Business Blog Posts

Steps to cool demand in China, the world's fastest-growing major economy, could weigh on global markets at a time when recoveries in Europe and the United States remain fragile.

To begin with, the State Council, or cabinet, said it would aim to increase the supply of commodities, especially food, that have driven inflation to a 25-month high, while also clamping down on speculative demand that has lifted prices higher.

"We need to understand the importance and urgency of stabilizing market prices and take forceful measures," it said after a routine meeting chaired by Premier Wen Jiabao.

"When necessary, temporary intervention measures will be implemented on prices of some important daily necessities and production materials," it added in the statement.

The State Council singled out grain, oil, sugar and cotton as markets that it wanted to stabilize. It also vowed to intensify a crackdown on price speculation and to punish those found hoarding commodities and pushing up prices by illegal means.

The statement made no mention of monetary policy.

"I don't believe that they will just stop here," said Kevin Lai, an economist with Daiwa Capital Markets. "Many people in the government are capable enough to figure out that prices controls are not that effective."

"They really have to do something more about controlling liquidity and money supply growth if they are serious about containing inflation," Lai said, adding that he expected the central bank to raise interest rates for the second time this year over the next two weeks.

MORE TIGHTENING AHEAD

Worries that the government could start tightening more aggressively drove China's main stock index down by 1.9 percent on Wednesday to a one-month closing low. The index has dropped 11 percent over the past four trading days.

Shi Chenyu, an economist with the investment banking arm of the Industrial and Commercial Bank of China, said the sternly worded statement showed that inflation had reached the top of Beijing's policy agenda.

"The government often opts for iron-fisted administrative measures to control prices when inflation becomes a serious problem," Shi said. "However, harsh administrative measures may backfire as expectations of further price rises may intensify."

"

The State Council said it would hold provincial governors accountable for the prices of "rice bags" and make mayors responsible for "vegetable baskets," though it did not specify how it would implement these directives.

GM sold 478 million common shares at $33 each, raising $15.77 billion, as well as $4.35 billion in preferred shares, more than the initially planned $4 billion.

Including an option that would allow underwriters to sell more shares, expected to be exercised in coming days, GM looks set to raise $23.1 billion -- the biggest initial public offering ever.

The strong response to the stock sale reflects growing investor confidence that GM is moving beyond its unpopular, taxpayer-funded bankruptcy in June 2009 with sharply lower costs and higher profit potential.

The U.S. government's stake in GM will drop to about 33 percent from 61 percent if all available shares are sold.

The stock will begin trading on Thursday on the New York and Toronto stock exchanges.

The success of the IPO is good news for the Obama administration, which faced criticism for bailing out GM, and will help the automaker shed its "Government Motors" label.

Auto industry executives and analysts said the reversal in Wall Street sentiment toward GM pointed to renewed confidence in an industry that was hit hard by the credit crisis of 2008.

That is a positive sign for a range of auto-related companies, including Chrysler, that are looking to tap the credit and equity markets in coming months, analysts said.

"You're not in GM for a three-month investment," Tim Leuliette, a director at auto parts maker Visteon Corp, (VSTO.OB) said at the Reuters Autos Summit.

"You're into GM because a critical element, a critical building block of the U.S. economy, has significantly repositioned itself to be competitive.

FROM BLUE-CHIP TO BAILOUT

The stock sale represents a big step toward taxpayers recouping the U.S. government's $50 billion rescue of the 102-year-old company, which had fallen from blue-chip status to bailout basket case in recent years.

GM earned $5 billion in the first nine months of 2010 and is on track for its first full-year profit since 2004. Earnings will accelerate if U.S. auto sales continue to creep back up toward the 15-million or 16-million vehicle-per-year sales rates the U.S. industry last saw in 2007, analysts say.

Sales plunged to 10.4 million vehicles in 2009 and have staged a slow recovery to near 11.5 million this year.

The data on Wednesday could help to ease criticism of the Fed's unpopular November 3 decision to inject more money into the economy through purchases of $600 billion worth of government debt.

The Labor Department said its Consumer Price Index rose 0.2 percent last month after edging up 0.1 percent in September and below economists' expectations for a 0.3 percent gain.

Excluding volatile food and energy prices, core CPI was flat for a third straight month in October and the increase from a year ago of 0.6 percent was the smallest since records started in 1957, the department said.

Economists polled by Reuters had expected core CPI to edge up 0.1 percent in October and the year-on-year rate to rise 0.7 percent after a 0.8 percent increase in September.

"Very much in line with the Fed policy initiatives suggesting that inflation right now is not a concern," said Lindsey Piegza, an economist at FTN Financial in New York. "This again gives them momentum to support their policies amid rising criticism."

In a separate report, the Commerce Department said housing starts plummeted 11.7 percent to a 519,000 annual rate from a downwardly revised 588,000 in September.

It was the weakest starts rate since 477,000 in April 2009 when the economy was still struggling with the impact of the 2007-2008 financial crisis.

Economists surveyed by Reuters had anticipated a starts rate in October of 600,000 -- far higher than the actual outcome.

Permit applications for new building edged up to 550,000 last month from an upwardly revised 547,000 in September, potentially a sign that builders hope for better times ahead.

Stock index futures held on to modest gains after the data, while U.S. government debt prices rebounded from losses. The dollar slipped against the euro and yen.

The inflation data came on the heels of a report on Tuesday that showed core producer prices recorded their biggest decline in more than four years in October as vehicle prices tumbled.

The U.S. central bank's unpopular decision was driven by policymakers' desire to prevent the current disinflation environment from translating into a crippling phase of deflation and to boost a sluggish labor market.

However, discount chain Target Corp (TGT.N) offered an upbeat fourth-quarter sales forecast on Wednesday, while earlier this week top retailer Wal-Mart Stores (WMT.N) said holiday sales would break a six-quarter streak of same-store sales declines in the United States.

In October, overall consumer prices were lifted by a 4.6 percent jump in gasoline prices after increasing 1.6 percent the prior month. Food prices rose by a muted 0.1 percent after gaining 0.3 percent in September.

New motor vehicle prices, which depressed core wholesale prices in October, contributed to holding down the core CPI number. New vehicle prices fell 0.2 percent, while the cost of used trucks dropped 0.9 percent.

Shelter costs edged up 0.1 percent, while apparel fell 0.3 percent in October.

(Reporting by Lucia Mutikani and Glenn Somerville; Editing by Neil Stempleman)

Dublin has so far resisted pressure to request aid, although euro zone ministers have agreed to send a joint European-IMF mission to Ireland that could prepare the way for a bailout to prevent its debt crisis spreading to other countries.

Asian stocks excluding Japan dropped to their lowest level in four weeks, while European bourses opened lower with the FTSEurofirst 300 index of top European shares .FTEU3 down 0.2 percent.

The rally in the dollar, meanwhile, briefly paused after two top Federal Reserve officials were reported by the Wall Street Journal as saying the central bank may need to go beyond its latest plan to pump $600 billion into the U.S. economy.

The MSCI Asia stock index excluding Japan .MIAPJ0000PUS fell 1.5 percent to its lowest level since October 20, on track to close lower for an eighth straight session.

Among the worst performers, Australian shares .AXJO slid 1.6 percent as BHP Billiton (BHP.AX) and Rio Tinto (RIO.AX) both suffered falls of more than 2 percent.

Investors worry that China, Australia's largest export market, is preparing more aggressive steps to tame inflation and thus risk slower growth.

CHINA INFLATION

Chinese Premier Wen Jiabao said his government was preparing steps to tame price rises, feeding into market expectations that China will intensify tightening policies. There is talk that it may do so as soon as Friday.

"China wants to send a message to everybody that this time they are serious in fighting inflation, reducing excess liquidity and controlling speculative inflows," said Danny Yan, who helps manage more than $400 million at Tai Fook Asset Management.

Hong Kong's Hang Seng index .HSI shed 2.2 percent, while Chinese shares .SSEC fell 1.9 percent. Several other markets in Asia were closed for holidays, including Singapore, Indonesia, Malaysia and India.

Japan's Nikkei average .N225, however, eked out a small gain as shares in some exporters, such as car makers, benefited from the yen's softness against the dollar.

The dollar hit a six-week high of 83.59 yen in New York, and was last at 83.44, while the euro, which fell as low as $1.3446 overnight, edged up to $1.3500.

Worries about further policy moves in China also knocked commodity prices lower. Shanghai copper and zinc futures fell by their daily limit, chasing losses of 5 to 8.5 percent in London in the previous session.

"We know it's coming, but we don't know when. The uncertainty is a risk-appetite killer, but like Rumsfeld once said, 'it's a known unknown'," a trader in Hong Kong said, referring to comments by former U.S. Defense Secretary Donald Rumsfeld.

The Fed's effort to pump money into the financial system by buying up Treasury bonds has sparked fears it will feed asset bubbles in emerging markets and generate domestic inflation.

Atlanta Fed President Dennis Lockhart took issue with the idea pressed repeatedly by top economic officials in countries like China and Brazil that the easing was a backdoor effort to jumpstart exports through a weaker dollar.

"There is no monetary policy intent to engineer specific values -- or even a direction-- for the dollar," Lockhart said in a speech before the Alabama World Affairs Council. "This policy was not undertaken to prompt dollar depreciation."

Others struck a similar chord.

In an interview with the Wall Street Journal, Charles Evans of the Chicago Fed said the central bank's primary concern must, by definition, the performance of the American economy.

After emerging last summer from its deepest recession since the Great Depression, the U.S. economy has grown unevenly. It registered a modest 2 percent annualized rate of growth in the third quarter.

Unemployment remains stuck at 9.6 percent and inflation is running at below the levels preferred by Fed policymakers.

"I would continue to want to apply accommodative monetary policy until I had some confidence that that situation was changing," Mr. Evans was quoted as saying in the Journal interview. He said $600 billion is a "good place to start" the easing program.

U.S. producer prices excluding food and energy unexpectedly fell in October to post their largest decline in more than four years.

"It suggests that the Federal Reserve's fight ... may be tougher than we might have thought," said Hugh Johnson, chief investment officer at Hugh Johnson Advisors in Albany, New York.

WHOLE HOG

Boston Fed President Eric Rosengren , who, like Evans, is considered one of the more dovish members of the Federal Open Market Committee that sets official U.S. interest rates, was even willing to consider additional purchases.

"As long as the economic outlook doesn't improve dramatically I would expect that we will purchase the entire amount," he told the Wall Street Journal. "If the economy were to weaken and we were to get further disinflation and a higher unemployment rate, then we would have to reflect on whether we should take additional action."

Lockhart, the Atlanta Fed President, also indicated he expected the full $600 billion program to be completed through its June deadline.