US lawmakers turn up heat on Geithner over AIG

Lawmakers challenged Treasury Secretary Timothy Geithner’s credibility recently after he said he was not involved in a decision by bailed-out insurer AIG to withhold details about $62bn paid to banks.

Geithner held his ground at a hearing, however, insisting the government-funded rescue which cost more than $180bn had been necessary to avert economic collapse.

Big taxpayer-funded bailouts for AIG and other financial institutions at a time of soaring unemployment have angered voters.

Concerns about the economy helped to put a Republican into a Senate seat that had been long-held by Democrats in Massachusetts, serving notice to lawmakers facing re-election in November.

“Why shouldn’t we ask for your resignation as secretary of the Treasury?” Florida Republican John Mica demanded. “I think you’re punting the blame … I believe we’re not getting the whole story.”

The populist backlash has heaped pressure on Geithner and threatened to scuttle a bid by Ben Bernanke for a second term as chairman of the Federal Reserve.

Both men are architects of the financial rescue.

“It was a circus and what I saw I thought Geithner handled it well and that the adults on Capitol Hill will recognise that,” said Kevin Krueger, an analyst with Concept Capital in Washington.

Democrats and Republicans alike questioned how Geithner, who led the New York Federal Reserve Bank at the time, could have been in the dark over a decision by American International Group Inc not to disclose for months the details about billions of dollars it paid banks to settle swaps contracts.

The payments amounted to letting Wall Street “loot the corpse” after the government had propped up AIG, said Edolphus Towns, the New York Democrat who chairs the US House of Representatives Oversight Committee.

The Republican who brought the controversy to a head, Darrell Issa of California, said he wasn’t satisfied with Geithner’s responses and vowed to keep pursuing his investigation.

“If [Geithner] didn’t know, he should have and no one has answered the question as to why the New York Fed were so adamant at keeping details of the counterparty deal confidential,” Issa said in a statement after the hearing.

Issa also released a document that showed tranche and identification numbers for individual bonds purchased by a Fed investment vehicle. The Securities and Exchange Commission last year had ordered the information sealed until 2018.

Thomas Baxter, the New York Fed’s general counsel, said the Fed sought to keep the so-called cusip data secret because it would give hedge fund traders an advantage and could hurt the value of the assets for taxpayers.

Protecting taxpayers
AIG’s trading partners received 100 cents on the dollar to settle the swaps deals and lawmakers questioned why taxpayers did not get a better deal.

Geithner held steadfast to his defense that he had withdrawn from decisions by the New York Fed, which led the AIG bailout, after he was nominated to the Treasury post in late 2008. He forcefully defended his role in helping rescue the insurer.

“For the first time since the Great Depression, you were seeing a full-scale run on the financial system,” Geithner said, his temper occasionally flaring.

He said he had “no role in making decisions regarding what to disclose about specific financial terms” of the AIG rescue in November 2008, a bailout that eventually grew to cost more than $180bn.

Neil Barofsky, special inspector general for the Treasury’s $700bn financial rescue fund, questioned whether the New York Fed and Treasury could have taken a harder line with bank counterparties, rather than paying them at par.

“They could have just tried a little harder,” he said. “It may have resulted in saving US taxpayers billions, if not tens of billions of dollars. We’ll just never know.”

Geithner shows remorse but defends decisions
Geithner ceded little ground during the two and a half hour grilling but expressed some remorse at AIG-related decisions taken after he had rescued himself.

“In retrospect I wish I’d known” that AIG was keeping details quiet about the names and amounts of payments it was making to banks, he said.

Geithner insisted, however, that the decision to save AIG was “the best of a terrible set of choices” the government had faced.

“People were taking their savings out of the banks, they were wondering if a dollar was a dollar… There was a basic calamitous breakdown in the fabric of our system.”

Henry Paulson, who was Treasury secretary when the initial decision to bail out AIG was taken, denied any knowledge of AIG’s payments to banks, saying the Fed had authority to deal with counterparties. He backed Geithner’s position that an AIG rescue was necessary.

“The decision to rescue AIG was correct and I strongly supported it,” he said.

Several lawmakers protested that not enough effort was made to negotiate discounts with bankers. They said New York Fed officials had concurred with an AIG decision not to reveal the names of banks that got payments, or amounts.

Democratic staff members said they had found no evidence in hundreds of thousands of pages of documents subpoenaed by the committee to suggest Geithner was directly involved in decisions on the bank payments.

Tullow launches $1.6bn share sale

London-based oil explorer Tullow Oil launched a placing of 80.4 million shares on Wednesday, equivalent to 10 percent of its outstanding shares, to pay for development of assets in Uganda.

Based on Tuesday’s closing price of 1,216 pence, the sale would raise almost £1bn. Tullow said the money will be needed to meet higher capital expenses after it dropped a plan to sell half its Uganda assets.

Tullow planned to sell the interests in the fields in the Lake Albert basin, to attract a partner with the technical expertise needed to develop the complex project.

However, when Tullow’s partner Heritage Oil agreed to sell its interests to Italian company ENI, Tullow exercised a pre-emption right and now plans to buy and sell on these assets, if the government approves the deal.

BOJ set to keep easing bias as gov renews pressure

The Bank of Japan may sound less pessimistic about the economy on Tuesday but it will likely keep its bias skewed towards further monetary easing, with the finance minister pressuring it again to do its utmost to fight deflation.

But it remains ready to ease monetary conditions in the future, such as by buying more government debt or expanding on the new funding operation, if sharp yen or bond yield gains threaten an economy barely out of deep recession.

In a sign the government will maintain its pressure on the BOJ, Finance Minister Naoto Kan told parliament on Tuesday he wanted to overcome deflation by working with the central bank.

“Deflation continues to plague the economy and if the yen shoots up again, the BOJ may expand its new funding operation as early as next month,” said Kyohei Morita, chief Japan economist at Barclays Capital.

The central bank is almost certain to keep its policy rate at 0.1 percent and hold off on new policy initiatives after its two-day rate review, having staved off government pressure in December by starting a new funding operation.

BOJ officials have become more confident that Japan will avoid another recession, given stronger-than-expected growth in Asia and receding pessimism over the US economy.

Confidence among Japanese manufacturers has recovered to its highest level since the financial crisis and strong exports to Asia have raised hopes of a global recovery, a Reuters survey showed on Monday.

But with the government still worried about the risk of a return to recession in the run-up to upper house elections expected in the summer, the BOJ may warn of downside risks to growth, such as weakness in capital spending, and reassure markets that it will stick to its ultra-easy monetary policy.

The government criticised the BOJ for being too rosy on the economy when the bank upgraded its assessment in November. That eventually led the BOJ to cave in to pressure and adopt last month a new fund supply operation at which it offers 10trn yen ($111bn) in three-months loans to banks at 0.1 percent. It then declared that it wouldn’t tolerate deflation.

Yen borrowing costs have since fallen and pulled the yen off a 14-year high against the dollar hit in November.

Three-month LIBOR rates have fallen below 0.26 percent from around 0.29 percent before the December 1 decision.

The BOJ has been virtually alone in expanding its monetary easing. The Federal Reserve and the ECB have said they will start phasing out their emergency lending and liquidity facilities in light of improvements in credit markets.

Mulling options
Japan has a deep-rooted problem with falling prices, and the BOJ looks likely on Tuesday to stick to its prediction that deflation will persist for three years, with price falls expected to moderate over that time.

In a review of the long-term growth and price forecasts it issued in October, the BOJ board is also likely to conclude that the economy is on track for a moderate recovery early next year.

The government, now partly preoccupied by a funding scandal, has toned down its criticism of the BOJ since the bank declared Japan was in deflation. Kan, one of the most vocal cabinet critics of the bank, said last Friday the government shouldn’t meddle in monetary policy affairs.

But on Tuesday he reminded the BOJ that the government would need its help to get out of deflation, saying that there are still various monetary policy options the BOJ could take.

Kan is also expected urge the BOJ to support the economy through flexible policy in a speech he will give in parliament on Friday, the Nikkei newspaper reported.

Analysts don’t expect the BOJ to respond immediately with another emergency meeting. But some say government pressure, coupled with a weakening economy, may nudge the bank into easing again later this year.

Japan isn’t alone in experiencing friction between the central bank and the government. The US Senate looks likely to approve Federal Reserve Chairman Ben Bernanke to a second term only grudgingly as the Fed has become a target of public outrage, with the US jobless rate stubbornly high even as Wall Street profits and bonuses have soared.

With little room to cut already low rates, the BOJ hopes to keep its policy gunpowder dry for when the economy falters and government pressure on the bank heightens again.

The central bank has pledged to keep rates near zero until prices start rising again, so most in the market don’t expect any hikes until early 2012.

Ahmadinejad says new budget less dependent on oil

Ahmadinejad, who faces opposition protests seven months after his re-election, also said Iran “will have good news over production of 20 percent enriched fuel in February”.

“This news will make the Iranian nation and other independent nations happy,” he told reporters in parliament after presenting the budget to parliament.

Critics accuse Ahmadinejad of squandering the windfall oil revenue Iran earned when crude prices soared in the first half of 2008, leaving it more vulnerable now that it faces possible UN sanctions over its nuclear work.

“We have paid special attention to reducing dependence on oil income and increasing non-oil revenue,” Ahmadinejad told parliament in a speech broadcast live on state radio.

A senior official said the world’s fifth-largest oil producer’s budget for the next Iranian year, which starts on March 21, was based on an oil price of $60 per barrel, much higher than last year’s $37.5 per barrel.

“The budget is based on around $60 per barrel,” said Rahim Membini, the president’s deputy in charge of Iran’s budget affairs, the official IRNA news agency reported.

New budget transparent
The US and its European allies plan to impose further sanctions on Iran after its failure to meet a December 31 US deadline for accepting a UN-brokered proposal to send its uranium abroad for processing.

Tehran has sought amendments to the deal, under which it would transfer stocks of low-enriched uranium (LEU) abroad and receive fuel in return for a medical research reactor. Tehran says it could produce the fuel itself if it is not able to obtain it from abroad.

The west says Iran is trying to develop nuclear weapons under the cover of its civilian atomic programme. Iran denies the claim, saying it needs the technology to generate power.

The UN Security Council has imposed three rounds of sanctions on Iran since 2006 for Tehran’s failure to suspend its sensitive enrichment work.

Ahmadinejad said the new budget was “transparent, integrated and flexible”, but did not offer any overall figures.

The semi-official Mehr news agency said the allocated budget for the next Iranian year was $368bn.

To ease the impact of sanctions on, for example, gasoline imports, parliament approved in December a bill to phase out energy and food subsidies.

By carrying out the plan, the government will save up to $100bn annually from subsidies on gasoline, natural gas, electricity, water, food, health and education.

“The inflation will drop to five percent by implementation of the subsidy bill,” Ahmadinejad said. The official inflation rate in Iran stands around 13 percent. The plan is expected to be implemented in the next Iranian year.

Critics say the plan will increase inflation and may ignite social unrest, when the establishment still faces street protests after the June 12 vote that plunged the country of over 70 million into its worst unrest in the past 30 years.

Gates says US recovery to take years, taxes rise

Bill Gates, the world’s richest man, has said the US economy could take years to recover from recession and predicted taxes will have to rise to bring the federal budget into balance.

Speaking on ABC’s Good Morning America, Gates also warned against too much government intervention and urged President Obama to focus policy on long-term issues such as education to combat the effects of the worst recession since the Great Depression.

“When you have a financial crisis like that, it’s years of digging out,” said Gates, who co-founded Microsoft Corp and remains its chairman.

“The budget’s very, very out of balance. And even as the economy comes back, without changes in tax and entitlement policies, it won’t get back into balance. And at some point, financial markets will look at that and it will cause problems,” he added.

“Taxes are going to have to go up and entitlements are going to have to be moderated.”

Gates spoke two days ahead of Obama’s State of the Union speech, which is expected to focus extensively on economic issues including the need for job creation.

“We’re having a slow recovery and everybody’s frustrated by the pace of the recovery. But I don’t think the government could change and magically make it speed up a lot,” he said.

“If you try to do too much, it can distort things. The government’s role is more of a long term role, investing in education.”

Gates also said the US needs its leaders to level with the American people about the long-term challenges the country faces and the sacrifices needed to overcome them.

“We need leadership for these long-term trade-offs and I’m hoping that won’t cut back a few key areas like aid to poor countries. But there’s going to be cutbacks,” he said.

“We’re seeing this at the state level right now, and so far it’s not being handled very responsibly.”

China’s future inflation is a present headache

Chinese inflation remains tame, but prices have been creeping up in the past few months and policymakers may not only have to step up their rhetoric but also the pace of monetary tightening to prevent Wang’s fears from becoming a reality.

“I really worry that prices may rise more quickly in the future, especially for rice, meat and vegetables. After all, we can skip buying things like clothing and entertainment, but we can’t skip food,” Wang said.

Inflation picked up to 1.9 percent in December, its highest in 13 months, though still low by international standards.

Some economists have dismissed the rise as a result of volatile food prices and bad weather, but these factors could profoundly affect consumer and corporate behaviour, in turn determining how fast prices may rise over the next few months.

China’s central bank has been trying to fulfil its promise to manage inflation expectations this year by cracking down on speculation in the property market, curbing rampant loan growth, guiding market rates higher and lifting bank reserve requirements.

However, double-digit economic growth in the fourth quarter of 2009, accelerating consumer price rises, and surging exports all shorten the odds that the central bank will go farther and raise interest rates perhaps as early as this quarter.

“It’s safe to say that this will only increase inflationary expectations, and inflationary expectations can be self-fulfilling. So there’s no point for them to wait,” Qu Hongbin, chief China economist with HSBC in Hong Kong, said of the most recent batch of strong economic data.

In fact, food prices have already risen by more than five percent in the year to December and with food accounting for a third of the consumer price basket, China is particularly vulnerable to food price shocks.

In 2008, food prices spiked more than 14 percent after pig stocks were decimated by the blue-ear disease, driving overall prices 5.9 percent higher.

What should be particularly unsettling for the People’s Bank of China is that its own survey results for the fourth quarter show an index of future price expectations outstripping another of future income confidence by the biggest margin in two years.

“If workers expect inflation to increase, they may argue for higher wages. If corporations see costs going up, they may want to raise prices,” said Wensheng Peng, chief China economist with Barclays Capital in Hong Kong.

“That channel is particularly important given what happened last year – expansion of bank credit. That in itself already generated some inflation expectations,” he said.

Falling behind?
China’s growth has led the global economic recovery, so how aggressively Beijing tightens policy is crucial for international markets. Recently, investors pulled a net $348m out of China-focused equity funds, the most in over four months, fund tracker EPFR Global said in a report.

Whether China is too slow in responding to the inflation threat is hotly debated, though analysts agree that it faces an immense challenge.

After Chinese banks doled out a record 9.6trn yuan ($1,406bn) in new loans last year, they added 1.1trn yuan worth of credit just in the first two weeks of January, causing the PBOC to take punitive action against some lenders.

Furthermore, with inflation creeping up, Chinese deposit rates provide only 35 basis points worth of incentive for consumers to keep their money in the bank.

That might keep driving savers to equity and real estate markets in search of higher returns, confounding Beijing’s efforts to tame asset price inflation.

Managing inflation expectations is a long established facet of modern central banking. They are a useful gauge of real borrowing costs and public understanding of monetary policy.

However, measuring where people and businesses expect prices to go is more art than science in China. It lacks a market for inflation-linked securities and has few established surveys to track consumer and business views.

For now, consumer inflation is expected to be quite mild at three percent this year, a Reuters poll showed recently, well below the long-term trend of 6.4 percent.

Yu Song, a Goldman Sachs economist, expects prices to rise 3.5 percent this year – assuming the government decisively tightens policy.

He is concerned China will not adjust its exchange rate by enough to matter and exports will keep growing rapidly this year. That means the government will try to cool down domestic demand using incremental steps that may be insufficient to keep prices pressures bottled up.

“We may see inflation continuing to rise despite an apparently tightened policy stance,” Yu said in a note.

US airlines top estimates, outlook hits shares

Continental projected a drop in its unit revenue for January, surprising investors who expected revenue per available seat mile (RASM) numbers to improve as it has been doing in the last few months.

The projections were driven by a slow recovery of business traffic and stronger-than-expected leisure demand in December, executives said.

“We are seeing business traffic come back slowly, but we’re stressing the word ‘slowly’,” Chief Marketing Officer Jim Compton said during a call with analysts and reporters.

Continental said its mainline RASM number would fall four percent in January. The carrier says consolidated RASM, which accounts for the performance of its feeder airlines, would fall three percent.

That outlook overshadowed news that Continental beat earnings forecasts for the fourth quarter. Continental shares dropped two percent, reversing an earlier rise.

The Arca Airline index fell 2.2 percent alongside a dive in the broader stock market. Southwest shares fell 0.4 percent to $11.29.

The results come a day after American Airlines parent AMR Corp posted a quarterly loss, but said demand was improving. Higher-than-expected revenue, cost cuts and a drop in fuel costs helped Southwest and Continental surpass analyst estimates.

US airlines have cut jobs and trimmed capacity in the past two years in an effort to hem costs in the face of a severe recession in 2009 and a surge in fuel prices in 2008.

Southwest, the leading US discount carrier, expects unit revenue to rise in the first quarter of 2010, but in a statement, CEO Gary Kelly said 2010 could be another challenging year.

Continental posts surprise profit
Continental said declines in its corporate revenue were abating. High-yield revenue, which can be used as a proxy for corporate demand, fell one percent in December, after a drop of nearly 40 percent back in May.

The world’s fifth-largest airline reported net income of $85m, or 60 cents per share, in the fourth quarter. A year earlier, it reported a net loss of $269m or $2.35 per share.

Excluding items, Continental posted a profit of three cents per share. Analysts on average expected the carrier to post a loss of seven cents per share, according to Thomson Reuters.

Continental expects mainline domestic capacity to remain flat. Continental expects international capacity to jump between four percent and five percent this year.

Southwest notches another profit
Dallas-based Southwest said it would keep capacity flat this year, but focus on flying to more profitable cities such as New York, Boston and Milwaukee.

The company’s yield, or revenue per available seat mile, rose 7.4 percent in the fourth quarter.

“We attribute [the rise in yield] to its domestic-centric network, its ‘bags fly free’ promotion and to recent revenue enhancement initiatives,” S&P analyst Jim Corridore said in a research note.

Southwest reported net profit of $116m, or 16 cents a share, compared with a net loss of $56m, or eight cents per share, a year earlier.

Excluding items, it posted a profit of 10 cents per share. Analysts on average expected the carrier to post a profit of seven cents per share, according to Thomson Reuters.

Southwest recently unveiled an early boarding charge of $10, but does not charge for checked bags, an important revenue source for other major airlines. Southwest says its strategy has helped it seize market share.

Southwest has derivative contracts for about half of its estimated 2010 fuel consumption at about $100 per barrel.

Obama threatens fight with banks on new risk rules

President Obama threatened to fight Wall Street banks on Thursday with new proposals to limit financial risk taking, sending stocks and the dollar tumbling.

“If these folks want a fight, it’s a fight I’m ready to have,” he told reporters at the White House, flanked by his top economic advisers and lawmakers.

“We should no longer allow banks to stray too far from their central mission of serving their customers,” he said.

The proposals, which need congressional approval, would prevent banks or financial institutions that own banks from investing in, owning or sponsoring a hedge fund or private equity fund.

They also would set a new limit on banks’ size in relation to the overall financial sector that would take into account deposits – which are already capped – as well as liabilities and other non-deposit funding sources.

Sources said Treasury Secretary Timothy Geithner had hesitations about the proposals, concerned that good economic policy was being sacrificed for politics. But a White House official said the plan had the unanimous backing of Obama’s economic team.

Geithner told the PBS programme “NewsHour” it is not in the national interest to allow the financial industry to keep conducting business as usual.

“Our financial system today is still operating under the same rules that helped create this crisis. And we need to move with Congress to change that system,” he said.

Proprietary trading operations
The proposed rules also would bar institutions from proprietary trading operations, unrelated to serving customers, for their own profit.

Proprietary trading involves firms making bets on financial markets with their own money rather than executing a trade for a client. These expert trading operations, which can bet on stocks and other financial instruments to rise or fall, have been enormously profitable for the banks but can hold huge risks for the financial system if the bets go wrong.

The White House blames the practice for helping to nearly bring down the US financial system in 2008.

The White House said it wants to coordinate with international allies in its implementation of the measures.

Big financial institutions criticised Obama’s move.

“Trading, proprietary or otherwise, did not lead to the financial crisis,” said Rob Nichols, president of the Financial Services Forum, a lobbying group for CEOs of firms such as Goldman Sachs and JPMorgan Chase.

He said the government should be focused on better risk management, corporate governance and other forms of regulatory oversight, “rather than arbitrarily banning certain activities, or setting arbitrary size limits.”

Obama’s move is the latest in a series to crack down on banks and follows a devastating political loss for his party in Massachusetts on Tuesday, when a Republican captured a US Senate seat formerly held by the late Democratic Senator Edward Kennedy, potentially imperiling his domestic agenda.

Bank shares slid and the dollar fell against other currencies after Obama’s announcement. JPMorgan fell 6.59 percent, helping push the Dow Jones Industrial average down two percent.

Citigroup Inc fell 5.49 percent and Bank of America Corp fell 6.19 percent while Goldman dropped 4.12 percent despite posting strong earnings on Thursday.

Ralph Fogel, investment strategist at Fogel Neale Partners in New York, said the move would have a major impact on big-name brokerage firms like Goldman Sachs and JPMorgan.

“If they stop prop trading, it will not only dry up liquidity in the market, but it will change the whole structure of Wall Street, of the whole trading community,” he said.

Underscoring the high level of public anger at banks, a majority of 1,006 Americans surveyed in a Thomson Reuters/Ipsos poll said executive pay was too high.

White House economic adviser Austan Goolsbee said the proposals were not designed to be punitive. He said they aimed to end the concept that some banks were “too big to fail” and to show that when such firms “mess up, they die.”

Before his announcement, Obama met with Paul Volcker, the former Federal Reserve chairman who heads his economic recovery advisory board and who favors putting curbs on big financial firms to limit their ability to do harm.

The House of Representatives approved a sweeping financial regulation reform bill on Decemeber 11 that included a provision that would empower regulators to restrict proprietary trading. The Senate has not yet acted on the matter.

Cautious Gibbs

The quietly spoken Jupiter fund manager gained attention most recently for squeezing a positive return out of his flagship financials fund by going “aggressively bearish on almost everything” ahead of the credit crisis.

He previously steered his funds clear of media and telecoms stocks and into property stocks before the market crash of 2001.

They are the kind of calls which can make relative performance numbers shine for years to come, but Gibbs is careful to warn investors they should avoid taking eye-popping outperformance for granted.

“At the end of the day if you can beat the index by a reasonable margin, that’s a reasonable target.

“It would be unrealistic of investors to expect me to beat the index by the margin that I have done over the last few years,” he told reporters.

It’s the tone you might expect from someone the Daily Telegraph once described as having the demeanour of a “rather earnest vicar”, but the very latest performance numbers seem to bear him out.

Gibbs’ £1.4bn Jupiter Financial Opportunities Fund has underperformed over the 12 months to end-December, returning close to 12 percent but undershooting the peer group by some 7.6 percent, according to data from Lipper.

His success in 2008 – when he delivered seven percent returns – puts that in the shade though. Over two years the fund is outperforming by 36 percent, and by 43 percent over three years.

Since launching in 1997, the fund has delivered a startling 820 percent, outperforming its peers investing in banks and financials by more than 650 percent, Lipper data showed.

Reputation
Chartered accountant Gibbs admits those two decisions stand out as the “major right calls” of his career, cementing a reputation as one of the top UK managers alongside Fidelity figurehead Anthony Bolton.

He was long property stocks in the early part of the decade, then short the sector in 2008, and reckons the key to his success has been identifying the impact of falling and rising interest rates on markets.

“I was ahead of the curve in the early part of the decade when people were throwing out stocks despite interest rates being heavily reduced and the impact of that on property was absolutely massive,” Gibbs, previously an analyst at BZW and Laing and Cruickshank, told reporters in an interview.

Other investors soon caught up, getting overbullish when rates went back up, he said. With a lag effect kicking in and with overleverage coming into play, property markets crashed.

The 51-year old Cambridge history graduate says he focuses on finding valuations where estimates are likely to be beaten due to macro reasons.

It hasn’t been all plain sailing.

Gibbs regrets not taking a more bullish stance on emerging markets between 2003-2007 when the regions had enormous growth.

He added: “In the early part of the year, I began to realise that the markets were going to rally, but again I could have been more aggressive about that.”

New funds
Last December, in a bid to capitalise on the attention attracted by Gibbs, Jupiter launched two new funds targeting retail investors seeking access to Gibbs’ long-short strategies. The funds have raised 390 million pounds in total in just over a month of their launch.

“To be able to take short positions is a very important power to have especially in difficult market conditions,” he said.

Gibbs, a cricket fan who supports his local county team Somerset, backs himself to score with the new funds and intends to invest most of his own “spare resources,” in line with his policy on the rest of the products he manages.

Gibbs is now running a total of six funds. Some independent financial advisers, who advise retail clients, worry that running such a large range may put pressure on performance.

There is also speculation the recent hire of high-profile fund manager Guy de Blonay from Henderson as joint manager on the financial fund may mean that Gibbs will eventually hand over the reins of the flagship financials fund after serving some 12 years at Jupiter.

Gibbs said he will continue to be involved in the fund for the “foreseeable future”.

Economy soars

GDP surged 10.7 percent between October and December, compared with a year earlier, a tad below market forecasts of 10.9 percent, but up sharply from a revised 9.1 percent in the third quarter.

China’s fastest quarterly growth in two years raised expectations that Beijing will lift interest rates sometime in next few months after a series of smaller steps taken to contain buoyant lending and prevent the economy and its markets from overheating.

“Obviously the month-on-month growth momentum is very strong,” said Xing Ziqiang, an economist at CICC in Beijing. “So I think the chances for us to see an interest rate rise in the first quarter are increasing.”

For all of 2009, the economy grew 8.7 percent. That handily exceeded the official target of 8 percent, a goal deemed the minimum needed to create jobs and preserve social stability.

That has instilled confidence in markets and consumers and paid off with growth becoming more robust and broad-based.

“Confidence is the spark setting fire to the plain,” Ma Jiantang, head of the National Bureau of Statistics, told a news briefing.

The data prompted JPMorgan and RBS economists to lift their 2010 growth forecasts to 10 percent from 9.7 percent and 9.5 percent respectively, but expectations of policy tightening outweighed optimism about China’s contribution to global recovery.

The dollar briefly rose to its highest in four months after the Chinese figures, as investors cut their exposure on riskier bets. Shares in most of Asia-Pacific eased, though stocks in Shanghai were up 0.3 percent.

The fourth-quarter flourish was flattered by a low base of comparison in the same period a year earlier, when China’s export-orientated economy was dragged down by the global financial crisis, costing more than 20 million migrant workers their jobs.

But the double-digit growth is also testimony to the government’s rapid response to the downturn.

A 4 trn yuan ($585bn) fiscal stimulus package was complemented by an unprecedented surge in lending by the nation’s predominantly state-owned banks, ensuring that China was the first major economy to recover decisively from the credit crunch.

Inflation alert
Indeed, banks have been lending so freely of late that policymakers have turned their attention to nipping inflation in the bud.

The statistics bureau, which released the GDP figures, also reported that consumer prices rose 1.9 percent in the year to December, a marked acceleration from November’s reading of 0.6 percent.

Alarmed by a new burst of credit at the start of January, the central bank increased the proportion of deposits that banks must hold in reserve, rather than lending out, and followed through by ordering some of them to sharply curtail lending for the rest of the month.

The central bank has also been lifting yields on its bills recently, and has nudged up the yield on three-month bills for the second time this year.

So far China has resisted international pressure to let the yuan resume its rise after an 18-month pause, but expectations are growing that Beijing will relent in coming months.

“Yuan appreciation is likely to resume in March or April, though the rise will be gradual, say about three to five percent a year,” said Xing at CICC.

A stronger exchange rate would dampen inflation and encourage domestic demand, thus helping to rebalance the Chinese as well as the global economy.

China has taken a slew of steps to spur spending, including subsidies for rural buyers of domestic appliances and tax breaks on fuel-efficient cars, a measure that helped China to overtake the US in 2009 as the world’s largest car market.

Retail sales grew 17.5 percent in the year to December, accelerating from 15.8 percent in November and compared with forecasts of a 16.4 percent rise.

Industrial production growth slowed to 18.5 percent from 19.2 percent, undercutting market forecasts of a 20 percent increase.

Growth of 8.7 percent in 2009 fell short of the previous year’s rate of 9.6 percent, but economists expect a rebound this year to around 9.5 percent.

That would be enough for China to relegate Japan to number three in the world economic rankings. Goldman Sachs expects China to eclipse the US as the biggest economy in the world by 2027.

Kenya fiscal stimulus may still be needed

There are signs the global economy is rebounding but Kenya should keep assessing its economic performance before reducing or removing its fiscal stimulus, the World Bank’s country director said recently.

Kenya put in about one percent of its GDP as fiscal stimulus in its 2009/10 budget after suffering the triple shocks of post-election violence, drought and global economic slowdown.

“In terms of reducing and removing the fiscal stimulus altogether it may actually be premature, although there are signs that the global economy is recovering, but we are not in a full fledged recovery yet,” Johannes Zutt told reporters.

“There is still a possibility that we are going to see a further dip. It’s just going to be a question of the government monitoring macroeconomic indicators, and particularly inflation levels, to see what action is appropriate going forward.”

Zutt said the World Bank felt the fiscal stimulus was appropriate because the government’s macroeconomic performance between 2002 and 2007, particularly its reduction of Kenya’s debt burden, had created enough space for the fiscal stimulus.

The debt to GDP ratio fell to 40 percent in 2008 from 60 percent in 2000, Zutt said.

Inflation in east Africa’s biggest economy also plummeted into single digits in the third quarter after the government started using a geometric mean to calculate inflation from an arithmetic mean previously.

The World Bank estimates that Kenya’s economy grew by 2.5 percent in 2009 from 1.7 percent the previous year and forecasts expansion of 3.5 percent this year.

Zutt said the bank hopes to pay out $200m for Kenyan projects this fiscal year from $150m over 2008/09, although it has the commitment authority of up to $400m annually. It had disbursed some $95m by December.

It is also looking into a $300m electricity expansion project, a $100m municipal development programme and a $60m youth empowerment plan.

The World Bank’s Kenyan portfolio is $1.7bn and only 26 percent of that has been disbursed. The uptake of funds has been low because of long procurement procedures for the often massive projects.

Zutt said the country has to spend $2.1bn annually on infrastructure such as energy, roads and water if it is to meet its goal of attaining the status of a middle income country.

The infrastructure projects will have to be done with the help of the private sector as they are too big, too many and too expensive for the government to carry out on its own.

Zutt said the World Bank would help the government come up with the regulatory framework to encourage the private sector to put money in that kind of infrastructure.

China tries to curb lending and avoid overheating

Chinese authorities ordered some big banks to curb lending for the rest of January, intensifying their efforts to prevent the world’s third-largest economy from overheating.

The news weighed down stocks in Asia and Europe and oil fell towards $78 a barrel on fears that demand in China, the world economy’s main source of growth, may now slow down as authorities tighten policy.

China’s central bank told some banks, including Citic Bank and Everbright Bank, to increase their reserve requirement ratio by half a percentage point, banking sources told reporters.

A surge of new lending in January has triggered a series of intensifying steps by authorities to rid the financial system of excess cash that can fuel inflation and asset bubbles.

In early January, the central bank raised bank reserve requirements for the first time since June 2008.

“The question now is not whether we need to control credit and money supply but when and how to control it,” said Chen Xingdong, chief China economist at BNP Paribas in Beijing. “Policy will not be a straight line.”

Chinese banks lent 1.1trn yuan ($161bn) in the first half of January, sources said, citing central bank data. That puts total new loans in January on track for the highest since June 2009, when banks doled out 1.5trn yuan in new lending.

The top four banks together lent more than 500bn yuan during the same period, the sources said.

Last year, Chinese banks lent a record 9.6trn yuan. The surge, combined with Beijing’s four trillion yuan stimulus plan, helped kick-start the economy after a slump, but aroused investor fears of overheating.

Zhu Baoliang, chief economist at a government think tank, said consumer inflation has accelerated a lot in December and would likely push policymakers to raise interest rates by the middle of the year.

Slow new loan growth
There were conflicting accounts of what exactly authorities would do.

The official China Securities Journal cited unidentified banking sources as saying that some banks had been told to stop all lending for the rest of the month.

However, a source at the China Banking Regulatory Commission, who spoke on condition of anonymity, said the CBRC had not ordered banks to halt lending for the rest of January, though it continued to crack down on lenders that do not meet criteria.

“It is our long-standing principle that banks that do not meet regulatory requirements must not lend any more,” the source said.

In any case, after the increase in bank reserve requirements, a rise in one year bill yields, and steps to root out speculation in the property market, the message from authorities is clear: fast growth in credits and money supply will not be tolerated because the stakes are too high.

A senior official with China Merchants Bank and an executive at Agricultural Bank of China told reporters that their banks would stop approving new loans until the end of this month.

Bank stocks stung
Worries over the impact of a lending clampdown knocked Shanghai’s benchmark index 2.9 percent lower, weighed on other Asian markets and hurt the Australian dollar.

China has been leading the way in a global recovery, so any potential for slower growth causes investors to reassess risk exposure.

Shares of Bank of China and China Construction Bank traded in Hong Kong tumbled more than three percent.

“I think the markets may have overreacted,” said Dong Dezhi, a senior money market analyst at Bank of China in Shanghai. “The government will anyway read CPI and overall economic performance to decide when and how much it will raise interest rates, not bank loans.”

Consumer price inflation on an annual basis is expected to have quickened to 1.5 percent in December from 0.6 percent in November.

Another CBRC official told reporters the lending surge in the first two weeks of January would probably trigger a policy change and that the regulator would probably further curb loan growth as the central bank’s steps to date had not been effective enough.

In the run-up to the reserve ratio rise, the central bank has pushed up its bill yields at its regular auctions over the past couple of weeks.

“This year we will continue to control the pace and amount of credit supply,” Liu Mingkang, head of the CBRC, told a financial conference in Hong Kong.

He added that new loans this year were estimated to total 7.5trn yuan, according to the transcript available on the CBRC’s website, although that comment was later deleted from the CBRC’s text of the speech.

Japan Inc set to file for bankruptcy

Japan Airlines Corp is set to file for one of the country’s largest ever bankruptcies on Tuesday, marking the failure of the former state-owned carrier that once symbolised Japan Inc’s international aspirations.

JAL, Asia’s largest airline by revenues, will remain in the skies under a state-backed restructuring plan as it tries to free itself from about $16bn in debt in exchange for slashing a third of its 47,000 staff and shedding unprofitable routes, sources have said.

JAL, which has been bailed out by the Japanese government three times in the past 10 years, must now look to reinvent itself through painful operation cuts and tough decisions about foreign capital and alliances.

“I am not worried about the future of the carrier as I believe the government will strongly support it,” said Yasuhiro Matsumoto, credit analyst at Shinsei Securities.

“But whether it will be able to grow as a business is unclear. I can’t see how JAL is going to build its network domestically and internationally.”

The move could make rival All Nippon Airways Co Japan’s new flagship carrier, some analysts said. The airline has lost more than 90 percent of its market capitalisation since the start of the month.

With a market value of $150m, JAL is now smaller than minor carriers Croatia Airlines and Jazeera Airways and worth less than the cost of a Boeing 747-8 widebody commercial airliner.

JAL bonds maturing in 2013 were trading at the equivalent of just 27.8 cents on the dollar, versus around 70 cents last month.

The carrier had once been seen by many Japanese as a symbol of the country’s postwar boom, as it transformed a handful of leased planes in 1951 into a nearly 50,000 staff airline with a fleet of almost 280 aircraft.

Following similar bankruptcies by overseas airlines such as Delta Air Lines and United Airlines, JAL plans to cut some 15,000 jobs and erase about two dozen unprofitable routes, sources said.

JAL is expected to file for protection from creditors using a procedure that will allow it to continue operations and seek to rebuild itself, similar to Chapter 11 in the US.

In return, the state-backed Enterprise Turnaround Initiative Corp of Japan (ETIC) will support the carrier with about 300 billion yen ($3.3bn) in capital and creditors will be asked to forgive about 350 bn yen of loans, sources said.

Units including Japan Airlines International, which handles domestic and overseas flights and JAL Capital, which raises operational funds, will also file for bankruptcy, one source said.

But that will only be the beginning for an airline with depleted capital, facing headwinds such as rising fuel prices and shrinking passenger numbers, on top of hefty restructuring costs.

JAL needs to do what it has long put off: Focus on its main business and cut operations it doesn’t need, said Andrew Miller, chief executive officer of CAPA Consulting.

“I would have a fire sale – get rid of the family silver, sell everything that is non-core and focus in on the core and make that work efficiently,” he said.

JAL will also need to make a decision about competing aid offers from Oneworld alliance partner American Airlines and rival Delta, which wants to woo JAL to its SkyTeam group.

The carrier has spent two decades trying to recover public trust following a 1985 crash that became the world’s worst single aircraft disaster in history, claiming 520 lives.

 JAL, headed for its fourth net loss in five years, last week drew down on the 145bn yen in emergency funding left from a 200bn yen credit line supplied by the state-owned Development Bank of Japan.

JAL was saddled with 1.5trn yen in total liabilities as of the end of September. That level of debt would make it the sixth-largest bankruptcy in Japan’s history, ranking just below the 2001 collapse of retailer Mycal.

The state-backed ETIC can draw on government-backed funding to support ailing Japanese companies. The fund has said it would guarantee payment for fuel and other commercial transactions to ensure JAL can maintain its operations.

Kazuo Inamori, the 77-year-old founder of electronics maker Kyocera Corp, was tapped last week to become JAL’s new chief executive officer to oversee its restructuring.

JAL’s restructuring plan also calls for increasing the fuel efficiency of its fleet, procuring 33 small jets and 17 regional jets while retiring 53 bigger ones.

“I think a revival of JAL will be good for manufacturers such as Mitsubishi Heavy industries which is developing new regional jets,” said Shinsei’s Matsumoto.

Uganda awaits formal oilfield deal from firms

Uganda’s oil minister said Kampala was waiting for documents about the sale of Heritage Oil’s assets, and stressed that neither Heritage nor partner Tullow Oil had consulted the government on the deals.

Tullow has exercised a right to buy Ugandan oil fields from Heritage, potentially derailing ambitions to expand in Africa by Italy’s Eni, which had previously agreed to buy them for up to $1.5bn.

“The government has not formally received documents pertaining to that sale. Once we receive the documents, we’re going to look through them and decide to approve it or not,” Minister Hillary Onek told reporters.

“Neither Heritage consulted with us about the deal with Eni nor did Tullow consult with us about the pre-emptive right.”

Heritage owns half of Block 1 and half of Block 3A, which is located in the oil-rich Albertine Graben region in western Uganda where foreign explorers have estimated that they have found more than two billion barrels of crude reserves.

Tullow – which last year started a process to sell up to 50 percent of its own Ugandan assets, with a buyer expected to be selected early this year – owns 50 percent in Block 1 and 3A and also 100 percent of Block 2.

Interest from larger oil firms is heating up for Uganda’s oil reserves. Kampala plans to resume licensing exploration companies at the end of this year after it halted the process in 2007 to come up with an oil and gas law.

Around 8,000 square km (3,089 square miles) is unlicensed.

Onek said Uganda could accommodate two or three large companies, and that the government would not “be held for ransom” by a monopoly of its oil sector.

Last week, Italy’s Foreign Minister Franco Frattini said that he discussed the Eni deal with senior Ugandan officials.

The Italian firm has argued it has the skills to help develop the project which would require the construction of crude processing facilities and a heated pipeline.