into a political union.”

“That is the lesson of the crisis and this will still require a lot of effort,” she said.

December Summit

Euro leaders are due to meet in Brussels on Dec. 9, when they have asked EU President Herman van Rompuy to present them with a report on a “timeframe for the further strengthening of the euro zone” that should include “the question of possible treaty changes,” the German Finance Ministry said Nov. 9.

“Merkel wants far more centralized euro fiscal oversight so that something like Greece can never happen again,” Jan Techau, director of the Brussels-based European center of the Carnegie Endowment for International Peace, said by phone. That means euro governments will have to cede some sovereignty over budgets, he said. “There seems to be some kind of deal between Merkel and Sarkozy on this.”

Michael Meister, the CDU’s parliamentary finance spokesman, raised the prospect of joint euro-area bonds following on. “An integrated fiscal policy” in the euro region would mean “we can discuss the question of joint liability,” he said in an interview on Nov. 10. “The sequence of events is important.”

The euro crisis now entering its third year is the main theme occupying Germany’s ruling party as more than 1,000 delegates gather in Leipzig. The convention’s main motion is on the euro.

Solidarity, Encouragement

Euro members that get financial support must reduce debt and strengthen their economies, according to the draft text of the motion to be debated today. “Some countries will achieve this quickly, while others will need our solidarity and our encouragement for years,” it says.

The chancellor addresses the convention with domestic public opinion going her way. Merkel’s handling of the debt crisis is backed by 56 percent of Germans, up from 45 percent in early October, according to an FG Wahlen poll for ZDF television published Nov. 11. Merkel’s overall approval rating also rose. The Nov. 8-10 poll of 1,278 people has a margin of error of as much as 3 percentage points.

Merkel will use her speech to issue a “warning” that it’s necessary to do everything to move toward a “stability union,” the CDU’s Meister said. “We mustn’t just draft rules, we need to patrol them and enforce them,” he said. “We need more discipline.” Merkel will deliver that message “loud and clear.”

To contact the reporters on this story: Tony Czuczka in Leipzig via aczuczka@bloomberg.net; Brian Parkin in Leipzig via bparkin@bloomberg.net.

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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Obama Promotes Trade Deal to Boost U.S. in Asia

By Shamim Adam - Nov 14, 2011 9:02 AM GMT+0700

Nine Asia-Pacific nations including the U.S. outlined a framework for a free trade accord and agreed to accelerate negotiations with the aim of completing an agreement within the next year.

Leaders involved in the Trans-Pacific Partnership trade talks are setting July as a target for reaching an agreement, Malaysian Prime Minister Najib Razak said in Honolulu on Nov. 12. President Barack Obama said the aim is to reach a formal pact in the next 12 months and a U.S. official said there is “no firm deadline.” Negotiators will meet in early December and schedule more discussions then, the leaders said in a statement.

An accord among the Pacific Rim nations would be the first trade deal that Obama signed rather than inherited and the biggest for the U.S. since the North American Free Trade Agreement with Canada and Mexico that took effect in 1994. It would also help the U.S. regain economic influence it has ceded to China in a region that contains sea lanes vital to world commerce, as well as coal, oil and other commodities.

“The Asia Pacific region is absolutely critical to America’s economic growth, we consider it a top priority,” Obama said yesterday at Asia Pacific Economic Cooperation forum. He told business leaders the day before that TPP countries are “trying to create a high-level trade agreement that could potentially be a model not just for countries in the Pacific region but for the world generally.”

Canadian Prime Minister Stephen Harper yesterday said his country is interested in joining the talks and U.S. Trade Representative Ron Kirk said Mexico also wants to participate.

Canada “can easily meet” the criteria to join, Harper said.

Seeking Agreements

Some nations are seeking their own free-trade agreements as the World Trade Organization’s Doha round of global talks remains unfinished after a decade. Japanese Prime Minister Yoshihiko Noda, rebuffing opponents of the trade deal within his own Democratic Party of Japan, said before the APEC summit started that he aims to join the U.S.-led TPP negotiations.

“A one-year timeline is a bit tight but given the impetus of a weak global economy, it can be done if there is political will,” said Irvin Seah, an economist at DBS Group Holdings Ltd in Singapore. “The Doha round has been impeded by layers and layers of bureaucracy and political issues. The TPP will be a boost for trade.”

The current TPP talks involve Australia, Chile, Peru and Singapore, all of which already have separate free-trade agreements with the U.S., as well as Malaysia, New Zealand, Vietnam and Brunei. In addition to tackling traditional trade issues such as tariffs and market access, negotiators at the talks are seeking restrictions on government-owned companies and stricter protections for patents and copyrights.

‘Move Forward’

“There are many relevant countries besides the U.S., and it will become clear what these countries want from Japan as we move forward with our discussions with them,” Noda said on Nov. 12 in Honolulu. “I will make that information clear to the Japanese people as we embark on a national debate” on the TPP.

A dispute between the U.S. and Japan emerged almost immediately. Japan’s Ministry of Foreign Affairs denied a White House statement that Noda told Obama during their Nov. 12 meeting that he is willing to negotiate all his country’s goods and services at the TPP.

“Prime Minister Noda never said this,” the ministry said in a news release. Deputy National Security Adviser Michael Froman told reporters the U.S. “would stand by the statement that we issued earlier.”

Two-Way Trade

Two-way trade between the U.S. and the eight nations in the TPP totaled $171 billion last year, compared with $457 billion with China, $181 billion with Japan and $88 billion with South Korea, according to the U.S. Commerce Department. Taken together, the eight member economies would be America’s fifth largest trading partner, Obama said.

“An APEC agreement on broad outlines may not signify much,” Razeen Sally, director of the Brussels-based European Center for International Political Economy, said by telephone. “It might provide some kind of impetus to the negotiations, but there’s still a long way to go given how disparate the membership is.”

Asia’s growth has boosted earnings for its companies and led to stock market gains that have beaten U.S. equities. The MSCI Asia Pacific Index of stocks has outperformed the Dow Jones Industrial Average seven of the past nine years through 2010.

‘Behind the Eight Ball’

“The United States is behind the eight ball in Asia,” Thomas Donohue, president and chief executive officer of the U.S. Chamber of Commerce, the nation’s largest business lobbying group, said in an e-mailed statement. While the announcement is welcome, “the Chamber urges further substantial progress as quickly as possible. Expanding trade represents one of the best ways to create jobs without raising taxes or increasing the deficit.”

A trade accord such as the TPP may face political hurdles as leaders fight protectionism and sensitive issues in domestic politics. Japan’s largest farm lobby submitted a petition with almost 11.7 million signatures saying the accord would mean the “collapse” of a farm industry that accounts for about one percent of the country’s economy.

‘Political Rebellion’

“The fundamental fact is that no Japanese political party has been able to withstand the political rebellion that the Democrats are facing now,” said Steven R. Reed, a professor of political science at Chuo University in Tokyo.

The TPP would slash tariffs like Japan’s 778 percent duty on rice and open competition in industries including pharmaceuticals. Failure to join a free-trade accord may hinder companies such as Mitsubishi Corp. (8058) and Toyota Motor Corp. (7203) in competing abroad.

Polls show Japanese are divided over the accord. Thirty- four percent of respondents said Japan should join the TPP, 25 percent said it shouldn’t, and 39 percent didn’t know, according to a Mainichi newspaper poll published Nov. 7. The paper surveyed 981 voters and didn’t provide a margin of error.

In Malaysia, reluctance to change policies that give preferential treatment for some state contracts to ethnic Malays and indigenous people were among issues that led to a previous breakdown in negotiations with the U.S. on a free trade pact.

‘Be Flexible’

“There is a need to be flexible in our approach and to be realistic in terms of what can be achieved and accepted, or the buy-in by our local constituencies,” Najib said on Nov. 12, referring to the TPP nations. “The question of sensitivity varies from country to country.”

The U.S.-South Korea free trade pact, initially agreed on by presidents George W. Bush and Roh Moo Hyun more than four years ago, was delayed as their successors Obama and Lee Myung Bak sought wide domestic support for the deal. While Obama signed the agreement into law on Oct. 21 after Congress passed it earlier that month, South Korea’s main opposition Democratic Party has stalled the government’s efforts since June to put the bill to a vote.

China, the world’s second largest economy, has not received an invitation to join discussions on the TPP and would “seriously study” such a request, Assistant Commerce Minister Yu Jianhua said Nov. 11. U.S. Trade Representative Ron Kirk said no nation needed an invitation as it is not a “closed clubhouse.”

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

To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net

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Obama Pressures China on Yuan, Property Rights

By Margaret Talev and Julianna Goldman - Nov 14, 2011 3:18 AM GMT+0700

President Barack Obama used his role as host of the Asia-Pacific Economic Cooperation summit to pressure China on currency and intellectual property rights while telling voters that nations in the region are counting on U.S. leadership.

Obama told Chinese President Hu Jintao yesterday that the American public and businesses are growing “increasingly impatient and frustrated” with the pace of progress in relations between the two nations, said Michael Froman, White House deputy national security adviser. Hu told Obama that a large appreciation of the yuan won’t solve U.S. problems, a statement on the Chinese Foreign Ministry’s website said.

Obama’s strong language came only hours after he announced the U.S. and eight other nations will join in forging an Asia- Pacific trade accord within the next year, a move he said demonstrates that “American leadership is still welcome.”

With the APEC summit followed by stops in Australia and Indonesia, Obama is underscoring his administration’s pivot toward Asia after a decade in which U.S. attention was focused on wars in Iraq and Afghanistan. The outreach is spurred by the rising commercial importance of the region and by China’s mounting economic and military power.

At a session yesterday morning with company executives moderated by Boeing Co. (BA) Chief Executive Officer Jim McNerney, Obama said the U.S., the world’s biggest economy, views the Pacific rim as the driver of future economic growth and intends to use its influence in the region.

Pacific Power

“The United States is a Pacific power and we are here to stay” Obama said. “There’s no region in the world that we consider more vital than the Asia Pacific region.”

He repeated that theme this morning as he opened a working meeting of leaders from the 21-member forum.

“The Asia Pacific region is absolutely critical to America’s economic growth,” he said.

The U.S. this year has exported more to the Pacific Rim than to Europe, according to the Commerce Department. Last year, exports to the region supported 850,000 U.S. jobs, the State Department says.

Obama also told the executives, representing companies in the U.S. and Asia, that he wants China to “play by the rules” and that the U.S. “can’t be expected to stand by” without getting reciprocity from China on currency, trade and protection of intellectual property.

Political Issue

China’s policies also have become an issue in U.S. politics. The Senate approved a bill last month that would let manufacturers seek duties on Chinese imports if they prove they were harmed by manipulation of the yuan. Tough talk on China has become a staple for many of the Republicans seeking their party’s nomination to run against Obama next year.

At a debate last night in South Carolina, Former Massachusetts Governor Mitt Romney said he would make a case against China at the World Trade Organization for manipulating its currency in order to artificially lower prices and run a trade surplus. The U.S. had a $273 billion trade deficit with China last year.

Still, China, which is also the biggest holder of U.S. debt, has made steps on its currency. The yuan has gained about 8 percent against the dollar in nominal terms since the country ended a two-year peg to the U.S. currency in June, 2010. In real terms the gain has been more than 10 percent, because inflation is higher in China than in the U.S.

The yuan rose 0.06 percent to 6.3424 in Shanghai on Nov. 11, according to the China Foreign Exchange Trade System.

Business Climate

John Rice, the General Electric Co. vice chairman who oversees the company’s international operations, said in a Nov. 10 interview in Honolulu that China is making progress improving the climate for foreign businesses such as GE.

He cited a decision by the government to put off new rules encouraging indigenous innovation that international companies said could shut them out of an annual state procurement market worth as much as $1.1 trillion.

“I think the playing field is improving all the time,” Hong Kong-based Rice said. “The government listens when people recommend opportunities for improvement.”

Obama took a less confrontational public stance when he began a bilateral meeting with Hu yesterday in Honolulu. He said Americans should be “rooting for China to grow” because it would benefit both nations, by raising living standards in China and providing new markets for U.S. companies.

Growing Relationship

“Although there are areas where we continue to have differences, I am confident that the U.S.-China relationship can continue to grow in a constructive way based on mutual respect and mutual interests,” Obama said.

In private, Obama “made it very clear” the U.S. wants to see greater progress and cooperation on those issues, Froman said.

White House press secretary Jay Carney said Obama was “very direct” with Hu and told him the U.S. frustrations exist broadly across the political spectrum.

The U.S. trade deficit and unemployment are not caused by the yuan exchange rate and a “large” appreciation in the currency won’t solve U.S. problems, Hu told Obama, according to the Chinese Foreign Ministry statement.

“China’s foreign exchange policy is a responsible one,” Hu told Obama, according to the statement. The country will “continue reforming its exchange rate mechanism.”

Broader Concern

White House deputy national security adviser Ben Rhodes said Obama also stressed that “this is not simply a matter of the United States” raising concerns and that China is risking the collective pushback of other countries in the region and around the world.

In his own speech to business executives, Hu said China will seek to boost imports in part to help stimulate economies around the world.

“We must be firmly committed to maintaining growth and promoting stability,” Hu said. China will “focus more on increasing imports while maintaining a stable level of exports.”

To contact the reporters on this story: Margaret Talev in Honolulu at mtalev@bloomberg.net; Julianna Goldman in Honolulu at jgoldman6@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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Mario Monti to Form New Italy Government

By Andrew Davis and Chiara Remondini - Nov 14, 2011 3:40 AM GMT+0700

Mario Monti, former European Union competition commissioner, will lead a new government in Italy after contagion from the region’s debt crisis led to the unraveling of Prime Minister Silvio Berlusconi’s coalition.

President Giorgio Napolitano offered Monti the post after sounding out the country’s political parties for their support in consultations today at the Quirinale Palace in Rome.

Monti, 68, must present the names of his Cabinet ministers to Napolitano before he can be sworn in. He will then face confidence votes in both houses of parliament. Leaders of Berlusconi’s People of Liberty party earlier today told Napolitano that they’ll support a Monti government, virtually ensuring his confirmation in parliament, which may come this week.

“If someone tries to set up a government in two hours, it ends up taking a lot longer,” Napolitano said in a nationally televised address. “How long this will take was never discussed. Monti will proceed as fast as he can while listening, evaluating and deciding whether to come here” and present his Cabinet list, the president said.

Monti’s Priority

Berlusconi’s government fell apart after defections left him without a majority and the country’s 10-year bond yield surged to more than 7 percent, the level that prompted Greece, Ireland and Portugal to seek EU bailouts. Monti’s priority will be to implement measures to cut the euro-region’s second-biggest debt and boost an economy where growth has lagged behind the euro-area average for more than a decade.

“Italy must once again be an element of strength, not of weakness, in the European Union,” Monti said after meeting Napolitano. He underscored that Italy helped found the EU, “in which we must be protagonists.” Monti also said his program would focus on cleaning up public accounts and boosting economic growth.

“The spread should narrow a bit on the news of Monti’s appointment, even though the impact will be mainly on the short- term bonds,” Fabrizio Fiorini, chief investment officer at Aletti Gestielle SGR SpA in Milan, said in an interview. “I expect about 25 basis points for Monti and another 25 for the list of ministers and the program. The long-term 10-year spread will narrow much less, about half that.”

Italy’s 10-year bond yield jumped to a euro-era record 7.48 percent on Nov. 9, driving the yield difference with German bonds to 575 basis points, more than twice the average for the year. Two-year yields rose as high as 7.14 percent on Nov. 10 and Italy was forced to pay 6.087 percent on one-year bills at an auction on Nov. 10, the most in more than 14 years.

Yields Narrow

As support for a Monti government grew, 10-year yields narrowed more than 100 basis points on the final two trading days of the week and the FTSE MIB stock index closed up 3.7 percent on Nov. 11, the biggest gain of any European benchmark.

“It’s key to recover the confidence of investors and of the European institutions,” Napolitano said at the presidential palace. “It’s a responsibility we feel we have toward the whole international community and to protect the stability of the common currency.”

Monti is an economist and president of Bocconi University in Milan, the country’s top-rated business school. He’s also an adviser for Goldman Sachs Group Inc.

Candidates

Monti plans to tap the Bocconi staff to fill key positions in his new administration, Corriere della Sera reported, without saying where it got the information. Monti may name Guido Tabellini, 55, another Bocconi economics professor, as finance minister, Corriere said. Giuliano Amato, a former prime minister and now an adviser to Deutsche Bank AG, may be named foreign minister, the newspaper said.

Monti spent almost a decade in Brussels as EU commissioner, first for the internal market and then for competition. In the latter role, in 2001 he blocked General Electric Co.’s $47 billion takeover of Honeywell International Inc., the first time the EU had stopped a deal previously approved by U.S. authorities. He also levied a record 497 million-euro ($683 million) fine against Microsoft Corp. He’s been an international adviser to Goldman Sachs for six years.

To contact the reporters on this story: Andrew Davis in Rome at abdavis@bloomberg.net; Chiara Remondini in Milan at cremondini@bloomberg.net

To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net

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Indian Billionaires Struggle With Airline Profits

By Karthikeyan Sundaram and Mehul Srivastava - Nov 14, 2011 1:30 AM GMT+0700

Even billionaires can’t figure out how to make money in Indian aviation.

Kingfisher Airlines Ltd. (KAIR), controlled by brewing tycoon Vijay Mallya, is expected to report a second-quarter loss today, following Kalanithi Maran’s SpiceJet Ltd. (SJET) and Jet Airways (India) Ltd., the nation’s biggest carrier. All three company have also slumped more than 65 percent in Mumbai trading this year.

Indian airlines have failed to turn a 19 percent jump in passenger numbers into profits because of a price war, fuel taxes that average about 25 percent and the rupee’s 11 percent depreciation this year. State-owned Air India Ltd. can also offer below-cost fares after winning 32 billion rupees ($639 million) of government bailouts since a 2007 merger.

“We have a serious issue on hand and that is to address the viability of Indian carriers,” said Kapil Kaul, the Indian head for CAPA Centre for Aviation. The financial status of domestic carriers is “very fragile,” he said.

CAPA expects the nation’s airlines to lose about $2.5 billion in the year ending March, including losses of as much as $2 billion for Air India. Only closely held IndiGo, India’s biggest discount airline, may make a profit, Kaul said, without giving a precise forecast.

‘Over-Taxed’

Kingfisher will likely report a 3.1 billion rupee loss for the three months ended Sept. 30, according an ICICI Bank Ltd. estimate compiled by Bloomberg. The carrier, named for Mallya’s flagship beer, has made about 48 billion rupees of losses in the last three fiscal years.

“In India, airlines are over taxed and over charged,” Mallya, the airline’s chairman and managing director, wrote on Twitter last week. The Bangalore-based carrier confirmed it was his feed. Mallya, 55, said he couldn’t talk because he was busy when called by Bloomberg News yesterday.

Kingfisher has a 19 percent share of India’s domestic aviation market about the same as Air India and IndiGo, according to the Directorate General of Civil Aviation. Mumbai- based Jet has a 26 percent share, including low-cost unit JetLite.

Jet slumped to a wider-than-expected 7.14 billion rupee loss for the three months ended Sept. 30 after a 50 percent jump in its fuel bill and a 2.76 billion rupees loss from currency fluctuations. Passenger numbers rose 16 percent from a year earlier.

The carrier hasn’t reported an annual profit in the last four years. The fortune of Chairman Naresh Goyal has shrunk to $435 million from $1.3 billion since 2007, according to Forbes.

SpiceJet Loss

SpiceJet, controlled by Maran who built a $2.5 billion fortune after founding Sun TV Network Ltd. (SUNTV), had a loss of 2.4 billion rupees in the three months ended Sept. 30, compared with a profit of 101.1 million rupees a year earlier. The New Delhi- based airline said fuel costs and the weaker rupee offset passenger numbers that jumped about 30 percent in the first eight months.

“The industry is focused on a war of market share and revenue growth,” said Srisu Subrahmanyam, a co-founder of Chicago-based Orchard Group, which advise airlines. “This has benefited the consumer due to the fare wars for market share but it cannot be sustained.”

The drop in the rupee, the worst performer among Asia- Pacific’s 10 most traded currencies this year, has raised the cost of airplanes bought from overseas. Jet-fuel prices have also risen about 30 percent in Mumbai since Jan. 1, excluding tax, according to Indian Oil Corp.’s website.

Air India

Air India has lost money every year since combining with Indian Airlines Ltd. in 2007. It has kept flying because of government handouts, and it is seeking another 65 billion rupees by the end of March. The airline is also close to agreeing a debt-restructuring package with state-controlled banks that will pare interest expenses by 13 billion rupees a year.

“Air India is still suffering because of the merger, but at least it has government support,” said P.C. Sen, a former chairman of the carrier. “For private airlines, things are quite different.”

The industrywide losses mean that India’s airlines need about $2.5 billion of new cash to maintain operations, including $1.32 billion for Air India, according to CAPA. Kingfisher needs $200 million immediately followed by another $200 million within three months, it said.

Kingfisher has a 14.8 billion rupee revolver loan maturing in January and a 60 billion rupee term loan running until 2019, according to Bloomberg data. It doesn’t have any bonds.

Kingfisher Credit

Kingfisher in a statement said it was seeking to increase bank lending limits, and cutting flights to 300 a day from 340 as it reconfigures planes and stops offering low-cost services as part of a turnaround plan. It denied having reduced services because of a shortage of pilots. The airline made the statement after shares plunged 18 percent in the two trading days amid reports about cancelations.

Mallya, who has a $1.1 billion fortune, according to Forbes, has already propped up Kingfisher’s finances. In the year ending March, he doubled personal loan guarantees to 61.7 billion rupees, for which he received 508.7 million rupees. United Breweries (Holdings) Ltd., Mallya’s holding company, also increased guarantees to 168.5 billion rupees.

Prime Minister Manmohan Singh said Nov. 12 that the government may help Kingfisher, according to Press Trust of India. He didn’t elaborate. The finance ministry may ask lenders to help the carrier recast debt and the oil ministry may extend credit for fuel to airlines, Civil Aviation Minister Vayalar Ravi said last week.

To help the wider industry, the government should cut fuel taxes and lower airport charges, the Associated Chambers of Commerce & Industry of India said yesterday. It also called for an end to a ban on overseas carriers buying into Indian airlines.

“Almost every airline needs funds,” said D.S. Rawat, the business group’s secretary general. “There will be a question mark on their survival if they aren’t able to raise them,” he said.

To contact the reporters on this story: Karthikeyan Sundaram in New Delhi at kmeenakshisu@bloomberg.net; Mehul Srivastava in New Delhi at msrivastava6@bloomberg.net

To contact the editor responsible for this story: Neil Denslow at ndenslow@bloomberg.net

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Hu Pushes Imports; IMF’s Zhu Sees ’Soft Landing’

By Michael Forsythe - Nov 14, 2011 7:18 AM GMT+0700

China’s President Hu Jintao pledged to boost imports as the world’s second-biggest economy heads for what the top Chinese International Monetary Fund official said was a successful downshift from inflationary growth.

IMF Deputy Managing Director Zhu Min and China’s National Economic Research Institute Director Fan Gang yesterday told the Asia Pacific Economic Cooperation forum in Honolulu that the economy was heading for a “soft landing” as growth slows. They cited lower inflation and less bad debt at banks, and what Fan said were timely measures to avoid a property market bubble.

“It has become ever clearer that the Chinese economy is moving to a soft landing,” Zhu said. “The Chinese economy today is really moving to an inflection point, moving to more services and capital-intensive economy.”

Zhu and Fan, speaking on the same panel, said economic expansion would slow from the 9.1 percent growth in the third quarter, with Fan saying sustainable growth in gross domestic product was about 8 percent. Their forecast contrasts with some observers including hedge fund manager Jim Chanos, who has predicted since at least February 2010 that the property market will slump, saying that China is on a “treadmill to hell” because of its reliance on real estate for growth.

Helping Others

Hu on Nov. 12 said China will seek to boost imports in part to help stimulate economies around the world.

“We must be firmly committed to maintaining growth and promoting stability, with a special emphasis on ensuring strong growth in order to add momentum to the economic development in the Asia Pacific and beyond,” Hu told APEC business executives. China will “focus more on increasing imports while maintaining a stable level of exports.”

China, the world’s biggest exporter, has been the target of critics for its large trade surplus with the U.S., the world’s biggest importer. China’s overall trade surplus has been declining as imports, including Porsche Automobil Holding SE (PAH3)’s Cayenne sport-utility vehicles and iron ore from Rio Tinto Plc (RIO), have increased along with rising incomes and a nationwide surge in construction spending.

China’s exports rose at the slowest pace in almost two years in October as Europe’s deepening debt crisis crimped demand. Overseas shipments from the world’s second-largest economy rose 15.9 percent from a year earlier, customs bureau data released Nov. 10 showed. The trade surplus was $17 billion, lower than all 24 estimates in a Bloomberg News survey. Imports climbed a more-than-forecast 28.7 percent.

Rising Yuan

A rising yuan makes imports cheaper and China’s exports more expensive. China’s currency has risen about 8 percent in nominal terms since the country ended a two-year peg to the dollar in June, 2010. In real terms the yuan has risen even more because inflation in China is higher than in the U.S. The yuan rose 0.06 percent to 6.3424 in Shanghai on Nov. 11, according to the China Foreign Exchange Trade System.

China’s inflation cooled in October, home sales fell and industrial output grew at the slowest pace in a year, adding pressure for measures to support growth in the world’s second- biggest economy.

Consumer prices rose 5.5 percent from a year earlier, the least in five months, the statistics bureau said Nov. 9. Housing transactions slid 25 percent from September, the bureau’s data showed.

Unfounded Worries

Chinese business leaders conveyed the message that worries about a sharp downturn in the economy were unfounded.

Bank of China Ltd. (3988) Chairman Xiao Gang said the bank had controlled lending to local-government investment vehicles, whose ability to repay debt is a source of concern for the government and international investors. He told reporters at APEC that the lender, the country’s third-biggest by assets, had controlled lending to local governments. The bank said it had 531.5 billion yuan ($83.8 billion) in loans to such entities at the end of June. Xiao said much of the debt was to highway companies that had steady revenue streams from tolls.

“Their toll collections are a guarantee that they’ll repay their debt,” he said on Nov. 12.

A government audit released in June said that more than 6,000 local government financing vehicles around the country had total debt of 10.7 trillion yuan as of the end of last year. Nearly a third of China’s local government financing vehicles are losing money, according to a study published in September in the magazine of the country’s official bond clearing house.

Still, Hu said “unbalanced, uncoordinated and unsustainable development poses a major challenge to China.” The country’s wealth gap is rising, food prices rose 11.9 percent in October from a year ago and investment makes up more than 40 percent of the economy.

“It will be very difficult to say for the time being that the Chinese consumer will save the world,” Zhu said. “China invests too much and it consumes too little.”

To contact the reporter on this story: Michael Forsythe in Honolulu at mforsythe@bloomberg.net

To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net

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