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.