Bickering US And China Play Blame Game

If the U.S. and China were dating, this is what they would be saying to each other right now: 'It's not me, it's you.'

As so often, money worries are the source of tension in this relationship; in particular, inflation. Neither party wants to accept responsibility for it, preferring instead to wait for the other to cave.

How this game of chicken plays out will define the global economy in the second half of this year.

To Beijing, rising commodity prices owe much to the Federal Reserve's continuing campaign against disinflation through quantitative easing and zero interest rates, undermining confidence in the dollar.

While QE has boosted financial-asset prices, though, U.S. house prices remain moribund and unemployment, while improving, remains high. For the Fed, the economic recovery remains fragile and spare capacity counteracts inflationary forces.

The Fed in turn points the finger at China's rampant appetite when it comes to rising raw materials prices. Under this argument, China's economy remains too wedded to fixed investment and exports, abetted by an artificially depressed yuan. A higher yuan would help make Chinese exports less competitive and encourage a shift towards a less resource-intensive consumer and services economy, as well as easing the cost of dollar-denominated commodities.

If Beijing won't countenance that, then Chinese inflation is the logical outcome and is also useful to Washington, as it makes Chinese exports less competitive.

Both positions have some merit. It is remarkable that QE continues nearly two years after the end of the U.S. recession. Higher real U.S. interest rates would take some heat out of commodities prices, especially if raised in tandem with central banks elsewhere, many of which are also running loose monetary policy.

Yet if the U.S. can be accused of playing with inflationary fire to bolster employment, so is China. Beijing's long-standing linkage of the yuan to the dollar and enormous injection of stimulus into the economy in the wake of the financial crisis both predate QE.

Recent measures, such as pressuring Unilever to postpone price increases, demonstrate the acrobatics required by Beijing to cool inflation if traditional monetary methods aren't used.

China is unwilling to raise rates sharply or let the yuan appreciate quickly because that would hurt big export industries and state-controlled borrowers with close ties to Beijing, says Diana Choyleva of Lombard Street Research. And price controls, while effective in the short term, encourage consumption and supply shortages in the medium-term, stoking inflation.

So the pressure on China looks intense. Slow to withdraw the stimulus deployed during the financial crisis, Beijing now struggles to contain rising prices with gradual, often unorthodox, methods. Fed policy and supply shocks like Middle Eastern turmoil compound the pressure.

And, unlike America, China is grappling with wage inflation due to demographic changes and still faces the risk of elevated property prices.

Sharp jumps in the cost of living have been associated historically with social turmoil in China. Beijing is, therefore, caught between fear of inflation squeezing incomes too hard and higher rates, or a stronger yuan, hurting growth and boosting unemployment.

The current course of policy makers pleases commodity bulls while making life difficult for the Fed, which must explain away headline inflation as a temporary phenomenon.

But, with inflation a more clear and present danger in China, expect Beijing to blink first.

Asia's Banking Bonanza: Resource Deals

Deals involving natural-resource companies helped drive investment-banking revenues for the Asia-Pacific region to a record in the first quarter, despite a decline in share sales, another key revenue source.

Underscoring the depth of Asia's interest in acquiring mining, energy and other resources, China's Minmetals Resources Ltd. said Monday it intends to offer 6.3 billion Canadian dollars (US$6.5 billion) for Australian-based copper-miner Equinox Minerals Ltd. More deals look likely.

'Given the rise in commodities prices, we see the natural-resources sector leading the way [in deal-making]. National oil companies are really scouring the market for opportunities and we think they will find several in the coming months,' said Rob Sivitilli, head of mergers and acquisitions for Southeast Asia at J.P. Morgan Chase.

U.K. oil giant BP PLC's acquisition of oil and natural-gas assets controlled by India's Reliance Industries Ltd. for up to $9 billion, depending on the success of future exploration, is one of the largest M&A deals in the region so far this year, according to data provider Dealogic.

Investment banks generated $3.8 billion in revenue across the Asia-Pacific region from M&A, syndicated loans and equity and bond deals in the first three months of the year, up from $3.5 billion in the same period a year earlier, according to Dealogic estimates. Excluding Japan, revenue was $3.0 billion, up 35% from the $2.2 billion a year earlier and a record for the first quarter of a year.

While M&A was strong, share sales, including initial public offerings, fell. So-called equity-capital-market deals around the region fell to $66.2 billion from $77.5 billion a year earlier, hit by a 53% slide in Japanese deals to $12.5 billion from $26.6 billion a year ago, according to Dealogic. Several deals were withdrawn in the wake of the March 11 earthquake in Japan, including real-estate investment trust United Urban Investment Corp.'s plans to raise about 65 billion yen (about $750 million).

Excluding Japanese share sales, volume stood at $53.7 billion across 518 deals, up 5.5% from a year earlier. The region's biggest share deal for the quarter was Hutchison Port Holdings Trust's $5.4 billion IPO in Singapore.

Bankers said the first quarter seemed relatively quiet after the busy autumn of 2010. One reason for the drop in activity was that the flood of money from global investors that flowed into Asia last year streamed back into U.S. and European markets because of fear inflation was rising in countries such as Indonesia and China.

This year through March 30, investors pulled a net $5.9 billion from the Asia-Pacific region, although capital flowed into the region in the final week of the period, according to data from EFPR Global.

Bankers hope the flow of cash picks up enough momentum to support the growing band of global brand names seeking Hong Kong listings.

Headline deals expected in the coming months include offerings from the Italian fashion house Prada SpA and the Swiss commodities company Glencore International AG.

Steven Barg, Goldman Sachs Group Inc.'s co-head of equity capital markets for Asia excluding Japan, said 2011 should rival 2010 in terms of IPO volume, with most deals coming towards the second half of the year. Goldman was the busiest firm in the region excluding Japan during the first quarter measured by the value of equity-capital-markets deals.

In anticipation of a flood of deals later this year, UBS AG is raising its investment-banking staffing for the Asia-Pacific region by 20% this year, said Matthew Hanning, the bank's regional head of investment banking. The bulk of the new hires will work on share sales for Chinese companies. In volume terms, equity-capital-markets business from Chinese companies reached the highest level for any first quarter on record. A total of $28.1 billion was raised via 150 deals, up 30% from a year earlier.

UBS remained the top-ranked bank in terms of investment banking revenue from M&A, syndicated loans and equity and bond deals for the Asia-Pacific region excluding Japan, according to data from Dealogic.

The Asia-Pacific area made up about 22% of revenues for banks globally. Mr. Hanning calculated that the region's share of the global revenue pie has been growing at about six times the global average, attracting more banks to the region.

'I think there must be nine or 10 banks that see being within the top three in Asia as a core part of their strategy,' he said.

The year 2007 saw a surge in the number of births in South Korea

It was the year of Golden Pig, which comes only once in 60 years according to the lunar calendar. Tradition says that people born in that year are destined to have good luck and fortune throughout their lifetime.

Now moms who gave birth that year might be having some regrets.

As kindergartens start receiving applications for next year, parents are struggling to snag a spot on the enrollment list. Some famous kindergartens have hundreds on the waiting list.

Daejin Kindergarten in Seoul says it has more than 200 kids who are waiting to be admitted.

'I think we have 30 percent more kids than usual,' said Kim Ki-jeong, who is in charge of the preschool.

According to the National Statistical Office, there were 493,189 babies or 1.25 births per woman in 2007, up 10 percent from a year earlier, a spike in Korea's steadily declining birthrate.

With retail-sales growth in the double digits every month of 2010 so far

Hong Kong retailers are looking forward to a very merry Christmas: This December is poised to draw the largest retail sales in years.

Christmas sales typically make December the highest-grossing month of the year for Hong Kong retailers, outselling Chinese New Year and Golden Weeks. Last year, December sales totaled 29.4 billion Hong Kong dollars, or $US3.8 billion, according to the Census and Statistics Department, growing 28% from November that year, and 16% from the year earlier.

January-to-September sales this year are up 17.9% from the same period in 2009.

In December, 'our tenants usually do twice the number in sales of an average month,' said Karim Azar, assistant general manager of retail leasing for the IFC mall in Central.

IFC is expecting a 20% or more increase in traffic in December over last year, with expected total spending in the mall to be up 30%.

Other malls are setting similar forecasts. Maureen Fung, general leasing manager for Sun Hung Kai Properties, said that its 33 shopping centers are all expecting about a 10% sales increase from a record season last December. By contrast, the United States saw a 0.3% drop in retail sales last December from the month before. Market research group eMarketer is forecasting a modest 2% to 3.5% growth for U.S. holiday sales from the year before.

A traffic increase in Hong Kong stores is helped by an influx of mainland shoppers in December, one of the most popular months for mainland tourists. This year's mainland visitors are expected to break the 20 million mark for the first time, according to chairman of the Hong Kong Tourism Board James Tien. As of September, total mainland visitor arrivals reached 16.5 million, a 28.1% increase from the same period a year earlier.

Although China doesn't traditionally celebrate Christmasâ 'few mainland companies give time off for the holidayâ 'Hong Kong retailers are instilling a cheer that they hope will translate to more shopping. Malls are spending more than HK$10 million on their Christmas programs, which include giveaways, performances and extravagant decorations.

Eiji Hosoya is the man who masterminded the massive privatization of Japan's sprawling national rail network 23 years ago

He still speaks of shinkansen â ' Japan's ultra-cool and ultra-fast bullet trains â ' with a passion. Today, nimble and a youthful-looking 65, he's the chairman of Resona Holdings, the country's fourth-largest bank that suffered the ignominy of nationalization in 2003.

Banking may seem an odd choice for a man who's worked for Japan National Railways and East Japan Railway for over 30 years, but government insiders thought Mr. Hosoya had what it took to turn around a failed and decaying bank.

But Mr. Hosoya, one of Japan's most respected business leaders, says more broadly that Japan may also fail and continue to stagnate if the country doesn't take urgent action to turn its fortunes around. The problem with Japan is that 'we have weak leaders,' said Mr. Hosoya bluntly, in an interview with the Wall Street Journal. 'Unless Japan changes, in five years from now, the country will become so weak.'

Mr. Hosoya says Japan needs to aggressively capitalize on its three biggest strengths: its strong service culture; technology; and, more broadly, Japanese culture. 'We have to appeal to South Korea, China and Taiwan â ' this is the volume zone for Japan and its services,' he said.

As if Tuesday's sell-off on the stock market weren't enough to be worried about

Global money managers have just turned dangerously optimistic. The booming market rally of September and October, and the Fed's new promise of easy money for all, proved too much for their self-control. They bounded into this month like eager puppies, their ears perked up and their tails a-wagging, eager to play.

Like I said: Oh, brother.

Bank of America Merrill Lynch says its latest survey of big fund managers, conducted between November 5 and 11, found 'market sentiment at its most bullish since April 2010.'

April? Hmmmm. Say, wasn't that just before the market slumped again?

Money managers have just dramatically raised their forecasts of economic growth (and inflation). And they have thrown as much money into stocks as they possibly could. Average cash holdings are down to just 3.5% one of the lowest readings on record.

Even hedge fund managers, those skeptical souls, have cautiously joined in. The survey shows their bets on rising shares, minus their bets on falling shares, have surged alarmingly since the summer. The most popular assets? Commodities, where institutions have become heavily over-invested, and emerging markets where they appear to have gone 'all in.'

This is ominous news. Big institutional investors move the market. If they have already invested most of their cash, it means there are fewer investors on the sidelines waiting to come in. Bank of America's survey polls around 200 big institutional investors around the world, with about $630 billion under management.

Among the other highlights from the survey: Money managers continue to shun gold, which they deem 'overvalued.' Relevant note: They have been saying that all the way up. The equities they like the least: Utilities, banks and Japan. (This columnist, who does not like crowds, has some money invested in the iShares Japan exchange-traded fund, EWJ.).

The Bank of America survey can be a great contrarian indicator although, as always in markets, it is far from infallible. In June/July 2007 it showed money managers were hugely bullish of European equities Merrill Lynch, as it then was, coined the term 'EU-phoria.' That proved the best possible moment to sell European equities, just before they went into freefall. And in April 2003 the survey was deeply bearish of Japanese equities. That proved an extremely good moment in which to buy…Japanese equities.

In isolation, the latest survey might be reason enough for caution.

And it is not in isolation.

Look at the valuations. Stocks are already trading at rich prices according to several long term measures. A lot of smart people have been increasingly pessimistic. Any investor looking to invest fresh money has for some weeks been struggling to find anything worth buying. Even blue chip equities with good dividend yields, one of the last assets that were offering some value, have been playing catch-up.

Now look at the broader picture. The latest debt panic in Europe is among a number of reminders that the financial crisis is not entirely in the rearview mirror. And now, maybe most ominously of all, come signs that the bond market mania is finally cracking. Treasury and corporate bonds have tumbled in the past couple of weeks, after hitting giddy and absurd heights. That suggests Ben Bernanke's confidence game may be coming to an end. Mr. Bernanke is promising to print money to buy up bonds. If investors had total confidence in his legerdemain, that would send bond prices higher, or at least keep them high. Apparently they may not have quite that degree of confidence after all.

General Motors Co.'s shares rose a modest 3.6% Thursday

The stock opened at $35, a 6% rise on the IPO price, climbing to an intraday high of $35.99, up 9%, before settling at $34.19 in 4 p.m. composite trading on the New York Stock Exchange.

'The GM IPO is a feather in the government's cap,' said Todd Colvin, vice president at MF Global, alluding to the U.S. Treasury's bailout of the auto maker last year. 'There's a bit of elation out there surrounding the stock. But now we're at a realization stage: can the auto maker sell cars and turn a profit? Those have to be the two questions on every investor's mind right now.'

Meanwhile, in Washington, President Barack Obama hailed the resurgence of GM and its return to the stock market, saying one of the 'toughest tales of the recession took another big step toward becoming a success story.'

'Two years ago this seemed impossible,' the president said. 'In fact there were plenty of doubters and naysayers who said it couldn't be done, who were ready to throw in the towel and read the American auto industry last rites.'

GM in its Wednesday IPO sold more shares than expected at a higher price than originally planned. While the move underscored how much more favorably investors view the company after its dramatic, U.S.-financed bankruptcy reorganization last year, it caused some concern that any first-day gains might be sucked out of the stock sale. That could indicate the company overreached in its pricing.

Earlier this week, GM raised the number of common shares in the offering to 478 million from 365 million, and boosted its price range to $32 to $33 from $26 to $29, ultimately raising $15.8 billion through the common shares in its offering, or 50% more than it had hoped for.

Underwriters aimed to keep GM's first-day 'pop' at 10%, give or take two percentage points. Though investors have come to expect bigger pops─in recent months stock sales have gone as high as 40% to 50% on their first trading day─bankers were dealing with a most unusual seller, the U.S. government.

Unlike private-company IPOs, where the selling company often is willing to sell at a deeper discount to ensure a good first-day send-off for the shares, the U.S. Treasury, the biggest owner of GM, wanted the maximum amount possible for its investment, which was financed with taxpayer dollars. There was concern that politicians and Wall Street would be criticized for leaving money on the table if the stock soared too high.

None of the money from the common-stock portion of the sale will flow to the car maker. The majority of the shares─358 million, or 412 million with an 'overallotment' option that allows the banks to sell additional shares─came from the U.S. Treasury, which took a controlling stake in GM as part of a taxpayer-financed bailout last year.

Through the sale, the Treasury reduced its stake to 37% from 66%, and it could go as low as 26% if the overallotment shares and warrants are exercised. It expects to further cut its ownership in future follow-on sales after a six-month 'lockup' period.

Along with the common stock offering, GM raised $4.35 billion in a preferred-stock sale that will go into the Detroit auto maker's own coffers. But that amount will quickly flow out again: GM plans to use the proceeds to buy back a separate tranche of preferred stock from the Treasury and to make a cash contribution to its union's pension plan.

If underwriters exercise their right to sell an additional 71.7 million shares in the overallotment, the total common stock sale could hit $18.1 billion, making it the second-largest U.S. IPO in history, after Visa Inc.'s $19.7 billion sale in 2008, according to Dealogic. Globally, GM's sale would be the fifth-largest IPO.