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Every Chinese Province bankrupt like Greece – Host Says Chinese Regime nearly bankrupt

China’s economy has a reputation for being strong and prosperous, but according to a well-known Chinese television personality the country’s Gross Domestic Product is going in reverse.

Larry Lang, chair professor of Finance at the Chinese University of Hong Kong, said in a lecture that he didn’t think was being recorded that the Chinese regime is in a serious economic crisis—on the brink of bankruptcy. In his memorable formulation: every province in China is Greece.

Related Article:

Bobsguide – China reduces lenders’ ratio requirements (02.12.2011)
EpochTimes – China’s Economy on the Brink of Collaps (Nov.2011)
The Guardian – IMF sounds warning  on Chinese Banking System (Nov.2011)
 
The restrictions Lang placed on the Oct. 22 speech in Shenyang City, in northern China’s Liaoning Province, included no audio or video recording, and no media. He can be heard saying that people should not post his speech online, or “everyone will look bad,” in the audio that is now on Youtube. 

In the unusual, closed-door lecture, Lang gave a frank analysis of the Chinese economy and the censorship that is placed on intellectuals and public figures. “What I’m about to say is all true. But under this system, we are not allowed to speak the truth,” he said.

Despite Lang’s polished appearance on his high-profile TV shows, he said: “Don’t think that we are living in a peaceful time now. Actually the media cannot report anything at all. Those of us who do TV shows are so miserable and frustrated, because we cannot do any programs. As long as something is related to the government, we cannot report about it.”

He said that the regime doesn’t listen to experts, and that Party officials are insufferably arrogant. “If you don’t agree with him, he thinks you are against him,” he said.

Lang’s assessment that the regime is bankrupt was based on five conjectures.

Firstly, that the regime’s debt sits at about 36 trillion yuan (US$5.68 trillion). This calculation is arrived at by adding up Chinese local government debt (between 16 trillion and 19.5 trillion yuan, or US$2.5 trillion and US$3 trillion), and the debt owed by state-owned enterprises (another 16 trillion, he said). But with interest of two trillion per year, he thinks things will unravel quickly.

Secondly, that the regime’s officially published inflation rate of 6.2 percent is fabricated. The real inflation rate is 16 percent, according to Lang.

Thirdly, that there is serious excess capacity in the economy, and that private consumption is only 30 percent of economic activity. Lang said that beginning this July, the Purchasing Managers Index, a measure of the manufacturing industry, plunged to a new low of 50.7. This is an indication, in his view, that China’s economy is in recession.

Fourthly, that the regime’s officially published GDP of 9 percent is also fabricated. According to Lang’s data, China’s GDP has decreased 10 percent. He said that the bloated figures come from the dramatic increase in infrastructure construction, including real estate development, railways, and highways each year (accounting for up to 70 percent of GDP in 2010).

Fifthly, that taxes are too high. Last year, the taxes on Chinese businesses (including direct and indirect taxes) were at 70 percent of earnings. The individual tax rate sits at 81.6 percent, Lang said.

Once the “economic tsunami” starts, the regime will lose credibility and China will become the poorest country in the world, Lang said.

Several commentators have expressed broad agreement with Lang’s analysis.

Professor Frank Xie at the University of South Carolina, Aiken, said that the idea of China going bankrupt isn’t far fetched. Major construction projects have helped inflate the GDP, he says. “On the surface, it is a big number, but inflation is even higher. So in reality, China’s economy is in recession.”

Further, Xie said that official figures shouldn’t be relied on. The regime’s vice premier, Li Keqiang for example, admitted to a U.S. diplomat that he doesn’t believe the statistics produced by lower-level officials, and when he was the governor of Liaoning Province “had to personally see the hard data.”

Cheng Xiaonong, an economist and former aide to ousted Party leader Zhao Ziyang, said that high praise of the “China model” is often made on the basis of the high-visibility construction projects, a big GDP, and much money in foreign reserves. “They pay little attention to things such as whether people’s basic rights are guaranteed, or their living standard has improved or not,” he said.

Behind the fiat control of the economy, which can have the appearance of being efficient, there is enormous waste and corruption, Cheng said. It means that little spending is done on education, welfare, the health system, etc.

Cheng says that for the last decade the Chinese regime has accumulated its wealth primarily by promoting real estate development, buying urban and suburban residential properties at low prices (or simply taking them), and selling them to developers at high prices.

According to Cheng, the goals of regime officials (to enrich themselves and increase their power) are in direct conflict with those of the people–so social injustice expands, and economic propaganda meant to portray the situation as otherwise prevails.

Few scholars inside the country dare to speak as Lang has, Cheng said. And that’s probably because he has a professorship in Hong Kong.

Source: TheEpochTimes, 15.11.2011

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Filed under: Asia, Banking, China, News, Risk Management, , , , , , , , , , , ,

Brazil to increase primary surplus and make room for interest rates cut – prepares for global slowdown

Brazil plans to further contain government spending this year to prepare the country for a global slowdown and make room for a cut in interest rates, Finance Minister Guido Mantega said on Monday.

The government raised its target for the 2011 budget surplus before interest payments to 91 billion Real (57 billion dollars) from 81.7 billion Real, Mantega told reporters in Brasilia.

Brazil joins countries from Mexico to Turkey in signalling that rate cuts may be on the horizon as global growth sputters and a debt crisis in Europe worsens.

“It makes it viable in the medium- or long-term to cut interest rates,” Mantega said. “As you reduce or stop increasing public spending, you open space for a reduction in interest rates when the central bank thinks it is possible.”

The central bank’s board of directors, led by President Alexandre Tombini, begins its August policy meeting Tuesday, with inflation above 7% for the first time since 2005. Traders are wagering that policy makers will cut rates a quarter-point this week, and between 0.75 and 1 percentage point by year-end, as the economy shows signs of cooling and the global recovery falters.

Mantega said he sees no immediate need for monetary stimulus and added that inflation is a permanent concern for President Dilma Rousseff’s government.

Mexico policy makers kept the benchmark rate at a record low 4.5% for the 21st consecutive meeting on Aug. 26 and said they would consider adjusting it if the national or global economic outlook worsens. The Turkish central bank also left its benchmark rate unchanged on Aug. 23 and Governor Erdem Basci said the institution may have to loosen monetary policy. Peru and Chile also held rates this month.

Brazil’s budget surplus (before interest payments) widened in July to a record for the month pushing the year-to-date total to almost 80% of the 2011 target.

The so-called primary surplus, which includes federal and local governments as well as state companies, last month rose to 13.8 billion Real from 13.4 billion Real in June. The government earlier this year cut 50.7 billion Real from its 2011 budget.

Brazil’s economic activity shrank in June for the first time since December, 2008. Industrial production fell 1.6% in June the second-biggest drop in output since 2008, and business confidence in the second quarter fell to its lowest level since 2009.

Source: Merco Press-South Atlantic News Agency, 30.08.2011

Filed under: Brazil, Events, Mexico, News, Risk Management, , , , , , , , , ,

China: BlackRock – Can China´s Saver save the world?

  • China has experienced rapid credit-led growth in recent years. This growth has been an important contributor to global economic recovery.
  •  Many commentators anticipate that the rapid nature of Chinese credit growth, allied to a capital allocation process led by political direction and undertaken at highly subsidized rates of interest, will inevitably end in a credit bust.
  •  Further, these critics point to the opaque nature of China’s banking system, rapidly growing off-balance-sheet exposures and an overblown real estate sector as evidence of a fragile Sino financial system overdue for a crisis that will, in turn, cripple world growth and extended financial systems elsewhere.
  •  While we are sympathetic to much of the logic behind these fears, we believe that these concerns float on some flimsy analysis. As one example, we cite the mismatch between the oft-cited story of 65 million empty apartments nationwide in China and the inconvenient truth that market estimates indicate that only 60 million apartments have been completed in the last decade.
  •  More importantly, we believe that the “panda bears” overlook the fact that much of the expansion in China’s financial balance sheet has been quasi-fiscal lending and that such lending is backed and guaranteed by a system that is experiencing rapid growth in income and starting from a low level of overall debt.
  • Domestic savings rates are high — indeed, excessive at over 50% of GDP. While external capital has funded much of the rise in banking system liabilities over the last 12 months, China also runs a current account surplus, is largely domestically funded and lacks many of the vulnerabilities that undid Western credit systems in 2007–08.
  •  We agree that bad debt levels in China will rise — in fact, in a worst-case scenario, there could be as much as 7 trillion RMB of bad loans in the system at present, according to our estimates. But bank balance sheets are strong, profit growth is subsidized by fixed lending and deposit rates, and economic growth itself should be strong enough to absorb most reasonable estimates of losses without serious challenges to financial system stability.
  •  Bank deposits are the main source of domestic savings. We are confident that Beijing will seek to avoid social discontent arising from any threat to the security of deposits with vigor and resources that would make Western bailouts appear puny by comparison. Our concern is that savings growth rates will slow over the next few years and that deposit growth will be much more pedestrian than over the last decade. The recent consolidation of data on funding growth under the banner of Total Social Financing (TSF) presents a clearer picture of the efficiency of deposit mobilization in funding growth. Even allowing for shortcomings in methodology, the incremental growth per unit of financing — Financial Incremental Capital Output Ratio, or FICOR, as we term it — has deteriorated over the last decade.
  •  As a consequence of slower savings rates and reduced FICOR, we expect a slowdown in trend growth over the next few years to 7-8% rather than the 8-10% level of recent times. State-led capital allocation and rate fixing was a feature of both Korea and Japan in the past. In both cases, financial crisis arising from this policy mix was triggered by financial reform. We believe the same holds for China, but will take a number of years to unfold.

Read full report Can China´s Savers save the world

Source: BlackRock / Carral Sierra, 12.07.2011

Filed under: China, Market Data, Risk Management, , , , , , , , , , , , , , ,

China’s banking sector Serious Problem with Bad Loans

Professor Pettis at Peking University explains that“in China, even if you believe that all the NPLs currently in the banking system have been correctly identified (a claim which few Chinese bankers believe), no one doubts we are about to see a surge in NPLs thanks to the out-of-control lending expansion of the past two years.  But things are even worse than the nominal numbers imply.  As I discussed in my April 6 entry, when we are trying to estimate the cost of a banking crisis we need to think about more than simply the ability of borrowers to meet current obligations.

This is because, as in the case of the Japanese government obligations, when borrowers are able to benefit from artificially low interest rates, the effect is of hidden debt forgiveness which must be paid for by the net lenders, who are, as in the case of Japan, the beleaguered households.  In other words, if you want to know how much real bad debt there is out there that must be cleaned up, you need to calculate what share of the loans would go bad if interest rates were raised by at least 300-400 basis points, the minimum needed to bring Chinese interest rates in line with an appropriate rate.  This suggests that the Chinese banks, if obligations were correctly counted, might have much larger amounts of bad debt than any of us realize, and this needs directly or indirectly to be cleaned up.”

Here are some recent reports from financial press sources regarding the health China’s banking sector:

-”SHANGHAI -(Dow Jones)- The non-performing loan ratio in China’s banking industry declined to 1.58% by the end of 2009, 0.84 percentage point lower than the figure at the beginning of 2009, China’s banking regulator said Saturday.”(1)

-”BEIJING: Chinese financial institutions’ non-performing loans (NPL) ratio edged down 0.1 percentage points to 1.48 percent in January, the China Banking Regulatory Commission (CBRC) said Friday.”(2)

-”BEIJING, Apr 14, 2010 (SinoCast Daily Business Beat via COMTEX) — Non-performing loan (NPL) ratio of China Development Bank, a policy bank, had reached 0.85% by the end of March”(3)

I don’t believe those reported percentages are accurate.

For context, here is an analysis of China’s non performing loan issue from 2002:

“Standard and Poor’s (S&P), which rates China as investment grade, said on Thursday it would take Chinese banks 10 to 20 years to cut average non-performing loans (NPLs) ratio to a manageable five per cent.

It estimates the Chinese banking sector’s average NPL ratio is atleast 50 per cent, higher than the 30 per cent estimate of China’s central bank governor Dai Xianglong.

“The cost of necessary write-offs could be equivalent to $518 billion or almost half of China’s estimated gross domestic product of $1.1 trillion for 2001,” Mr Terry Chan, a S&P director in Hong Kong said.

The agency said China would be unlikely to cut NPLs in its banking sector to 15 per cent within five years, as its central bank wishes, given the current operating performance of the sector.”

I seriously doubt that the problem identified in 2002 has been resolved yet.  There is an analysis here that supports my assertion.

Source:SinoRock, 07.07.2010

Filed under: Banking, China, News, Risk Management, , , , , , , , , , , , ,

China Property Market Beginning Collapse That May Hit Banks, Rogoff says

July 6 (Bloomberg) — China’s property market is beginning a “collapse” that will hit the nation’s banking system, said Kenneth Rogoff, the Harvard University professor and former chief economist of the International Monetary Fund.

As China’s economy develops, “especially at the speed it’s growing, it’s going to have bumps,” said Rogoff, speaking in an interview with Bloomberg Television in Hong Kong. He also said that while recoveries across the global economy are “very slow,” the danger of a return to recession isn’t “elevated.”

Rogoff’s concern echoes that of investors, who sent China’s benchmark stock index to its worst loss in more than a year last week. China’s data have been a focus because the nation has led the global recovery from the worst postwar recession.

Chinese authorities have this year been trying to cool the economy as it expanded at an 11.9 percent annual pace in the first quarter, and to reduce property-market speculation. The central bank has told lenders to set aside more money as reserves, and targeted a 22 percent cut in credit growth at banks this year, to 7.5 trillion yuan ($1.1 trillion).

The efforts have contributed to a slump in real-estate sales, while prices continue to climb. The value of property sales dropped 25 percent in May from the previous month.

“You’re starting to see that collapse in property and it’s going to hit the banking system,” Rogoff said today. “They have a lot of tools and some very competent management, but it’s not easy.”

Growth Outlook
Goldman Sachs last week cut its growth forecast for China this year to 10.1 percent from 11.4 percent because of the government’s monetary tightening measures.
Rogoff also said it’s unrealistic to expect China to continue growing its exports to the rest of the world “at the pace it’s been doing.”

“It’s impossible. At some point they have to redirect their strategy” for economic growth, he said.

For your info:
1) About one third of the total bank lending (about 40 trillion) is in real estate sector in China.
2) Most of the bank lending has used land and real estate properties as collateral.

Source: Bloomberg, 06.07.2010

Filed under: China, News, Risk Management, Services, Wealth Management, , , , , , , , , ,

Chinas growing worries

China is in the midst of “the greatest bubble in history,”
March 17 (Bloomberg) –The Chinese central bank’s balance sheet resembles that of a hedge fund buying dollars and short-selling the yuan, said Rickards, now the senior managing director for market intelligence at McLean, Virginia-based consulting firm Omnis Inc.

“As I see it, it is the greatest bubble in history with the most massive misallocation of wealth,” Rickards said at the Asset Allocation Summit Asia 2010 organized by Terrapinn Pte in Hong Kong yesterday. China “is a bubble waiting to burst.”
Rickards joins hedge fund manager Jim Chanos, Gloom, Boom & Doom publisher Marc Faber and Harvard University professor Kenneth Rogoff in warning of an overheating and potential crash in China’s economy following a rally in stocks and property prices. The government has raised lenders’ reserve requirements twice this year to cool an economy that grew at the fastest pace since 2007 in the fourth quarter.

Leveraged speculation in the stock market, wasteful allocation of resources by state-owned enterprises, off-balance- sheet debt through regional governments and the country’s human rights record are concerns, said Rickards, who worked for LTCM between 1994 and 1999, helping negotiate a $3.6 billion rescue after the hedge fund lost $4 billion in a few weeks in 1998.

“Take Russia and China together, neither of them is really deserving any investment” except for short-term speculation, Rickards said. India and Brazil are two of the “real economies” among the developing countries, he said.

U.S. Treasuries
Rickards also disputed an argument that China could hold U.S. policies hostage through its U.S. Treasury securities holdings. The Asian nation remained the largest overseas owner of the debt after trimming its holdings by $5.8 billion in January to $889 billion, according to Treasury Department data released March 15.

China would suffer massive losses if the debt was dumped, reducing the funds available in the U.S. securities market and forcing the prices lower, he said. The U.S. president also has the authority, rarely used, to freeze such positions, he said.
Harvard’s Rogoff said Feb. 23 that a debt-fueled bubble in China may trigger a regional recession within a decade, while Chanos, founder of New York-based Kynikos Associates Ltd., predicted a slump after excessive property investments.
To contact the reporter on this story: Bei Hu in Hong Kong at bhu5@bloomberg.net.

March 18 (Bloomberg) — Chinese companies owned by the central government should speed up plans to pull out of property development if it doesn’t form part of their main business, their watchdog said today amid complaints that private real- estate groups are being squeezed out of the market.

PEs preferring China, India for investments in 2010
The survey noted that distressed private equity and small to mid-market buyout funds continue to attract a significant degree of investor interest, with 35 per cent and 36 per cent of respondents citing these as areas of the market that present the best current opportunities respectively.
Economics Inside China bubbling, NPL rising and local government fiscal insolvency are clearly increasing. Though still under debate, macro tightening (monetary policy and property) has begun
China’s 8,000 Credit Risks
Beijing’s stimulus has spawned thousands of special government investment funds holding billions of dollars in off-balance-sheet debt.

As the world struggles to recover from the most severe economic slowdown in a generation, China seemingly has accomplished a miracle. Growth registered at almost 9% last year, yet the government debt-to-GDP ratio still stood around a modest 20% as of December 31. Has China enjoyed the proverbial free lunch?

Far from it: The Chinese government has financed much of an enormous stimulus package through thousands of investment entities created by local governments. If Beijing doesn’t soon recognize this problem and put a stop to it, banks in China, which have provided the bulk of the funding, may soon face …

Source: SinoRock, 18.03.2010

Filed under: Asia, China, News, Risk Management, , , , , , , , , , , ,

Goldman Sachs ‘to monitor potential Asian real estate bubbles’

Fred Hu, Goldman Sachs’s chairman of Greater China, has said that the financial institution’s operations in Asia are keeping a close eye on the development of potential real estate bubbles.

Among the countries causing the most concern to Goldman Sachs are Hong Kong, Singapore and China, Mr Hu said.

China recorded its highest growth in property prices for 18 months in December, Singapore saw a record number of residential real estate sales in 2009 and Hong Kong house prices currently stand at their highest point in more than a decade, reports Bloomberg.

Mr Hu gave a particular warning about growth in Hong Kong and Singapore.  “I would be very skeptical about this kind of pace,” he said.

Last week, it was reported that Goldman Sachs is close to selling off a luxury real estate development in Shanghai. It is to sell the Shanghai Garden Plaza to Chinese property developer Shanghai Forte Land for $200 million, people close to the deal told Reuters.

Source: Bobsguide, 18.10.2010

Filed under: Asia, China, Hong Kong, News, Risk Management, Singapore, , , , , , , , , ,

Fears of China property bubble

A large bubble is forming in China’s property market as a result of Beijing’s credit-driven stimulus programme, one of the country’s most prominent real estate developers warned.

Zhang Xin, chief executive of Soho China, one of the country’s most successful privately owned property developers, told the Financial Times the asset bubble was leading to rampant wasteful investment in the sector, undermining the country’s long-term growth prospects.

“Real estate prices should only go up because people want to actually use the space, but at the moment we can see more and more empty buildings across the whole country and in every real estate segment,” Ms Zhang said. “The rising prices are a direct result of so much money coming from the banks and the Chinese banks should be very worried.”

Ms Zhang’s assessment was echoed by Fan Gang, a member of the central bank’s monetary policy committee, who warned on Wednesday that real estate in cities such as Beijing, Shanghai and Shenzhen was expensive and there was a growing risk of asset price bubbles.

Urban property prices in 70 big and medium-sized Chinese cities rose 3.9 per cent in October from a year earlier, accelerating from September’s 2.8 per cent rise, according to government figures.

Price rises in top-tier markets such as Beijing and Shanghai have been much faster. Analysts say the rebound has largely been driven by an unprecedented government-led expansion of bank lending. It is also being driven by government policies, including tax breaks, low interest rates and smaller down-payment requirements.

Investment in real estate development, a key driver of economic growth, rose 18.9 per cent in the first 10 months of the year on a year earlier, a marked acceleration from 17.7 per cent growth in January-September.

Ms Zhang said the current speculation should be a serious warning for the industry and the general economy.

“In Manhattan, they have vacancy rates of 10-15 per cent and they feel like the sky is falling, but in Pudong [the central business district in Shanghai] vacancy rates are as high as 50 per cent and they are still building new skyscrapers,” she said.

“If you look at GDP growth, then China looks like a new engine driving the global economy, but if you look at how growth is being created here by so much wasteful investment you wouldn’t be so optimistic.”

Source: FT, 18.11.2009 Jamil Anderlini in Beijing

Filed under: Asia, China, News, Risk Management, , , , , , , , , , ,

The Demise of the Dollar, Robert Frisk

In a graphic illustration of the new world order, Arab states have launched secret moves with China, Russia and France to stop using the US currency for oil trading

By Robert Fisk

October 06, 2009 “The Independent” — — In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars. The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years.

The Americans, who are aware the meetings have taken place – although they have not discovered the details – are sure to fight this international cabal which will include hitherto loyal allies Japan and the Gulf Arabs. Against the background to these currency meetings, Sun Bigan, China’s former special envoy to the Middle East, has warned there is a risk of deepening divisions between China and the US over influence and oil in the Middle East. “Bilateral quarrels and clashes are unavoidable,” he told the Asia and Africa Review. “We cannot lower vigilance against hostility in the Middle East over energy interests and security.”

This sounds like a dangerous prediction of a future economic war between the US and China over Middle East oil – yet again turning the region’s conflicts into a battle for great power supremacy. China uses more oil incrementally than the US because its growth is less energy efficient. The transitional currency in the move away from dollars, according to Chinese banking sources, may well be gold. An indication of the huge amounts involved can be gained from the wealth of Abu Dhabi, Saudi Arabia, Kuwait and Qatar who together hold an estimated $2.1 trillion in dollar reserves.

The decline of American economic power linked to the current global recession was implicitly acknowledged by the World Bank president Robert Zoellick. “One of the legacies of this crisis may be a recognition of changed economic power relations,” he said in Istanbul ahead of meetings this week of the IMF and World Bank. But it is China’s extraordinary new financial power – along with past anger among oil-producing and oil-consuming nations at America’s power to interfere in the international financial system – which has prompted the latest discussions involving the Gulf states.

Brazil has shown interest in collaborating in non-dollar oil payments, along with India. Indeed, China appears to be the most enthusiastic of all the financial powers involved, not least because of its enormous trade with the Middle East.

China imports 60 per cent of its oil, much of it from the Middle East and Russia. The Chinese have oil production concessions in Iraq – blocked by the US until this year – and since 2008 have held an $8bn agreement with Iran to develop refining capacity and gas resources. China has oil deals in Sudan (where it has substituted for US interests) and has been negotiating for oil concessions with Libya, where all such contracts are joint ventures.

Furthermore, Chinese exports to the region now account for no fewer than 10 per cent of the imports of every country in the Middle East, including a huge range of products from cars to weapon systems, food, clothes, even dolls. In a clear sign of China’s growing financial muscle, the president of the European Central Bank, Jean-Claude Trichet, yesterday pleaded with Beijing to let the yuan appreciate against a sliding dollar and, by extension, loosen China’s reliance on US monetary policy, to help rebalance the world economy and ease upward pressure on the euro.

Ever since the Bretton Woods agreements – the accords after the Second World War which bequeathed the architecture for the modern international financial system – America’s trading partners have been left to cope with the impact of Washington’s control and, in more recent years, the hegemony of the dollar as the dominant global reserve currency.

The Chinese believe, for example, that the Americans persuaded Britain to stay out of the euro in order to prevent an earlier move away from the dollar. But Chinese banking sources say their discussions have gone too far to be blocked now. “The Russians will eventually bring in the rouble to the basket of currencies,” a prominent Hong Kong broker told The Independent. “The Brits are stuck in the middle and will come into the euro. They have no choice because they won’t be able to use the US dollar.”

Chinese financial sources believe President Barack Obama is too busy fixing the US economy to concentrate on the extraordinary implications of the transition from the dollar in nine years’ time. The current deadline for the currency transition is 2018.

The US discussed the trend briefly at the G20 summit in Pittsburgh; the Chinese Central Bank governor and other officials have been worrying aloud about the dollar for years. Their problem is that much of their national wealth is tied up in dollar assets.

“These plans will change the face of international financial transactions,” one Chinese banker said. “America and Britain must be very worried. You will know how worried by the thunder of denials this news will generate.”

Iran announced late last month that its foreign currency reserves would henceforth be held in euros rather than dollars. Bankers remember, of course, what happened to the last Middle East oil producer to sell its oil in euros rather than dollars. A few months after Saddam Hussein trumpeted his decision, the Americans and British invaded Iraq.

Source: The Independent, 06.10.2009

Filed under: Asia, Brazil, China, Energy & Environment, India, Japan, Latin America, News, Risk Management, , , , , , , , , , , , , , , , , , , ,

Strategist warns of fiscal stimulus side-effects in China

Beware of asset price bubbles and a spike in non-performing loans, says RBC Capital Market’s Brian Jackson.

China’s fiscal stimulus package has boosted growth, but excessive liquidity risks major side-effects, including asset price bubbles and a spike in non-performing loans, according to Brian Jackson, senior emerging markets strategist at investment bank RBC Capital Markets, which is part of the Royal Bank of Canada.

“Strong stimulus has supported growth and eased concerns about a protracted economic slowdown, but now other concerns are building,” says Jackson. “The surge in bank lending has several potential side-effects that threaten the sustainability of China’s recovery and that could force a sharp reversal in the policy stance. The accelerator is working well, but at some stage Beijing will need to apply the brake.”

The risk, Jackson says, is that excessive liquidity in the economy may require the brake to be used sooner and more forcefully than policymakers and investors would prefer.

The potential side-effects of China’s policy stimulus reflect the size and speed of the lending surge, Jackson notes. With so much financing made available so quickly, it is almost inevitable that there will not be enough shovel-ready investment opportunities available to absorb these funds. This implies that much of the new lending will be used for other purposes. And even among those investment projects that can be started quickly, it is very likely that many of them will prove to be ill-advised, eventually putting the borrower under severe stress.

Rising asset prices provide strong circumstantial evidence that a significant proportion of new bank lending is being used for speculative purposes, Jackson adds. Chinese equity markets, in particular, have recorded massive gains, with the main Shanghai index up almost 90% year-to-date. These gains have prompted renewed retail interest. Property markets in major cities have also rebounded in recent months. With growth still below trend and the outlook for corporate earnings still weak, these sharp moves in asset prices clearly raise concerns that a new bubble is forming.

China is among the most favoured markets of fund managers investing in Asia, largely because of the Rmb4 trillion ($586 billion) stimulus package announced in November, which is aimed at combating the most serious economic threat to the mainland since the Asian financial crisis in 1997. Before the stimulus package was announced, China was riddled with worries over the impact of the global financial crisis on both domestic consumption and exports.

The stimulus package, with a life span that extends until 2010, covers key areas including affordable housing, rural infrastructure, railways, power grids, post-earthquake rebuilding in Sichuan, and social welfare to raise incomes. It also includes reforming the value-added-tax system to encourage investment in new technologies.

With foreign reserves and a budget surplus amounting to around $2 trillion, investors are generally confident that China has the capacity to further stimulate the economy if needed. There are those, however, who believe that too much faith has been placed on China’s growth prospects and, as it stands, the market could be over-crowded and valuations stretched.

Source: AsianInvestor.net, 05.08.2009

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‘Bubble-Mania’ in Shanghai Spreads to Global Markets

The S&P-500 Index, a global bellwether for the world stock markets, extended its best five-month winning streak since 1938, by advancing through the psychological 1,000-level, and is up nearly 50% from its 12-year low set on March 10th. The S&P-500 gained 7.4% in July, its best monthly performance since 1997, even as average earnings per-share tumbled -32% and sales slid -16% from a year ago.

Industrial commodities, often viewed as barometers for global economic trends, have also moved sharply higher. So far this year, copper has soared by +96%, nickel is up 62%, and zinc is +50% higher. China, which buys two-thirds of the world’s seaborne iron ore shipments, boosted imports 30% in the first seven-months of this year to 353-million tons, lifting its spot price to $91 /ton, up from $60 per ton in February. Crude oil rose above $71 /barrel this week, doubling in value since December.

In hindsight, while the “Group of Seven” (G-7) economies in North America, Europe, and Japan, were experiencing the most severe economic contractions since the Great Depression of the 1930’s, coupled with unemployment rates ratcheting upward to multi-decade highs, the emerging economic giant – China – was demonstrating its prowess, with the most ambitious stimulus plan the world has ever seen, to rescue its juggernaut economy from the brink of social disaster and unrest.

In a little more than nine months, the pendulum of investor sentiment in Asia has swung from the extreme of terrifying panic and fear, to the opposite side of the emotional spectrum – hope and unbridled greed. The Shanghai stock market index has surged +90% this year, owing its good fortune to 1.2-trillion of bank loans clandestinely funneled into the stock market by brokerage firms, leaving it awash with yuan and lifting share prices above what economic reality can support.

China’s ruling Politburo is demonstrating to the world its command and control over its stock market and economy. Over the past few years, Beijing has proven its ability to either massively deflate a stock market bubble, as seen in 2008, and the wizardry to re-inflate a stock market bubble this year. Beijing is following the Greenspan – Bernanke blueprints, – turning to massive money printing to re-inflate bubbles in asset markets, in order to jump start an economy from the doldrums, or in this latest case, from the grip of the Great Recession.

A relatively healthy banking system enabled the Chinese central bank to work its magic. China’s M2 money supply is growing at a record +28.5% annualized rate, and the money supply surge is coinciding with big rallies in stocks and property, spilling over into neighboring Hong Kong. State-controlled Chinese banks extended 7.4-trillion yuan ($1.2-trillion) of new loans in the first half of this year, equal to 25% of China’s entire economy – helping to fuel a powerful Shanghai red-chip rally.

One of the beneficiaries of the explosive growth of the Chinese money supply is the Shanghai gold market, which is trading near 6,600-yuan /ounce, and is also tracking powerful rallies in industrial commodities. China is poised to overtake India as the world’s top gold consumer this year, and there is speculation that Beijing will quietly buy the gold which the IMF wants to sell in the years ahead.

China, the world’s biggest gold mining nation, is seeking to boost gold output by 3% to 290-tons this year, far less than the 400-tons it consumed last year. Thus, China could become an even bigger importer of the yellow metal in the months ahead, helping to cushion inevitable corrections in the gold market. Given the trade-off between expanding growth and fighting asset-price inflation, Shanghai traders are betting that Beijing will opt to blow even bigger bubbles in asset markets.

Industrial Commodities Eyeing Shanghai

China’s super-easy monetary policy is designed to offset the damage to its export-dependent regions, which are suffering from the collapse in global trade. Beijing is also spending 4-trillion yuan on infrastructure projects, equal to roughly 15% of its economic output per year, to create jobs and stoke economic growth. So it was of great interest to global traders, when the Shanghai red-chips suddenly plunged -5% on July 29th, the biggest daily loss in eight-months, on rumors that Beijing would curb bank lending in the second half of this year.

The Shanghai index is prone to sudden shake-outs, with the index trading at 35-times earnings, and Shenzhen’s small-cap shares trading at 45-times earnings. The Shanghai red-chip index has evolved into the locomotive for key industrial commodities, such as crude oil, base metals, and rubber. Industrial commodities rebounded from a nasty one-day shake-out on July 29th, after the People’s Bank of China wasted little time in denying rumors swirling in the media that it was considering the idea of enforcing quotas on bank loans.

The prospects for Chinese corporate earnings growth are of critical importance, with the Shanghai stock index flying higher in bubble territory. Large-scale industrial companies in 22 Chinese provinces saw their profits decline -21.2% in the first half to 894.14 billion yuan, but the decline rate was less from the first quarter’s 32% slide, and nowadays, “less bad,” means signs of recovery.

The most optimistic scenario calls for Chinese industrial profits to rebound to an annualized growth rate of +30% in the fourth quarter, due to the government’s massive stimulus. China’s Bank of Communications predicts the economy’s growth rate will accelerate to a pace of +9% in the third-quarter and +9.8% in the fourth-quarter. China’s crude steel output would surely top 500-million tons this year, equaling 40% of the world’s total production.

Korea Joins Alignment of B-R-I-C-K

Upbeat markets in China are helping underpin the BRIC nations, including Brazil, India, and Russia, which have the four best performing stock markets this year. Brazil’s Bovespa Index is up 79%, India’s Sensex Index is up 63%, and Russia’s RTS Index has gained 62-percent. The S&P-500 Index by comparison, is up 9.4% this year, while Japan’s Nikkei-225 index is up 7.5-percent.

One could add Korea to the alignment of B-R-I-C-K stars, since the Kospi Index has rebounded by 72% above its November low, emerging as the most favored market among global investors. With growing appetites for risky assets, global investors have rushed to snatch up Korean Kospi shares, particularly those in the information technology (IT) and the auto sectors. Foreigners were net buyers of $4.7 of Korean stocks in July, much larger than net-purchases of $2.6-billion of stocks in Taiwan, $1.9-billion shares in India, and $1.29 billion shares in South Africa.

“Money has no motherland, financiers are without patriotism and without decency, – their sole object is gain,” observed Napoleon Bonaparte. Highlighting the fickle nature of speculators, – foreigners bought a record $18-billion of Korean securities in the second-quarter of this year, or 24-times more than $750 million the previous quarter. In the third and fourth quarters of 2008, foreigners sold $17.9-billion and $17.4-billion, respectively, at the height of the global financial turmoil.

Foreign buying of Korean equities knocked the US-dollar 28% lower against the Korean-won, and the Japanese yen has tumbled 20% to 12.8-won, since March 10th, when global stock markets bottomed out. “Carry traders” are active in Seoul, and profiting from a stronger won. In a world where G-7 central banks are pegging rates at record low levels, it does not take much imagination to envision the Federal Reserve, the ECB, and the Bank of Japan underwriting rallies in the emerging currencies of Brazil, Russia, India, and Korea, just as Tokyo pumped massive liquidity straight into New Zealand and Australian dollars during its flirtation with the hallucinogenic drug – “Quantitative Easing” (QE) between 2001 and 2006.

Virtuous Cycle Swings in the Kremlin’s Favor

The resilience of China’s economy has rekindled the de-coupling debate, which hinges on the premise that the emerging economies in Brazil, Russia, India, China, (BRIC) can grow in spite of a declining G-7 economies. The so-called BRIC countries accounted for half of global growth in 2008 – China alone accounted for a quarter, and Brazil, India, and Russia combined equaled another quarter. Furthermore, the IMF notes that BRIC “accounted for more than 90% of the rise in consumption of energy products and metals, and 80% of grains since 2002.”

The virtuous cycle of events are now swinging back in the Kremlin’s favor, as global speculators flock back into hard-hit resource shares trading in Moscow. Russia’s central bank cut its main interest rates for the fourth time in less than three-months, after Moscow said the local economy contracted an annual 10.2% in the January-May period. Bank Rossii lowered the refinancing rate a half-point to 11% following on initial reduction on April 24th and two further cuts on May 13th and June 5th.

The Russian rouble has rebounded 16% against the US-dollar, since the first quarter, as Urals blend crude oil rebounded towards $70 a barrel, and base metals surged higher, boosting demand for Russia’s currency, a world leader in commodity exports. Russia is the world’s second-largest oil exporter behind Saudi Arabia, and supplies a quarter of Europe’s natural gas needs. Russia is also the world’s largest nickel and palladium miner, the second largest platinum miner, and the fourth-largest iron ore miner, behind Brazil, Australia, and India.

After reaching a record high of $597-billion last August, Moscow’s foreign currency reserves were dramatically depleted in the second-half of 2008, as the central bank spent more than $200-billion supporting the Russian rouble and bolstering the capital position of domestic banks. This year’s rebound in Urals blend crude oil has improved the Kremlin’s coffers, to the tune of $404-billion today. China, the world’s second-largest oil guzzler, imported 3.83-million barrels per day in July, or 25% more than a year earlier, the fastest pace in nearly two-years.

The BRIC nations are rethinking how their US-dollar currency reserves are managed, underlining a power shift from the United States, which spawned the global financial crisis. Russian chief Dmitry Medvedev has repeatedly questioned the US-dollar’s future as a global reserve currency. China is allowing companies in its southern provinces of Yunnan and Guangxi to use yuan to settle cross-border trade with Hong Kong and Southeast Asia to reduce exposure to the US-dollar.

India Weathers the “Great Recession”

Reserve Bank of India chief Duvvuri Subbarao says India’s modest dependence on exports will help Asia’s third largest economy, to weather the “Great Recession” and even stage a modest recovery later this year. Even during the depths of the October massacre in the Bombay Sensex Index, India managed to maintain a 5.3% growth rate in the fourth quarter, and India’s banking system had virtually no exposure to any kind of toxic asset, manufactured in the United States.

India’s factory output contracted by a slim 0.25% in January, the first decline this decade, and export earnings had fallen for six straight months. In January exports were 16% lower from a year earlier tumbling to $12.3-billion. So the Reserve Bank of India (RBI) scrambled to rescue the Bombay stock market, by slashing its lending rates six times from September thru April, by a total of 425-basis points.

click to enlarge

The Indian Sensex index began to decouple from Wall Street and Tokyo in early May, after it rallied 14% for its biggest weekly gain since 1992, when Indian Prime Minister Manmohan Singh won a second term. Bombay stocks soared with enthusiasm at the prospect that Singh’s new government, shorn of Communists, would privatize up to $20-billion of state-owned assets, increase foreign investment in highly profitable crown jewel companies, begin deregulation of banking and financial services, and gut restrictions on the closing of factories.

India’s factory sector, measured by the Purchasing Mgr’s Index, held strongly at a reading of 55.3 in July, or 2-points higher than China’s, signaling a strong industrial recovery in the second half of this year. If the decoupling of China, India, Russia, and Brazil becomes a reality, it could be good for the developed G-7 nations, as growing wealth in BRIC nations could, in theory, increase demand for goods made in battered nations like Japan, Germany, and the United States.

A decoupling between the emerging BRICK nations and the more developed G-7 economies would mean a huge shift in the global financial markets, away from the traditional pattern of emerging markets dancing to the tune of G-7 economies, which still account for 60% of global GDP. Instead, increasing independence could lead to a greater sphere of influence of the emerging giants, led by Beijing.

In the United States, Fed chief Bernanke is pumping a “bailout bubble” for Wall Street, similar to the policies of his mentor “Easy” Al Greenspan, who inflated the housing bubble, the sub-prime debt bubble, and the high-tech bubble. It’s a never ending cycle of boom-and-busts of bubbles, engineered by central banks. The revival of the “Commodity Super Cycle,” might already be in motion, and if a global economic recovery gains traction, soaring input costs would begin to crimp the profit margins of the giant Asian industrialists.

All the liquidity that’s been unleashed into the global banking system would play havoc with accelerating inflation. History shows that central banks won’t pre-empt inflation by withdrawing liquidity early. Instead, the money printers tend to inflate bubbles to dangerous proportions. Add to the mix, the vast leverage of the US-dollar and Japanese yen carry trades, it’s going to be a wild ride for the US Treasury bond market, which is increasingly dependent upon the whims of BRICK.

Source: SeekingAlpha, 05.08.2009 by Gary Dorsch

Filed under: Asia, Banking, Brazil, China, Exchanges, India, Korea, News, Risk Management, Services, , , , , , , , , , , , , , , , , , ,

Coming Doom vs Coming Recovery

While unemployment, bankruptcy and defaults are growing and retail consumtion is falling,  financial institutions which just a few months ago where on the brink of collaps are claiming profits and  the media, analysts and government start claiming to have found the road to recovery.   Too good to be true?  Here are a few alternative view:


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Rapid loan growth puts Chinese banks at Risk

Aggressive loan growth could significantly stretch the banks’ newly developed risk management systems, and the quality of new loans is expected to be inferior to the quality of those written a year ago, S&P analysts say.

Loan growth among Chinese banks hit more than Rmb7.76 trillion ($1.13 trillion) in the first half of 2009, a record high. As a result, asset quality is likely to slip further in 2009, but should remain highly manageable. It could deteriorate sharply in the next two to three years, however, if the economic slowdown is protracted in China.

Chinese banks seem to be lending so aggressively despite the economic slowdown for three key reasons.

First, the strong growth suggests that the banks’ corporate governance is still relatively weak and that the government continues to exert strong influence over banking practices as a dominant shareholder.

Second, the banks appear willing to extend additional funding to borrowers facing cash-flow difficulties on the premise that such difficulties are short-term in nature and should correct themselves when China’s growth recovers.

And third, they may be looking to compensate for the negative effects on earnings from the squeeze in net interest margins.

We expect the quality of new loans to be on average inferior to the banks’ loan book a year ago. That’s because the banks are either expanding into an enlarged but inferior client base or making incremental loans to existing clients with deteriorated financial metrics. Some new borrowers had no or limited access to bank credit in the past because they didn’t meet previous underwriting standards. But banks are likely to have eased their underwriting standards for projects related to the government’s stimulus package, as the government relaxed the capital leverage requirement for many types of projects. Loan quality should, however, be adequate for infrastructure projects that the central government or affluent provincial governments have backed; but these loans perhaps represent only a fraction of total new lending.

While further slippage in bad loans in 2009 and 2010 is likely in our view, it should be at a manageable pace. This is due to the very supportive liquidity environment for corporations as a result of strong loan growth, the limited exposure of major banks to severely hit small businesses in the export sector, and signs of economic recovery, particularly at home. A jump in the non-performing loan ratio is still very likely, as the dilutive effect gradually wanes and banks eventually stop renewing loans.

Barring a protracted slowdown in the Chinese economy, we anticipate the system will on average be able absorb incremental credit costs, given still healthy official interest spreads and banks’ improving capacity to generate fee-based income. For banks that are aggressively increasing their exposure in concentrated segments or regions, we expect potential credit losses to significantly weigh down their already below-average earnings profile. This is likely to lead to further divergence in credit profiles across the sector.

The aggressive loan growth in the first six months of this year could significantly stretch Chinese banks’ newly developed risk management systems and undermine their underdeveloped risk culture. Inflationary pressure may be the single-largest macroeconomic risk that the banks face. Historically in China, inflation often followed when loan growth ran above 20% (it was about 30% year-over-year at the end of June 2009). We’ll have to wait to see if this time will be an exception as the global economic slowdown continues to weigh on overall pricing levels. If the inflation pressure becomes so acute that the government resorts to a policy u-turn and increases lending restrictions, the heightened policy risks could exacerbate the difficulties for borrowers and banks.

The government’s role and commitment to reforms

The government remains highly influential with regard to lending policy at the banks, in our view. It has encouraged banks to make loans to prevent the economy from making a hard landing. But some government agencies, particularly the China Banking Regulatory Commission, have continually warned against excessive lending. Recently, the government seems to be fine-tuning its policy to favour a greater check on bank loan growth. The central government appears to have a delicate balancing act. It’s trying to use bank credit as a lever to maintain economic growth while preserving the banking system’s fundamental strengths. This reflects an inherent conflict between the government’s different roles as the country’s policymaker, banking regulator and major shareholder.

There are still strong incentives for the government to press ahead with banking reforms. The aggressive response to the government’s call for greater lending indicates that the banks do not yet have a sound risk culture and effective corporate governance in place. Given the experience in some markets, Chinese policymakers are likely to take a cautious approach to deregulating relatively risky activities and products. They’re also likely to slow down some reforms, such as those regarding compensation schemes. Some recent initiatives, such as those related to the development of the debt market and renminbi convertibility, indicate the government’s intention to proceed with market-oriented banking reforms.

Ratings impact on Chinese banks

We believe the major rated banks have sufficient financial strength to weather the economic slowdown. Although we see growing pressure from credit risks, policy risks and other risks for the banking sector, these are still within our expectation. We have long factored the significant volatility in Chinese banks’ financial metrics into the ratings on banks. If we are convinced that any bank has been performing better than we originally expected due to its own structural strengths, we would acknowledge these strengths against the context of a less-supportive operating environment.

Ratings On Chinese Banks
Banks Issuer Credit Rating
Industrial and Commercial Bank of China Ltd. A-/Positive/A-2
China Construction Bank Corp. A-/Stable/A-2
Bank of China Ltd. A-/Stable/A-2
Bank of Communications Co. Ltd. BBB+/Stable/
China Merchants Bank Co. Ltd. BBB-/Stable/A-3
CITIC Group BBB-/Watch Pos/A-3
Agricultural Development Bank of China A+/Stable/A-1+
China Development Bank A+/Stable/A-1+
Export-Import Bank of China A+/Stable/A-1+
Note: Ratings as of July 20, 2009.

The authors of this article, Qiang Liao and Ryan Tsang, are senior analysts in the financial institutions ratings team at Standard & Poor’s Ratings Services.

Source:FinanceAsia.com, 23.07.2009

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Mexico Central Bank prohibit some Lender/Credit/Banking Fees

July 21 (Bloomberg) — Mexico’s central bank said it will prohibit commercial banks from applying some fees in a bid to make charges more transparent and bolster competition.

Starting Aug. 21, banks won’t be able to charge fees for depositing checks that are returned, for exceeding debit card limits or for canceling deposit accounts, credit cards, debit cards or online banking services, the central bank said today in an e-mailed statement.

FiNETIK recommends

The measures may force Mexican banks to issue more loans to compensate for revenue they currently get from fees, which may open up credit channels that seized up amid the global financial crisis, said Gabriel Casillas at UBS AG in Mexico City. Fees and commissions accounted for 20 percent of the Mexican banking industry’s operating revenue in 2008, Standard & Poor’s says.

“This is an important blow to one of the biggest sources of revenue for Mexican banks,” said Casillas, who is chief economist for Mexico and Chile. “This should give them an incentive to increase credit and obtain revenue from there.”

Banco Bilbao Vizcaya Argentaria SA, which controls Mexico’s largest lender BBVA Bancomer SA, fell 1.4 percent to 9.675 euros at 12:15 p.m. New York time from 9.81 euros at 10 a.m., when the measures were announced.

Banks will also be unable to charge customers for opening or managing accounts that were opened in order to receive a loan, the bank said.

Antitrust Chief

Mexican antitrust chief Eduardo Perez Motta said in a July 17 interview that authorities needed to make it easier for customers to switch banks so they could more easily shop for low-cost services, which would in turn boost competition.

“When you tell your bank you want to leave, they make your life difficult,” Perez Motta said.

Still, Angelica Bala, an S&P credit and banking analyst in Mexico City, said increased regulations won’t improve competition or transparency.

“The central bank is doing this because there has been a big political push against banks charging so much for fees and commissions,” Bala said in a telephone interview. “But putting a cap on fees and commissions is not a good thing. It has to be driven by competition.”

Source: Bloomberg, 21.07.2009 by : Jens Erik Gould in Mexico City at jgould9@bloomberg.net.

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Brazil’s Antitrust Chief says ‘Irrational’ Rate cuts may hurt Brazilian banks

July 21 (Bloomberg) — Brazilian antitrust agency chief Arthur Badin said a move by state-owned banks to cut interest rates in a bid to force others to match lower borrowing costs threatens to hurt the banking industry.

“Public banks fulfill an important role in helping the economy recover,” Badin said in an interview in Brasilia. “It’s also important that, under the pretext of increasing competition, you don’t achieve the opposite in the long term, with irrational pricing of interest rates when there exists the possibility for effective competition.”

Brazilian officials, including President Luiz Inacio Lula da Silva, have urged banks to increase lending and cut borrowing costs after the credit crunch last year. Banco do Brasil SA, the nation’s largest federally controlled bank, Caixa Economica Federal and state development bank BNDES have all slashed borrowing costs over the past year.

“Decisions by public banks to lower rates were mainly political and don’t solve structural problems, such as default rates and future rate expectations,” Andre Perfeito, an economist at brokerage Gradual CCTVM Ltda, said in a telephone interview from Sao Paulo. “It may produce results in the short term, but in the long term it will cost more and won’t be very effective.”

Aldemir Bendine, who was made Banco do Brasil’s president in April, on May 25 announced he expanded credit to individuals by 13 billion reais ($6.8 billion), reduced rates on consumer loans and mortgages and extended the maturity of car loans in a bid to revive consumer spending. The boost to personal loans benefited 10 million clients, about a third of the bank’s total.

Brazil also cut its Long Term Interest Rate, used by state development bank BNDES, to a record 6 percent last month.

The share of outstanding credit from public banks rose to 37.8 percent in June from 34.2 percent in September last year, according to central bank figures.

Source: Bloomberg, 21.07.2009 by Iuri Dantas in Brasilia at idantas@bloomberg.net

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