Daily Sources 5/19

1. BEIJING TO EXTEND CAR AND HOUSEHOLD SUBSIDY PROGRAMS TO RURAL AREAS VIA NEW FOR OLD PROGRAM, THE GUARDIAN UK BREAKS STORY THAT US OFFICIALS WERE NEGOTIATING WITH CHINA REGARDING JOINT CLIMATE CONTROL EFFORT IN FINAL MONTHS OF BUSH ADMINISTRATION, BEIJING OUTLAWS CREDIT CARD CASH WITHDRAWAL ADVERTISING

Elaine Kurtenbach at the Associated Press reports that the State Council has announced a decision today to extend the length of its subsidization program for cars and home appliances as well as expand its reach from rural areas to "Beijing, Shanghai, Tianjin and several provinces in China's affluent coastal regions."

"According to the State Council's announcement, Beijing will spend a total of 5 billion yuan (~ $732 million) on subsidies to consumers who trade in older vehicles for new ones. It will devote 2 billion yuan (~ $290 billion) to the appliance subsidy program, which will pay rebates of 10 percent of the purchase price."

This subsidy, if I understand correctly, differs from the earlier subsidy program focused on rural provinces insofar as it is strictly designed to incentivize swapping old cars and appliances, which would increase the energy efficiency of the vehicle fleet and households generally.

"The decision by an executive meeting of the State Council is meant to pump up China's domestic demand, supporting domestic industries hit by a slump in demand for exports and encouraging use of more energy-efficient, less polluting cars and appliances, said a statement on the government's Web site."

In a related story, Suzanne Goldenberg at the Guardian UK reports that a bipartisan group of senior US officials led two China missions in the final months of Bush's final term in order to conduct secret negotiations in the hope of coming to an agreement on joint US-Chinese action on climate change.

"The first communications, in the autumn of 2007, were initiated by the Chinese. Xie Zhenhua, the vice-chairman of the National Development and Reform Commission, the country's central economic planning body, made the first move by expressing interest in a co-operative effort on carbon capture and storage and other technologies with the US."

Ms. Goldberg infers from the meetings that the Obama Administration is focused on coming to some climate control arrangement with China prior to the UN meeting on greenhouse gas emissions in Copenhagen this December. Meanwhile, Sky Canaves at China Journal reports that the State Administration of Industry and Commerce on Monday ruled that credit card companies in the country may not promote cash withdrawals in their advertising.

2. BEIJING OKS NEW PRIVATE YUAN DENOMINATED BOND ISSUES

James T. Areddy at the Wall Street Journal reports that the China units of HSBC Holdings PLC and Hong Kong's Bank of East Asia Ltd. have announced separately today that they have been granted permission by Beijing to issue renminbi-denominated bonds.

"A small number of Chinese issuers, including commercial and government banks, have sold yuan bonds outside mainland China in the past, also in Hong Kong. The issues were targeted at Hong Kong residents with yuan banking deposits.

Mainland China's bond markets, meanwhile, have been largely off limits to foreign issuers. In a rare offering, the World Bank's International Finance Corp. in 2005 issued 1.13 billion yuan in Chinese-currency securities in the country's interbank market. Those securities were dubbed 'panda' bonds."

The move could be another step in the direction of the internationalization of the yuan.

3. NEW US-RUSSIAN NUCLEAR ARMS CONTROL TREATY DISCUSSIONS UNDER WAY, JOINT US-RUSSIAN STUDY CONCLUDES MISSILE DEFENSE SHIELD TO PROTECT EUROPE FROM IRANIAN ATTACK WOULD BE INEFFECTIVE

Vladimir Isachenkov at the Associated Press reports that negotiating teams led by US Assistant Secretary of State Rose Gottemoeller and the chief of Russian Foreign Ministry's security and arms control department, Anatoly Antonov, began negotiations on a replacement to START I today. START I expires on December 5th. Should no treaty replace it, the US and Russia would have no formalized controls on the sizes of their respective nuclear arsenals.

"Gottemoeller said in a recent interview with Interfax that Obama's team is ready to negotiate cuts in missiles and other so-called delivery vehicles. But [Retired Maj. Gen. Vladimir] Dvorkin [a veteran Cold War arms control negotiator who helped write START] said it remains to be seen whether the two sides can agree on how to count the weapons.

There are other points of disagreement hampering progress.

The United States is prepared to count only the warheads ready for launch, while Russia wants to count those in storage as well.

The US also plans to swap nuclear warheads for conventional explosives on some long-range ballistic missiles. Russia opposes the plan because it would be impossible to tell whether a missile launched by the US was carrying a nuclear warhead."

In the meantime, Joby Warrick and R. Jeffrey Smith at the Washington Post report that a year-long joint US-Russian analysis of a planned US missile shield to protect Europe from a possible Iranian attack would likely be ineffective.

"The year-long study brought together six senior technical experts from both the United States and Russia to assess the military threat to Europe from Iran's nuclear and missile programs. The report's conclusions were reviewed by former defense secretary William J. Perry, among others, before being presented to national security adviser James L. Jones and Russian Foreign Minister Sergei Lavrov."

The full report is available at the East West Institute's website here, h/t Yevgeny Bendersky at the Compass.

4. RUSSIAN FOREIGN EXCHANGE HOLDINGS NOW MORE HEAVILY WEIGHTED IN EURO THAN DOLLAR, RUSSIAN FOREIGN MINISTER SAYS GDP SCENARIOS UNDER CONSIDERATION EXPECT A CONTRACTION OF FROM 4 TO 8%

Brad Setser at Follow the Money notes that according to the annual report of Bank Rossi, the euro's share of Russia's foreign reserves has grown to 47.5% in January 1, 2009 from 42.4% a year ago and that the dollar's share has fallen to 41.5% from 47% a year ago, and 49% at the start of 2007. Setser comments:

"It is often asserted that the dollar is the global reserve currency. It would be more accurate to say the dollar is the globe’s leading reserve currency. The dollar is the dominant reserve currency in Northeast Asia. And the two big economies of Northeast Asia both happen to both hold far more reserves than either really needs. The dollar is also the reserve currency of the Gulf. And Latin America.

But the dollar isn’t the dominant reserve currency along the periphery of the eurozone. Most European countries that aren’t part of the euro area now keep most of their reserves in euros. That makes sense. Most trade far more with Europe than the US--and some, especially in Eastern Europe, ultimately want to join the eurozone.

Russia has long traded far more with Europe than with the United States. By increasing the euro share of its reserves, Russia is in some sense just converging with the norm among other countries on the periphery of the eurozone."

In another long and detailed post at Fistful of Euros, Edward Hugh reports that the Russian Economy Minister, Elvira Nabiullina, said in an interview with Bloomberg Television that the economy was likely to contract from between four and eight percent in 2009. Last week the Russian Federal Statistics Office released data showing that first quarter GDP had contracted by 9.5% from the year previous--see Daily Sources 5/15 #6.

5. INDIAN ECONOMY WEATHERING DOWNTURN MOSTLY ON LIMITED EXPORT EXPOSURE

In yet another long and detailed post in Fistful of Euros, Edward Hugh notes that a good part of the reason India is weathering the current economic storm is that it isn't especially globalized--"only 15% of the Indian economy is export oriented--and Indian banks and financial corporations were relatively free of contamination from 'toxic' instruments." Hugh notes that inflation remains low in the country, allowing the central bank to maintain historically low benchmark interest rates. (He also discounts the idea that price spikes in the commodities complex will undermine this policy, which I think is right on the fundamentals, but am not hearing much positive reinforcement for my suspicion out of the oil analyst community that I have access to anyways.) Though industrial production is down in the first quarter, the ABM Amro Manufacturing PMI has been steadily rising from December and is back in expansion territory (over 50) in April:



Hugh concludes:

"[T]he massive slack which exists in the global economy means that Indian now has a more-or-less unique opportunity to accelerate the development process at non-inflationary growth rates well above those which would have been envisaged only two or three years ago. At the same time, as the age structure has shifted, and the weight of child dependence has reduced, India’s savings rate has risen steadily from 23.4% of GDP in 2000–01 to 35.4% in 2007–08. During the same period investment rose from 24% of GDP to 36.3% of GDP, suggesting the need for a slight current account deficit to cover the gap between savings and investment."

The piece should be read in full.

6. NORWAY ENTERS RECESSION

Matthew Saltmarsh at the New York Times reports that the Norwegian economy shrank by 1% in the first quarter from the fourth quarter, when it contracted by 0.8% from the quarter previous. The data released today by Statistics Norway means that the country has officially met the definition of a "recession," or two straight quarters of economic contraction.

"The relatively high levels of personal indebtedness make the economy particularly responsive to rate moves, Mr. [Kyrre] Aamdal [an analyst at DnB NOR] said. That and an expansive fiscal policy should produce an economic bounce next year, with growth of about 1.5%, he added.

Last week, the government said it would spend more of its oil wealth this year to help stimulate the economy and create jobs. The three-party coalition government said in a revised 2009 budget presentation that it would increase central government spending of oil revenue by 9.5 billion kroner, or $1.52 billion, to about 130 billion kroner, roughly 15 percent of total government expenditures for 2009.

Over all, the real underlying growth in government expenditure is now expected to be 6.75% in 2009, up from the 3.25% projection in the original budget for 2009."

7. SAUDI ARABIA TO IMPORT 29% LESS GASOLINE IN JUNE

James Jukwey at Arabian Business reports that Saudi Arabian gasoline imports are expected to fall 29% in June from May to about 50 kb/d. RBOB gasoline futures on NYMEX have been rising over the last couple of months, and there is a fairly persuasive argument that crude prices are following them, but the numbers are hard to figure given that there does not appear to be enough demand in the US to take up European surplus gasoline production.

8. ETHIOPIA RETURNS TO SOMALIA

BBC reports that Ethiopian troops are moving back into Somalia after having left four months ago, apparently in reaction to the recent successes of al-Shabaab.

9. HOUSING STARTS FALL 50% IN APRIL FROM YEAR PREVIOUS

Barry Ritholtz reports that the number of building permits granted in April fell by 50.2% (±1.4%) from April 2008, and at a seasonally adjusted annualized rate of 3.3% (±2.3%) from March. Single family house building permits, however, were up 3.6% (±2.2%)from March, though down 42% from April 2008. Ritholz links to Barron's Econoday's chart plotting housing starts,



and comments:

"As bad as these numbers sound, they are actually a net positive. More inventory is a bad thing, so less starts and permits is a good thing. . We still have several million foreclosures possible over the next 3 years, and that will add to supply and drive prices further down. In the event that prices do move higher somehow, expect to see millions of shadow inventory--homes bought on spec or to be flipped--to hit the market."

10. CREDIT CRUNCH EASING ON RADICAL STEPS BY FED & TREASURY AND INFLATION EXPECTATIONS STILL MODERATE

Calculated Risk reports that LIBOR, and a number of other credit indicators, have returned to near normal.

"Last week, FDIC Sheila Bair said "the liquidity crisis is over for good". That might be a little optimistic (some ARS markets are still frozen), but it does appear the Fed has eased the liquidity crisis for now. The Treasury is still working on the solvency issues. "

Worth reading in full. In a related story, Menzie Chinn at Econbrowser points out that fears of hyperinflation in the US are neither manifested in survey- nor market-based expectations. Chinn notes that the median expectation for ten year inflation per surveys of economics forecasters remains pretty much as it has been for the last ten years. He plots a graph of market-based expectations, using the rate implied by the difference between the yields on 10 year Treasury Inflation-Protected Securities (TIPS) and 10 year treasuries:



Well worth reading in full.