China banks cleared to buy insurer stakes

SHANGHAI, April 10 (Reuters) - China's insurance regulator has given Bank of Communications <601328.SS><3328.HK> and Bank of Bejing <601169.SS> approval to buy into domestic insurers, the official China Securities Journal reported on Friday.

The approvals mark an acceleration of the development of financial conglomerates in China, the paper quoted a source at a state-run commercial bank as saying.

The China Insurance Regulatory Commission has given Bank of Communications, China's fifth-largest lender, approval to buy a stake in Shanghai-based China Life-CMG Insurance Co, the paper said, citing sources.

The insurer is a joint venture between Commonwealth Bank of Australia <CBA.AX> (CBA) and China Life Insurance <2628.HK> <601628.SS>.

The regulator has also approved the purchase by Bank of Beijing, which is 16 percent owned by ING Groep NV <ING.AS>, of a stake in Pacific-Antai Life Insurance Co, the paper said.

The report did not specify the size of the stakes or the financial terms of the purchases.

China is relaxing its rules and allowing banks to enter the brokerage, fund management and insurance businesses to reduce their reliance on lending in a weakened economy, as well as to develop and deepen the country's financial services sector. (Reporting by Edmund Klamann; Editing by Jonathan Hopfner) ((edmund.klamann@reuters.com; +86 21 6104 1799; Reuters Messaging: edmund.klamann.reuters.com@reuters.net)) ((If you have a query or comment on this story, send an email to news.feedback.asia@thomsonreuters.com))

Blogged with the Flock Browser

China Sets Electric-Car Plan

By NORIHIKO SHIROUZU

BEIJING -- Nissan Motor Co. is expected to agree to help set up an electric-car program in a major Chinese city, in an unusual partnership between the Chinese government and a foreign company to further Beijing's efforts to develop environmentally friendly automobile technology.

Under the deal, which could be signed as early as Friday, Nissan would work with China's Ministry of Industry and Information Technology and the government of Wuhan to cooperate on a pilot electric-vehicle program in the central Chinese city, according to people familiar with the matter.

Nissan is expected to provide free electric vehicles to Wuhan and to help develop a network of vehicle-charging stations, the people said. It isn't clear how many cars or how much money the project involves.

AFP

Nissan is partnering with China to start an electric-car program in Wuhan. The company is making a global push for its electric cars, like the Nuvu, above.

Nissan and the industry ministry are also expected to sign a memorandum of understanding to jointly explore ways to make electric vehicles popular in China.

The planned agreements are part of China's efforts to promote vehicles powered at least partly by batteries. China's government is encouraging its own auto industry to shift to such electric vehicles, believing auto makers can use the technology to narrow the gap with bigger foreign rivals. Beijing last month unveiled an auto-industry plan to create capacity to produce 500,000 "new energy" vehicles, such as all-electric battery cars and plug-in electric hybrid vehicles by 2011.

Wuhan, which has a population of nine million, is among 13 cities recently chosen by the Chinese government for a pilot program to boost use of new-energy vehicles. Those cities -- which also include Beijing, Shanghai and Chongqing, the country's biggest municipalities -- are supposed to provide subsidies for purchases of all-electric battery cars, plug-in hybrids and hydrogen-fuel-cell cars. They are expected to collectively put 60,000 new-energy vehicles in service in four years.

The industry ministry believes China could learn from Nissan, an experienced advocate of electric propulsion, which has plans for a big global push for its line of small battery cars, starting in 2010. By that year, the company is expected to start marketing a compact all-electric battery car to corporate-fleet customers in the U.S. and Japan. People familiar with the planned Nissan agreement said the joint effort could be extended to more cities, such as Beijing.

In China, Nissan plans to launch the same compact battery car as early as 2011 and is considering building factories to produce batteries and the entire car in China -- something Nissan wants to accomplish over the next few years to "be cost competitive," according to a senior company executive. Some auto makers believe that by 2020, 10% to 20% of China's passenger-auto sales will come from electric cars, plug-in electric hybrids and other new-energy cars.

The planned Wuhan program is expected to be patterned on a program currently being implemented in Nissan's home prefecture of Kanagawa, just south of Tokyo. Kanagawa plans to install 1,000 charge stations by 2014. Kanagawa Gov. Shigefumi Matsuzawa is expected to deliver a speech Friday at an electric-vehicle forum in Beijing, where the Wuhan plan is expected to be announced.

Write to Norihiko Shirouzu at norihiko.shirouzu@wsj.com

Blogged with the Flock Browser

Tsingtao H2 net up 18 pct, targets higher sales in 09

* H2 profit up 18 pct on higher beer sales

* Aims to improve sales volume and margins in 09

(Add details and comments)

HONG KONG, April 9 (Reuters) - Tsingtao Brewery Co Ltd <600600.SS><0168.HK>, China's best-known beer brand, posted a 17.8 percent rise in second-half profit on solid revenue growth, despite high raw material prices and intense competition, and pledged to improve sales growth in 2009. China's fiercely competitive beer market suffers from overcapacity as nearly 400 brewers vie with an increasing number of foreign companies expanding into the world's largest market by volume.

Tsingtao, the country's No.2 brewer by volume, competes with Heineken <HEIN.AS>, Carlsberg <CARLb.CO>, Kingway Brewery <0124.HK> and the CR Snow joint venture between China Resources Enterprises <0291.HK> and SAB Miller <SAB.L>.

Tsingtao said it aims to achieve full-year sales growth that is 2 percentage points higher than that of the national beer industry and increase the sales volume of products with high margins.

Tsingtao, a domestic sponsor of last summer's Beijing Olympics, said late on Wednesday that July-December net profit rose to 318.4 million yuan ($46.58 million) from 270.25 million yuan a year earlier.

Full-year net profit was 699.6 million yuan against 538.9 million yuan in 2007.

The six-month result came almost in line with analysts' forecasts for 320.8 million yuan based on an average full-year forecast of 701.95 million yuan from 16 analysts polled by Reuters Estimates.

Full-year sales revenues rose 16.6 percent to 15.8 billion yuan.

For a statement on the company's results, click: http://www.hkexnews.hk/listedco/listconews/sehk/20090408/LTN20090408757.pdf

ASAHI INFLUENCE

Japan's largest beer maker, Asahi Breweries <2502.T>, a joint venture partner of Tsingtao since the 1990s, agreed in January to buy a 19.9 percent stake in Tsingtao from Anheuser-Busch InBev <INTB.BR>, the world's biggest brewer, for $667 million, making it Tsingtao's second largest shareholder.

Anheuser-Busch, which brews Budweiser, Stella Artois and Beck's, will hold 7 percent of Tsingtao after the deal.

Lower barley prices are expected to help Tsingtao's gross margin in the current second quarter, and the brewer's volume growth year-to-date has outpaced the industry average, Goldman Sachs said.

Barley prices have dropped 45 percent from peak levels last May, but Tsingtao first needs to use up its high-cost stocks, Macquarie said in a research note.

Tsingtao's Hong Kong-listed shares gained 1.9 percent in the second half of last year, compared with a more than 33 percent drop in Chinese companies traded in Hong Kong <.HSCE> and about a 35 percent fall in the broader market <.HSI>.

Tsingtao's Hong Kong-listed shares are up 7.2 percent so far this year, slightly trailing an 8.3 percent gain on the index of Chinese companies traded in Hong Kong <.HSCE>.

The stock trades at about 28 times forecast earnings, in line with local rival Yanjing Brewery Co Ltd <000729.SZ>. (US$1=HK$7.75=6.83 yuan

Blogged with the Flock Browser

China and the Dollar

Markets don't like Treasury talking down the dollar's status.

As if the dollar didn't have enough problems, Timothy Geithner took China's bait yesterday and said he was "quite open" to its suggestion this week to displace the greenback with an "international reserve currency." The dollar promptly fell and stocks followed, before the Treasury Secretary re-emerged to say "the dollar remains the world's dominant reserve currency. I think that's likely to continue for a long time."

AP

Mr. Geithner is learning on the job, and yesterday's lesson is that it isn't smart to fool with currency markets when you are already tempting fate with a gigantic U.S. reflation. Treasury and the Federal Reserve are flooding the world with dollars to break the recession, and the world is rightly getting nervous. The solution floated by Chinese central bank governor Zhou Xiaochuan -- an increased role for the International Monetary Fund -- isn't desirable. But his warning about the dangers of dollar weakness and exchange-rate instability is still worth heeding.

Since the collapse of Bretton Woods in 1971, the global economy has tried to function with floating exchange rates, in which the "market" is said to set currency prices. As the world discovered in the 1970s and the Bush Treasury forgot, however, the market for currencies isn't the same as for apples or copper. Central banks control the supply of currencies through their monopoly on money creation. Often, as at the Alan Greenspan-Ben Bernanke-Donald Kohn Federal Reserve this decade, they get policy wrong, with disastrous consequences. Amid the global economic downturn, some central banks, like Vietnam's, are also turning to currency devaluation for a trade advantage.

Mr. Zhou may want to head off this potential train wreck. On Monday he proposed an international reserve currency "anchored to a stable benchmark and issued according to a clear set of rules." He wants the supply of money to allow for "timely adjustment" to "changing demand," and those adjustments to be "disconnected from economic conditions and sovereign interests of any single country." And he thinks the IMF can create a global currency by expanding the use of its already-existing Special Drawing Rights (SDRs), a synthetic currency linked to the underlying currencies of IMF states.

Yet who would determine the "right price" of the SDR -- the IMF? The multilateral institution's economic prescriptions have sent numerous nations into tailspins, particularly in Asia. There's nothing to say, too, that national monetary authorities wouldn't cheat and adjust their domestic money supplies as they saw fit -- or apply political pressure on the IMF to change the SDR's currency weightings in their favor.

But the main problem with the SDR is that it can't be used for anything in the real world. When the IMF allocates SDRs, recipient countries exchange them for local currencies at local central banks. That money is then used to buy real assets and facilitate trade. That exchange inflates the money supply of the domestic country that's accepting the SDRs in exchange for local currency.

There isn't consensus within China's central bank on the idea of empowering the IMF, though Beijing is eager to have more say at the institution. Hu Xiaolian, a vice governor of the bank, said Monday that "investing in U.S. Treasury bonds is an important component of China's foreign currency reserve investments." She added: "We are naturally relatively concerned with the safety and profitability of U.S. government bonds."

Ms. Hu isn't alone, and we only wish the Treasury, the White House and the Fed were equally as concerned. The dollar's status as a reserve currency gives the U.S. enormous advantages, and it should be protected ferociously by our public officials. It means we don't have to repay our debts in foreign currency and that our borrowing costs are cheaper. To the extent that the rest of the world follows a dollar standard, it also gives us far greater global sway.

It is this influence that Russia, China and others sometimes resent and would like to see displaced. The problem is that there really isn't an obvious successor to the dollar. No other economy is large enough, with deep enough capital markets. The euro might become an alternative down the road, but it remains too new and lacks the necessary underpinning of political cohesion.

Yet Mr. Zhou's demarche is also a warning that reserve currency status carries special obligations. It means the U.S. isn't conducting monetary policy only for itself but for much of the world. And it means that when the U.S. falls for the temptation to debase its currency, it sends shocks through the entire global trading system. The dollar's sharp but needless gyrations during this decade are in our view one of the major causes of the housing and commodity asset bubbles that led to the financial panic and global recession.

If Mr. Geithner meant yesterday that he is "open" to broader monetary and exchange-rate cooperation, that could be a step forward. But instead of abdicating to IMF bureaucrats, this would mean working with the world's most important governments and central banks -- for starters, the Fed, ECB, and the Banks of England, Japan and China. The world could use monetary reform, but the goal should be to reduce currency fluctuations and enhance price stability and world trade. In the meantime, the dollar's special status is an asset worth preserving.

Please add your comments to the Opinion Journal forum

ICBC Chairman Upbeat About China Economy

By ALEX FRANGOS

HONG KONG -- The head of China's largest bank gave an upbeat assessment of the Chinese economy and said the country's domestic consumption is already picking up some of the slack for the sharp decline in exports.

Bloomberg News/Landov

Jiang Jianqing

Jiang Jianqing, chairman of Industrial & Commercial Bank of China Ltd., said that "China and its people are already seeing a revival" and that "confidence is beginning to recover."

State-controlled ICBC is China's largest lender and the world's largest bank by market capitalization at $177.14 billion, based on its Hong Kong closing share price Tuesday.

Mr. Jiang also said ICBC would look at opportunities for overseas acquisitions. He said the bank's expansion into emerging markets in the past few years helped to manage ICBC's risk. While roughly 98% of ICBC's business is in China, the bank has begun to make inroads abroad, in recent years purchasing bank stakes in South Africa and Macau.

Mr. Jiang spoke at a Credit Suisse investment conference in Hong Kong a day after ICBC announced a 36% rise in net profit last year and Goldman Sachs Group Inc. agreed to keep 80% of its stake in the Chinese lender locked up until April 2010, although it is free to sell the remainder after its current lockup period ends next month. ICBC's stock shot up Thursday, ending 15% higher in Hong Kong and making Goldman's stake worth $8.5 billion.

Mr. Jiang echoed Chinese government forecasts that the nation's economy would grow by at least 8% this year, although many outside economists have projected slower growth. He said spending by consumers in China is already supporting the economy, though he acknowledged it won't be enough to entirely offset the massive drop in global demand for Chinese goods. "How we can make up for the entire loss, I really don't know," he said.

He said recent increases in the Shanghai stock market -- largely restricted to Chinese investors -- indicates renewed domestic optimism.

Mr. Jiang also pointed to the Chinese property markets rebounding. He cited statistics that show sales volumes have picked up since the start of the year. "The recovery in the property market could act as a stimulus," he said, prompting increased spending in related industries such as home furnishings and decoration. He said developers haven't yet responded in full with new construction as they are waiting to benefit from increased lending.

Mr. Jiang downplayed concerns that Chinese banks would experience significant defaults from borrowers.

While not disclosing the latest quarter's troubled-loans figures, he said calls to ICBC branch managers indicate credit quality hasn't eroded despite global economic woes.

He said the balance of ICBC's nonperforming loans has declined steadily since 2005.

Mr. Jiang highlighted the relative strength of Chinese lenders at a time when some Western banks teeter on the edge of insolvency. Four of the world's 10 largest banks by market capitalization are Chinese.

"It's not because we are so good. It's because our competitors have done so badly," he quipped.

Asked about recent comments by Chinese government officials questioning the strength of the U.S. dollar, Mr. Jiang said "the confidence of this currency is of extreme importance, not only to China."

Write to Alex Frangos at alex.frangos@wsj.com

• ABREAST OF THE MARKET
• MARCH 9, 2009

Dow 5000? A Bearish Possibility

Strategists Still See Rally, but Earnings Point to 1995 Levels for Stock

By ANNELENA LOBB

Just how low can stocks go?

Despite Friday's small gain, the Dow Jones Industrial Average marked its fourth consecutive week of losses as it tumbled through the 7000-point mark and spiraled to new 12-year lows. The Standard & Poor's 500-stock index is trading below 700 for the first time since 1996.

As earnings estimates are ratcheted down and hopes for a quick economic fix fade, the once-inconceivable notion of returning to Dow 5000 or S&P 500 at 500 looks a little less far-fetched.

Associated Press

Specialist Gerard Petti works his post on the trading floor of the New York Stock Exchange March 6.

A decline to 500 on the S&P is 183.38 points and 27% away. The index already has lost 881.77 points, or 56%, since its peak in October 2007. The index, which lost 7% last week, hasn't been below 500 since 1995, when the tech-stock bubble was just beginning. After dropping 6.2% last week, the Dow is 1626.94 points and 25% above 5000, a level it also hasn't seen since 1995.

Analysts and investors looking at valuations, history and stock-price trends are mostly predicting the indexes will avoid plumbing those lows, although all concede that, in this market, anything is possible.

Even Wall Street strategists are crunching the numbers, while sticking to forecasts of a second-half rally.

Goldman Sachs's David Kostin in late February presented three scenarios for the S&P, including a "bear case" that put the index at 400 to 500. Although Mr. Kostin says he doesn't anticipate the index will fall that low, "these are the cases that different types of investors are making," he says.

Looking solely at valuations, namely price relative to earnings estimates, the S&P at 500 isn't necessarily a wild stretch.

The current 2009 earnings estimate for S&P companies is about $64 a share, down from about $113 last April, according to S&P. Goldman is now predicting $40, having cut its forecast from $53 in late February. Bank of America Merrill Lynch estimates $46 a share, and Citigroup is predicting $51.

At $64, the S&P is trading at about 11 times earnings. At $40, the index is at about 17 times.

According to Goldman's data, the bottom of the 1974 bear market had a forward P/E of 11.3. At the trough in 1982, it was 8.5. Put a multiple of 10 with estimates of $40 to $50 a share and the S&P comes out at 400 and 500.

Mr. Kostin himself offered his own prognosis, in which the S&P stays between 650 and 750 and possibly rises to 940 at year end. Goldman's earnings prediction includes write-downs and provisions, Mr. Kostin adds. But as financial companies recognize a significant amount of remaining losses in the next couple of quarters, investors, he says, could shift their focus to 2010 and what 2009 earnings might look like before write-downs and provisions -- a figure he puts at $63.

Whether stocks continue to fall "boils down to confidence," says Chris Guinther, president and chief investment officer of Silvant Capital Management. Mr. Guinther argues that without clear signs that the government stimulus and rescue packages are working, investors have little incentive to buy.

While Silvant sees the S&P staying in a range of 650 to 750, a decline to 500 is "definitely possible," Mr. Guinther says.

A level of 500 on the S&P is "possible, but I wouldn't put it in the realm of probable," says Thomas Lee, chief U.S. equity strategist at J.P. Morgan. Mr. Lee on March 2 removed a tentative "buy" recommendation he had placed on the S&P in February.

For Mr. Lee, the S&P at 500 "would imply that we are now in a period similar to April 1932 -- the final stages of a bear market."

Between April 8, 1932, and July 8, 1932, stocks fell 34% -- a little more than what it would take to get the S&P to 500.

A level of 500 would take declines for the S&P to 68% since its October 2007 high, compared with the peak-to-trough depression-era slump of almost 90%.

Still, Mr. Lee sees a tentative bottom for stocks in mid-2009, together with a trough in the economy. From there, he is still "really comfortable" with the prospect of the S&P heading toward 1100 by year end.

This time, the barrage of government policy prescriptions make a decline of Depression-era magnitude very unlikely, says Richard Sylla, a financial historian and economics professor at New York University's Stern School of Business.

"People say [government policy] hasn't worked yet, and there have been slips in the execution, but I would say things could be much worse. It will put a bit of a floor under the declines," Mr. Sylla says. That said, he thinks stocks aren't at their lows yet, and guesses the Dow will bottom near 6000.

There are those of course, who think the whole decline is overdone.

"Analysts are just slashing numbers and people are trying to extrapolate that earnings plunge into Dante's Inferno," Citigroup's chief U.S. equity strategist, Tobias Levkovich, says. Mr. Levkovich is keeping a year-end target of 1000 on the S&P.

He says a high single-digit P/E ratio isn't necessarily a valid assumption. In other periods when stocks were similarly valued, inflation, interest rates and risk premiums all were higher, he says.

Some analysts who look at stock price trends see the indexes heading much lower.

"There's a good chance the market could keep going lower," says Bill Strazzullo, chief market strategist at Bell Curve Trading.

His firm's targets are 500 on the S&P and 5500 on the Dow, using charts of buying and selling trends. A small bounce may come around 650 for the S&P as short sellers take profits around that level, Mr. Strazzullo says. Long-term buyers have also been "active" at about those levels and may help push prices higher temporarily, he says.

"Some people may say that is the bottom, but I think there is another leg to go on this," Mr. Strazzullo says. "That last leg will probably be the general public throwing in the towel."

Write to Annelena Lobb at annelena.lobb@wsj.com

Goldman, Deutsche Bank and Others Got AIG Aid

By SERENA NG and CARRICK MOLLENKAMP

The beneficiaries of the government's bailout of American International Group Inc. include at least two dozen U.S. and foreign financial institutions that have been paid roughly $50 billion since the Federal Reserve first extended aid to the insurance giant.

Among those institutions are Goldman Sachs Group Inc. and Germany's Deutsche Bank AG, each of which received roughly $6 billion in payments between September and December 2008, according to a confidential document and people familiar with the matter.

Covered Counterparties

Some banks that were paid by AIG after it was bailed out by the government

• Goldman Sachs
• Deutsche Bank
• Merrill Lynch
• Société Générale
• Calyon
• Barclays
• Rabobank
• Danske
• HSBC
• Royal Bank of Scotland
• Banco Santander
• Morgan Stanley
• Wachovia
• Bank of America
• Lloyds Banking Group

Source: WSJ research

Other banks that received large payouts from AIG late last year include Merrill Lynch, now part of Bank of America Corp., and French bank Société Générale SA. More than a dozen firms with smaller exposures to AIG also received payouts, including Morgan Stanley, Royal Bank of Scotland Group PLC and HSBC Holdings PLC, according to the confidential document.

The names of all of AIG's derivative counterparties and the money they have received from taxpayers still isn't known, but The Wall Street Journal has identified some of them and is publishing others here for the first time.

Lawmakers Want Names

Multiple AIG bailouts have become a political hot potato as the risk of losses to U.S. taxpayers rises. This past week, legislators demanded that the Federal Reserve disclose names of financial firms that have received money from AIG, which Fed officials have described as too systemically important in the financial system to be allowed to fail.

The Fed rescued AIG in September with an $85 billion credit line when investment losses and collateral demands from banks threatened to send the firm into bankruptcy court. A bankruptcy filing would have caused losses and problems for financial institutions and policyholders globally that were relying on AIG to insure them against losses.

Since September, the government has had to extend more aid to AIG as its woes have deepened; the rescue package now has swelled to more than $173 billion.

The government's rescue of AIG helped prevent its counterparties from incurring immediate losses on mortgage-backed securities and other assets they had insured through AIG. The bailout provided AIG with cash to pay the banks collateral on the money-losing trades; it also bought out underlying mortgage-linked securities, many of which were trading at about half their original value.

In a Senate Banking Committee hearing in Washington on Thursday, Fed Vice Chairman Donald Kohn declined to identify AIG's trading partners. He said doing so would make people wary of doing business with AIG.

But Mr. Kohn told lawmakers he would take their requests to his colleagues. The Fed, through a new committee led by Mr. Kohn to discuss transparency concerns, is now weighing whether to disclose more details about the AIG transactions.

The banks were all trading partners of AIG's financial-products unit, which operated more like a Wall Street trading firm than a conservative insurer. This AIG unit sold the banks credit-default swaps, which acted like insurance on complex securities backed by mortgages. When the securities plunged in value last year, AIG was forced to post billions of dollars in collateral to counterparties to back up its promises to insure them against losses.

More Problems

Now, other problems are popping up for AIG. The insurer generated a sizable business helping European banks lower the amount of regulatory capital required to cushion against losses on pools of assets such as mortgages and corporate debt. It did this by writing swaps that effectively insured those assets.

Values of some of those assets are declining, too, forcing AIG to also post collateral against these positions. And if the portfolios incur losses, AIG will have to compensate the banks.

The concern has been that if AIG defaulted, banks that made use of the insurer's business to reduce their regulatory capital, most of which were headquartered in Europe, would have been forced to bring $300 billion of assets back onto their balance sheets, according to a Merrill report.

AIG had seen this business as a relatively safe bet for the company and its investors. The structures were designed to allow European banks to shuck aside high capital costs. A change in capital rules has meant that the AIG protection no longer meets regulatory requirements.