Business Blog Posts

It said it was raising benchmark rates by 25 basis points, taking one-year deposit rates to 2.5 percent and one-year lending rates to 5.56 percent.

The impact was felt by global markets across the board. Oil prices fell, stock markets turned negative in Europe and the dollar rose as investors were caught off guard by the tightening step.

"The interest rate rise is entirely outside of market expectations," said Zhu Jiangfang, chief economist at CITIC Securities in Beijing.

"The recent rise in headline inflation has put the real rate into negative territory. And I think that's why the central bank needs to raise interest rates in such a hasty way," he said.

Although announced by the People's Bank of China, the decision to increase rates would have received approval from the highest echelons of Chinese power, with Premier Wen Jiabao likely signing off on it.

Once a consensus has been forged in Beijing to raise or cut rates, past experience shows that moves often come in bunches.

In the view of some, it is about time for China to embark on a more aggressive tightening cycle. To date, it has relied on lending restrictions and banks' reserve requirements to keep growth from boiling over.

"Fundamentally, policy rates are just too low for an economy that's growing around 10 percent. To avoid bigger distortions, China needs to start moving rates to more appropriate levels," said Rob Subbaraman, an economist with Nomura in Hong Kong.

"China's economy looks as though it's decoupling from other major economies, and its policies should as well," he said.

DEBATED BUT UNEXPECTED

A number of leading economists, including some advisers to the central bank, have urged an increase in deposit rates to keep savers' returns in positive territory.

China reported consumer inflation of 3.5 percent in the year to August and economists expect that the pace climbed to 3.6 percent in September.

Still, the increase in rates is surprising given that several top leaders have recently expressed confidence that inflation is under control, and have said that higher rates would potentially suck in speculative capital from abroad.

"They did it now likely because Thursday's GDP and CPI data is too strong for them," said Dariusz Kowalczyk, senior economist at Credit Agricole CIB in Hong Kong.

Third-quarter shareholder net income fell to $1.9 billion, or $2.98 a share, from $3.19 billion, or $5.25 a share, a year earlier.

Analysts on average expected $2.32 a share, according to Thomson Reuters I/B/E/S.

"Even though expectations were lower and even though the EPS numbers were reduced dramatically in the past couple of weeks, it's still a much more positive release than many of their competitors," said Matt McCormick, portfolio manager at Bahl & Gaynor Investment Counsel Inc.

New York-based Goldman has found itself in the crosshairs of regulators this year, first defending against fraud charges from the U.S. Securities and Exchange Commission, and then preparing to reshape trading businesses to comply with the financial regulation reform bill.

Trading profits, which motored Goldman's rebound from the financial crisis, have weakened.

Goldman reported net revenues in fixed income, currency and commodities of $3.77 billion, down 37 percent from a year ago. The firm attributed the drop to a challenging environment in which activity levels dropped significantly.

Equities trading net revenues were $1.05 billion, down 43 percent.

A bright spot in the earnings was Goldman's investment banking division, which reported net revenues of $1.12 billion, up 24 percent.

Goldman, which has faced a backlash over its pay practices, set aside $3.83 billion for compensation in the third quarter, bringing its total pool to $13.12 billion for the year, down 21 percent from a year ago.

Goldman shares were up 30 cents to $154.00 in premarket trading.

(Reporting by Steve Eder; Editing by John Wallace)

WTO Director-General Pascal Lamy said governments had largely resisted resorting to conventional trade measures such as higher tariffs to protect jobs in the wake of the crisis, but friction over exchange rates risked undermining that.

"For the moment it's a risk, but it's a risk that can be dangerous for trade," he told reporters late on Monday.

Lamy has in the past refused to get involved in discussions about currencies, arguing that such matters are primarily the mandate of the International Monetary Fund.

But the comments, following an interview in a British newspaper on Thursday, indicate that the body that polices world trade is getting increasingly concerned about currency policies.

Currency tensions are likely to dominate next month's summit of the G20.

The United States and European Union are calling on China to let its yuan appreciate, China has condemned lax monetary policy in the United States for distorting the global economy, Japan and Switzerland have been selling their currencies to ward off deflation and emerging economies from Thailand to Brazil are seeking to block inflationary capital inflows.

Underlying these disputes, economists say, is the fear that countries will slip into a tit-for-tat round of devaluation to make exports more competitive and preserve jobs.

WTO rules do include an article that requires members not to circumvent trade agreements through exchange rate policy.

But this measure has never been tested in a WTO dispute.

Lamy declined to comment on the bill passed by the U.S. House of Representatives that would allow the U.S. government to treat China's undervalued currency as a subsidy and impose countervailing duties in response.

(Reporting by Jonathan Lynn; Editing by Jon Boyle)

In a monthly report, the government downgraded its assessment of the economy for the first time since February 2009. A senior Japanese official said further pressure on the economy, which is mired in stubborn deflation, could tip it into recession.

"If the economy turns out as expected in our main scenario, we may end up describing the current situation as a soft patch," said the official at the Cabinet Office, which compiled the report.

"But if it comes under further downward pressure, it could end up slipping into recession," he said.

Faltering recoveries from the global financial crisis in developed economies have pushed global investors into emerging markets in search of higher returns, driving up their currencies.

The move has been exacerbated by widespread expectations that the U.S. Federal Reserve will print billions of dollars to try to lift the U.S. economy, sparking concerns that the extra liquidity will find its way into emerging markets.

The currency tensions will dominate a Group of 20 finance ministers' meeting in South Korea starting on Friday and a G20 summit in November, as officials look to tackle the economic imbalances and the threat of competitive currency devaluation.

"Currencies will be the topic that many people will be talking about ... at the G20. I hope that good ideas will be put forward there and we will explain the present situation in Japan," Finance Minister Yoshihiko Noda said.

Japan's policymakers have grown increasingly concerned by a slowdown in growth in the export-reliant economy, prompting the government to draw up a supplementary budget and the central bank to offer cheap loans and to promise to buy assets.

A rise in the yen to a 15-year high against the dollar added to these woes, sparking the first currency intervention by Japan in six years.

YEN'S RISE HURTS

The latest assessment by the government was the first time since July 2008 -- just before the onset of the last global recession -- that it had described the economic situation as at a standstill.

It said the economy could be depressed by a slowdown in the global economy and swings in share prices and foreign exchange rates as a rising yen threatens exports.

"Economic movements appear to be pausing recently," the report said, while repeating that the economy was in a mild deflationary phase.

Previously, it had said the situation was becoming increasingly severe although the economy was recovering, with some movement seen toward a self-sustaining recovery.

The World Bank buttressed the argument made by China and others that U.S. policies are sending a wave of cash flowing into higher-yielding emerging markets, undermining their export competitiveness and pumping up inflation and asset bubbles.

"We are seeing an effort by developing East Asia to deal with the large amounts of liquidity driven in very large part by the monetary policy easing in the United States," Vikram Nehru, the bank's chief economist for Asia-Pacific, told reporters in Tokyo.

Nehru, presenting a semi-annual report, urged policymakers to learn the lessons of the 1997/98 Asian financial crisis, when an influx of footloose global capital inflated property and equity prices, only for them to collapse when the money flows reversed.

"The authorities in East Asia need to take adequate precautions to ensure that they do not repeat the same mistake twice in slightly over a decade," the report said.

While capital controls were not very effective in controlling long-term investment flows, Asian countries had an array of instruments to deal with rising inflows, the World Bank said.

"If this liquidity abundance is sustained and increases, I think they are going have to take further action," Nehru said.

Thailand introduced a withholding tax on foreign purchases of government bonds last week, and Brazil on Monday increased an existing tax on foreign bond buyers to 6 percent from 4 percent.

Foreign investors in Brazil will also have to pay more tax to trade currency derivatives, blamed in part for driving up the real, the country's currency, to a two-year high.

"Our objective is to reduce foreign investment into Brazil," Finance Minister Guido Mantega told reporters in Sao Paulo.

YUAN VS DOLLAR

Strains over the constellation of exchange rates needed to put global growth on a more solid, sustainable footing are likely to dominate a meeting of finance ministers of the Group of 20 major economies in South Korea starting on Friday.

The dispute boils down essentially to the exchange rate of the yuan, also known as the renminbi.

The United States, supported by most economists, believes Beijing is unfairly holding the yuan down to give its exporters an advantage in global markets.

This is causing a broader misalignment of global currencies, Washington contends, because other developing countries are reluctant to lose competitiveness versus China by permitting their own currencies to appreciate in isolation.