Reuters News - World Bank urges China to cut economic growth target to seven percent in 2015, focus on reforms

Workers labour at a construction site in Beijing October 10, 2013.

CREDIT: REUTERS/KIM KYUNG-HOON

(Reuters) - China can cut its economic growth target to 7 percent next year without hurting its labor market, the World Bank said on Wednesday even as it urged Beijing to get rid of rigid growth objectives.

At its thrice-yearly review of the Chinese economy, the World Bank warned China against carrying its "ambitious" 2014 economic growth target of 7.5 percent into next year, saying that such a move would detract from the government's reform plans.

After 30 years of breakneck, double-digit economic expansion that lifted millions of Chinese from abject poverty but also polluted the nation's air, land and waterways, China wants to retool its economy to generate slower but better-quality growth.

But the quest to let market forces supplant state planning in running the world's second-biggest economy would require China to live with less frenzied economic growth rates and income rises, a point stressed by the World Bank.

"Our policy message is the focus should be on reforms rather than meeting specific growth targets," Karlis Smits, a senior economist at the World Bank office in Beijing, told reporters at a media briefing.

"In our view, an indicative target of around 7 percent for 2015 would meet ... the kind of indicative growth that is needed to maintain stability in the labor market," he said.

The bank's message on employment would appeal to its audience in Beijing, where Communist Party leaders who are wary of social unrest have said that having a healthy job market is a top policy priority.

Hurt by softening domestic demand as China's property market sags and investment growth wanes, the Chinese economy has had a rough ride this year, even though the government and the central bank have rolled out a series of support measures to avert an even sharper slowdown.

The economy grew at its slowest pace since the global financial crisis in the September quarter and is expected by analysts to miss China's official growth target for the first time in 15 years.

The World Bank and other analysts expect the economy to expand by 7.4 percent this year, the slackest in 24 years, and a hair's breadth from the 7.5 percent target.

And the World Bank made clear that it would not welcome a similar growth target from China next year.

"A prevalent concern is that a policy focused on meeting an ambitious growth target, similar to one set for 2014, would require macroeconomic policies to remain oriented to support domestic demand rather than on reforms," it said in a report.

The World Bank's comments echoed those of the International Monetary Fund, which said in July that Beijing should set a growth target of 6.5-7 percent for 2015 and refrain from stimulus measures unless the economy threatens to slow sharply from that level. [ID:nL4N0Q60HV]

Beijing is not expected to announce its 2015 target until next March.

MORE PROPERTY WEAKNESS

On China's slowing housing market, judged by many economists to be the biggest risk to the economy, the World Bank predicted that property prices could fall further in coming months due to an over-supply of homes.

In China's biggest cities - Beijing, Shanghai, Guangzhou and Shenzhen - home inventory levels have more than doubled since the start of 2013, the bank said. For every square meter of homes sold in those cities, there are 13 square meters of unsold property.

The ratio of housing inventory to sales was even higher in smaller, "second-tier", cities at around 17, though off a peak of about 20 seen earlier this year, the World Bank said.

"Excess inventory will depress housing prices over the next few quarters," the bank said, adding that any policy response is constrained by the fact that China's housing market needs to undergo some structural adjustment that is not temporary.

Smits alluded to speculation and lack of other investment avenues driving excess investment in certain cities in the past. However, housing starts shifted in the first half of the year to correspond to areas of highest population growth, indicating market forces are taking hold.

While some analysts have argued that only by advancing reforms can China power its future economy, the World Bank cautioned that any growth impetus derived from reforms would not be as potent as those in the past.

"'Second generation' reforms are likely to have a smaller impact on growth than the 'first generation' reforms implemented over the last few decades," the World Bank said.

A calculation made by the World Bank and the Development Research Center - a think-tank linked to the Chinese cabinet - showed that reforms would increase China's potential growth by about 0.8 percentage points in the first year, the bank said.

Spread over five years, reforms would raise China's growth potential by a total of 3.5 percentage points, it said.

"Implementing such a coordinated reform plan can accelerate China’s economic growth potential, but it will not reverse a moderation of growth over the next decade," the bank said.

(This version of the story was refiled to fix typo in sixth paragraph from the bottom)

(Reporting by Jake Spring; Writing by Koh Gui Qing; Editing by Kim Coghill)

BBC News - European Commission to approve France and Italy budgets

The European Commission has said it is likely to approve France and Italy's 2015 budgets after both countries made adjustments to their first proposals, submitted earlier this month.

EU Economic Affairs Commissioner Jyrki Katainen said there was no reason to reject the budgets

France had initially disregarded the Commission's calls for further budgetary cuts.

Since the financial crisis, the Commission has gained greater powers to ensure members meet deficit targets.

France's original budget forecast a deficit of 4.3%, above the 3% target.

The 3% target would not have been met until 2017, under this first proposal.

The budget deficit is the amount a government spends over and above its annual income, expressed as a percentage of total economic output, or GDP.

"After taking into account all of the further information and improvements... I cannot immediately identify cases of particularly serious non-compliance which would oblige us [to reject the plans]", said EU Economic Affairs Commissioner Jyrki Katainen.

France and Italy have been negotiating with the Commission since they submitted their budgets on 15 October.

On Tuesday, France's Finance Minister Michel Sapin said he would cut a further €3.6-3.7bn ($4.6bn; £2.8bn) from the 2015 budget to meet the EU rules.

He said he had found the money because of lower-than-expected costs on interest payments, as well as lower contributions to the EU's budget.

BBC News - Penalise 'bad apple' traders, suggests Bank of England

More should be done to punish traders who try to manipulate financial markets, the deputy governor of the Bank of England has said.

Minouche Shafik, the Bank's deputy governor, said more may need to be done to discourage "bad apples"

Minouche Shafik said the Bank's consultation into rebuilding trust in financial markets, should consider stronger penalties for what she called "bad apples".

Ms Shafik made the suggestion during her first speech as deputy governor.

The Bank's review will focus on fixed income, currency and commodity markets.

The nine-month consultation by the Bank comes in the wake of the Libor scandal which saw banks fined £4bn for manipulating the inter-bank lending - or Libor - rate, which they did to boost profits.

The inquiry - called Making Markets Fair and Effective - was ordered by chancellor George Osborne, who said he wanted to restore the reputation of other UK-based financial markets.

"The integrity of the City matters to Britain. Markets here set the interest rate for people's mortgages, the exchange rates for our exports and holidays, and the commodity prices for the goods we buy," he added.

'Misconduct'

Speaking at the London School of Economics (LSE), Ms Shafik warned that there could easily be a repeat of the Libor scandal.

"The risk is that, as memories of recent enforcement cases fade, bad practices may re-emerge," she said.

"Some say that may already be happening," she added.

And she suggested that the review - which she is heading - should think about increasing sanctions against individuals.

"The review also wants to consider whether more needs to be done to monitor for, and where it is found, punish misconduct," she said.

Any changes as a result of the review would come on top of new laws already brought in by the government.

Under these new laws, senior bank managers could be sent to prison if their conduct leads to the failure of a bank.

Transparency

The Financial Conduct Authority (FCA) and the Treasury are working on the review with the Bank of England.

Among its recommendations, the review suggests

• a global code of conduct
• greater use of electronic surveillance
• stronger penalties for staff breaching guidelines
• improved transparency, for example by greater use of electronic platforms
• improvement of benchmark design

Benchmarks

The Bank has already singled out seven benchmarks, which it believes should be reformed. These are used for the trading of everything from interest rate swaps to foreign exchange, and from gold to oil.

The benchmarks affect millions of people, by determining the price of shopping, or the cost of filling up at the pumps, for example.

Benchmarks ripe for reform?
Name	Asset
SONIA - Sterling Overnight Index Average	Unsecured overnight sterling lending
RONIA - Repurchase Overnight Index Average	Secured overnight sterling lending
ISDAfix - International Swaps and Derivatives Assoc fix	Fixed for floating interest rate swaps
WM/Reuters 4pm London Closing Spot	Spot price for foreign exchange rates
London Gold Fixing	Twice daily fix on gold prices
LBMA Silver Price - London Bullion Market Assoc	Daily fix on silver prices
ICE Brent	Futures contract on Brent crude oil

The Bank of England proposals will now go out for consultation, before a final report in the summer of 2015.

Reuters News - Europe's bank test celebrations mask mounting challenges

General view of the headquarters of the European Central Bank (ECB) in Frankfurt October 26, 2014.

CREDIT: REUTERS/RALPH ORLOWSKI

(Reuters) - Investors were spared immediate pain on Sunday after the European Central Bank's landmark banking health check did not force massive capital hikes amongst the euro zone's top lenders.

But the sector's long-term attractiveness has been damaged by revelations of extra non-performing loans and hidden losses that will dent future profits.

The ECB said on Sunday the region's 130 most important lenders were just 25 billion euros ($31.69 billion dollar) short of capital at the end of last year, based on an assessment of how accurately they had valued their assets and whether they could withstand another three years of crisis.

The amount of new money needed falls to less than 7 billion euros after factoring in developments in 2014, well shy of the 50 billion euros of extra cash investors surveyed by Goldman Sachs in August were expecting. That means existing investors will only be asked for a fraction of the demand they expected in order to maintain their shareholdings.

But, those who read the details of the ECB's proclamation on the health of the euro zone banking sector would have seen more ominous signs too, as the ECB pointed to the amount of work that remains to be done to restore the region's lenders.

CHALLENGES AHEAD

The review said an extra 136 billion euros of loans should be classed as non-performing - increasing the tally of non-performing loans by 18 percent - and that an extra 47.5 billion euros of losses should be taken to reflect assets' true value.

"Banks face a significant challenge as the sector remains chronically unprofitable and must address their 879 billion euros exposure to non-performing loans as this will tie-up significant amounts of capital," accountancy firm KPMG noted.

Others took a bleaker view. "One-fifth of European banks are at risk of insolvency," said Jan Dehn, head of research at Ashmore, referencing the fact that one-fifth of banks fell shy of the ECB's pass mark at the end of last year.

He added that the ECB's efforts to boost the euro zone's sluggish growth through pumping money into the economy would not work if banks were too poorly capitalized to lend.

After the ECB adjusted banks' capital ratios to reflect supervisors' assessments of banks' asset values, 31 had core capital below the 10 percent mark viewed by investors as a safety threshold, while a further 28 had ratios just 1 percentage point above.

"(The results were) positive for equity, fundamentally disappointing on credit due to limited capital raising," Societe Generale strategist Kit Juckes noted.

Banks need to lend more to boost their earnings, since they profit from the difference between the ultra-low rate they can borrow money at and the higher rate they charge to customers. Lending can also boost economic growth, which helps banks.

Analysts from Citi remarked that the scale of the asset quality review adjustments "matter in terms of future potential regulatory constraints". Banks with big hits to capital ratios as a result of the ECB's adjustments will have less capacity to expand, lend more, or pay dividends.

Others found a silver lining in the bad news delivered by the ECB. "We were positively surprised at the severity of the asset quality review, the scale of the additional non-performing loans for example," said Roberto Henriques European credit analyst at JPMorgan. "That additional information showed that they are going to be much more stringent."

Several also welcomed the fact that investors at least now had transparent figures they could rely on. "This should ease any concerns about more skeletons the banks' closets," said Geir Lode, head of Hermes Global Equities. "(It's) positive for the markets."

That extra information gives investors some protection if the ECB's relatively modest capital demand proves not to be the final word in how much the banks really need. "Everyone will be looking hard to decide whether the ... is too little to shore up the banks that are at risk," said Salman Ahmed, global fixed income strategist at Lombard Odier Investment Managers.

"The good news is that the review process is fully transparent. Investors have been handed plenty of data on the banks' assets and are now in a position to judge for themselves."

(Reporting By Laura Noonan; Additional reporting by Nishant Kumar and Carolyn Cohn in London and Carmel Crimmins in Dublin. editing by David Evans)

Bloomberg News - Fed’s $4 Trillion Holdings Keep Boosting Growth Beyond End of QE

Photographer: Andrew Harrer/Bloomberg

Janet Yellen, chair of the U.S. Federal Reserve, opened the door to keeping a multi-trillion-dollar portfolio for years, saying a decision on when to stop reinvesting maturing bonds depends on financial conditions and the economic outlook

Quantitative easing may turn out to be a gift that keeps on giving for the U.S. economy.

As the Federal Reserve prepares to end its third round of bond buying next week, the central bank plans to hang on to the record $4.48 trillion balance sheet it has accumulated since announcing the first round of purchases in November 2008.

That will continue to keep a lid on borrowing costs, helping the Fed lift inflation closer to its target and providing support to a five-year expansion facing headwinds abroad, from war in the Mideast to slowing growth in Europe andChina.

Holding bonds on the Fed’s balance sheet limits the supply of securities trading on the public markets, which helps keep prices up and yields lower than they otherwise would be. That provides stimulus to the economy just as a cut in the Fed’s benchmarkinterest rate would, according to Michael Gapen, a senior U.S. economist for Barclays Plc in New York and former Fed Board section chief in charge of monetary and financial markets analysis.

“Preserving it will continue to support the economy,” Gapen said. “The Fed message is we think we’ve done enough to generate momentum and keep the economy on the right track. Now we’re going to wait and see how things go.”

The Federal Open Market Committee plans to end its purchases of Treasuries and mortgage bonds at the next meeting Oct. 28-29, according to minutes of the last gathering.

Maintaining Holdings

Chair Janet Yellen opened the door to keeping a multi-trillion-dollar portfolio for years, saying a decision on when to stop reinvesting maturing bonds depends on financial conditions and the economic outlook. Shrinking the balance sheet to normal historical levels “could take to the end of the decade,” Yellen said at her press conference last month.

Fed quantitative easing has provided the Treasury market with a steady and consistent buyer, helping to keep yields lower than they otherwise would be. The central bank is now the largest holder of U.S. government securities.

If the Fed continues to hold the securities, it “will continue to put some downward pressure on rates relative to what they would have been had the Fed not had this balance sheet,” said Josh Feinman, the New York-based global chief economist for Deutsche Asset & Wealth Management, which oversees $1.31 trillion, and a former Fed senior economist. “That’s a factor that I think will linger.”

Lower Yields

The 10-year Treasury note yielded 2.27 percent late yesterday in New York, down from 3.03 percent at the end of last year. It fell to a record low 1.39 percent in mid-2012. Yields averaged 2.65 percent since the first QE began in November 2008, compared with 6.95 percent before that in data since 1962. The average rate on a 30-year fixed mortgage was 3.92 percent this week, still near a record low 3.31 percent in November 2012, Freddie Mac data show.

The FOMC said in a supplementary statement at the last meeting that it expects to stop reinvestments of maturing securities once it starts raising the benchmark interest rate, a step that policy makers project they will take next year.

Richmond Fed President Jeffrey Lacker, who votes on policy next year, later said he opposes continuing to hold mortgage bonds. “This approach unnecessarily prolongs our interference in the allocation of credit,” Lacker said in a Sept. 19 statement.

The Fed’s balance sheet includes bonds bought in all three rounds of QE. The first two totaled $2.3 trillion through June 2011. The third round, announced in September 2012, differed from its predecessors in that it was open-ended, with no limit on the amount of purchases and no target date for halting them. The FOMC said it would buy $85 billion of bonds a month until the labor market improved “substantially.”

Falling Unemployment

The jobless rate when QE3 started under Chairman Ben S. Bernanke stood at 8.1 percent, and policy makers forecast it would fall to 6 percent to 6.8 percent by late 2015. It’s now 5.9 percent, near what most officials project is full employment, and monthly payroll growth has averaged 209,000 for the past two years, up from a 172,000 monthly average during the prior two-year period.

“The objective was to produce a substantial improvement in the labor market, and that’s occurred,” said Keith Hembre, a former researcher at the Minneapolis Fed who helps oversee $120 billion as chief economist at Nuveen Asset Management LLC in Minneapolis. “You’ve got a labor market that’s much improved and closer to full employment. It’s hard to prove what would have happened in the absence of the program.”

Tapering

The FOMC began tapering purchases in December 2013, when it slowed monthly buying by $10 billion. It made six more cuts of the same size at each of the following meetings, saying with each that it would respond to incoming data. The current pace is $10 billion in Treasuries and $5 billion in mortgage bonds.

“The flexibility allowed the Fed to continue to add stimulus until it achieved the goal it set out to achieve,” said Laura Rosner, a U.S. economist at BNP Paribas SA in New York and a former New York Fed researcher. “That’s what made this last one effective.”

While most policy makers agree with that assessment, not all of them are ready to declare mission accomplished.

St. Louis Fed President James Bullard, who helped lay the intellectual groundwork for QE2 in a 2010 paper calling on officials to avert deflation by purchasing Treasury notes, said in an Oct. 16 interview with Bloomberg News in Washington the “logical policy response at this juncture may be to delay the end of the QE” amid stalling growth in Europe and declining inflation expectations. Bullard will vote on policy in 2016.

Low Inflation

The Fed in 2012 set a 2 percent inflation target, saying that pace for the personal consumption expenditures index is consistent with its longer-run mandate. The gauge rose 1.5 percent in August from a year earlier, and hasn’t exceeded 2 percent since March 2012. Policy makers want to avoid deflation, because falling prices can encourage businesses and consumers to delay spending in the expectation of further price declines, reducing aggregate demand.

Boston’s Eric Rosengren differs with Bullard in supporting an end to asset purchases. He calls QE3 “materially helpful,” in part because it helped boost housing prices. Rosengren votes in 2016.

“The fact that we had a very large QE program played an important role,” Rosengren said in an Oct. 17 interview. “That was an important component of getting more confident the economy was going to go, that we were serious about returning the economy to full employment and inflation to 2 percent.”

QE Effects

San Francisco Fed President John Williams, who also supports ending QE, said in apresentation in Washington earlier this year that research shows purchases have “sizable effects” on lowering bond yields, though uncertainty remains about the magnitude of these effects and their impact on the overall economy. He cited several research papers showing QE2 lowered yields on the 10-year Treasury note by around 15 to 25 basis points.

Bernanke rattled investors worldwide by telling lawmakers in May 2013 the Fed may slow buying “in the next few meetings,” spurring the so-called taper tantrum that pushed the 10-year yield up more than 1 percentage point in 15 weeks. Now that skittishness about stimulus withdrawal is long gone.

“We’ll live just fine without QE,” former U.S. Treasury Secretary Lawrence Summers said in an Oct. 21 interview with Bloomberg Television’s “Market Makers” with Stephanie Ruhle. “Interest rates at the 10-year are now much lower, not much higher, than they were before QE started.”

To contact the reporter on this story: Jeff Kearns in Washington at jkearns3@bloomberg.net

BBC News - Wind farms outstrip nuclear power

The UK's wind farms generated more power than its nuclear power stations on Tuesday, the National Grid says.

Wind farms have attracted controversy in the UK

The energy network operator said it was caused by a combination of high winds and faults in nuclear plants.

Wind farms are causing controversy in rural areas and the government is choking off planning permission for new sites.

But for a 24-hour period yesterday, spinning blades produced more energy than splitting atoms.

Wind made up 14.2% of all generation and nuclear offered 13.2%.

It follows another milestone on Saturday, when wind generated a record amount of power - 6,372 MW, according to National Grid.

This formed nearly 20% of the the UK's electricity, albeit at a time at the weekend when demand is relatively low.

Reactors down

But wind power's ascendancy over nuclear is expected to be temporary.

The situation is caused by windy conditions boosting the output from turbines at a time when eight out of the UK's 15 nuclear reactors are offline.

EDF Energy said current ageing reactors are down for a number of reasons:

• Sizewell B is in the middle of a planned "statutory outage" for maintenance and refuelling
• Hunterston B Reactor 4 is down for maintenance, expected back in early November
• At Dungeness B, one unit is being refuelled and the other is expected back online soon after being shut down after a fault on a boiler pump was discovered
• The four reactors at Heysham and Hartlepool were taken offline in August after a crack was found on a boiler spine.

'Convenient whipping boy'

A government spokesman said a "diverse energy mix" was essential to the UK's energy security.

"We're preventing a predicted energy crunch by turning round a legacy of underinvestment and neglect.

"To deliver this, we need a diverse energy mix that includes renewable sources like wind and solar alongside nuclear and technologies like carbon capture and storage so we can continue to use fossil fuels in a cleaner way."

But wind energy has proved controversial in rural areas and among some politicians.

Last week the former environment secretary Owen Paterson condemned the wind industry for soaking up subsidies, producing a "paltry" amount of power and ruining landscapes. He called instead for a new generation of mini nuclear plants dotted around the country.

The government is offering more generous subsidies to nuclear than wind in the long term.

But Jennifer Webber, a spokeswoman for RenewableUK, the trade body, said: "Wind power is often used as a convenient whipping boy by political opponents and vested interests.

"All the while, it's been quietly powering millions of homes across the UK and providing a robust response to its vocal detractors."

BBC News - Give cities more power to boost UK growth, says study

Allowing UK cities to make their own decisions on tax and spending could boost economic growth by £79bn a year by 2030, a year-long study has concluded.

Cities like Manchester should have more power over their finances, says the RSA City Growth Commission

The amount equates to boosting current UK productivity by 5%, said the RSA City Growth Commission, which conducted the study.

It is pushing for draft legislation to be in place by 2015.

"Our centralised political economy is not 'fit for purpose'," it said.

The commission, chaired by economist Jim O'Neill, concluded that shifting power away from government ministers and officials to cities would drive up the UK's long-term rate of economic growth.

"There needs to be a radical reshaping of the UK's political economy, with our metros given sufficient decision-making powers and financial flexibilities in order to become financially self-sustainable," the commission said.

Better connected

The report said that transport links in the north of England should be improved, particularly in the North West in an area it calls "ManSheffLeedsPool".

It suggested a new high-speed underground system, with a single transport payment card that would work across the region, similar to London's Oyster card.

Also upgraded broadband services would "drive additional inward investment to our cities".

The commission said the current national approach to skills training and immigration was hurting businesses.

It suggested that handing funding for training over to cities would enable them to provide the right kind of training.

It also wants the current national immigration policies to be reformed.

If the UK persists in restricting immigration to meet its "growth-inhibiting" net migration target, there is "a risk that households in all metros will suffer in the long term, as GDP and GDP per person falls and average incomes are squeezed", it added.

"In a world in which cities are the new drivers of growth, decentralising our political economy will boost GDP and enable our major metros to achieve their social and economic potential," said Ben Lucas, chair of public services, RSA and city growth commissioner.

The report from the RSA, or Royal Society for the encouragement of Arts, Manufactures and Commerce, is the final report in a series commissioned to examine policies to promote growth in the UK's regional cities