Category: News

‘China needs to break up big banks to maintain growth’

Breaking up China`s biggest banks would be the “most aggressive reform measures” seen in post-1978 China, a Beijing-based economist told CNBC on Wednesday, adding that it was badly needed if growth in the world`s second-biggest economy was to be sustained.

The Big Four Banks, as the largest state-owned lenders are known, cannot continue to be merely a “government financing arm,” Alistair Thornton, China Economist at IHS Global Insight said. What the country needs is a commercialized banking sector, he added.

Thornton`s comments came after Premier Wen Jiabao said Tuesday that lenders make money “far too easily” and their monopoly on financial services has to be broken if cash-starved private enterprises are to get timely access to capital.

Indeed, the inability for non-state-owned firms to access capital is one of the main hurdles to growing the private sector, and a breakup may be necessary, Wen said.

“Frankly, our banks make profits far too easily,” China National Radio quoted Wen as telling local businesses at a roundtable discussion. “Why? Because a small number of major banks occupy a monopoly position, meaning one can only go to them for loans and capital.”

“That`s why right now, as we`re dealing with the issue of getting private capital into the finance sector, essentially, that means we have to break up their monopoly,” the radio news service reported Wen as saying on its website.

According to Thornton, banks need to be pushed into more competition, eroding their vastly profitable net interest margins and forcing them away from lending solely on the basis of state relationships.

“This would not only funnel much-needed credit towards SMEs (small and medium enterprise) and the private sector, but also help to bring down the high corporate savings rate that is a major driver behind China`s imbalances,” Thorton told CNBC Wednesday in an email.

However, the banking sector is so established that some analysts are not convinced that any drastic change would happen soon.

The Big Four Banks — Bank of China, China Construction Bank, the Agricultural Bank of China and Industrial and Commercial Bank of China – controlled 58% of all retail deposits in the country in 2011, according to a report by consulting firm McKinsey. They also controlled more than 30% of new loans.

Jim Antos, banking analyst at Mizuho Securities in Hong Kong, said reforms to allow private ownership in banks – starting in Wenzhou is really a “very, very small effort.”

“You would not expect something like the opening of 100 new banks because opening up the sector to new players who have no experience in operating banks would have risks,” Antos said. “It`s an expression of intent. It`s not an expression of reality.”

“If China were to go down this route, it would take something like 20 years before it became reality,” he said.

Reuters contributed to this article.

Copyright 2011 cnbc.com

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Why the Fed will intervene if stocks fall too far

Investors looking for more Federal Reserve intervention can pretty much ignore the economic data and train their sights on one area: the stock market, and how much of a drop it will take before the central bank comes to the rescue.

Though the recent market selloff is worrisome, it could take as much as a 10% drop or more before the Fed acts.

While central bank action ostensibly is geared toward using monetary policy to control the levers of prices and employment, the era of quantitative easing has brought with it increased focus on how the equity markets push the economy, and not the other way around.

As such, Chairman Ben Bernanke and his fellow Fed officials will be paying great attention to whether the sharp stock decline Wednesday, as well as the market`s generally lackluster performance the past three weeks, signals a need for more stimulus.

“Bernanke and (former Fed chair Alan) Greenspan made it clear that the stock market is the transmission mechanism for monetary policy,” said Quincy Krosby, chief market strategist at Prudential Annuities in Newark, NJ. “They know that a stronger stock market feeds into a stronger economy, which feeds into investor confidence.

“It is an underpinning for that all-important virtuous cycle that Bernanke and all economists talk about.”

Major indexes shed more than 1 percent the day after minutes from the most recent Fed Open Market Committee meeting indicated significant hesitation toward a third round of easing.

While most of the economic data has been on an upward slope, investors remain nervous over whether the market can stand on its own. Since the financial crisis, the Fed has expanded its balance sheet to nearly USD 2.9 trillion with bond buying that has helped spur liquidity.

Pinpointing how much the market would need to drop is a difficult exercise, but Krosby said it probably would take something approaching a full-blown correction – or 10% drop – before the Fed would step in.

“If the data weakens and begins rolling over, it will reflect in the market and show a repeat of 2011. The Fed is cognizant of that and their time frame for action is very narrow,” she said. “A 5% pullback now – that goes under the rubric of consolidation and you would have more buyers come back in.”

More than that, though, and the Fed is likely to use the lessons of the past two rounds of quantitative easing and take action, which likely would come in the form of $1 trillion or so of mortgage bond purchases.

“When QE1 has ended, when QE2 has ended, basically the stock market has gone down by 1,500 points the next month or two,” Bill Gross, co-CEO of bond giant Pimco, said in a CNBC interview. “Is the Fed trapped in this conundrum of providing cheaper liquidity in order to pump up the stock market and risk markets? I think they are. I won`t argue…whether it`s good policy, but it`s necessarily policy based on where central banks have led us.”

Gross, too, did not speculate on how much of a drop it would take, but previous Fed actions provide some clues.

The second round of QE followed a 15% summer stock swoon, and after Bernanke telegraphed the move in a speech he gave at the annual Jackson Hole, Wyoming, summit in late August 2010.

Implementation of QE1 in November 2008 came after a much steeper decline, after markets lost about 40 percent during the height of the financial crisis.

The Fed followed the end of QE2 last year with Operation Twist, a balance-sheet-neutral move in which it sold shorter-dated debt and bought longer maturities. The program was aimed at driving down interest rates, but has coincided with a sharp stock market rally.

“Equity markets around the world didn`t take too well to the prospect that the Fed is set to remove the punchbowl – and with good reason. The recent bout of risk-on investing, as we had predicted, is predicated purely and simply on the success of quantitative easing and the prospect of more in the coming months,” Andrew Wilkinson, chief economic strategist at Miller Tabak in New York, said in a note to clients.

Wilkinson sees possible intervention coming, but believes it could be a painful period for investors with a likely “slide in equities to help recalibrate the reality of where the global economy really stands.”

“The message from the Fed`s minutes could harshly be interpreted that from here, investors are on their own,” he said. “What we had hoped was that such a message would be very apparent to consumers, homeowners and investors who just couldn`t wait to race away from the starting tape. Instead it looks like the economy faces a long, hard crawl.”

Copyright 2011 cnbc.com

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Fed’s low interest rates ‘toxic’ for economy: Expert

While the US Federal Reserve has reiterated it would keep interest rates near zero until late 2014, Sam Chandan, Chief Economist at Chandan Economics, says that low interest rates distort asset prices and are “toxic” for the economy.

“An extraordinarily low interest rate environment has become our drug of choice in this country. But the potential impact on the economy over the long run, in terms of how it distorts the markets, is potentially quite toxic. (It is) something we got to back away from,” Chandan told CNBC.

He adds that the US has not had an “interest rate environment that looks anything close to normal for a long time” and when that happens it will be difficult to handle. He gives the example of the housing market, which is struggling to recover despite low mortgage rates.

“There are a lot of people who want to become homeowners but it`s difficult for them to qualify for mortgage credit even though the price of the mortgages are very, very low,” Chandan told CNBC. “We will begin to see an erosion of that affordability as interest rates begin to rise.”

According to him loose monetary policy has “masked” underlying economic challenges in the country. “The continuing intervention through monetary policy makes it very difficult for us to assess whether private economies are allowed to function on their own or if these asset price trajectories are sustainable,” Chandan said.

While it may be tempting to keep interest rates low, Chandan says, “Ultimately, we will reach a point where we need to balance out the fact that the economy has to run on its own legs.”

Copyright 2011 cnbc.com

Improving housing mkt driving US economy: JPMorgan

The US housing market is very close to a bottom and there are already signs its improvement is giving a boost to the overall economy, JPMorgan Chase CEO Jamie Dimon told CNBC Wednesday.

“I believe we`re very close to the inflection point. People look at prices that are still coming down but all the other signs are flashing green,” Dimon said during a job fair in New York for hiring veterans.

Housing is more affordable and “the shadow inventory everyone talks about is lower today than it was 12 months ago. It will be a lot lower 12 months from now,” he said.

Distressed inventory “is actually coming down, not going up. Homes for sale are about half what they were four years ago. You could come up with a pretty bullish case. If the economy grows, housing gets better, quicker.”

He said the US economy is “getting stronger all the time. It`s broad-based, companies are in great shape…Consumers are in great shape.”

So are the banks – JPMorgan was one of those that passed the Federal Reserve`s latest round of stress tests. The bank was so pleased by this it jumped the gun and announced it was raising its dividend and buying back shares before the official release of the test results.

Dimon believes the threat of a double-dip recession is behind us.

“No one can forecast the economy with certainty,” Dimon said, “but most of us in business [have] got growth plans that have nothing to do with the actual state of the economy. We`re going to always open new branches,” do more marketing, hire more people and work to bring in more customers.

Europe`s financial problems, at least for now, have been “put to bed,” he said, and while he expects China to have a “soft” economic landing, it will still have 7.5 percent growth, he said.

Meanwhile, the U.S. has had 24 straight months of job increases. JPMorgan, he said, has “never stopped expanding,” opening branches in the U.S. and around the world even during the financial crisis, and it wants to add 3,000 veterans to its banking and call center staff under the “Hiring our Heroes” jobs program.

If the economy is doing so well why is the Federal Reserve holding interest rates down until late in 2014?

“I think they want to see 300,000 to 400,000 jobs a month for six months before they declare victory” and raise rates, the JPMorgan CEO said. “If that actually happened, I think they might reverse course.”

As for the stock market, he said American companies are “enormously valuable, and you can buy them at very good prices. They are among the best companies in the world… You could buy a good piece of America at a very good price.”

Copyright 2011 cnbc.com

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Investors focus on GDP, claims and end of quarter

The third read on fourth quarter GDP would normally be a ho hum event, but Thursday`s report could contain some important insights about first quarter growth.

Economists are looking to see what kind of revisions will show up in personal consumption, and then whether that could spill into the February personal consumption number, released Friday.

There is also important weekly jobless claims data, at 8:30 am ET, and a 1 pm. auction of USD 29 billion in 7-year notes.

Fed Chairman Ben Bernanke is back in class, scheduled to give his final lecture at George Washington at 12:45 pm ET, and Philadelphia Fed President Charles Plosser speaks at 1 pm on the economy, in Wilmington, Del. Richmond Fed President Jeffrey Lacker speaks at 10:30 am ET.

“If GDP is revised up in the fourth quarter, and I think it will be that makes it, at the margins, even more impressive that the economy was able to recover in the second half of last year, given all the shocks it faced,” said Deutsche Bank chief US economist Joseph LaVorgna. He expects fourth-quarter GDP to come in at 3.3%, up from 3%.

“Assuming we get this revision to consumption that will effectively give us a better lift off point for the first quarter, my guess is when we get Friday`s data on February consumption that you`ll see not just an increase in February personal consumption, but you`ll probably see an increase in December and January (revisions),” he said. He expects a 0.4% increase in the fourth-quarter consumption number. LaVorgna currently expects first quarter growth of 2.8%.

Nomura economists were also expecting an increase in fourth-quarter GDP, to an above consensus 3.5%. “We think that there are some upside risks to our forecast. As a result, we think the full-year real GDP growth for 2011 might also be revised up by one-tenth to 1.8 percent from 1.7%,” according to a note. They are also looking to Friday`s personal consumption data to see if it signals stronger first quarter growth.

LaVorgna expects jobless claims of 350,000. “Something that shows a grinding improvement will remain in place,” he said, adding that last year and the year before claims became more elevated in April. “It will be very important to see if claims can sustain this deceleration,” he said.

Stocks wobbled Wednesday, with the Dow (Dow Jones Global Indexes: .DJIA) down 71 at 13,126, and the SandP 500 (INDEX: .SPX) off 6 to 1,405. Traders have said there could be more selling, amid talk that asset allocators are rebalancing after the first quarter`s strong stock market gains, by selling stocks and increasing bond holdings. Stocks are on track for the best first quarter since 1998.

But doubts about global growth sent a round of jitters into equities markets Wednesday, after an overnight sell off in Shanghai stocks on concerns about Chinese growth. Copper was weak, and stocks were led lower by basic materials and energy shares. A weaker than expected U.S. durable goods report added to the negative tone. Caterpillar (NYSE: CAT), a global growth bellwether, slumped in heavy trading.

There is also increasing focus on Europe, where finance ministers will be tackling the reshaping of the European bailout funds at the end of the week, and Spain will put forth a budget.

Earnings reports are expected from Best Buy (NYSE: BBY) and Shaw Group (NYSE: shaw) before the opening bell Thursday, while Blackberry maker Research in Motion (NASDAQ: rimm) and Tibco (NASDAQ: TIBX) report after the bell.

Follow Patti Domm on Twitter: @pattidomm

Questions? Comments? Email us at marketinsider@cnbc.com

Copyright 2011 cnbc.com

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Plunge in natural gas prices is reshaping energy industry

Natural gas prices are falling near levels last seen in the 1990s, which could help spur the US to develop more uses for the fuel, including transportation.

The collapse in natural gas prices to decade lows amid record supplies have changed the dynamic of the energy industry.

Natural gas is already displacing coal in power generation, driving coal`s share to the lowest level since the 1970s, and promises to drive it even lower. And there`s more talk now that it could replace some gasoline in transportation.

But for now, natural gas is being overproduced across the country, as companies extract shale gas in 32 states and off shore. In just a few short years, the shale gas industry has turned the US from a potential importer of natural gas to a potential major exporter.

This abundance of supply and an unusually warm winter combined to create a record amount of natural gas in storage for this time of year. The latest weekly inventory data is released Thursday at 10:30 am ET by the EIA.

“We are right now at 2.38 trillion cubic feet. It`s a record for this time of year, and it`s 55% above the five-year average,” said John Kilduff of Again Capital.

“April historically sees the start of natural gas injection, or the build in inventories, but this year it started in March,” Kilduff said. The injection period typically runs to November 1, when gas starts to get drawn down for heating.

Natural gas futures finished at 2.19 per million BTUs on the NYMEX, down 3.7 percent for the week and down 27% since January 1. Natural gas is now trading at levels last seen in February, 2002.

“We`re going to see an injection of 40 bcf (billion cubic feet) tomorrow… and we saw an injection last week. It`s unusual. Usually in March, we see the last of the withdrawals,” Kilduff said.

Kilduff said he expects gas to break through USD 2 in the near future, and his next target is USD 1.82 per million BTUs. But it could certainly fall into the USD 1.60s level, last seen in the late 1990s, he said.

Natural gas prices could rise “if companies were to aggressively shut in supply, if we get some early cooling demand or if for some reason there was to be some unusual amount of nuclear power plant maintenance that that too would push the potential to get some electricity demand on that would be natural gas fired,” he said.

Many in the industry expect to see low single digit prices for natural gas into the foreseeable future, with the price eventually getting back towards $3 to USD 4.

“I think it`s hard to say what the level will be but we`re certainly in a long period of low natural gas prices, given the volumes, given demand. And that`s why this discussion about natural gas and transportation is a lot more serious now than it was a year ago,” said Daniel Yergin, CEO of IHS/CERA.

Both Chrysler and General Motors recently announced natural gas fueled pickup trucks, and Shell Oil has said it would test some natural gas fueling stations in Canada.

Companies, like Chesapeake, have cut back on production but analysts say there will have to be more shut ins to stem the price decline.

“We`re seeing more companies pledge to accelerate their shift into liquid or oil production. There have been natural gas curtailments, but it hasn`t` been enough to move prices,” said Michael Zenker, managing director, commodities research at Barclays.

“Prices are likely to continue to soften this year-how low they go is anyone`s guess-sub USD 1 price is certainly possible, but not necessarily likely,” said Zenker.

Barclays expects prices to average USD 3.25 per million BTUs in 2013. “Most of the upside in prices comes in a cutback in drilling, slowdown in production and we`re factoring in normal winter weather conditions, which should help reset the imbalance,” he said.

The drop in prices is also causing pain in the industry. Companies, like oil field services company Baker Hughes and Schlumberger, are feeling it on the bottom line. Baker Hughes this week said it is cutting costs after warning last week that it was being hurt by the shift to oil from natural gas basins.

“I think the large companies have the staying power to get through it and look to the other side of the valley,” said Yergin. “Independents have depended on hedging. That`s been critical to their ability to survive this.”

“If you have low prices at this level, it will eventually provoke a shakeout in the industry,” he said.

Follow Patti Domm on Twitter: @pattidomm

Questions? Comments? Email us at marketinsider@cnbc.com

Copyright 2011 cnbc.com

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China to spur growth via fiscal stimulus in 2012: Goldman

As Beijing commits itself to increase domestic consumption in the wake of slowing Western demand for its exports, analysts at Goldman Sachs say Chinese authorities will pursue a more “proactive” fiscal than monetary policy to stimulate the economy.

According to a report published by the investment bank on Tuesday, the Chinese government’s fiscal revenues in 2012 are expected to exceed budget estimates. That will put more money in the government`s hand to spend on projects that will support consumption, in turn giving a boost to the retail, consumer goods and energy sectors.

The report says, “Fiscal revenues will likely beat the budget by around Yuan 500 billion (USD 79.3 billion).” It also states that historically expenditure has exceeded budget estimates each year together with revenues.

“Executing a more proactive fiscal policy is a core part of China`s 2012 economic agenda,” the report says. “With low fiscal deficit as part of gross domestic product (GDP) in 2011 and low government debt as part of GDP, we believe China has ample fiscal flexibility.”

According to the report, the government`s 2012 fiscal deficit target is 2% of GDP, up from 1% in 2011 indicating higher potential to spend on spurring a slowing economy.

During the last financial crisis in 2008-2009 China announced a USD 586 billion stimulus plan to reignite its economy.

In 2012, the government is expected to spend on education, social housing, healthcare, and social security, says the report. This is in line with the Ministry of Finance priorities, which is to channel fiscal expenditure towards urbanization, transportation, rural projects and supporting small and midsized enterprises.

“The only way to be able to move from an export-led economy to a consumption-led economy is to increase wages, improve healthcare and education,” Uwe Parpart, Managing Director of Reorient Financial Markets told CNBC. “So people don`t have to save that much and can spend the money rather than worry about having to put away these huge amounts of money for 20-30 years.”

The beneficiaries of increased government spending this year, according to Parpart will be the retail and consumer goods sectors. He also sees the energy and infrastructure sectors as benefiting from the stimulus.

According to the Goldman Sachs report, the mass market consumption sector will benefit with the bank`s top picks including sports goods company Li Ning, China Eastern Airlines, Dongfeng Motor, apparel manufacturers and distributors Daphne International Holdings and Bosideng International.

Its picks in the energy sector include China Coal Energy , China Resources Cement Holdings and China National Building Material.

Copyright 2011 cnbc.com

Third round of bond buying not needed: Fed’s Bullard

A third round of Treasurys purchase is not necessary unless the US economy deteriorates further, according to James Bullard, president of St Louis Federal Reserve Bank.

Recent economic data have signaled that the US economy is doing better than economists think, Bullard told CNBC Tuesday, and a third round of bond buying by the Fed – in a program known as quantitative easing, or QE – is not needed.

“I think QE3 would require the economy to deteriorate somewhat from where it is right now,” Bullard said. “The basic story on the US economy is that we’ve had good news over the last six months or so, especially compared to the recession scenario that was being painted in the August-September time period of last year.”

The Fed has bought USD 2.3 trillion in bonds and kept rates near zero since December 2008 to stimulate growth. At its March 13 meeting, the Fed reiterated that it would keep rates near zero through late 2014 because of the lackluster economy.

A third round of bond buying may be in the works, according to Bill Gross, manager of the world’s largest bond fund at PIMCO. He posted on Twitter Sunday that he expects the Fed to signal during its April meeting that more stimulus will be needed for the US economy.

Ultra-Loose Policy is ‘Detrimental’

Federal Reserve Chairman Bernanke said Monday that the US job market remains weak despite three months of hiring and that the Fed’s existing policies will help boost growth. More robust consumer spending and business demand will be needed for further job gains, Bernanke said during a speech at the National Association for Business Economics spring conference in Arlington, Virginia.

Bullard says he would like to see the Federal Reserve resume a “more normal monetary policy as soon as possible” because it has detrimental effects on the economy. 

“It (the policy) punishes savers, for instance, in the economy, it does send a pessimistic signal about the economy and I think that can hurt investment prospects in the US,” Bullard said. “But we need to provide the right amount of support for the recovery as we do that, and we need to keep an eye on inflation.”

Inflation ran at 2.9% in February, with the consumer-price index hitting 0.4%, the US Department of Labor said earlier this month.

Copyright 2011 cnbc.com

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An early read on 2011’s top 5 paid CEOs

Financial firms continue to take flack for what many see as the outsized compensation they pay, but an early look at CEO pay for 2011 shows the biggest paychecks were doled out to the top executives at entertainment firms.

Pay consultant Steven Hall and Partners examined the first 100 proxies filed by firms with over USD 1 billion in revenue. The proxies were filed between January 1, 2012 and March 7, 2012, and the study included only those companies whose CEOs had been in the job for at least two years.

These rankings are likely to change given hundreds of more large companies will be filing their proxies in the coming weeks, but in this first pass, Viacom’s  Philipe Dauman comes out on top when it comes to 2011 pay. The entertainment giant paid Dauman USD 43.1 million total compensation, a 49% decrease from 2010 when a huge retention grant pushed his total pay above USD 80 million. Dauman’s pay fell even as Viacom delivered a 22.5% increase in total shareholder return for 2011.

Second on the top paid list, Disney’s CEO Bob Iger.

Hit total compensation jumped 12% to USD 31.3 million dollars even as total shareholder return for investors in the operator of theme parks and movie studios dropped eight percent last year.

Chipmaker Qualcomm doubled the stock awards granted to CEO Paul Jacobs in 2011, bringing his total pay to USD 21.7 million.

Jacob’s 17% increase in pay coming for a year in which Qualcomm’s total shareholder return, or stock price appreciation and dividend payouts, rose 14.7%.

Number four on the list is Nicholas Howley, CEO of TransDigm.

The maker of aircraft components doling out nearly USD 18 million in stock options to its CEO last year, bringing Howley’s total compensation to USD 21.7 million, an 89% increase in a year total shareholder return rose a healthy 31.6%.

The fifth highest paid CEO on the list, Randall Stephenson of ATandT.

The USD 18.7 million paid by the telecom giant, a 9% increase from Stephenson compensation in 2010, even as investors saw an 8% decline in total shareholder return last year.

As for median CEO pay, this early look at the numbers suggests pay in the C-suite jumped for the second year in a row. Median total compensation for the 100 CEOs reviewed by Steven Hall and Partners rising 7% to USD 6.1 million.

Follow Mary Thompson on Twitter: @MThompsonCNBC

*All numbers courtesy of Steven Hall and Partners.

Copyright 2011 cnbc.com