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Feb 19 - 25, 2001

China economy may lose steam

China's economic growth will be hampered by slowing exports and subdued consumer spending this year, putting pressure on Beijing to unveil another large special debt issue to stimulate the economy, experts said on Monday.

The government is expected to target growth around seven per cent in 2001, slower than 2000 and similar to the pace of expansion in 1999, but to achieve this it will need to issue around $18 billion in debt to support its spending.

There will be uncertainty this year. The fundamentals for a sustained growth upturn isn't strong enough, said Zhang Shuguang, senior economist at the Beijing Unirule of Economics, an independent think-tank.

Analysts say China will not escape the expected US-led global slowdown, which is expected to cut export demand, while more state layoffs and stunted income growth could make a nascent recovery in Chinese consumption short-lived.

Last year, the economy staged a remarkable turnaround, ending a seven-year slowing streak by growing a provisional eight per cent. The growth rate peaked at 14.2 per cent in 1992 and fell steadily to 7.1 per cent in 1999.

Exports are expected to slow this year and consumption is unlikely to grow very strongly, Zhang said. The private-sector investment is still restrained.

Official data showed exports surged an annual 27.8 per cent last year, buoyed by robust overseas demand. Retail sales rose an annual 9.7 per cent in 2000, nearly three per centage points higher than 1999 and 1998.

Consumption was fuelled by low bank interest rates, a bullish stock market and Beijing's move to raise salaries for civil servants and allow workers to have more holidays, analysts said.

Beijing has cut interest rates seven times since May 1996, bringing one-year bank deposit rates to just 2.25 per cent from 9.18 per cent. A tax has been imposed on bank interest income.

Rate change weakens yen

The failure of the Bank of Japan to reinstate its zero interest rate policy, or ZIRP, at Friday's board meeting has undermined the yen, analysts said.

The Japanese central bank lowered its official discount rate by a token 15 basis points to 0.35 per cent, but key money market rates were left unchanged.

"What does this mean? Nothing!" said Carl B. Weinberg, chief economist at High Frequency Economics, Valhalla, N.Y.

The discount rate is the emergency rate at which the BOJ offers funds to banks that are in serious trouble making reserve minimums. Less than 1 per cent of all bank reserves are borrowed at this rate, Weinberg said.

"Anyone who was looking for the BOJ to act decisively to boost liquidity in the economy has to be disappointed by these results," he said.

The yen slumped against the dollar for the third day in a row on Friday, and analysts expect this trend to continue.

"The discount rate cut is really meaningless, although it sounds good," said Andrew Chaveriat, currency technical analyst at BNP Paribas.

"They really have not eased monetary policy, and fiscal policy looks to be an unattractive option due to concern over the deficit," Chaveriat said. "Massive public works projects have created highways to nowhere and the cementing over of the bottoms of goldfish ponds," he said.

"The only way out for Japan is to see the yen weaken," Chaveriat said.

Fiscal policy measures have done little to resolve Japan's low personal consumption, said David Gilmore, economist and partner at Foreign Exchange Analytics, Essex, Conn.

ECB holds rates at 4.75%

The European Central Bank kept interest rates at 4.75 per cent for a fourth straight month on Thursday, as expected.

Europe's economy is still growing steadily and inflation remains above the ECB's short-term target of 2 per cent, necessitating a stand-pat policy, said economists polled earlier this week by CNN.com.

However, most economists forecast a cut in rates during the second quarter to stave off the impact from a U.S. economic downturn.

That's amid a backdrop of solid European growth. ECB President Wim Duisenberg has forecast growth in the 12-nation euro-zone to come in at around 3 per cent this year.

The U.S. Federal Reserve, concerned about slowing growth, slashed its short-term interest rate target by a full per centage point last month. That was followed last week by modest easing by the Bank of England and the Bank of Japan.

Shortly after the announcement, the euro traded at 90.83 U.S. cents, compared with 91.25 cents earlier in the day.

Euro group on US slowdown

The 12-nation Euro group on Monday said it was "realistically optimistic" on its ability to deal with the US economic slowdown as well as the world at large.

I can confirm this realistic optimism for the euro zone and very reasonable capacity to resist a slowdown in the world at large, said Belgian Finance Minister Didier Reynders, who chaired the Euro group meeting.

That is our message...to the G7 meeting next Saturday in Palermo (Italy), confirming our realistic confidence in euro area, said Reynders.

He added that the Euro group viewed the euro as a strong currency within a strong economy...which promotes growth.

The 12 ministers of the euro zone, considered an IMF report on the euro zone economic situation, saying they "largely agreed" with most of its points.

Fed: No inflation threat

The United States has an oversupply of capital goods that will take an indefinite period to work off before investment picks up again yet inflation is not seen as a threat this year, Federal Reserve Vice-Chairman Roger Ferguson said Wednesday.

"Over the last few months, data on orders and shipments of nondefense capital goods have provided hard evidence on a slowdown in business spending on high-tech capital goods," Ferguson said in prepared remarks for delivery at Vanderbilt University in Nashville. Ferguson was there to speak about the new economy.

His comments fit with testimony on Tuesday from Fed Chairman Alan Greenspan, who told Congress that businesses were struggling with a glut of unsold inventories while consumers appeared to have turned wary.

Techs lift Europe

Europe's main markets recovered to end higher Thursday, led by a tech rebound in chip, software and telecom stocks.

In Frankfurt, the DAX index gained 1.3 per cent to reach 6,565.33 in late trade, led by Europe's largest software firm SAP (FSAP3) and chipmaker Infineon Technologies (FIFX).

The CAC 40 in Paris added 1.1 per cent to 5,704.53, with chipmaker STMicroelectronics (PSTM) and network equipment maker Alcatel (PCGE) leading gains.

London's FTSE 100 index rose 0.4 per cent to 6,197.9, as cable and telecom operator Telewest Communications (TWT) and information technology consultant CMG (CMG) topped gains.

In Amsterdam, the AEX index gained 0.6 per cent while Milan's MIB30 added 0.5 per cent. In Zurich, the SMI gained 0.7 per cent.

The broader FTSE Eurotop 300 index, composed of a basket of Europe's largest companies, added 1.3 per cent.

Ciena lights Nasdaq fire

An upbeat sales outlook from Ciena sent investors piling into optical and networking stocks Thursday, lifting the Nasdaq composite index for a second day.

The Nasdaq gained 61.51 points, or 2.5 per cent, to 2,552.91, building on Wednesday's 63-point advance. The Dow Jones industrial average jumped 95.61 to 10,891.02, lifted by Hewlett-Packard, which, after the close of trading, posted first-quarter earnings that met Wall Street's targets. The S&P 500 advanced 10.69 to 1,326.61.

New York Stock Exchange beat declining ones 1,679 to 1,394 as 1.1 billion shares traded. Nasdaq winners topped losers 2,243 to 1,497 as 2 billion shares changed hands.

In other markets, Treasury securities declined. The dollar rose against the euro but fell versus the yen.

Asian shares close mixed

Asian share markets closed mixed on Thursday with key markets in Tokyo and Hong Kong little changed following directionless trading.

The Tokyo Stock Exchange's Nikkei-225 index rose 43.33 points to finish at 13,327.39. The key Hang Seng index lost 104.05 points to close at 15,756.37. The All Ordinaries index fell 22.6 points to 3,272.2, while the SP/ASX 200 index slumped 24.4 points to close at 3,325.7. The Straits Times Index rose 9.45 points to 1,975.55.

Malaysian shares closed 0.5 per cent lower following the fall of the Dow Jones Industrial Average on Wall Street. The Jakarta Stock Exchange composite index closed up 17.009 points at 440.223. The NZSE40 index closed down 10.87 points at 1,960.80 on turnover of US$40.7 million.

Palm oil prices

Malaysia's palm oil market saw further liquidation at the close on Tuesday due to persistent worries over high stocks, which some traders said could reach 1.5 million tons in February due to poor exports.

The benchmark third-month April futures contract shed 22 ringgit at 724 ringgit ($190.52) a ton. Volume was 2,710 lots.

There are rumours that production in February could reach a minimum of 900,000 tonnes. So if exports don't show any great progress, the closing stocks in February could reach 1.5 million tons, said one trader in Kuala Lumpur.

Mergers & Acquisitions

Bear Stearns—Wagner Stott Mercator: Broker and investment banker Bear Stearns Companies is buying Wagner Stott Mercator LLC, one of the leading specialist firms on the New York Stock Exchange.

PSINet: Troubled Internet service provider PSINet Inc. plans to sell one of its more lucrative units for $325 million as a way to fix its financial woes, according to press reports Thursday.

eBay—iBazar: Online auction site eBay Inc. is in talks to acquire French online auction company iBazar Group SA for about 100 million ($92 million) in stock, the Wall Street Journal reported Monday.

De Beers: De Beers landed a $17.6 billion takeover bid from its major shareholders on Thursday, aimed at taking the company back into private hands.

Ameritrade—TradeCast: Ameritrade Holding Corp., the nation's sixth-largest online broker based on trades, agreed Wednesday to acquire TradeCast Ltd. in a nearly $70 million stock deal.

Citibank—EAB: Citibank N.A. agreed Monday to acquire European American Bank, a unit of ABN AMRO Bank N.V., for $1.6 billion plus the assumption of $350 million in preferred stock.

Treasurys continue slide

U.S. Treasury issue prices fell for the fourth straight session Thursday as the market reacted to a stock market rally and continued to digest testimony by Federal Reserve Chairman Alan Greenspan that suggested a reduced urgency for further interest rate cuts.

Two-year Treasury notes fell 1/32 to 99-25/32, pushing their yield, which moves inversely to price, up to 4.87 per cent. Five-year notes shed 3/32 to 102-31/32, yielding 5.03 per cent after a steep 14/32 drop on Wednesday. Benchmark 10-year notes fell 6/32 to 98-18/32 to yield 5.19 per cent, while 30-year bonds lost 18/32 to 98-8/32, yielding 5.49 per cent.

Mortgage rates hold steady

Long-term mortgage rates were almost unchanged from last week's figures as market sentiment awaits the release of key economic data Friday.

The benchmark 30-year fixed-rate mortgage (FRM) averaged 7.01 per cent for the week ending Feb. 16. The average this week for a 15-year fixed-rate mortgage was at 6.61 per cent. One-year adjustable rate mortgages (ARMs) averaged 6.40 per cent.

U.S. jobless claims drop

New claims for unemployment benefits dropped slightly in the most recent week, the government reported Thursday.

The Labor Department said first-time claims for state unemployment benefits fell by 11,000 to a seasonally adjusted 352,000 for the week ended Feb. 10, down from a revised 363,000 a week before.


Novartis: Switzerland's top pharmaceuticals group Novartis AG unveiled better than expected profits on Thursday. Net profits in 2000 rose eight per cent to 7.21 billion Swiss francs ($4.32 billion) on a seven per cent rise in drug sales.

Renault: French car maker Renault said Tuesday its operating profit fell 8.3 per cent in 2000. Operating profit of 2.02 billion ($1.8 billion) in 2000, slightly above consensus forecasts, pulled down the group's operating margin to 5.0 per cent from 5.9 per cent in 1999.

Global Crossing: Global Crossing Ltd's loss widened to $454 million, or 58 cents per share, compared with a loss of $240.6 million, or 34 cents per share, a year ago.

MGM: Metro-Goldwyn-Mayer Inc. reported fourth-quarter net income of $12.4 million, or 6 cents a share, compared with $15.2 million, or 8 cents a share, a year earlier.

MetLife: MetLife Inc., said operating profits, excluding one-time items, rose to $404 million, or 51 cents per share, from $370 million, or 47 cents per share, on a proforma basis, in the year-ago quarter.

Reuters: Reuters Group posted an unexpected 4 per cent rise in profits on Tuesday. The news provider said income before tax in 2000 climbed to £657 million ($955 million) up from £632 million a year ago.

ABB: ABB, said net income was virtually unchanged, down just $1 million to $219 million, while earnings per share remained flat at $0.74. Revenue fell 2.2 per cent to $6.9 billion.

Microsoft demos new OS

Microsoft Corp. on Tuesday took the wraps off its latest computer operating system software, which some industry observers say could give a lift to flagging consumer PC sales when it is introduced to the mass market in the latter half of this year.

Executives gave the public its first glimpse of the new operating system, called Windows XP, at a press conference in Seattle. The new software, formerly code-named "whistler," is aimed in large part at consumers, but a business version will be made available as well.

Windows XP has been designed with more emphasis on multimedia features such as Web publishing and streaming audio and video. It was built on the same platform as Microsoft's Windows 2000 operating system and is the first consumer operating system since Windows 95 that has an entirely new underlying code base.

Europe raps Ireland, UK

European finance ministers riled Ireland and Britain on Monday, saying their budgets failed to meet European Union guidelines.

In an unprecedented decision the European council of financial ministers recommended the Irish government take budgetary measures during the current fiscal year to remove "inconsistencies" with European Union policies.

The ministers, meeting in Brussels, were opposed to Ireland's proposal to pump 2.0 billion Irish pounds ($2.4 billion) into the already booming economy. The Commission forecasts Ireland's economy grew 10.7 per cent in 2000.

On the other end of the economic spectrum, the finance ministers criticised Britain's spending plans that would put the country's finances into deficit.