Reuters News - Fed to keep buying bonds despite firmer U.S. growth

U.S. Federal Reserve Chairman Ben Bernanke talks at the Economic Club of Indiana in Indianapolis October 1, 2012.

Credit: Reuters/Brent Smith

By Pedro Nicolaci da Costa

WASHINGTON | Wed Oct 24, 2012 1:49am EDT

(Reuters) - The U.S. Federal Reserve appears intent to stick to its bond-buying stimulus on Wednesday, having already indicated it would take more than a modest show of economic strength for policymakers to begin taking their foot off the gas.

The Fed unveiled a third round of bond purchases last month to try to rev up a sluggish economic recovery despite a looming presidential election that some thought might deter action.

Now analysts believe the central bank will wait until at least December to make any changes to its current plans to buy $40 billion of mortgage debt per month.

"With the election in two weeks, the Fed will be in a self-imposed quiet mode this week," said Stephen Stanley, an economist at Pierpont Securities, in Stamford, Connecticut. "Look for a statement that has no more than marginal language changes."

Policymakers have already said they will stick to their open-ended plans to buy bonds until the employment outlook improves substantially, and they are expected to reiterate that intention in a statement due around 2:15 p.m. (1815 GMT).

While officials will likely nod to recent signs of a pickup in economic activity emerging in employment and housing, economists agree that the glimmers of a stronger recovery are too few and far between for the Fed to alter its policy course.

Indeed, it is also likely the Fed will repeat that it expects to keep overnight interest rates near zero through at least mid-2015 and that it intends to keep a highly stimulative policy in place "for a considerable time" after the recovery strengthens.

The Fed, which has held rates close to zero since December 2008, had already bought $2.3 trillion in mortgage-related and government debt before it launched its latest round of stimulus.

TALKING THE TALK

Aside from a discussion over the stance of monetary policy, officials look set to debate fine-tuning their communications strategy by adopting numerical thresholds for economic variables that would guide the central bank's unconventional stimulus.

Chicago Federal Reserve Bank President Charles Evans, for instance, has advocated keeping rates near zero until the unemployment rate, currently at 7.8 percent, goes down to 7 percent, as long as inflation does not exceed 3 percent. The central bank formally targets 2 percent inflation.

Policymakers are also strongly considering the adoption of a consensus economic forecast for the central bank as a whole, as opposed to the quarterly individual projections for growth, employment, inflation and interest rates currently published.

But no announcement is likely until at least December, when the Fed releases its next installment of economic estimates and Chairman Ben Bernanke holds a news conference.

"We do not anticipate that an agreement will be reached at this meeting," said Millan Mulraine, senior U.S. economic strategist at TD Securities, in New York. "However, the tone of the accompanying statement should remain exceptionally dovish, with the Fed offering only modest upgrades to the economic assessment and reiterating its commitment to do more if necessary."

The December meeting is also seen as a good time for the Fed to re-evaluate the extent of its monthly bond purchases. In addition to the new program to buy mortgage-backed debt, the Fed has been using proceeds from short-term government securities to buy longer-term ones. That program, known as Operation Twist, expires at the end of the year.

In response to the financial crisis and deep recession of 2007-2009, the Fed launched a series of unconventional policy actions, including its bond purchases. Some analysts have expressed concern about future inflation from the Fed's policies, but price increases have remained tame so far.

The problem is, growth has, too. U.S. gross domestic product grew at an annual rate of just 1.3 percent in the second quarter, not enough to put steady downward pressure on the jobless rate.

Economists expect a report on Friday to show the recovery perked up a bit in the third quarter on the back of stronger retail sales, but there are concerns a looming tightening of U.S. fiscal policy could toss the economy back into recession.

Europe's debt crisis, a key source of concern for the Fed, also remains unresolved, although it is not flaring up too wildly in financial markets, offering comfort that the U.S. economy will escape any contagion.

(Editing by Tim Ahmann and Jan Paschal)

BBC News - China manufacturing contracts at slower pace, HSBC says

Chinese manufacturing showed signs of recovery in October, shrinking at a slower pace than in previous months, according to a report by HSBC.

The HSBC PMI has indicated a contraction in activity, a reading of below 50, for 12 straight months

The bank's influential purchasing managers index (PMI) hit 49.1 this month, compared with 47.9 in September

That is the PMI's highest level in three months, helped by a pick up in new orders.

The figure is the latest to suggest an improvement in the world's second biggest economy.

In September industrial production rose a better-then-expected 9.2% from a year earlier, the first rise in four months.

Exports and retail sales also improved.

"The report confirms recovery in Chinese manufacturing seen in September industrial output data, and overall recovery of gross domestic product growth," said Dariusz Kowalczyk, senior economist at Credit Agricole CIB.

"We continue to believe that gross domestic product growth momentum will keep improving in sequential terms," Mr Kowalczyk said.

Broader view

HSBC's purchasing managers index is not the official report on China's manufacturing index.

However, a number of economists and analysts follow it, saying it gives a broader view of what is happening in industry.

A reading above 50 in the index indicates an expansion in manufacturing activity. The last time HSBC's index was above 50 was 12 months ago.

The official PMI figures for October will be published on 1 November, the same day HSBC releases its final results.

Bloomberg News - Bernanke QE3 Stocks Miss Greenspan Irrational Exuberance

By Caroline Salas Gage and Jeff Kearns - Oct 23, 2012 1:01 AM GMT+0200

Federal Reserve Chairman Ben S. Bernanke is trying to inject a little of the exuberance his predecessor Alan Greenspan called “irrational” into markets for everything from stocks to housing.

Bernanke, who is seeking to spur the economy with a third round of so-called quantitative easing, has said his stimulus works by lowering borrowing costs and encouraging investors to seek higher-yielding assets. Boosting home and equity prices through bond buying will encourage consumers and businesses to spend more, according to Bernanke.

Since these are the same assets that plummeted during the financial crisis after reaching record highs, “is there some risk you could start a new bubble and repeat the whole cycle? I suppose there is,” said Robert Shiller, the Yale University professor who forecast the end of the Internet boom in his book, “Irrational Exuberance,” which was published in March 2000, the month the Nasdaq Composite Index peaked before crashing 78 percent. (CCMP)

Bernanke’s approach risks “distorting” decisions, and “it might be economically inefficient to try to push prices up so much,” Shiller, who also predicted the bursting of the subprime-mortgage bubble, said in a New York interview Oct. 15.

While Federal Reserve Bank of New York President William C. Dudley acknowledged that current policy “could distort asset allocations and lead to renewed financial-asset bubbles,” this isn’t a risk now, he said in an Oct. 15 speech.

‘Little Evidence’

“There is little evidence of problems or excesses, but this could change as the recovery proceeds,” said Dudley, who is also vice chairman of the policy-setting Federal Open Market Committee.

If these risks climb, they will need to be factored into the committee’s decisions, and Fed officials will “examine what steps could be taken on the macro-prudential front in response,” he said.

In answering audience questions, Dudley said the Fed’s policies are affecting yields in the bond market, though “to say that’s a bubble, I don’t think that’s quite right.” He added that the debt market is a “lever of policy” for the central bank. The Fed’s asset purchases helped drive yields on the benchmark 10-year Treasury note to a record low of 1.38 percent on July 25. The yield was 1.81 percent on Oct. 22.

The Standard & Poor’s 500 Index reached 1,465.77, the highest since 2007, on Sept. 14, the day after the FOMC said it would buy $40 billion of mortgage-backed bonds a month without limiting the total or duration of purchases. The index is up 112 percent (SPX) since hitting a nadir in March 2009.

Home Prices

Home prices also have begun to rise, jumping in the second quarter by the most in more than six years, according to the S&P/Case-Shiller index, a real-estate benchmark of property values in 20 cities that Shiller created with Karl Case, a professor emeritus at Wellesley College in Massachusetts.

Fed policy makers are meeting today and tomorrow in Washington.

The Fed’s large-scale asset purchases probably will lift stocks by 3 percent in the two years following the Sept. 13 announcement of QE3, as low yields on government bonds push investors into riskier assets, according to a Sept. 27 report by Deutsche Bank AG economists. They also estimate the new stimulus will lift home prices by 2 percent in the same period, assuming the Fed maintains purchases of Treasuries and mortgage debt through 2013.

Perfect Knowledge

“How do they know whether or not these prices will prove to be justified in the long run?” saidJohn Lonski, chief economist at Moody’s Capital Markets Group in New York. “The Fed doesn’t have perfect knowledge about what constitutes a sound long-term price for equities or housing, but this is a risk the Fed is willing to take.”

Lonski said potentially inflated asset prices could prove “devastating” if the Fed is forced to tighten policy quickly or mistimes its exit from record monetary stimulus. The Fed has had “less than perfect” timing in the past, he said.

Greenspan’s “irrational exuberance” comment in 1996 wasn’t actually timely: When he spoke, the Dow Jones Industrial Average was above 6,400. It peaked at over 11,700 in January 2000, before technology stocks crashed. In May of this year, Greenspan said stocks are “very cheap” and likely to rise. The Dow was 13,345.89 at 4 p.m. Oct. 22.

Blame Greenspan

Critics blame Greenspan for inflating the housing bubble by holding the Fed’s benchmark interest rate too low for too long, slashing it to 1 percent in late June 2003 and keeping it there for a year.

Bernanke has relied on unorthodox stimulus such as quantitative easing to reduce borrowing costs after cutting the federal funds rate to near zero in December 2008. The latest steps have succeeded in making home mortgages less expensive, with the average fixed rate offered on new 30-year loans at 3.47 percent on Oct. 19, down from 3.57 percent Sept. 12, the day before the last FOMC meeting, according to Bankrate.com data.

QE3 is designed to boost “Main Street,” the Fed chairman said at a Sept. 13 press conference after the Fed announced the measure. “Many people own stocks directly or indirectly,” Bernanke said. “The issue here is whether or not improving asset prices generally will make people more willing to spend.”

The S&P 500 has risen 1.9 percent since Bernanke set the stage for a third round of bond buying in an Aug. 31 speech in Jackson Hole, Wyoming.

‘Underrated Effect’

Allen Sinai, president and chief executive officer of Decision Economics Inc. in New York, says the stock-market effect is “underrated.” He estimates that a 20 percent gain in the S&P 500 can add as much as 1 percentage point to U.S. growth with a one- to two-year lag.

The Fed’s third round of quantitative easing could be more powerful for stock prices than previous rounds because the open- ended policy is contingent on higher employment and stronger economic growth, assuring better earnings, he said.

“It is as if the Federal Reserve has promised to keep on reducing the federal funds rate until the economy grows at a higher rate,” Sinai said. Persistent Fed stimulus means “I can expect stronger growth, and stronger growth should mean higher earnings, and I can buy stocks.”

Fed Governor Jeremy Stein questioned in an Oct. 11 speech whether companies would take advantage of record-low borrowing costs to invest in equipment and software or simply buy back stock and pay dividends.

Record Low

Investment-grade corporate bonds with an average maturity of more than 10 years yielded a record low 2.76 percent on Oct. 15, according to index data compiled by Bank of America Merrill Lynch. Investment-grade issuance in the U.S. has topped $900 billion in 2012, already exceeding all of last year’s borrowing, data compiled by Bloomberg show.

As corporate bond yields fell and issuance rose, total dividend payments jumped to $275.8 billion in the four quarters ending Sept. 2012 compared with $247.3 billion in the previous four quarters, according to data gleaned from Securities and Exchange Commission filings by FactSet, a data-analysis company in Norwalk, Connecticut.

Stein also said the possibility that Fed policies are causing banks, insurance companies and pension funds to take on more risk as they try for higher returns “should be taken very seriously.”

“A short summary would be that there is some qualitative evidence of reaching-for-yield behavior in certain segments of the market but that we are not seeing anything quantitatively alarming at this point,” Stein said. “The worry is that one often sees only the tip of the iceberg in these kinds of situations, so one needs to be cautious in interpreting the data.”

Falling Yields

Yields on high-yield, high-risk securities also have fallen, to a record low of 6.84 percent on Oct. 18, Bank of America Merrill Lynch index data show.

If Fed policy makers “just keep buying assets, the price of assets will go up in a big way because they want to do a huge amount every month,” said Jagdish Bhagwati, a professor of economics at Columbia University in New York whose former students include European Central Bank President Mario Draghi and International Monetary Fund Chief Economist Olivier Blanchard.

“That also has a downside because it can lead to a bubble; that’s exactly what we should be worried about,” Bhagwati said. “Creating bubbles is not a risk-free thing.”

To contact the reporters on this story: Caroline Salas Gage in New York atcsalas1@bloomberg.net; Jeff Kearns in Washington at jkearns3@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

Reuters News - EU "sucks up decision-making:" UK's foreign secretary

Britain's Foreign Secretary William Hague takes part in a news conference with Canada's Foreign Minister John Baird (not pictured) on Parliament Hill in Ottawa September 24, 2012.

Credit: Reuters/Chris Wattie

LONDON | Mon Oct 22, 2012 7:47pm EDT

(Reuters) - Britain is increasingly disillusioned with the European Union which it sees as a "machine that sucks up decision-making", Britain's foreign secretary said on Tuesday in prepared remarks.

"People feel that the EU is a one way process, a great machine that sucks up decision-making from national parliaments," William Hague said in an advance text of a speech to be delivered later in Berlin.

"...That needs to change. If we cannot show that decision-making can flow back to national parliaments then the system will become democratically unsustainable," Hague said.

The criticisms of Europe are some of the strongest to be voiced by a British government minister in recent months.

They are likely to strain already frayed ties between Britain and the EU's power brokers, with Germany increasingly irritated by the isolationist instincts of British Prime Minister David Cameron and the bulk of his Conservative lawmakers.

"This coalition government is committed to Britain playing a leading role in the EU but I must also be frank: public disillusionment with the EU in Britain is the deepest it has ever been," Hague said.

After a torrid time for Cameron last week, in which a senior minister resigned for ranting at the police and the introduction of a new energy policy was botched, the prime minister will be keen to be seen as reasserting his authority.

Cameron is under pressure to claw back powers from the EU, or even pull Britain out of the 27-member bloc altogether, as anti-Europe sentiment mounts among many legislators in his party.

He has said he plans to negotiate a "new settlement" with the EU as it seeks to further integrate in response to the euro zone's debt crisis, but Cameron rejects opting out altogether given that Britain does almost half its trade with EU countries.

Another restraining influence on Cameron comes from the keenly pro-Europe Liberal Democrats, the junior partners in his coalition government.

The prime minister has promised a "tough" and "rigorous" approach to EU budget negotiations next month, and has pledged to block a proposed banking union in the euro zone if it does not contain safeguards for Britain's own vast financial sector.

(Reporting by Mohammed Abbas; Editing by Michael Roddy)

Reuters News - EU faces two tough months of bargaining to boost euro confidence

(Reuters) - European Union leaders face two months of tough bargaining on money, power and the future governance of the euro zone before they can boost confidence that the existential threat to the single currency has faded.

The European Central Bank's pledge to buy the bonds of struggling euro zone countries in unlimited amounts has changed the terms of Europe's debt crisis.

Yet French President Francois Hollande may have been a little premature in declaring a turning point last week after another night of summit negotiation yielded a deal for a euro zone banking regulator to be launched next year.

"We are on track to solve the problems that for too long have been paralyzing the euro zone and made it vulnerable," said Hollande. "I again have confirmation that the worst is behind us."

More nights of horse-trading lie ahead between now and mid-December in which EU states must agree on a common budget for the next seven years, closer fiscal union with more intrusive central supervision of national budgets and a possible separate budget for the euro zone, and more support for the most vulnerable euro states.

They will need to decide how to keep Greece afloat if, as expected, it reaches a deal with international creditors to avoid bankruptcy next month in exchange for more drastic spending cuts and structural reforms.

And they may face months of uncertainty over whether Spain, which has already been promised up to 100 billion euros in loans to recapitalize its ailing banks, can avoid a sovereign bailout.

Above all, the euro zone is a long way from returning to the levels of economic growth needed to make its debts more manageable and get millions of angry unemployed back to work.

For now, the financial market turmoil that threatened the very survival of the currency area a few months ago has abated, at the risk of lulling EU leaders back into complacency over what remains to be done.

The European Central Bank removed that acute sense of crisis by agreeing to buy unlimited quantities of short-term bonds of troubled euro zone countries that apply for a rescue program and accept strict conditions.

"The state of urgency we had over the summer is just not there to the same degree," said a senior EU official who has been present at every night of summitry since the crisis began in late 2009.

"There is not the same sense of having our backs to the wall," he said. "One should know from the way politics works in the European Union that you need a certain sense of crisis to act -- that's the way it works."

BIG THREE TIES AT LOW EBB

Complicating the next few weeks of negotiation, relations among Europe's three leading powers - Germany, France and Britain - are as difficult as at any time for a decade.

The collapse of a proposed aerospace mega-merger between European Airbus manufacturer EADS and British defense company BAE Systems over government stakes underscored the depth of mistrust between Paris, Berlin and London.

Within the euro zone, Germany and France remain at odds over the balance between central EU control of national budgets and economic reforms, and mutualising risks and liability for each others' debts and bank deposits.

Hollande argues Germany must first take steps he sees as vital to underpin vulnerable countries' government borrowing and financial institutions before France will agree to yield more sovereignty to Brussels over its fiscal and economic policy.

German Chancellor Angela Merkel seems determined to avoid any new liability for German taxpayers which would require her to seek approval from her increasingly reluctant parliament before a September 2013 general election.

That may explain why she insisted that euro zone rescue funds could not recapitalize any bank until a euro zone banking supervisor is fully operational late next year, and there would be no retroactive direct recapitalization of banks.

Her stance was a blow to Spain's hopes of getting the cost of rescuing banks hit by the collapse of a real estate bubble off the state's balance sheet, and hence easing its debt burden without recourse to a euro zone bailout. It was also a setback for Ireland's hopes of shedding some of its bank-induced debt.

It remains to be seen whether Merkel's refusal to share such "legacy" costs is Germany's last word, or whether a future Berlin government may revisit the issue after the election.

Many economists believe that a fresh start for the euro zone will require action such as common euro zone bonds or at least a reduction in peripheral members' "legacy" debts to be viable in the long run. Early relief for Madrid appears ruled out, although Merkel said on Sunday Ireland was a "special case".

Yet German officials say relations between Merkel and Hollande are not as tense as they seem in public, and they are confident that he will accept trade-offs between greater European solidarity and more pooling of fiscal sovereignty.

BRITAIN DRIFTING AWAY?

While the rest of Europe is negotiating intensively on closer integration, Britain is talking increasingly about loosening its ties with the EU, and some influential members of the governing Conservative party of leaving completely.

Prime Minister David Cameron has threatened to veto the seven-year EU budget due to be agreed at a November 22-23 summit if spending is not cut. And he wants to exploit the negotiations on closer euro zone integration as an opportunity to negotiate looser membership terms for Britain in the Union.

It remains to be seen how far other European partners are prepared to accommodate British exceptionalism. Finland's Europe minister said last week that Britain seemed to be waving "bye, bye" to the EU, and there was little others could do about it.

The main achievement of the latest summit was to keep plans for a single European banking supervisor broadly on track despite a rearguard battle led by Germany's finance minister.

"I struggle to find any major piece of reform involving more than a couple of countries which has moved from idea to implementation as fast as the European banking union," said UniCredit global chief economist Erik Nielsen.

The most encouraging news for the future of the euro zone, Nielsen said, was the way that Germany's leadership has changed its attitude towards keeping Greece in the euro area, and hence supporting peripheral states in difficulty.

"There is no turning back now, not only because of the already clear signals from the government leadership, but because the political challenge (from the opposition Social Democrats) - impressively - turns out to be coming from a demand for more Europe, and more support for Greece," he said.

(Additional reporting by Luke Baker in Brussels and Andreas Rinke and Noah Barkin in Berlin; Writing by Paul Taylor; editing by Jason Webb)

Reuters News - China cabinet seeks ambitious economic reform agenda: advisers

. China's Premier Wen Jiabao waits for a question at his annual news conference following the closing session of the National People's Congress (NPC), or parliament, at the Great Hall of the People in Beijing March 14, 2011.

Credit: Reuters/Jason Lee/Files

By Kevin Yao

BEIJING | Sun Oct 21, 2012 5:34pm EDT

(Reuters) - China's top leaders have asked policy think-tanks to draw up their most ambitious economic reform proposals in decades that could curb the power of state firms and give more freedom to the setting of interest rates and the yuan currency.

But after almost 10 years of delay to painful structural reforms by the outgoing leadership, some of the authors of the proposals told Reuters they fear a nascent rebound in economic growth could derail the recommended agenda.

"China is approaching a stage when the government must embrace more fundamental reforms," said Shi Xiaomin, vice president of the China Society of Economic Reform, a think-tank under the National Development and Reform Commission, the top economic planning body.

China's once-in-a-decade leadership change will be finalized next month at the ruling Communist Party's 18th congress. Vice President Xi Jinping is set to take over from Hu Jintao as president and Li Keqiang will replace Wen Jiabao as premier at the meeting, which opens on November 8.

The congress convenes as the economy heads for its weakest annual growth rate in at least 13 years after three decades of near 10 percent annual expansion in the wake of sweeping reforms launched by former leader Deng Xiaoping.

Reuters interviewed five policy advisers involved in drawing up the reform proposals. They said the order for the agenda came from members of the State Council, or cabinet, although they declined to give specifics for fear of repercussions.

Significantly, planning sources said cabinet members had signaled an interest in seeing proposals from policy advisers outside Beijing, in the provincial hinterland, implying that a nationwide consensus is being sought on the content and timetable for painful structural reform.

High on the list drawn up by the advisers is how to contain the government's meddling in the economy and clip the wings of more than 100,000 state-owned enterprises (SOEs) which enjoy enormous privileges, including preferential access to bank lending and government contracts.

Other reforms include allowing the market to set the cost of bank credit, land and various natural resources.

Credit is currently basically allocated by the central government. It tells state-backed banks how much to lend and when - mainly to other big state-controlled businesses and projects. Meanwhile all land and basic resources are owned by the state, with private ownership limited to temporary leased rights to usage.

Analysts say reform of these two areas would bring fundamental change to China's economic structure, even more so than making the yuan currency more convertible - also on the table as part of a package of proposals to liberalize capital markets and boost the yuan's use in global trade settlement.

Reform to China's complex tax structures, under which the central government commands the lion's share of receipts while local governments do most of the spending, is needed if serious progress is to be made cleaning up local government debt that stood at 10.7 trillion yuan ($1.7 trillion) at the end of 2010.

"I think a consensus on reforms has been formed at the central level, even though people may have different considerations on when and how to implement reforms," said Wang Jun, senior economist at the China Centre for International Economic Exchanges, a top government think-tank in Beijing.

UNFINISHED BUSINESS

Experts say Chinese leaders must unlock fresh growth potential and put the economy on a more sustainable path to avoid the "middle-income trap", where wealth creation stagnates as market share is lost to lower cost competitors and the attainment of high-income country status stays out of reach.

The World Bank says China's GDP per capita was $5,500 last year, versus $22,400 in South Korea, $34,500 in Hong Kong and $46,200 in Singapore, which all avoided the middle-income trap.

There has been soul searching among Chinese academics about the 4 trillion yuan ($640 billion) stimulus package unveiled in late 2008, which led to excessive investment in white elephant projects, created mountains of local government debt and sent house prices rocketing in big cities.

The stimulus helped state-owned firms stage a comeback at the cost of private businesses.

SOEs have repeatedly fought off Beijing's plans to get them to pay higher dividends to state coffers and have sought to delay reforms on income distribution systems, which could imply capping hefty wages in monopoly sectors, government sources say.

The reforms aim to require SOEs to pay more dividends to the government to meet a funding shortfall in social welfare.

"We could see serious problems if we don't reform," said Zuo Xuejin, head of the Institute of Economics at the Shanghai Academy of Social Sciences, which advises the local government in China's financial hub.

Still, some government advisers fear signs of a recovery in the economy could ease the pressure to act.

China's annual economic growth slowed to 7.4 percent in the third quarter from 7.6 percent in the second - the seventh consecutive quarter of slower expansion, but government officials have flagged signs of a modest rebound in September.

Industrial production, retail sales and investment data were all slightly ahead of forecasts in September and quarter-on-quarter GDP growth was strong, suggesting the worst may be over and the world's No.2 economy will pick up in the final quarter.

"They may have to change if there is an economic crisis, but they may choose to muddle through if the economy recovers," said an economist with a top government think-tank in Beijing, who requested anonymity due to the sensitivity of the issue.

TRAJECTORY OF CHANGE

Past changes tend to support the anonymous economist's view.

Deng Xiaoping launched economic reforms in the late 1970s to rescue an economy on the verge of collapse after Mao Zedong's disastrous Cultural Revolution.

He made his famous tour of southern China in 1992 to jumpstart the second stage of reforms when the economy nosedived in the aftermath of the 1989 Tiananmen Square crackdown. And sweeping market measures spearheaded by former Premier Zhu Rongji were introduced after the Asian financial crisis in the late 1990s.

Chinese leaders have acknowledged that three decades of 10 percent average annual GDP expansion are over and that the economy needs fresh drivers, analysts say.

In February, the World Bank said in a report with the cabinet think-tank, endorsed by presumptive-premier Li, that Beijing must implement deep reforms to avert a crisis.

The World Bank said China's annual economic growth may slow to 5 percent a year by 2026-2030, from 8.5 percent in 2011-2015.

The mainstream view in Beijing is to blame the global financial crisis for China's slowdown, which also reflects diminishing gains from past reforms and market opening spurred by China's entry into the World Trade Organisation a decade ago.

Even fresh reforms may not deliver a swift turnaround.

"The easiest part of the reforms were carried out in the past 30 years, so we don't have many areas where reforms can deliver quick results," said Zuo at the Shanghai think-tank.

(Editing by Nick Edwards and Dean Yates)

BBC News - EU summit: France says bank deal helps eurozone fusion

The French president says a deal to start building a banking union on 1 January will enable the eurozone to speed up economic integration.

The BBC's Gavin Hewitt reports on the winners and losers in the deal

"Thanks to this we can advance more quickly and with more assurance," Francois Hollande said in Brussels.

He was speaking after EU leaders agreed to set up a single banking supervisor for the 17-nation eurozone - a key step towards a banking union.

But Mr Hollande also said EU states "need different speeds" of integration.

"We should have a council of the eurozone to meet on a regular basis... We need different speeds - that's agreed by everyone now, and there are even some moving backwards," he told a news conference.

Germany's Chancellor Angela Merkel insisted again that "quality takes precedence over speed" in setting up the banking union.

New ECB clout

It has been agreed that the European Central Bank (ECB), as supervisor-in-chief, will have the power to intervene in any of the eurozone's 6,000 banks.

The deal appears to be a compromise between France and Germany, who earlier disagreed over the timing and over the number of banks the ECB would oversee.

A legislative framework is to be in place by 1 January, with the supervisory body starting work later in 2013.

The timetable remains important, because only when the body is fully operational will the eurozone's new rescue fund, the European Stability Mechanism (ESM), be able to recapitalise struggling banks directly, without adding to a country's sovereign debt pile.

A priority is to rescue weak banks in Spain, where a recent audit put the bailout requirement at 59.3bn euros (£48.3bn; $77.4bn).

But the Greek crisis also looms large, as the EU awaits a key report from the "troika" of international lenders - the ECB, European Commission and International Monetary Fund.

Mr Hollande insisted that "Greece's presence in the eurozone should not be questioned any more" and Mrs Merkel said the Greek government was "really making an all-out effort" to reform its economy.

Meanwhile, Spain's main trade unions have called a general strike for 14 November, coinciding with similar protests in Portugal and Greece.

'Ambitious roadmap'

Berlin wanted to apply the brakes over the banking union and much wrangling lies ahead, the BBC's Europe editor Gavin Hewitt says.

Mrs Merkel insisted on Friday that "the right sequence is important" and added: "It's already quite an ambitious roadmap."

Germany had been at odds with the European Commission over the scope of the proposed ECB supervision. All the eurozone banks will be included - but Germany had wanted it limited to the biggest, "systemic" banks.

Previously, the German government has expressed a desire to retain supervisory responsibility within Germany over the country's Landesbanks - state-owned banks that play a key role in the economies and state finances of Germany's federal regions.

European Council President Herman Van Rompuy said the 27 EU leaders had agreed to set up "a Single Supervisory Mechanism[SSM], to prevent banking risks and cross-border contagion from emerging".

"Once this is agreed, the SSM could probably be effectively operational in the course of 2013," he said.

With new supervisory powers the ECB would be able to act early on to prevent a systemically dangerous accumulation of debt on a bank's balance sheets.

UK concerns

ECB supervision will not extend to the UK - Europe's main financial centre, but outside the euro.

However, the BBC's Business editor Robert Peston says there is now a serious risk that the UK will always be outvoted when decisions are taken on the regulation of banking and finance in the EU as a whole.

It is more than a theoretical possibility that the interests of the UK and City of London in shaping financial rules will be systematically ignored or overridden, he says. The UK also wants safeguards to protect the powers of the Bank of England.

Mrs Merkel said the agreement was that "banks must be supervised in a differentiated way. That means that some will be direct... at the ECB level and others indirectly, via the national authorities."

She also said that ECB President Mario Draghi had told her it would be some months before the ECB was ready to take on its new role.

Fraught with complications

The leaders agreed that the ECB's new supervisory function would be strictly separated from its role in setting monetary policy.

The banking union plan is fraught with legal complications, as it would give more powers to the ECB and possibly weaken those of national regulators.

There is speculation that it could lead to treaty changes - something that has caused big headaches for the EU in the past.

The EU Commission said the arrangement would be "as inclusive as legally possible for non-euro members to join if they want to".