Fannie And Freddie: Where Do We Go From Here?

There are two really big things that the sweeping financial regulation bill doesn't even begin to tackle — Fannie Mae and Freddie Mac.

At $145 billion and counting, bailing out the mortgage giants is turning out to be the most expensive part of the financial meltdown.

Fannie and Freddie are basically expensive wards of the state. And yet, they are critical components of the housing market recovery — such as it is.

"Right now they're responsible for the financing of roughly three out of every four mortgages," says Ed DeMarco, the government's conservator who oversees Fannie and Freddie.

In September 2008, the federal government stepped in to save the firms from insolvency. And the U.S. Treasury is backing up the firms' losses — some estimate the total bill could reach $400 billion. Fannie and Freddie's future is in doubt, but DeMarco says one thing is certain: "We cannot do this indefinitely."

'No Way To Run A Business'
Fannie and Freddie were created by Congress to expand home ownership. But they were also private companies with shareholders — a strange blend of public and private.

What these companies did, and still do, is buy loans from banks, bundle them up into securities and then sell the securities to investors — with the promise that if the loans go bust, the firms will take them back.

And go bust they have. As of April, the two firms were sitting on more than 160,000 foreclosed homes, each home representing more money down the drain.

"That's unstoppable because those liabilities are sitting with Fannie and Freddie and taxpayers," says Tom LaMalfa, who has been a mortgage industry analyst for 30 years. "So irrespective of what we do, the bill is continuing to grow."

LaMalfa is among a growing chorus of people who say the government should get out of the mortgage business.

"I really believe we don't need the government," he says. "We don't need this huge government presence. It's done very few positive things. And it has created this huge liability. That's no way to run a business."

Tom LaMalfa, a 30-year mortgage industry analyst
"We tried, it was a dismal failure, and we're never doing that again," is what Dwight Jaffee says he would like to see on Fannie's and Freddie's tombstones. He's a professor of finance and real estate at the Haas School of Business at the University of California Berkeley.

"The only role of Fannie and Freddie is to be an intermediary between the Main Street lender who makes the loan and the Wall Street investors who buy the mortgage-backed securities," he says. "There's plenty of private investment banks that will serve that role just as well as Fannie and Freddie. "Of course, he says, there would be a transition period. But not everyone is ready to write that obit just yet.

Long-Term Effects
"The last time the government was completely out of housing finance was the 1920s, and that didn't work really well," says Richard Green, a professor of policy and business at the University of Southern California. "That imploded."

Green says the debate is really about what types of loans will be available to consumers. He says we need Fannie and Freddie or something that resembles what they were like in the 1990s. "I'm reasonably convinced that we would not have 30-year, fixed-rate ... pre-payable mortgages without them," he says. "If we want to have sort of the standard American mortgage, I think we need to have institutions like this."

Dealing with Fannie and Freddie could mean rethinking the entire mortgage system. And maybe that's why lawmakers decided to put this one off for later.

Related NPR Stories
National Review: Reject the Financial Bill June 25, 2010
Lawmakers Reach Deal On Bank Bill June 25, 2010
Panel Examines Fannie Mae, Freddie Mac Collapse May 26, 2010
Fannie Mae Asks Taxpayers For Billions More May 11, 2010

Fannie-Freddie Fix at $160 Billion with $1 Trillion Worst Case

Play Video
June 14 (Bloomberg) -- Anthony Sanders, a professor of finance at George Mason University, talks about the potential costs of fixing Fannie Mae and Freddie Mac after the biggest bailout in American history. He speaks with Erik Schatzker on Bloomberg Television's "Inside Track." (Source: Bloomberg)

The cost of fixing Fannie Mae and Freddie Mac, the mortgage companies that last year bought or guaranteed three-quarters of all U.S. home loans, will be at least $160 billion and could grow to as much as $1 trillion after the biggest bailout in American history.

Fannie and Freddie, now 80 percent owned by U.S. taxpayers, already have drawn $145 billion from an unlimited line of government credit granted to ensure that home buyers can get loans while the private housing-finance industry is moribund. That surpasses the amount spent on rescues of American International Group Inc., General Motors Co. or Citigroup Inc., which have begun repaying their debts.

It is the mother of all bailouts,” said Edward Pinto, a former chief credit officer at Fannie Mae, who is now a consultant to the mortgage-finance industry.

Fannie, based in Washington, and Freddie in McLean, Virginia, own or guarantee 53 percent of the nation’s $10.7 trillion in residential mortgages, according to a June 10 Federal Reserve report. Millions of bad loans issued during the housing bubble remain on their books, and delinquencies continue to rise. How deep in the hole Fannie and Freddie go depends on unemployment, interest rates and other drivers of home prices, according to the companies and economists who study them.

Worst-Case Scenario
The Congressional Budget Office calculated in August 2009 that the companies would need $389 billion in federal subsidies through 2019, based on assumptions about delinquency rates of loans in their securities pools. The White House’s Office of Management and Budget estimated in February that aid could total as little as $160 billion if the economy strengthens.

If housing prices drop further, the companies may need more. Barclays Capital Inc. analysts put the price tag as high as $500 billion in a December report on mortgage-backed securities, assuming home prices decline another 20 percent and default rates triple.

Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pennsylvania, said that a 20 percent loss on the companies’ loans and guarantees, along the lines of other large market players such as Countrywide Financial Corp., now owned by Bank of America Corp., could cause even more damage.

“One trillion dollars is a reasonable worst-case scenario for the companies,” said Egan, whose firm warned customers away from municipal bond insurers in 2002 and downgraded Enron Corp. a month before its 2001 collapse.

Unfinished Business
A 20 percent decline in housing prices is possible, said David Rosenberg, chief economist for Gluskin Sheff & Associates Inc. in Toronto. Rosenberg, whose forecasts are more pessimistic than those of other economists, predicts a 15 percent drop.
“Worst case is probably 25 percent,” he said.

The median price of a home in the U.S. was $173,100 in April, down 25 percent from the July 2006 peak, according to the National Association of Realtors.

Fannie and Freddie are deeply wired into the U.S. and global financial systems. Figuring out how to stanch the losses and turn them into sustainable businesses is the biggest piece of unfinished business as Congress negotiates a Wall Street overhaul that could reach President Barack Obama’s desk by July.

Neither political party wants to risk damaging the mortgage market, said Douglas Holtz-Eakin, a former director of the Congressional Budget Office and White House economic adviser under President George W. Bush.

“Republicans and Democrats love putting Americans in houses, and there’s no getting around that,” Holtz-Eakin said.

‘Safest Place’
With no solution in sight, the companies may need billions of dollars from the Treasury Department each quarter. The alternative -- cutting the federal lifeline and letting the companies default on their debts -- would produce global economic tremors akin to the U.S. decision to go off the gold standard in the 1930s, said Robert J. Shiller, a professor of economics at Yale University in New Haven, Connecticut, who helped create the S&P/Case-Shiller indexes of property values.

“People all over the world think, ‘Where is the safest place I could possibly put my money?’ and that’s the U.S.,” Shiller said in an interview. “We can’t let Fannie and Freddie go. We have to stand up for them.”

Congress created the Federal National Mortgage Association, known as Fannie Mae, in 1938 to expand home ownership by buying mortgages from banks and other lenders and bundling them into bonds for investors. It set up the Federal Home Loan Mortgage Corp., Freddie Mac, in 1970 to compete with Fannie.

Lower Standards
The companies’ liabilities stem in large part from loans and mortgage-backed securities issued between 2005 and 2007. Directed by Congress to encourage lending to minorities and low- income borrowers at the same time private companies were gaining market share by pushing into subprime loans, Fannie and Freddie lowered their standards to take on high-risk mortgages. Many of those went to borrowers with poor credit or little equity in their homes, according to company filings. By early 2008, more than $500 billion of loans guaranteed or held by Fannie and Freddie, about 10 percent of the total, were in subprime mortgages, according to Fed reports.

Fannie and Freddie also raised billions of dollars by selling their own corporate debt to investors around the world. The bonds are seen as safe because of an implicit government guarantee against default. Foreign governments, including China’s and Japan’s, hold $908 billion of such bonds, according to Fed data.

‘Debt Trap’
“Do we really want to go to the central bank of China and say, ‘Tough luck, boys’? That’s part of the problem,” said Karen Petrou, managing partner of Federal Financial Analytics Inc., a Washington-based research firm.

The terms of the 2008 Treasury bailout create further complications. Fannie and Freddie are required to pay a 10 percent annual dividend on the shares owned by taxpayers. So far, they owe $14.5 billion, more than the companies reported in income in their most profitable years. “It’s like a debt trap,” said Qumber Hassan, a mortgage strategist at Credit Suisse Group AG in New York. “The more they draw, the more they have to pay.”

Fannie and Freddie also benefited by selling $1.4 trillion in mortgage-backed securities to the Fed and the Treasury since September 2008, bonds that otherwise would have weighed on their balance sheets. While the government bought only the lowest-risk securities, it could incur additional losses.

‘Hard to Judge’
Treasury Secretary Timothy F. Geithner has vowed to keep Fannie and Freddie operating. “It’s very hard to judge what the scale of losses is,” Geithner told Congress in March.

One idea being weighed by the Obama administration involves reconstituting Fannie and Freddie into a “good bank” with performing loans and a “bad bank” to absorb the rest. That could cost taxpayers as much as $290 billion because of all the bad loans, according to a May estimate by Credit Suisse analysts.

At the end of March, borrowers were late making payments on $338.4 billion worth of Fannie and Freddie loans, up from $206.1 billion a year earlier, according to the companies’ first- quarter filings at the Securities and Exchange Commission.

The number of loans more than three months past due has risen every quarter for more than a year, hitting 5.5 percent at Fannie as of the end of March and 4.1 percent at Freddie, according to the filings.

Surge in Delinquencies
The composition of the $5.5 trillion of loans guaranteed by Fannie and Freddie suggests that the surge in delinquencies may continue. About $1.98 trillion of the loans were made in states with the nation’s highest foreclosure rates -- California, Florida, Nevada and Arizona -- and $1.13 trillion were issued in 2006 and 2007, when real estate values peaked. Mortgages on which borrowers owe more than 90 percent of a property’s value total $402 billion.

Fannie and Freddie may suffer additional losses as a result of the Treasury’s effort to prevent foreclosures. Under the program, banks with mortgages owned or guaranteed by the companies must rewrite loan terms to make them easier for borrowers to pay.

The Treasury program is budgeted to cost Fannie and Freddie $20 billion. The companies have already modified about 600,000 delinquent loans and refinanced almost 300,000 more, in some cases for an amount greater than the houses are worth.

The government is using Fannie and Freddie “for a public- policy purpose that may well increase the ultimate cost of the taxpayer rescue,” said Petrou of Federal Financial Analytics. “Treasury is rolling the dice.”

Republican Phase-Out
If the plan works and foreclosures fall, that could help stabilize Fannie’s and Freddie’s balance sheets and ultimately protect taxpayers.

“Avoiding foreclosures can be a route to reducing loss severity,” said Sarah Rosen Wartell, executive vice president of the Center for American Progress, a Washington research group with ties to the Obama administration.

Loans issued since 2008, when the companies raised standards for borrowers, should be profitable and help offset prior losses, Wartell said.

Republicans attempted to include a phase-out of the mortgage companies in the financial reform bill. Democratic lawmakers and the Obama administration opted for further study, and the Treasury began soliciting ideas in April.

Representative Scott Garrett, a New Jersey Republican and co-sponsor of the phase-out amendment, said eliminating Fannie and Freddie would force the government and the housing market to confront the issue.

“It’s somewhat impossible to predict the magnitude of their impact if they continue to be the primary source of lending,” Garrett said in an interview.

Caught in ‘Quandary’
Democrats dismissed the phase-out idea as simplistic.
“We need to have a housing-financing system in place,” Senate Banking Committee Chairman Christopher Dodd said last month. “If you pull that rug out at this particular juncture, I don’t know what the particular result would be. We’re caught in this quandary.”

By delaying action, the Obama administration keeps losses off the government’s books while building a floor under housing prices during a congressional election year.

Keeping Fannie and Freddie functioning could also support an overall economic recovery. Residential real estate -- the money spent on rent, mortgage payments, construction, remodeling, utilities and brokers’ fees -- accounted for about 17 percent of gross domestic product in 2009, according to the National Association of Home Builders.

‘Already Lost’
Allowing the companies to go under and hoping that private financing will fill the gap isn’t realistic, analysts say. It would require at least two years of rising property values for private companies to return to the mortgage-securitization market, said Robert Van Order, Freddie’s former chief international economist and a professor of finance at George Washington University in Washington.

The price tag of supporting Fannie and Freddie “needs to be evaluated against the cost of not having a mortgage market,” said Phyllis Caldwell, chief of the Treasury’s Homeownership Preservation Office.

Whatever the fix, the money spent will not be recovered, said Alex Pollock, a former president of the Federal Home Loan Bank of Chicago who is now a fellow at the Washington-based American Enterprise Institute.

“It doesn’t matter what you do or don’t do, Fannie and Freddie will cost a lot of money,” Pollock said. “The money is already lost. There’s an attempt to try to avert your eyes.”

To contact the reporter on this story: Lorraine Woellert in Washington at lwoellert@bloomberg.net; John Gittelsohn in New York at johngitt@bloomberg.net.

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Should Obama Push The Rest Of The World To Follow China's Lead And MASSIVELY Revalue Their Currencies?

Joe Weisenthal Jun. 22, 2010, 10:18 PM

Despite the glum market reaction, in theory the loosening (and likely upward revaluation) of the Chinese yuan should provide some help to the US economy, both in terms of labor cost competitiveness and increased demand for some of our goods.So if a revalued yuan is so good, why stop there?

Indeed, in a piece at The New Republic*, Clyde Prestowitz argues that getting the Chinese to revalue their currency is merely the first step. Next up: The rest of the G20.

At the G-20 meeting, the administration’s first step should be for the president to ask his colleagues to cooperate in bringing about a 25 percent to 40 percent revaluation of manipulated currencies in relation to the dollar within the next three years. The president should warn that if such an agreement cannot be reached, he will have no choice but to launch a full-scale effort in the IMF, WTO, and elsewhere to halt the mercantilist manipulation of currencies. He should leave no doubt that he will do whatever is necessary, including even taxing certain capital inflows, to achieve substantial currency adjustments.

Ha!Sorry, that's not a very serious response, but it was the first thing that came to our mind upon reading this proposal. The idea that Obama could convince everyone to strengthen their currencies so radically against ours is ludicrous.

Every country wants the same thing right now, which is basically an increase in exports (presumably leading to job creation). The idea that a) other countries would go along with this, and b) that the IMF and WTO would be well equipped to deal with "mercantlist manipulation of currencies" is extaordinarily improbable.

But Prestowitz doesn't stop there: The administration should also call for negotiating restraints on the investment incentives other countries employ to attract foreign companies. At the same time, however, it should create a fund with which to match the offers of others. The president and his top officials should also preach “Invest in America.” No foreign business leader should come to America without hearing how important it is to consider investing in America. No American business leader should escape hearing the same message. The Secretary of Commerce should develop an Invest in America office modeled after Singapore’s Economic Development Board.

At this point, we're beginning to wonder if this is satire. On what basis could the US justify demanding other countries impose restraints on themselves, while at the same time bolstering our efforts to invite foreign businesses inside our borders.

There are two really depressing aspects of this piece, the first is that if this is what it will take to fix our economy then we're totally screwed because none of it is going to happen. What's more, it takes an almost pathologically zero-sum look at the world: we can't prosper unless other countries could themselves at the knees. That's how Prestowitz views things.

But again, rest easy: none of this is going to happen, and it's certainly not going to come up at the G20 meeting (to be honest, we're not sure what they're going to talk about, given that China has blunted the criticism of it, and the whole stimulus debate is finished, with Europe deciding that it won't join along).

*It's occurred to us that this story could be a saitre, though we doubt it, but just in case it is, we were fooled.

Read more: http://www.businessinsider.com/should-obama-push-the-rest-of-the-world-to-follow-chinas-lead-and-massively-revalue-their-currencies-2010-6?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+businessinsider+%28Business+Insider%29#ixzz0reXXGjCQ

Read more: http://www.businessinsider.com/should-obama-push-the-rest-of-the-world-to-follow-chinas-lead-and-massively-revalue-their-currencies-2010-6?

Marc Faber: "Symptoms of a bubble building in China"

Marc Faber spoke with Bloomberg News recently and had some interesting things to say about China and what he sees a burgeoning bubble. His sentiments echo those from Ten ways to spot a bubble in China by Edward Chancellor, author of a well-regarded history of financial manias, Devil Take The Hindmost.

Let me say a few words about China. The clip of Faber is at the bottom (hat tip David).

I first saw a mention of this interview in Bloomberg News’ Business Week yesterday. The article says: “There are some symptoms of a bubble building in China, with the increase in foreign exchange reserves, rapidly rising property prices,” Faber, the publisher of the Gloom, Boom & Doom report, said in a Bloomberg Television interview today. “From here on, the China economy will slow down regardless. Whether it will crash this year or later, I don’t know.”

The point being that, when asset markets rise, at some point (I use a divergence of two standard deviations from longer-term trend as a rule of thumb), psychology starts to dominate price activity. It is rational that people speculate in an asset class that has risen so far above trend. But, that’s the point at which anything could happen. Mark Buchanan has a good analogy about “fingers of instability” in his book Ubiquity. What he shows is that many different systems reach a critical state in which any minor change in dynamics can have a disproportionate impact on the entire system because of the fingers of instability that have built up. This is the critical state.

Buchanan uses a sand pile as an example where adding one grain of sand to the pile could cause one, ten, one thousand or ten thousand grains to avalanche down the sand pile. What he demonstrates is that systems reach a critical state in which standard distributions (the bell curve) wildly understate event probabilities.

The overall point – one that Jeremy Grantham seems to make in an FT interview as well - is that markets become very unstable as they become far advanced above the longer-term trendline. And while markets always revert to mean, they do so in a violent and unpredictable way once you reach that critical state. That’s what crises are all about: you don’t know when the violent reversion to the mean will happen, but you do no it will happen.

Once bubble psychology takes over, it’s difficult to dislodge it. Remember Greenspan’s interest rate conundrum last decade?

The favorable inflation performance across a broad range of countries resulting from enlarged global goods, services and financial capacity has doubtless contributed to expectations of lower inflation in the years ahead and lower inflation risk premiums. But none of this is new and hence it is difficult to attribute the long-term interest rate declines of the last nine months to glacially increasing globalization. For the moment, the broadly unanticipated behavior of world bond markets remains a conundrum. Bond price movements may be a short-term aberration, but it will be some time before we are able to better judge the forces underlying recent experience.

Greenspan was saying in effect: "I am raising short-term interest rates, but it’s having no effect on long-term rates. I have no clue why I can’t get long-term rates to go up but apparently I can’t steer this thing."

Isn’t it altogether conceivable that the Chinese will face a similar conundrum now that animal spirits are well-entrenched in the Chinese economy.

Yes, Chinese officials are aware of the bubble and are looking to forestall any negative outcomes. But, Business Week points to another comment that Faber makes that bears remembering: “If you believe the government can steer the economy like a car, that’s not my view,” said Faber, who oversees $300 million at Hong Kong-based Marc Faber Ltd. Government measures “always lead to unintended consequences.”

This is what Chancellor calls "Blind faith in the competence of the authorities." It is a hallmark of all bubbles. Why should we trust the competence of the authorities running things in China any more than we trust those in the US. And confidence in government in the U.S. is at its lowest ebb in decades. It’s absurd that people think the communist leaders of China are better at steering their economy than the leaders of the US have been.

That’s not to say a burst bubble means that China won’t flourish over the long-term. But, there are serious medium-term challenges. In the Bloomberg interview, Faber points this out using early American boom-bust cycles as an example. He covers a lot of other good points on China as well.

Sources
China Exhibits ‘Danger Signals,’ Marc Faber Says – Business Week
Testimony of Chairman Alan Greenspan, Federal Reserve Board’s semiannual Monetary Policy Report to the Congress Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate February 16, 2005
GD Star Ratingloading...Marc Faber: "Symptoms of a bubble building in China", 8.5 out of 10 based on 2 ratings
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Author: Edward Harrison
Edward Harrison is the founder of Credit Writedowns and a former strategy and finance executive with twenty years of business experience. He started his career as a diplomat and speaks six languages, a skill he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. He is a regular contributor at Seeking Alpha, Naked Capitalism, and Roubini Global Economics. Edward has often spoken on television and radio in the US, the UK, Canada and Russia. Contact him at edh at creditwritedowns dot com to schedule a media appearance or for a question about this site.

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ileneca 1 month ago
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RT @edwardnh Marc Faber: "Symptoms of a bubble building in China" http://www.creditwritedowns.com/2010/04/marc-faber-symptoms-of-a-bubble-building-in-china.html

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China May ‘Crash’ in Next 9 to 12 Months, Faber Says (Update3)

By Shiyin Chen and Haslinda Amin

May 3 (Bloomberg) -- Investor Marc Faber said China’s economy will slow and possibly “crash” within a year as declines in stock and commodity prices signal the nation’s property bubble is set to burst.

The Shanghai Composite Index has failed to regain its 2009 high while industrial commodities and shares of Australian resource exporters are acting “heavy,” Faber said. The opening of the World Expo in Shanghai last week is “not a particularly good omen,” he said, citing a property bust and depression that followed the 1873 World Exhibition in Vienna.

“The market is telling you that something is not quite right,” Faber, the publisher of the Gloom, Boom & Doom report, said in a Bloomberg Television interview in Hong Kong today. “The Chinese economy is going to slow down regardless. It is more likely that we will even have a crash sometime in the next nine to 12 months.”

An index tracking Chinese stocks traded in Hong Kong dropped 1.8 percent today, the most in two weeks, after the central bank raised reserve requirements for the third time this year. The Shanghai Composite has slumped 12 percent this year, Asia’s worst performer, as policy makers seek to rein in a lending boom that’s spurred record gains in property prices. China’s markets are shut for a holiday today.

Copper touched a seven-week low and BHP Billiton Ltd., the world’s biggest mining company, fell the most since February on concern spending in the world’s third-largest economy will slow and after Australia boosted taxes on commodities producers. Rio Tinto Ltd., the third-largest, slid as much as 6 percent.

Chanos, Rogoff
Faber joins hedge fund manager Jim Chanos and Harvard University’s Kenneth Rogoff in warning of a crash in China.

China is “on a treadmill to hell” because it’s hooked on property development for driving growth, Chanos said in an interview last month. As much as 60 percent of the country’s gross domestic product relies on construction, he said. Rogoff said in February a debt-fueled bubble in China may trigger a regional recession within a decade.

The government has banned loans for third homes and raised mortgage rates and down-payment requirements for second-home purchases. Prices rose 11.7 percent across 70 cities in March from a year earlier, the most since data began in 2005.

The government has stopped short of raising interest rates to contain property prices. Within an hour of the central bank announcement on reserve ratios, Finance Minister Xie Xuren said that officials remained committed to expansionary policies to cement the nation’s recovery.

Stocks ‘Fully Priced’
The nation’s economy grew 11.9 percent in the first quarter, the fastest pace in almost three years. The government projects gross domestic product growth for the year of about 8 percent. The clampdown on property speculation may prompt investors to turn to the nation’s stock market, Faber said. Still, shares are “fully priced” and Chinese investors may instead become “big buyers” of gold, he said.

BlackRock Inc. is among money managers reducing their holdings on Chinese stocks on expectations that economic growth has peaked. The BlackRock Emerging Markets Fund has widened its “underweight” position for China versus the MSCI Emerging Markets Index to about 7.5 percent from 4.6 percent at the end of March, the fund’s London-based co-manager Dan Tubbs said.

Industrial & Commercial Bank of China Ltd., China Construction Bank Corp. and Bank of China Ltd, the nation’s three largest banks are trading near their lowest valuations on record as rising profits are eclipsed by concern bad loans will increase.

Local Governments
Citigroup Inc. warned in March that in a “worst case scenario,” the non-performing loans of local-government investment vehicles, used to channel money to stimulus projects, could swell to 2.4 trillion yuan by 2011.

Housing prices nationwide may fall as much as 20 percent in the second half of the year on government measures to curb speculation, BNP Paribas said April 23. Under a stress test conducted by the Shanghai branch of the China Banking Regulatory Commission in February, local banks’ ratio of delinquent mortgages would triple should home prices in the country’s commercial center decline 10 percent.

Shanghai is projecting as many as 70 million visitors to the $44 billion World Expo, more than 10 times the number who traveled to the 2008 Beijing Olympics. More than 433,000 people visited the 5.3 square-kilometer (3.3 square-mile) park on its first weekend.

--With assistance from Karolina Miziolek in Hong Kong. Editors: Richard Frost, Linus Chua
To contact the reporter on this story: Shiyin Chen in Singapore at schen37@bloomberg.net
To contact the editor responsible for this story: Linus Chua at lchua@bloomberg.net

Text of China's statement on loosening yuan rate

By MarketWatch
The following is the text of a People's Bank of China statement Saturday on increasing the exchange-rate flexibility of the yuan, or renminbi (RMB) currency:

In view of the recent economic situation and financial market developments at home and abroad, and the balance of payments (BOP) situation in China, the People´s Bank of China has decided to proceed further with reform of the RMB exchange rate regime and to enhance the RMB exchange rate flexibility.

Starting from July 21, 2005, China has moved into a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies. Since then, the reform of the RMB exchange rate regime has been making steady progress, producing the anticipated results and playing a positive role.

When the current round of international financial crisis was at its worst, the exchange rate of a number of sovereign currencies to the U.S. dollar depreciated by varying margins. The stability of the RMB exchange rate has played an important role in mitigating the crisis´ impact, contributing significantly to Asian and global recovery, and demonstrating China´s efforts in promoting global rebalancing.

The global economy is gradually recovering. The recovery and upturn of the Chinese economy has become more solid with the enhanced economic stability. It is desirable to proceed further with reform of the RMB exchange rate regime and increase the RMB exchange rate flexibility. In further proceeding with reform of the RMB exchange rate regime, continued emphasis would be placed to reflecting market supply and demand with reference to a basket of currencies. The exchange rate floating bands will remain the same as previously announced in the inter-bank foreign exchange market.

China´s external trade is steadily becoming more balanced. The ratio of current account surplus to GDP, after a notable reduction in 2009, has been declining since the beginning of 2010. With the BOP account moving closer to equilibrium, the basis for large-scale appreciation of the RMB exchange rate does not exist. The People´s Bank of China will further enable market to play a fundamental role in resource allocation, promote a more balanced BOP account, maintain the RMB exchange rate basically stable at an adaptive and equilibrium level, and achieve the macroeconomic and financial stability in China. See this statement in English on the People's Bank of China Web site.

Citigroup takes a step ahead of reform --- and rivals

Commentary: Fundraising anticipates regulatory changes

By MarketWatch
NEW YORK (MarketWatch) -- A major Wall Street bank is making a move to get ahead of financial reform. Goldman Sachs Group Inc.? Nope. J.P. Morgan Chase & Co.? Try again.

Citigroup Inc. /quotes/comstock/13*!c/quotes/nls/c (C 4.01, +0.05, +1.26%) is seeking to raise $3.5 billion to fund its private equity and hedge funds, according to a report on Dow Jones Newswires and first reported by Bloomberg. Read Dow Jones report on Citigroup.

Citi Capital Advisers may seek $1.5 billion for private equity this year and $750 million for hedge funds. Another $1 billion could be raised next year, according to Bloomberg, citing anonymous sources. Read Bloomberg report.

The move isn't surprising given the groundswell of support for the Volcker Rule in Congress. The rule requires banks to wall off, curtail or spin off their proprietary trading, hedge and private equity operations.

At the minimum, banks will have to bolster capital to fund these operations as lawmakers seek to wall off customer deposits from risk-taking operations. The move is shrewd. There's never certainty about whether funding sources will come forward. Being first assures Citi at least a head start. But Citigroup isn't the financial institution most people associate with being ahead of the trends on Wall Street. Yes, Citigroup.

Remember it was Charles Prince, the former chief executive, who said "as long as the music is playing, you've got to get up and dance" referring to Citi following rivals funding private equity deals -- just before that market went belly-up. "We're still dancing," he added.

The soundtrack to financial reform is playing its opening overture. Citi is first on the dance floor, and this time, they're going to lead.

-- David Weidner

China's yuan move ripples across Asia

Commentary: Loosening has big implications, but currency's rise will be slow
By MarketWatch

LOS ANGELES (MarketWatch) -- When an economy the size of China's takes a step, smaller players sometimes need to scramble to avoid getting squashed underfoot.

Beijing's announcement over the weekend that it would loosen its de-facto peg to the U.S. dollar is -- on the face of it -- such a move, and one of the most obvious groups affected are foreign firms who do business in China.

Labor problems have let offshore owners of Chinese factories -- from Japan's Honda (JP:7267 2,690, -46.00, -1.68%) /quotes/comstock/13*!hmc/quotes/nls/hmc (HMC 29.75, -0.33, -1.10%) to Taiwan's Foxconn (HK:2038 5.94, +0.33, +5.88%) /quotes/comstock/11i!fxcnf (FXCNF 0.70, 0.00, 0.00%) -- to promise higher wages. If the Chinese yuan starts to march upward against other currencies, those pay raises will eat further into margins denominated in Japanese yen or Taiwan dollars.

Then there's the case of Hong Kong. A river of mainland Chinese money already flows to the former British colony, as the well-heeled buy into Hong Kong assets, especially real estate. Hong Kong's currency is firmly pegged to the U.S. dollar, so if the yuan rises, their prices will only look more attractive to the mainland's investors.

Of course, questions remain over how quickly the yuan will move against the dollar, and even what direction it will go over the medium term.

The People's Bank of China's statement on the new policy decision has emphasized that changes in the yuan's exchange rate will be gradual. See full story on China's loosening of yuan. Certainly, the central bank will still restrict the dollar-yuan rate from rising or falling more than 0.5% a day, and some analysts say the pair is unlikely to drift more than 5% between now and the end of the year.

The People's Bank of China's statement on the new policy decision has emphasized that changes in the yuan's exchange rate will be gradual. See full story on China's loosening of yuan. Certainly, the central bank will still restrict the dollar-yuan rate from rising or falling more than 0.5% a day, and some analysts say the pair is unlikely to drift more than 5% between now and the end of the year.

Meanwhile, some contrarians question whether the loosening necessarily means a rise in the yuan against all its rivals.

Caixin Online reported prior to the yuan announcement that the currency's real effective exchange rate (which takes currencies other than the greenback into account) rose 3.37% during May alone. This is because the effective dollar peg forced the yuan to rise against the euro, a currency that features significantly in China's trade account.

With China's trade surplus with the world having narrowed from its previously gaping width, the upward pressure on the yuan that existed some years back, when Western officials ratcheted up their calls for appreciation, is no longer as much of as a factor as it once was.

China's yuan move good for some, bad for others

China's yuan move good for some, bad for others
China airline, paper shares may rise, but Korean exporters could face pressure

By Lisa Twaronite , MarketWatch

TOKYO (MarketWatch) -- Asian equities markets rallied in the wake of China's weekend announcement that it will allow its currency to gradually move against the U.S. dollar, with some sectors seen more likely than others to benefit from the move.

China's central bank said Saturday it would loosen the yuan's de-facto peg to the dollar, while ruling out a one-time revaluation. Analysts expect the yuan to rise between 3% and 5% a year, against its U.S. counterpart. Read more on Chinese yuan move.

"We expect modestly positive reactions from the Chinese equity markets," especially airline shares, as investors price for more appreciation, said strategists at Deutsche Bank.

Chinese domestic consumption "should be the biggest beneficiary of these structural changes," they said, identifying instant noodles, dairy, tobacco and alcohol shares as "key winners."

In Hong Kong trading Monday, shares of Air China Ltd. /quotes/comstock/22h!e:753 (HK:753 8.29, +0.28, +3.50%) /quotes/comstock/11i!airy.y (AIRYY 20.77, -0.58, -2.72%) were up 3.6%, China Eastern Airlines Corp. /quotes/comstock/22h!e:670 (HK:670 3.74, +0.24, +6.86%) /quotes/comstock/11i!cheaf (CHEAF 0.40, +0.03, +8.11%) shares were up 7.1%, and China Southern Airlines Co. /quotes/comstock/22h!e:1055 (HK:1055 3.80, +0.28, +7.95%) /quotes/comstock/11i!chkif (CHKIF 0.40, 0.00, 0.00%) surged 8%. In Shanghai, Air China /quotes/comstock/28c!e:601111 (CN:601111 11.59, +0.57, +5.17%) rose 5.3%, China Eastern /quotes/comstock/28c!e:600115 (CN:600115 7.90, +0.39, +5.19%) rose 5.1% and China Southern /quotes/comstock/28c!e:600029 (CN:600029 7.18, +0.46, +6.85%) jumped 6.4%.

Japan shares up after China's move to de-peg yuan

By Myra P. Saefong
JP:6305 HTCMY JP:7270 FUJHF JP:5701

TOKYO (MarketWatch) -- Japanese shares climbed Monday morning in Tokyo, finding support after China's decision over the weekend to ease the yuan's de-facto peg against the U.S. dollar. The Nikkei Stock Average added 1.6% to 10,158.23 after tapping a more than one-month high of 10,162.17. The broader Topix was at 896.23, up 1.3%. Metals and construction shares were among the larger gainers, with China's yuan move expected to boost Chinese economic demand.

Shares of Hitachi Construction Machinery Co. (JP:6305 1,755, -16.00, 0.90%) /quotes/comstock/11i!htcmy (HTCMY 0.00, 0.00, 0.00%) were up 5.2%, Fuji Heavy Industries Ltd. (JP:7270 536.00, -5.00, -0.92%) /quotes/comstock/11i!fujhf (FUJHF 5.00, -0.60, -10.71%) climbed 3%, and Nippon Light Metal Co. Ltd. (JP:5701 129.00, -1.00, -0.77%) added 2.3%. Elsewhere, South Korea's Kospi was up 1.6% in early dealings.

Emerald Bandar Kinrara

Phase name : EMERALD (7A12)
Project : Bandar Kinrara (BK)
Prp. type : 2 Storey Terrace
Lot size (sqft) : 22 X 75
Built-up area (sqft) : 2,433 - 3,668
Price range : RM 680,888 - RM 1,654,888
Launch status : Current launch (29 May 2010)
Sales status : Available


Description :Open for sale. xiaomi malaysia

Lee’s Henderson Says 20 Apartment Sales Scrapped (Update2)

June 16 (Bloomberg) -- Hong Kong billionaire Lee Shau-kee’s Henderson Land Development Co. said the sale of 20 luxury apartments collapsed, ending HK$2.67 billion ($342 million) in deals that sparked a government inquiry and fueled efforts to rein in home prices.

Most buyers pulled out of the 39 Conduit Road project in Hong Kong’s Mid-Levels district, Henderson said in a filing to the stock exchange yesterday, responding to government demands for more information on the sales of 24 units. Henderson said it has sold four of the units and will record a charge of HK$734 million in its half-year results.

The failure of the sales, including a unit that would have set a world record price of HK$88,000 ($11,300) per square foot, marks a setback for Hong Kong’s second-richest man as regulators try to cool the city’s surging property market. Lee had said in March buyers could have more time to complete the deals.

The cancellations are “quite a negative surprise,” said Raymond Ngai, Hong Kong-based analyst at JPMorgan Chase & Co. “Those record prices they reported earlier, I doubt they’ll be able to sell them at those prices again,” Ngai said by telephone. “To sell them for around HK$30,000 per square foot is still quite possible. But selling an apartment at HK$70,000 a square foot is just too out of line with the market.”

No Price Cuts
“We won’t be cutting prices,” Lee, Hong Kong’s second- richest man, told reporters yesterday. “Maybe we’ll make more money when we sell these apartments again.”

Henderson announced the sale cancellations after the stock market in Hong Kong closed yesterday and the market is shut for a public holiday today. Henderson Land shares closed at HK$47.80 yesterday and have slumped 18 percent this year, the biggest drop among the seven-member Hang Seng Property Index.

Responding to an outcry over rising property prices last year, Hong Kong raised down-payments on luxury homes to 40 percent from 30 percent and clamped down on marketing techniques. The HK$439 million apartment Henderson had said was sold for a record -- based on usable space excluding common areas -- was listed on the 68th floor while it was actually on the 45th. Floor numbers are often skipped in Hong Kong to avoid those considered unlucky.

Henderson included sales of the 24 apartments plus one that was sold in a completed transaction as part of its revenue of HK$15.2 billion for the 18 months ended December 2009, the company reported March 30.

Prices Climb
The total price of the 20 apartments whose sales collapsed came to HK$2.67 billion, Henderson spokeswoman Bonnie Ngan said by telephone today.

Henderson said yesterday it was confident in selling the apartments because of the “prestigious” location, and will be “sparing” with sales.

Hong Kong’s government responded to Henderson’s filing, saying “clear market information” is important to the city. “The government is determined to create a fairer and a more transparent environment for flat purchasers,” the government said in a press release on its website.

Home prices in Hong Kong have risen 5.7 percent this year, adding to 2009’s 29 percent advance and raising concerns the market is overheating. Hong Kong builders often sell apartments before they are completed, drawing in customers by showing models of the homes.

The government this month tightened rules on new home sales, including the use of show apartments and asking developers to disclose properties sold to their own executives.

Financial Secretary John Tsang in February announced higher stamp duty on luxury properties and pledged to raise the supply of land as it wants to reduce the risk of “a property bubble” and keep housing affordable.

To contact the reporters on this story: Kelvin Wong in Hong Kong at kwong40@bloomberg.net Last Updated: June 16, 2010 01:59 EDT

投资商场单位细看条文

投资致富 2010-06-14 14:44

购物商场的商业单位属於商用產业，购买这类產业的投资者，与发展商签署的不是標准买卖合，而是由发展商律师草擬的条约，业主在签署有关买卖合约时，务必非常谨慎，避免被不合理的条文牵制、进退两难。

另外，这类產业发展商不受房屋部管辖，面对相关问题的业主，即使向房屋部反映，问题也不受理。

个例一：
林先生来信指出，他於2009年12月购买了吉隆坡某商场內的一个单位，这间商场於去年建好。不久前，业主收到发展商的通知，告知他们，如果没有开门做生意，每天面临50令吉的罚款。他说，问题是，这条例並没有列入当初与发展商签署的买卖合约，而是在发展商移交商场单位锁匙的《业主手册》，所有的业主都认为这很不公平及合理，因为发展商並没有告诉他们有这样的规则。

在向发展商做出投诉后，发展商的解释是：买卖合约里有这样一条文：发展商有权利针对有关发展计划／共管產业，制定附加条例（包括约束），然后以书面通知业主，发展商表示，手册里的罚款条例是这一条文的延伸！

个例二：
李雅妹来信指出，她在首都一购物广场购买了一个商店单位，半年前已经可以出租营业；可是，她一直物色不到適当的租户，所以没有將店铺出租。

最近，她收到这间购物广场管理公司的来信，表示要向她徵收一天50令吉的罚款，她拨电有关管理公司询问详情，有关的负责人告诉她，由於她的店铺没有出租或是自己营业，因此他们从某月某日起，向业主徵收一天50令吉的罚款。她说，如此算来，一个月的罚款大约是1500令吉，她问：大马是否存在这样的条例？

答：综合这2名读者的问题，首先要说的是，由於购买的是商业单位，所签署的买卖合约，並非按房屋发展法令擬定的標准合约。

因此，遇到这种问题的投资者或业主，即使向房屋部投诉也不受理，因为推行这类產业的发展商，並不受房屋部的管辖。

另外，发展商在买卖合约列举的上述条文，给予他很大的发挥空间，包括在交锁匙递给《业主手册》，造成业主处於劣势。

我们不晓得业主手册列入的规则与条例细节，可以选择挑战发展商上法庭，也许可召集所有或大部份业主，通过集体力量採取行动，包括与发展商谈，尝试寻求解决问题的办法。
星洲日报／投资致富‧產业问诊室‧2010.06.12 public bank

Euro-zone Credit Crisis and China Shanghai Commodites Market Shakeout / Interest-Rates / Credit Crisis 2010

Until mid-April, few traders knew much about the credit default swap (CDS) markets. They’re traded on an unregulated, over-the-counter market, and far from the public’s view. Yet nowadays, the CDS market has become a major battleground between high-stakes speculators and Euro-zone politicians, with the fate of the Euro currency hanging in the balance. In turn, the violent swings in the CDS markets are having a profound impact on the global bond, commodity, currency, and stock markets.

Credit default swaps have existed since the early 1990’s, but the volume of trading began to increase dramatically in 2003. By December 2007, the CDS markets had grown in size to $62-trillion of contracts outstanding, before shrinking to $38-trillion by the end of 2008. Huge throngs of “naked” short sellers were wiped-out in the CDS market following after Lehman Brothers defaulted on $365-billion of liabilities, which were settled at just 8-cents on the dollar.

Fourteen months later, the obscure CDS markets were again at the center of another major financial crisis, this time, raising the specter of a sovereign debt default. CDS traders were among the first to recognize that the government of Greece was technically insolvent, and unable to repay its €300-billion of outstanding debt. The size of Greece’s debt rivals the size of Lehman’s, when it defaulted, and is almost four times of the size of Argentina’s debt, when it defaulted in 2001.

Typically, a bond-holder can hedge against the risk of default by purchasing a CDS contract, and making quarterly insurance payments to the CDS seller. If a company or a national government defaults on its debt obligations, seeks a restructuring, or declares bankruptcy, the CDS seller is obligated to pay the CDS buyer the par value of the bond, in exchange for physical delivery of the bond. Most CDS contracts are in the $10-to-$20-million range with maturities of 1-to-10-years.

However, speculators can buy “naked” CDS contracts without actually owning the underlying bond. Likewise, sellers of CDS contracts might not have sufficient funds to cover their obligations, in the event of a default. These “naked” credit default swaps constitute the majority of trading volume, and permit banks and hedge funds to place bets on whether or not a company, or even a country, will default on it debts.

The nature of CDS trading, - which doesn’t require reporting of transactions to a government agency, - is such, that CDS speculators have an incentive to push companies or countries toward bankruptcy. CDS traders nearly toppled the Greek finance ministry, and are now betting on defaults in Euro-zone junk bonds. Attracted to the highly indebted Greek bond market like vultures to a decaying corpse, the CDS traders at major banks and hedge funds moved in for the kill in April.



Prior to the climactic surge in late April and early May, each time CDS traders bid-up the cost of insuring Greek bonds against default, Euro-zone politicians and the IMF were quickly forced to ante-up more bailout money. Initially, Euro-zone politicians pledged a paltry €22-Euros to prevent Athens from defaulting on its debts. When that gambit failed, the ante was raised to €45-billion.

However, on April 26th, the S&P credit rating agency, - which usually lingers far behind the credit default curve, lit a fire in the CDS tinderbox, roiled Euro-zone politicians and shocked the global markets, by downgrading Greece’s €300-billion of debt three notches to junk status, at BB+. Greek CDS rates soared to 1,200-bps, and yields on Greece’s two-year notes jumped to 25.8-percent. Euro-zone politicians and the IMF quickly raised the ante for the Greek bailout to €110-billion.

German finance minister Wolfgang Schauble had warned on April 20th, of another global financial meltdown. “We cannot allow the bankruptcy of a Euro member state like Greece to turn into a second Lehman Brothers,” he told Der Spiegel. “Greece’s debts are all in Euros, and it isn’t clear who holds how much of those debts. The consequences of a national bankruptcy would be incalculable. Greece is just as systemically important as a major bank,” Schauble warned.

On May 6th, Greece’s 2-year CDS rate surged to a record 1,195-basis points, and triggered the historic “flash crash” on Wall Street, - an intra-day, 1,000-point meltdown in the Dow Jones Industrials, climaxed by a shocking 700-point drop, in less than 20-minutes, to below the psychological 10,000-level. Since the mainstream media was unfamiliar with the movements of the Greek CDS market, it peddled a story, that a computer glitch caused the “flash crash.”

The rebellious CDS speculators in Greek bonds, refused to fold their cards, knowing that Athens would need to raise €50-billion for each of the next five years, in order to roll-over debts and pay interest. That adds up to €250-billion, easily topping the EU’s €110-billion bailout offer. On May 8-9th, European politicians, finance chiefs, central bankers, and officials from the IMF were taken aback, by the brazen CDS traders, and huddled behind closed doors for an emergency summit, trying to devise a decisive plan of action, that could stamp out the speculative attack against the Euro and to bring some calm into the Greek bond market.

“We now see wolf-pack behavior, and if we will not stop these packs, they will tear the weaker countries apart,” Swedish Finance chief Anders Borg told reporters before the meeting. “We need resources to stop the market turmoil. If this goes on for more than a couple of days it will be very, very problematic for the recovery,” Borg warned on May 8th. French Prime Minister Francois Fillon added, “The joint action taken to save Greece will defeat and put an end to speculation which has been unleashed against this country and which represents an attack on the entire Euro zone.”

On May 10th, after two-days of deliberations, the EU-leaders unveiled the financial equivalent of “shock-and-awe,” – a €750-billion package of standby funds and loan guarantees that could be tapped by Euro-zone governments shut-out of credit markets, plus central bank purchases of bonds, to steady markets, - all designed to crush CDS speculators by its sheer scale. The European Central Bank (ECB) immediately began implementing its part of a deal, - unleashing the “nuclear option,” - buying Greek and Portuguese government bonds in the open market.

With the ECB pledging to buy Greek bonds, yields on its two-year note plunged in the blink of an eye, from an intra-day high of 24%, to 7.5-percent. Since May 10th, the ECB has effectively locked Greece’s two-year yield between 7% and 9.5-percent. However, the cost of insuring Greek debt is still hovering around 850-bps today, very high by historical standards. CDS traders reckon that at some point, Athens might grow tired of trying to pay-off an insurmountable mountain of debt, and will demand a restructuring, - a haircut of 50% or more for its creditors.

Since May 10th, the EU’s “shock and awe” effect has worn-off. The EuroStoxx-600 Index briefly fell to new lows on May 25th, and the Athens stock index fell to within 5% of its March 2009 lows. The Euro failed to gain any traction, and is still sliding lower along a slippery slope towards $1.20 versus US-dollar. While the “Big-Bang” bailout has subdued the threat of a Greek debt default, the next lethal phase of the European debt crisis is starting to materialize, - a frightful situation where European banks become unwilling to lend money to the private sector.

Specter of Euro-zone Credit Crunch
There are latent fears that a Euro-zone “credit crunch,” is looming on the horizon which could put the $14-trillion Euro-zone economy, into a deep freeze. On May 31st, the ECB warned that Euro zone banks could face a new wave of loan losses - up to €195-billion of losses over the next 18-months. Euro-zone banks would need to raise additional capital in order to cover expected losses of €90-billion this year and €105-billion in 2011, on top of €238-billion in bad debts already written off. Banks have already begun hoarding a record amount of cash at the ECB, opting for the safety of the central bank, rather than risk more profitable lending in the private sector.

Euro-zone banks are finding it very difficult to find buyers for their debt in the capital markets. Bond issuance has slumped to $2.6-billion in May, down from $82-billion in January. Also, indicative of a potential credit crunch in the offing, the credit default swap rate for the Euro-zone’s top-50 junk bond index, measuring lesser credit worthy companies, jumped as high as $625,000 on May 25th, from around $460,000 four weeks ago. Each upward surge in Euro-zone junk bond CDS rates has ignited a sell-off in the EuroStoxx-600 Index. Conversely, each decline in CDS junk bond rates has lifted the fortunes of the Euro-zone stock market.

The Euro-zone is a major player on the world economic stage, accounting for roughly 22% of the world’s economic output. The Euro-zone buys 20% of China’s exports, and 15% of Latin America’s, and nearly a quarter of S&P-500 multinational income is earned by US-affiliates located in Europe. Given the increasing synchronization of the world’s economy, any sharp downturn in the Euro-zone economy, precipitated by a lending freeze, could undermine global commodity and stock markets.

Traders got their first look at what a European credit crunch might do to the global economy on June 2nd. The Euro-zone’s factory Purchasing Managers’ Index (PMI) for May sank to 55.8 from a reading of 57.6 in April. The factory sector is still where global recessions tend to begin and end. For this reason, the factory PMI’s in the top industrialized nations are watched very closely, setting the tone for the upcoming month and other key economic indicators.

The Euro-zone’s factory PMI figures might have already peaked in April, since Euro-zone governments are starting to remove large dosages of fiscal stimulus. EU leaders have rescued the Euro-zone banks from enormous losses, but also vowed to cut their budget deficits to 3% of GDP, to meet a 2013 deadline for compliance with EU stability criteria. In order to do so, the Euro-zone countries and Britain will have to slash their budget deficits by a total of €400-billion ($492-billion).

Greece is aiming to reduce its budget deficit by €30-billion over the next three years through wage and pension cuts, slashing social programs and a 2% increase in VAT (sales tax) to 23-percent. Spain voted to cut spending by €80-billion, with a one vote majority in parliament. To this end, 13,000 jobs in the public service will be cut, the salaries of state employees will be reduced by 5%, and pensions frozen. Britain’s budget deficit will be cut over the next four years by more than $120-billion. This will include slashing 300,000-jobs in the public service and a freeze on public sector pay. Italy agreed to spending cuts of €25-billion by 2012.

China Tightens Liquidity, Clobbers Industrial Commodities
Whereas the ECB has just crossed the Rubicon, by embracing “Quantitative Easing, (QE), - or printing vast quantities of Euros in the year ahead, in order to monetize the debts of the Euro’s most reckless delinquent borrowers, - the People’s Bank of China (PBoC), is moving in the opposite direction, - removing a large chunk of the stimulus that it injected into the Shanghai money markets last year.

PBoC chief Zhou Xiaochuan said on May 24th, that domestic issues are by far the most important factors in determining Chinese monetary policy, and the European liquidity crunch wouldn’t necessarily affect the central bank’s calculations on when to hike interest rates. Zhou thinks the global economy will likely maintain the pace of its recovery despite the Euro-zone’s woes. Therefore, there’s a risk that the PBoC might continue to tighten its monetary policy in the months ahead, despite signs of rough patch in global factory activity developing in May.

Even in the midst of the turmoil in Europe, on May 2nd, the PBoC lifted the reserve requirement ratio for its largest banks by 50-basis points, to 17%, its third increase this year, thus draining about 900-billion yuan ($132-billion) out of the Chinese banking system. The PBoC is trying to contain an accelerating inflation rate, while deflating a housing price bubble. April’s 12.8% jump in property prices in China’s top-70 cities, defied the government’s crackdown on speculation. Meanwhile, producer prices jumped +6.8%, and consumer prices climbed +2.9%, up from +2.4% in March. New lending of 774 billion yuan ($113 billion) was far above target, and retail sales were +18.5% higher in April from a year earlier.

In order to deflate asset bubbles, the PBoC aims to reduce bank lending 22% this year, from a record $1.4-trillion of yuan loans extended in 2009. The PBoC has also stepped up its drainage of yuan via open market operations. By tightening the money spigots, the PBoC has slowed the growth of the Chinese M2 money supply, from a +29.7% clip in November, to +21.5% in April. In turn, by draining excess liquidity, the PBoC has sucked some helium out of the Shanghai stock market.

While the benchmark Shanghai Composite Index has tumbled 22% this year, to as low as 2,568-points, - the worst performing sector in the marketplace is the property index, tracking 34 real estate firms, which briefly fell below the 3200-level, or 48% below its high of 6,137 seen in July 2009. China’s property market is vulnerable to a crash, warned Li Daokui, a top advisor to the PBoC. “China’s housing market problems combine a possible bubble with the risk of social discontent,” he said.

Beijing’s efforts to deflate the real estate bubble, include measures that restrict pre-sales by developers, curbs loans for third-home purchases, doubled mortgage rates, and lifted down-payments to 50% for second-home purchases. Property sales in Beijing, Shanghai and Shenzhen fell as much as 70% in May as developers delayed sales following government tightening measures. A tax on residential real estate has been submitted to the Chinese central government for review.

The sharp slide in Shanghai red-chips, led by a slumping property sector, combined with a decline in China’s Purchasing Managers’ Index to a reading of 53.9 in May, from 55.7 in April, and mixed with the headwinds from the Euro zone credit crunch, conspired to knock the Reuters CRB Index of 19 commodity futures -8.2% lower in May, the biggest monthly plunge since the collapse of Lehman Brothers.

Traders are betting that the slide in the CRB commodity index is signaling a peak in global factory activity. According to the CFTC, speculative net-long positions, or bets on rising prices, for 16 commodity futures have plunged 33% in the past three weeks. Industrial commodity kingpins, such as copper and crude oil, have tumbled by roughly 16% from their highest levels in April. The shakeout in the CRB Index, might also reflect fears of smaller position limits in the US-commodity markets, under a financial reform bill, that is under debate in Congress.

The outlook for the Chinese economy, is of utmost importance to speculators in key industrial commodities, since Chinese consumption as a percentage of global demand last year, was 68% for nickel, 44% for aluminum, 36% for iron ore, and 10% for crude oil. In addition to a potential credit crunch in the Euro-zone, a big risk for industrial commodities is a miscalculation by Beijing, - in tightening its monetary policy too aggressively. A bursting of the Chinese real-estate market may put China’s 8% annual growth target in jeopardy.

Gold Knows what no One Knows!
Despite the 15% slide in key industrial commodities, the Gold market remains resilient, fighting off nagging worries about deflation, or a downturn in the global economy. Instead, Gold knows what know one knows! At the end of the day, the nations of Greece, Portugal, and Spain are technically insolvent, and living on artificial life support, courtesy of their wealthier neighbors.

As much as French and German taxpayers resent the idea of guaranteeing the debts of their delinquent neighbors, Greek and Spanish workers abhor the idea of working slavishly for decades to pay-off the debt, accumulated by corrupt politicians. The only easy way out of dealing with the Euro-zone debt crisis is the ECB’s monetization of the debts, by printing vast quantities of Euros, to buy sovereign bonds. Thus, gold has soared to above the psychological 1,000-euros /oz level in recent weeks.

So far, the ECB has bought about €35-billion of sovereign debt, mainly Greek. It probably needs to buy debt on a far larger scale, in order to prevent yields on Club-Med bonds from rising again. Spanish 10-year bond spreads have already widened to 180-basis points over German Bunds, a record since before the credit crisis began. Italy’s odds of default have followed Spain’s in sympathy. Italian CDS rates are trading at 240-basis points, a record high, and 10-basis points higher than before the ECB’s bond-buying scheme was launched on May 10th. Spanish CDS rates are trading at 270-basis points, also near a record.

In addition to the bond buying spree, the ECB quietly injected €118-billion into the banking system last week the highest amount since the ECB flooded money markets with half-a-trillion Euros of ultra-cheap 1-year money in June 2009. At some point, depositors may fear that European banks are too exposed to Club-Med debt, and combined with the ECB’s money printing operations, could spark a flight into the king of currencies, a truest safe-haven in times of financial distress - Gold.

This article is just the Tip of the Iceberg of what’s available in the Global Money Trends newsletter. Subscribe to the Global Money Trends newsletter, for insightful analysis and predictions of (1) top stock markets around the world, (2) Commodities such as crude oil, copper, gold, silver, and grains, (3) Foreign currencies (4) Libor interest rates and global bond markets (5) Central banker "Jawboning" and Intervention techniques that move markets.








By Gary Dorsch,
Editor, Global Money Trends newsletter
http://www.sirchartsalot.com

GMT filters important news and information into (1) bullet-point, easy to understand analysis, (2) featuring "Inter-Market Technical Analysis" that visually displays the dynamic inter-relationships between foreign currencies, commodities, interest rates and the stock markets from a dozen key countries around the world. Also included are (3) charts of key economic statistics of foreign countries that move markets.

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Mr Dorsch worked on the trading floor of the Chicago Mercantile Exchange for nine years as the chief Financial Futures Analyst for three clearing firms, Oppenheimer Rouse Futures Inc, GH Miller and Company, and a commodity fund at the LNS Financial Group.
As a transactional broker for Charles Schwab's Global Investment Services department, Mr Dorsch handled thousands of customer trades in 45 stock exchanges around the world, including Australia, Canada, Japan, Hong Kong, the Euro zone, London, Toronto, South Africa, Mexico, and New Zealand, and Canadian oil trusts, ADR's and Exchange Traded Funds.

He wrote a weekly newsletter from 2000 thru September 2005 called, "Foreign Currency Trends" for Charles Schwab's Global Investment department, featuring inter-market technical analysis, to understand the dynamic inter-relationships between the foreign exchange, global bond and stock markets, and key industrial commodities.