Tokyo stocks plummet after U.S. losses, China woes

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TOKYO (MarketWatch) -- Tokyo stock indexes were sharply lower at midday Monday, with the Nikkei 225 Average losing 3.3%, or 369.48 points, at 11,001.21. The broader Topix of all Tokyo Stock Exchange first section issues was down 33.42 points at 1,117.25. Foreign investors were heavy sellers after U.S. losses Friday, and sentiment was further damaged by escalating tensions between Tokyo and Beijing. Japanese Foreign Minister Nobutaka Machimura and his Chinese counterpart Li Zhaoxing each blamed the other country for being at the root of riots and attacks on Japanese missions and businesses in China.

Suddenly investors, economists are worried that much weaker growth, lower profits are ahead.

NEW YORK (CNN/Money) - After cruising along for much of 2004 and the start of this year, the U.S. economy may be having engine problems.

Economists and investors who were confident about the pace of growth only a week or two ago are suddenly much more concerned about a slowdown in the months ahead.

As the first-quarter earnings reporting period speeds up next week and key economic reports are released the next two weeks, there will be talk about whether factors such as high gas prices and rising short-term interest rates could choke off growth in the months ahead.

"We've seen a sea change in the way the financial markets and economy watchers are looking at the world," said Anthony Chan, senior economist with JPMorgan Fleming Asset Management. "For many months, people thought the economy was so strong and robust, they could ignore these headwinds."

"But what we've seen is if you hit the economy over the head enough time with higher energy prices and short term interest rate hikes, it reacts."

This past week has seen a much weaker-than-expected retail sales report for March, coupled with disappointing earnings from IBM (Research) that hit the entire tech sector Friday.

Suddenly there is talk that the Fed might have to at least pause its policy of regular quarter-point rate hikes at its June meeting due to weakness, said economist Greg Valliere of the Stanford Washington Research Group. He said a week ago the debate was whether the Fed would get more aggressive on hikes to cool off the economy and inflationary pressures.

"That's a really dramatic shift," he said. "The fear in the market we're looking at less robust growth than people were thinking only a month ago."

Neither Valliere nor Chan say they think that the economy will actually go into recession with a negative reading on gross domestic product. But many estimates for second quarter GDP are being lowered to the 2 to 3 percent rate, rather than growth of close to 4 percent seen in earlier forecasts.

That's a sharp enough drop to change all the assumptions about consumer spending, corporate profits and the outlook for stocks.

"It's changed a lot of thinking about earnings in the second quarter," said Valliere.

Next week will bring economic reports on wholesale and consumer pricing, as well as housing starts and building permits. The Fed's Beige book, normally a lower-profile report on the strength of manufacturing in different regions around the country, will get much closer attention when it is released Wednesday afternoon, Valliere said.

But earnings reports will also be closely watched, particularly what corporate executives are saying about sales and demand going forward.

Troubled automakers General Motors Corp. (Research) and Ford Motor Co. (Research) are set to report what both have signaled will be disappointing results. GM is due Tuesday, while Ford's out Wednesday.

Thursday morning comes reports from United Parcel Service (Research), the world's leading transportation company, along with Union Pacific (Research), the nation's largest railroad. Both can be bellwethers about the level of freight being moved by businesses.

After IBM's results shook the market, there will be more attention given to chipmakers Texas Instruments (Research) when it reports after the market close Monday, and Intel (Research) on Tuesday afternoon.

The Fed does not meet this month. But it meets in just over two weeks on May 3, and the comments of Fed governors leading up to that meeting will be even more closely watched than normal.

"The Federal Reserve and energy prices really have the fate of the economy in their hands," said Chan.

On a March 29 flight to Seattle, the U.S. Treasury secretary, John Snow, dictated a letter to Hu Xiaolian, China's new top foreign-exchange regulator, expressing the hope they could work together.

Around the same time, China sent its own message to the Treasury: Jin Renqing, the finance minister, and Zhou Xiaochuan, the governor of the central bank, would not attend meetings this week in Washington of the International Monetary Fund and World Bank, and so would be unavailable for the gathering of policy makers of the Group of 7 industrial nations that begins Friday.

U.S. and European politicians and business leaders called the absence evidence that a two-year effort by Snow and his G-7 colleagues to persuade Beijing to end the yuan's peg to the dollar was failing and that a tougher approach was required. Critics say the peg, which gives Chinese-made goods a price advantage, has helped drive the U.S. trade deficit to a record and now threatens growth in other G-7 countries.

"Quiet diplomacy hasn't worked," said Wilbur Ross, a New York-based financier who last year bought two companies out of bankruptcy to create the Greensboro, North Carolina-based International Textile Group. "We're for free trade - but fair trade, not currency manipulation."

China has fixed the yuan's value, with $1 buying 8.3 yuan, since 1995. It buys and sells dollars and yuan to keep the currency at that level regardless of market developments. That means that as the dollar has weakened against other currencies, the yuan has depreciated, too, giving Chinese-made goods an advantage in world trade.

For the past two years, Snow, as well as Gordon Brown, the British chancellor of the Exchequer, Finance Minister Hans Eichel of Germany and other G-7 colleagues, have tried to politely persuade the Chinese to move faster in loosening the peg. China, while not in the G-7, sent ministers to the last two meetings as observers.

The Bush administration sent Snow to make the case in Beijing, appointed a Treasury emissary to China, turned down calls to investigate Chinese trade practices, and did not include China in the Treasury's official list of countries that manipulate currency values.

The G-7, in a September 2003 statement, called for "more flexible" exchange-rate systems worldwide and in September invited Chinese officials to attend its private talks for the first time. A similar invitation was extended again at a London meeting in February.

While China is laying the groundwork for a more flexible exchange-rate system and may introduce changes "unexpectedly," the government has yet to agree on how to adjust the peg, Prime Minister Wen Jiabao said last month.

"It's very unlikely that China will change its foreign-exchange regime in the foreseeable future, because we do not see justification for it," Long Yongtu, the country's former vice trade minister, said in an interview.

As G-7 finance ministers head for their regularly scheduled talks Friday and Saturday, lawmakers and manufacturers on both sides of the Atlantic are threatening to take matters into their own hands by filing complaints with the World Trade Organization and imposing tariffs on Chinese exports.

The U.S. Senate is considering legislation that would slap duties of as much as 27.5 percent on Chinese imports until the peg is loosened. The Italian industry minister, Antonio Marzano, demanded last month that the European Commission, the European Union's executive arm, impose tariffs on Chinese textile and clothing imports.

"China's economy is the 600-pound gorilla in the living room, and that's inducing a protectionist fever in other countries," Paul Samuelson, who won the Nobel in economic science in 1970, said in an interview.

Snow has spoken positively about China's recent steps to prepare its economy and financial markets for change, like raising interest rates for the first time in nine years and working with the Chicago Mercantile Exchange to help develop currency derivatives trading.

"They've taken steps to strengthen their architecture, which is a prelude to flexibility," he told the Senate Banking Committee on April 7. Tariffs, he said, would be "counterproductive" to bringing about change.

The U.S. trade deficit reached a record $61 billion in February, the Commerce Department reported Tuesday. Last year the country had an unprecedented $162 billion trade deficit with China, and through February of this year the figure was already 47 percent larger than in the first two months of 2004.

"China is manipulating its currency and taking a sledgehammer to manufacturers in the U.S. and Europe," Senator Lindsey Graham, a South Carolina Republican who is co-sponsoring the tariff legislation, said in an interview. "So far, our response has been tepid. China's currency is undervalued and needs to be adjusted."

Group of Seven Frets About Oil, China

"We have to prepare the world to live with prices at these levels"

By Chisa Fujioka
swissinfo
April 16, 2005 4:35 PM
http://www.swissinfo.org/sen/swissinfo.html?siteSect=143&sid=5691546&
cKey=1113662118000

WASHINGTON (Reuters) - Finance chiefs from the Group of Seven economic powers met on Saturday to discuss two of the global economic concerns over which they have least control --high oil prices and China's fixed currency peg.

Increasingly aware of the group's ebbing influence amid shifting world economic power toward developing giants such as China, India, Brazil and Russia, many G7 officials said the world may simply have to adapt to higher oil prices.

The United States, meanwhile, lobbied G7 members to urge China to allow its currency to rise against the dollar --ratcheting up pressure on Beijing as the White House seeks answers for critics at home who say the administration has been too soft on what they see as an effective export subsidy.

Meeting in Washington for the second of four yearly meetings and against a backdrop of increasingly jittery financial markets, the finance ministers and central bank governors are due to release a statement about 11 a.m. EDT.

The G7 is made up of the United States, Britain, Canada, France, Germany, Italy and Japan.

Record oil prices, which have risen about 50 percent over the past 12 months, and China's rigid currency peg to the dollar are frequently cited as two of the biggest risks to world economic stability.

U.S. Treasury Secretary John Snow said on Friday the G7 was preparing for an era of more costly energy and could handle recent increases that have pushed prices over $58 a barrel.

Another G7 official said: "Concern is growing because it seems the higher prices may not be out of line and are more permanent than was thought."

"We have to prepare the world to live with oil prices at these levels," the official added.

With crude demand from the rapidly industrializing developing world one of the drivers of higher energy costs and oil producing nations already close to full production, the G7may look at ways of simply mitigating the impact.

The need for better data on crude production and stock piles is likely to be re-emphasized, officials said, along with an increased focus on conservation, alternative energy sources and improvements in industrial productivity.

The other big worry for the world economy, expected by the International Monetary Fund to grow a still-robust 4.3 percent this year, is international trade and financial imbalances.

The United States has run up balance of payments deficit with the rest of the world set to top 6 percent of national income this year and monthly trade gaps exceeding $60 billion.

CHINA'S FOREX PEG UNDER PRESSURE

Snow will come under pressure from some members to do more to cut the U.S. budget deficit and lift household savings. Bu the will likely bat these away by repeating a long-standing pledge to half the deficit while applauding the Federal Reserve for gradually raising interest rates.

China's policy of keeping its exports cheap via fixing its yuan to the dollar will generate more vigorous debate.

China has said it will eventually allow a more flexible exchange rate but shows no signs of doing so soon. Its absence from the G7 table for the first time in three gatherings, dampens hopes of greater engagement with Beijing.

Snow said Washington feels China has had ample time to bolster its banking sector to withstand a floating currency.

"They're there now," he said. "They've made enormous strides in fixing the financial infrastructure. ... It's time for the Chinese to move to flexible currency."

He echoed that message in bilateral meetings with France and Japan, a senior Treasury official said.

Japan's Finance Minister, Sadakazu Tanigaki, sounded a slightly more cautious note as Tokyo does not want any precipitous action that could destabilize its Asian neighbor.

"It is not about simply pressuring China," Tanigaki said, saying any discussion on the yuan should be broader-based.

Many G7 sources say the closing communique on Saturday will merely contain the usual call for currency flexibility, aimed chiefly at China but not mentioning it by name.

There was palpable concern in financial markets as the G7members gathered. Economic worries, mainly centered on the impact of higher oil prices, sent the Dow Jones industrial average skidding 191.24 points to end at 10,087.51 on Friday.

The G7 sessions lead into spring meetings of the 184-nationInternational Monetary Fund and its sister lending institution, the World Bank, on Saturday and Sunday.

The issue of debt relief for the world's poorest nations, a thorny patch at the last G7 gathering in February when Britain and the United States clashed about how to proceed, is expected to again throw off heat but shed little light.

British officials said they want to see progress in hopes of scoring a final deal by June, when leaders of the G7 and Russia meet in Gleneagles, Scotland. Britain, which holds theG7 presidency this year, has declared 2005 a make-or-break year for Africa. (Additional reporting by Glenn Somerville, Stefano Bernabei, Luke McCann, Gernot Heller, Swaha Pattanaik, Sumeet Desai,Alister Bull).