Thursday, July 16, 2009

China's growth accelerates on stimulus boom

China's second-quarter growth accelerated on a stimulus-fed investment boom, the government reported Thursday, sparking a rise in Asian stocks on hopes the world's third-largest economy could help to lead a global recovery.

The economy grew by 7.9 percent from a year earlier, up from the first quarter's 6.1 percent growth rate, the National Bureau of Statistics said. Analysts said full-year growth should easily reach the government's 8 percent target.

"This should give people confidence that China's economy is on strong footing and that there are a lot better days ahead," said Alan Landau, Hong Kong-based president of Marco Polo Pure Asset Management.

The pickup in growth reflected the impact of Beijing's 4 trillion yuan ($586 billion) stimulus, an effort to offset a collapse in exports by pumping money into the economy through spending on public works construction.

"We are in a blood transfusion-led economic recovery," said Rock Jin, chief economist for Sinolink Securities Co. in Beijing.

Many analysts expect China to be the first major country to emerge from the worst global slump since the 1930s. That could help propel global growth as China imports more raw materials, industrial components and consumer goods.

In the United States, a Chinese recovery could help to boost exports of factory and construction equipment and farm goods such as soybeans. But the bulk of China's imports are raw materials such as Australian iron ore and components from other Asian countries, so the direct impact on the United States and Europe might be limited.

China's strong quarterly results, coupled with higher U.S. corporate profits, spurred a rally in Asian stocks. Markets in Tokyo, Hong Kong, South Korea and Singapore all rose. In mainland China, markets fell as investors took profits after a rally, but the benchmark index is still up 75 percent this year on enthusiasm about the stimulus.

The International Monetary Fund raised its forecast of China's 2009 growth this month by one percentage point to 7.5 percent. The World Bank boosted its forecast last month from 6.5 percent to 7.2 percent, citing unexpectedly strong stimulus results.

Still, the Chinese government warned that despite the latest improvement, a full-fledged recovery is not firmly established.

"The difficulties and challenges in the current economic development are still numerous," said a statistics bureau spokesman, Li Xiaochao. "The basis of the rebound of the people's economy is not stable."

Goldman Sachs said compared with the previous quarter — the way other major countries measure economic expansion — growth accelerated to a near-record 16.5 percent on an annualized basis. JP Morgan said it calculated that sequential expansion at 14.9 percent.

China's growth sank last year as global demand for exports collapsed, wiping out up to 30 million factory jobs. But the economy was regarded as poised for a quick a recovery, with strong banks unhampered by the mortgage crisis that battered Western lenders.

State-owned banks have boosted lending to record levels, pushing new credit in the first half to a record 7.3 trillion yuan ($1.1 trillion) and sparking a revival in China's real estate market.

Most of the stimulus has gone to state-owned construction companies and suppliers of cement and steel. But money is flowing to the private sector as builders hire workers and buy other materials.

Industrial output rose 10.7 percent in June from a year earlier, faster than May's 8.9 percent growth, the statistics agency said. It said retail sales rose 15 percent in the first half from a year earlier, while spending on factories and other fixed assets was up 33.5 percent.

Sinolink's Jin said 2.5 percentage points of the 7.9 percent quarterly growth came from stimulus-financed investment and the rest from production.

Zhu Jianfang, chief economist for Citic Securities Ltd., said he expects growth to accelerate to 9 percent in the third quarter and into double digits for the final three months of 2009.

"I think the economy is in a fairly good recovery state," Zhu said. "It's not only stimulated by the government investment but also followed by some private investment. This is a positive change."

Consumer prices in June fell 1.7 percent from a year earlier, the statistics agency said, giving Beijing a freer hand to keep spending on its stimulus without a danger of adding to pressure for prices to rise.

The wave of positive data in recent weeks has encouraged investors, driving a stock market boom that has boosted China's benchmark Shanghai Composite Index by 75 percent since the start of the year.

The jump in lending and investment has prompted warnings from some analysts and even the central bank governor about a possible rise in bad loans and bubbles in real estate and stock prices. But most analysts say potential problems are still modest.

Li, the government spokesman, said Beijing is closely watching to make sure the stimulus does not ignite inflation.

"There are still quite a lot of uncertainties," Li said. "We should remain watchful about changes in prices."

CIT's shares, bonds plunge on bankruptcy fears

Shares of embattled U.S. lender CIT plummeted and its debt sold off steeply on Thursday on escalating fears about a potential bankruptcy after the company said bailout talks with the government had ended.

The announcement late Wednesday followed last-ditch talks in which U.S. Treasury officials had expressed concern about a worsening liquidity crunch at the 101-year-old company, which lends to hundreds of thousands of small and mid-sized U.S. businesses.

"This comes as a surprise as we had thought CIT had a good chance of obtaining support," analysts at brokerage Stifel Nicolaus said in a research note. "With these talks ending fruitlessly, we think CIT likely was too stressed for any temporary government solution."

"As a result, we expect the company to file for bankruptcy in short order," they added.

CNBC, citing a source close to the company, has said CIT is now pursuing a plan that is likely to include a Chapter 11 bankruptcy filing on Friday.

The company's stock swooned more than 80 percent to as low as 31 cents in early trading on the New York Stock Exchange as it reopened after being suspended on Wednesday afternoon.

CIT's 5 percent notes due in 2014 fell to 52 cents on the dollar early on Thursday from 61.5 cents late on Wednesday, according to MarketAxess.

"The prudent course for bondholders is to brace for bankruptcy," wrote analysts at independent research firm CreditSights in a research note.

The company was not immediately available to comment.

If CIT were to go bankrupt, it would join Lehman Brothers Holdings Inc (LEHMQ.PK: Quote, Profile, Research, Stock Buzz) and Washington Mutual Inc (WAMUQ.PK: Quote, Profile, Research, Stock Buzz) among large financial companies to collapse since the credit crisis accelerated last September.

While the company has indicated it needs at least $2 billion of rescue financing in the next 24 hours or it would likely file for bankruptcy, "we believe the figure is in the range of $4 billion to $6 billion plus, making outside capital sources shy away from such a heavy recapitalization," the CreditSights analysts wrote.

Costs to insure CIT's debt against the risk of default surged. CIT's credit default swaps widened to about 47 percent as an upfront cost, from 34 percent late on Wednesday, according to Phoenix Partners Group data.

SAD END

CIT's problems surfaced two years ago in the wake of Chief Executive Jeffrey Peek's decision earlier in the decade to expand into subprime mortgages and student loans, both potentially highly profitable but fraught with added risk.

Founded in St. Louis in 1908, CIT boasts on its Website that a million business customers depend on it for financing.

Many may now have to turn to another firm at a time when credit markets remain tight, reducing business activity as the government tries to lift the economy out of a deep recession.

CIT sought new help even after winning bank holding company status in December so it could draw $2.33 billion of taxpayer money from the government's Troubled Asset Relief Program.

The U.S. Treasury Department had been considering an aid package that could have included a temporary loan, access to the Federal Reserve's discount window, or asset transfers to CIT's banking unit, a person familiar with the matter said. The person requested anonymity because the talks were private.

Federal Deposit Insurance Corporation Chairman Sheila Bair, whose office is already under strain as banks fail by the dozens, had been reluctant to let CIT issue government-guaranteed debt, believing that a program allowing such issuance was designed for healthy institutions.

"This marks a sad end for the 100-plus-year-old finance company," Stifel Nicolaus analysts said.