Chinese stocks rebound on central bank assurances

China's stock markets recovered modestly today after fears of tightening credit drove key indexes on Wednesday to their steepest losses in eight months.

Investors seemed appeased for the moment, after a top central bank official indicated that the government had no plans to suddenly corral the banking industry's liberal lending policies.

The remarks, which were published on the People’s Bank of China website late Wednesday, appeared to be aimed at allaying worries that China’s economic rebound would slow.

"We need to focus on using market means and utilizing various monetary policy tools, instead of setting lending quotas, to guide a reasonable and sustainable lending growth, satisfying the need of a stable economic recovery," said Su Ning, deputy governor of the central bank.

In a volatile session, the Shanghai composite stock index finished with a gain of 1.7%, to 3,321.56, after tumbling 5% on Wednesday.

The selling wave that hit the market followed a report in Caijing, an influential domestic business publication, that two of China’s largest banks -- China Construction Bank and the Industrial and Commercial Bank of China -- would rein in lending.

There has been growing concern in Beijing that much of the record $1.1 trillion in new bank loans this year has been funneled into the stock and real estate markets rather than the real economy. The Shanghai stock index was up 89% year to date through Tuesday as investors have piled into shares.

Ben Simpfendorfer, an economist for Royal Bank of Scotland, estimates that half of this year’s increase in credit has been used to buy equities, property and commodities.

However, he believes Beijing’s leadership will overlook the problem in favor of maintaining growth and thus employment. The bank lending spree had been encouraged by the government as part of its economic-stimulus program.

A lack of cash at some banks has driven up money market rates this week. But real credit tightening won’t occur until the fourth quarter, though worries will persist about it earlier, Simpfendorfer said.

-- David Pierson, reporting from Beijing

Photo: Su Ning. Credit: Kevin Lee / Bloomberg News

Buyers balk at Treasury note sales, forcing yields up

The Treasury suddenly is having a harder time finding investors to buy its shorter-term debt, which typically is an easy sell.

That’s triggering a fresh case of nerves among bond traders, given Uncle Sam’s continuing massive borrowing needs.

The Treasury’s auction of a record $39 billion in new five-year T-notes today saw weaker-than-expected bidding -- a replay of what happened at Tuesday’s sale of $42 billion in two-year T-notes.

The government had to sell the five-year notes at an annualized yield of 2.69%, well above the 2.635% yield forecast in a Bloomberg News survey of bond dealers.

Investors put in a total of $75 billion in bids for the five-year notes -- enough to make the sale, obviously, but still less than expected.

The five-year auction "now takes the cake as one of the worst-performing auctions for the year," said George Goncalves, chief rates strategist at bond dealer Cantor Fitzgerald in New York.

The two-year T-note sale on Tuesday "was indeed the shot across the bow as front-end demand for Treasuries is waning more and more as we get deeper in the second half of the year," he said.

Worse for investors who bought the two-year notes at the auction yield of 1.08%: The market yield on the notes has jumped to 1.18% today -- the highest in five weeks -- as dealers struggle to find buyers.

Tom Di Galoma, head of U.S. rates trading at Guggenheim Capital Markets in New York, said one rumor was that China wasn’t a buyer at either of the auctions this week -- which, if true, would be a slap at Treasury Secretary Timothy F. Geithner, who sought to assure the Chinese on Monday that the U.S. will eventually rein-in its borrowing.

The government has another big sale coming on Thursday, when it will auction $28 billion of seven-year notes. The market yield on existing seven-year notes is at 3.32% today, up from 3.28% on Tuesday.

Treasury yields had been moving up in recent weeks as the hot rally in the stock market lured cash out of the bond market. But today stocks are lower across the board -- reacting, in part, to the disappointing T-note auctions.

The Dow Jones industrial average was down 62 points, or 0.7%, to 9,035 at about 11:15 a.m. PDT.

-- Tom Petruno

Photo: The Treasury building in Washington.

Chinese stocks dive as investors fear curbs on bank loans

China's stock markets today suffered their biggest selloff in eight months on worries that the government wants to make easy money less easy.

The decline also spread across other emerging markets, which have been star performers this year as investors worldwide have boosted bets on a rebounding global economy.

The Shanghai composite index tumbled 171.94 points, or 5%, to 3,266.43, the largest one-day loss since Nov. 18. The smaller Shenzhen market slumped 5.8%.

In U.S. trading today, a popular exchange-traded fund of Chinese shares -- the iShares FTSE/Xinhua China 25 fund -- was off $1.64, or 3.8%, to $41.23 at about 10 a.m. PDT.

From Bloomberg News:

Stocks plunged amid speculation the central bank is poised to order lenders to set aside larger reserves, Beijing-based Caijing magazine reported today on its website. Market News International said Chinese equities fell on speculation regulators will increase a tax on stock trading.

"Speculation the central bank may take steps to rein in liquidity worried the market," said Gabriel Gondard, deputy chief investment officer at Fortune SGAM Fund Management Co., which oversees about $7.2 billion in assets. "A lot of people were looking to take profit" after the market gains.

The Shanghai index had been up 89% year-to-date through Tuesday as domestic investors poured cash into stocks. Analysts have warned for months that the government’s program to encourage bank lending -- a key element of China’s economic-stimulus plan -- was fueling heady speculation in stocks as some of the new loans were being used to gamble in the market.

"Bank lending could be tightened in the second half of the year as new lending in the first half is already close to the full-year target," Li Jun, Shanghai-based strategist at China Central Securities Holdings Co., told Bloomberg.

One sign of the speculative frenzy for stocks: wild bidding last week for the initial public offering of China State Construction Engineering Corp., the country’s No. 1 housing contractor. The IPO raised $7.3 billion.

The stock began trading today and soared 56% for the session, despite the overall market slump.

The IPO valued the company at 51 times annual per-share earnings.

"I can tell you no institutions are getting in at these levels, the valuation is just crazy," Chris Tang, chief investment officer at Marco Polo Pure Asset Management in Hong Kong, told Bloomberg.

Among other emerging markets today, Russia’s Micex share index fell 1.5% and the Indian market lost 1.1%. Brazilian shares are off 1.7% in midday trading.

-- Tom Petruno

Photo: Happy, for now, is China State Construction Engineering Corp Chairman Sun Wenjie as his company's shares soared on their first trading day. Credit: AFP / Getty Images

Ahead of big bond sales, U.S. pledges deficit restraint

Treasury Secretary Timothy F. Geithner is trying to convince China and other foreign buyers of U.S. debt that they don't have to worry about losing their shirts if they buy bonds at current yields.

Ahead of another huge sale of Treasury debt this week, Geithner opened this week’s high-level talks with Chinese leaders in Washington by reiterating that the U.S. was committed to "reducing the federal deficit to a sustainable level by 2013."

China and other major U.S. creditors naturally are fearful that interest rates could soar if Washington keeps borrowing at this year’s record pace. Nobody should be buying a long-term bond yielding, say, 3% interest if they expect that new bonds will be paying double that rate in a year or two.

Yields on longer-term Treasury bonds have rebounded this month as the stock market has rallied, drawing money out of the bonds. Traders also have been pushing up yields ahead of this week’s Treasury sales.

The auctions begin with today’s sale of $6 billion in 20-year inflation-protected bonds. That sale will be followed by an auction of $42 billion in two-year notes on Tuesday, $39 billion of five-year notes on Wednesday and $28 billion of seven-year notes on Thursday.

The jump in yields over the last two weeks is giving investors who are bearish on the economy a chance to buy Treasuries closer to their spring peak yields reached in early June.

The five-year T-note yield hit 2.93% on June 8 -- then dived as low as 2.22% by July 10 amid fresh concerns about the economy. The five-year note is trading at 2.59% today, up from 2.53% on Friday.

The seven-year T-note is at 3.28% today, up from 2.90% on July 10. The two-year note is at 1.05%; it yielded 0.90% on July 10.

The longest-term Treasury issues have seen the sharpest moves up in yield. The 10-year T-note is at 3.71% today, up from 3.66% on Friday and 3.31% on July 10. The 10-year yield had reached an eight-month high of 4% on June 10.

-- Tom Petruno

Photo: Treasury Secretary Timothy F. Geithner. Credit: Matthew Cavanaugh / EPA

Huge housing IPO sees wild demand in China's hot market

Try to imagine a housing construction company in the U.S. going public today ... and attracting crazed demand from investors.

That’s what happened in Shanghai on Friday, as China State Construction Engineering Corp., the nation’s No. 1 housing contractor, launched the world’s biggest initial public stock offering in 16 months.

The company sold 12 billion shares at 4.18 yuan (61 cents) apiece, raising 50.2 billion yuan, or $7.3 billion.

Investors bid for more than 30 times the number of shares offered, according to the Shanghai Stock Exchange.

The offering will just deepen the conviction of people who say Chinese stocks are in a scary new bubble, but the market isn’t paying attention to the bears: The Shanghai composite share index rose 1.3% Friday to 3,372, the highest since early June 2008.

The index is up a stunning 85% year to date, compared with the 8.4% gain in the U.S. Standard & Poor’s 500 index.

From Bloomberg News:

State Construction is taking advantage of a stock market rally to raise money for real-estate projects as a recovery in the world’s third-largest economy boosts property prices.

"This is the first major state-owned construction firm listed," said Donald Straszheim, managing principal of Straszheim Global Advisors in Los Angeles. "With the push by Beijing for infrastructure and growth of other [state-owned enterprises], it is not surprising that it would be a new darling of investors."

China’s $600-billion economic-stimulus program helped boost the country’s growth in the second quarter, and investors see State Construction as a prime beneficiary of renewed interest in real estate.

From Bloomberg:

New home prices in 36 medium-sized and large Chinese cities rose 6.3% in June from a year earlier, the National Development and Reform Commission said on July 20. Nationwide property sales jumped 53% by value last month from a year earlier, and investment in real estate development increased 9.9%, the statistics bureau said July 10.

By U.S. standards, at least, State Construction is no bargain: The IPO valued the company at 51 times earnings, according to Bloomberg.

The stock will begin trading on July 29.

-- Tom Petruno

Photo: Luxury apartments under construction in Beijing. Credit: Andy Wong / Associated Press

China's foreign reserves surge as hot money pours in

China's foreign exchange reserves topped $2 trillion in June -- a new high -- fueled in part by foreign money inflows as global investors bet the economy would stay on a strong growth track.

From Bloomberg News:

The reserves rose a record $178 billion in the second quarter to $2.132 trillion, the People's Bank of China said today on its website.

“Hot money is flowing back,” said Sherman Chan, an economist with Moody’s Economy.com in Sydney. “China has the strongest prospects out of all major economies.”

The trade surplus was $34.8 billion in the second quarter and foreign direct investment was $21.2 billion, leaving the bulk of the increase in the reserves unaccounted for. Investment returns and currency movements also affect their size.

“The capital inflows have driven up stock and property prices,” said Yang Shengkun,a currency analyst in Beijing at China Citic Bank Co. “Speculators are favoring China because the government’s stimulus package is working quite well, which will help the country to be the first to recover globally.”

China's stock markets have soared this year and bank lending has rocketed as the government has pumped money into the economy to maintain growth, even as much of the rest of the world has fallen into a deep recession.

The market and banking-system booms also have fueled fears that Beijing is inflating a dangerous bubble. But if so, this is one bubble the rest of the planet should be grateful for at the moment, given the lack of any other significant force to pull up the global economy.

-- Tom Petruno

Photo: People's Bank of China headquarters in Beijing. Credit: Gao Xueyu / Associated Press

Japan's export picture worsens as buyers pull back again

Japan's exports weakened in May, including shipments to its Asian trading partners, raising doubts about the region's ability to pull the rest of the world out of its slump.

From Bloomberg News:

Shipments abroad dropped 40.9% from a year earlier, more than April’s 39.1% decline, the Finance Ministry said Wednesday. The median estimate of economists surveyed was for a 39.3% decrease.

From a month earlier, exports fell 0.3%, the first deterioration since February.

Declines in shipments to Asia accelerated for the first time since January, damping hopes that demand from the region will spur a recovery in the world’s second-largest economy.

“Final demand just isn’t picking up and it’s still hard to expect a very strong economic recovery,” said Azusa Kato, an economist at BNP Paribas in Tokyo.

Shipments to China, Japan’s No. 1 trading partner, were down 29.7% in May from a year earlier, compared with a 25.8% year-over-year drop in April, according to the Finance Ministry's report. Exports to Asia overall were off 35.5%, versus a 33.4% decline in April.

Indian demand for Japanese goods was particularly weak, falling 50% in May compared with a 31.2% drop the previous month.

Japanese exports to the U.S. fell 45.4% from a year earlier, but that was a slight improvement compared with the 46.3% drop in April. Japan's imports of U.S. goods, however, shrank substantially. They were down 40.3% in May compared with a 29.3% decline in April.

Among other trading partners, demand for Japanese exports in Russia has virtually collapsed in recent months; shipments to Russia plummeted 88.3% in May from a year earlier.

-- Tom Petruno

General Electric CEO Immelt: 'Time to hunker up'

General Electric Co. CEO Jeffrey Immelt had some things to say Tuesday about the New World Order for businesses in the aftermath of the economic and financial cataclysms of the last 18 months.

A few comments Immelt made at the International Economic Forum of the Americas in Montreal, as reported by Bloomberg News and Canada’s Financial Post:

-- "The government has moved in next door and it ain’t leaving. You could fight it if you want but society wants change. And government is not going away. . . . We are going to have to deal in a government-structured world."

-- "Do I agree with President Obama on everything. No. Did he get elected without my vote? Yes. But he’s my president and we’ve got to be involved in the way change is going to take place -- or we really risk not having the voice of business broadly felt."

-- "My suspicion is that … taxes are going up, and [federal] spending is going to have to come down. This has to be addressed."

-- "As a company you have to invest now. You have to invest when things are darkest. I hope this is a V-shaped recovery. I hope this is like 1982. That’s not what I’m counting on. If you are hunkering down, you are going to get crushed. It’s time to hunker up."

-- "We are going to plant a lot of seeds in the resource-rich parts of the world because we just think the long-term tailwind on energy prices is only going up."

-- "I’ve been going to China for 25 years, my entire career with GE. I always leave with a headache. I always think, ‘How do we beat these guys in 30 years?’ And every year my headache gets bigger. This is the high-tech corridor of the world, China and India. They have more engineers than we have."

-- Tom Petruno

Photo: General Electric CEO Jeffrey Immelt in Montreal on Tuesday. Credit: Graham Hughes / Canadian Press

China's stimulus plan beats Obama's, Caterpillar says

Heavy-equipment manufacturer Caterpillar Inc., which today reported its first quarterly loss in 16 years, says it prefers China’s economic-stimulus plan to President Obama’s.

From Bloomberg News:

"The infrastructure portion of the [U.S.] stimulus package was disappointing in that it was less aggressive than other countries and missed an opportunity to correct past underinvestment in U.S. infrastructure," Caterpillar said in an economic commentary with today’s first-quarter earnings report.

CEO Jim Owens is a member of the president’s Economic Recovery Advisory Board. Obama visited the company’s Peoria, Ill., headquarters Feb. 12, the final day of his campaign to press for congressional passage.

"You can measure America’s bottom line by looking at Caterpillar’s bottom line," Obama said during the February visit. "What’s happening at this company tells us a larger story about what’s happening in the American economy."

Caterpillar said it lost $112 million, or 19 cents a share, in the first quarter, compared with a profit of $922 million, or $1.45 a share, a year earlier. Revenue was $9.2 billion last quarter, down 22% from a year earlier.

The company said it still expected to be profitable for the full year. It predicted earnings of about $1.25 a share, excluding severance expenses and other one-time costs. But the new estimate is half what the firm projected in January.

Cat's shares were up 91 cents to $31.40 at about 10 a.m. PDT, after diving 5.6% in Monday's broad market decline.

From Bloomberg:

The company attributed the lower forecast in part to uncertainty about stimulus plans and said the effect of U.S. measures would be "fairly limited."

Caterpillar said the U.S. may disburse as much as $70 billion this year for infrastructure building, about 6.5% of last year’s total construction spending.

"We do not expect this increase to offset steep declines in private construction spending," today’s statement said.

At the same time, the company said it did expect some benefit this year from China’s economic-stimulus package.

"China, with an economy one-third the size of the United States, is allocating over three times as much for infrastructure," Caterpillar said. "Initial results from this package look promising."

-- Tom Petruno

Photo: President Obama and Caterpillar CEO Jim Owens at a Cat plant in East Peoria, Ill., on Feb. 12. Credit: Charles Rex Arbogast / Associated Press

U.S. flip-flops on labeling China a currency 'manipulator'

Upon further review, as they say in the NFL, Treasury Secretary Timothy F. Geithner has decided that China doesn’t manipulate its currency for trade purposes.

Not surprisingly, U.S. manufacturing groups aren’t happy with Geithner’s about-face.

From Bloomberg News:

In its first semiannual report on foreign-exchange policies since Geithner became secretary, the Treasury said that while the yuan remains "undervalued," no country "met the standards" for illegal currency manipulation during the period of the report, from July 2008 through December 2008.

The conclusion clashes with Geithner’s Jan. 22 statement to a Senate panel that President Barack Obama "believes that China is manipulating its currency." Today’s shift may anger U.S. lawmakers, companies and trade unions who have sought measures to punish nations perceived to have undervalued exchange rates.

"Clearly the Treasury has made more of a political decision than an economic decision here," Republican Sen. Lindsey Graham of South Carolina said in a Bloomberg TV interview. "The truth is the Chinese manipulate their currency."

Everyone knows that China "manages" its currency. The government has allowed the yuan to slowly strengthen from 8.2 per dollar in 2005 to 6.8 now. U.S. manufacturing groups say China still is keeping the yuan too weak, which in turn keeps Chinese exports cheap for U.S. consumers.

But everyone also knows that the U.S. needs China to remain willing to hold record sums of U.S. Treasury debt, as federal borrowing soars. Labeling your chief creditor a "manipulator" would be a classic case of biting the hand that fills your coffers with cash.

Still, the 1,900-member U.S. Business and Industry Council condemned the administration’s flip-flop.

"This report breaks the major commitment candidate Obama made last year to fight Chinese exchange rate protectionism effectively by endorsing the strongest currency manipulation bill proposed in Congress," said Council Research Fellow Alan Tonelson."His decision not to cite China gives Beijing a green light to keep cheating America’s domestic manufacturers and their employees out of earnings and jobs."

The Alliance for American Manufacturing was gentler on the administration, saying the Treasury report was "perplexing."

But Alliance Executive Director Scott Paul was no less harsh than Tonelson on China, calling the nation’s currency policy "the most protectionist, trade-distorting and mercantilist practice by any of the G-20 nations. The U.S. should lead the way in ensuring that China honor the commitments it made to gain access to the U.S. market and the rules-based trading system."

-- Tom Petruno

Photo: Treasury Secretary Timothy F. Geithner. Credit: Jay Mallin / Bloomberg News