Real Traders Pay Most Premium to Guard Against Drop

May 24 (Bloomberg) — Brazilian currency traders are paying the highest premium in developing markets to insure against a tumble in the real after Europe’s debt crisis sparked the biggest monthly retreat since November 2008.

One-month options giving investors the right to sell the real cost 7 percentage points more than contracts to buy as of May 20, the most among 24 emerging currencies tracked by Bloomberg. The difference is a change from three months earlier when Russia’s ruble and Hungary’s forint demanded higher premiums for protection against possible declines, data compiled by Bloomberg show.

Investors are concerned that the real, last year’s best- performing currency with a gain of 33 percent against the dollar, will fall as Europe’s crisis threatens both the global recovery and forecasts that Latin America’s largest economy will grow by the most in two decades. Brazilian bond and stock funds lost a net $520 million the past two weeks, the most since February, data compiled by EPFR Global, a research firm in Cambridge, Massachusetts, show. The real sank 4.9 percent the past month.

“The currency was a crowded trade for awhile, and in a time like this, it’s going to be the most impacted,” said Edgardo Sternberg, an emerging-markets strategist at Loomis Sayles in Boston who helps oversee $145 billion. “The country is fine, but people are always nervous.”

Risk Reversal

The so-called risk-reversal rate has more than tripled from 2.34 percentage points in February in favor of options to give investors the right to sell the real, according to data compiled by Bloomberg.

Foreign institutions made 112,634 more bets on the currency falling than rising as of May 21, the highest level since March 2009, data from the BM&FBovespa SA exchange in Sao Paulo show.

The real fell 4.6 percent against the euro last week, the most since February 2009. Before last week’s selloff, the real had gained 13 percent against the euro this year on speculation the crisis would be limited to Europe.

The reversal suggests “market fears have started to morph from a potential European credit event, to a more generalized fear of a double dip in terms of global growth,” Citigroup Inc. analysts led by Dirk Willer wrote in a research note to clients on May 21.

The extra yield investors demand to own Brazilian government dollar bonds instead of U.S. Treasuries narrowed four basis points, or 0.04 percentage point, to 242 basis points at 9:51 a.m. in New York, according to JPMorgan Chase & Co. The gap reached 246 on May 21, within two basis points of a three-month high reached May 6.

Default Swaps

The cost of credit-default swaps to protect against a default on Brazilian debt for five years rose 17 basis points last week to 148, according to data compiled by CMA DataVision. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

The yield on Brazil’s interest-rate futures contract due in January was little changed at 10.93 percent today. The yield fell 15 basis points, the biggest decline since March, last week as traders trimmed expectations on the total amount of interest- rate increases by the central bank this year.

The real rose 0.2 percent to 1.8499 per dollar, from 1.8534 on May 21. It sank 2.9 percent last week.

‘Overreacting’

“The market is overreacting,” said Yerlan Syzdykov, a senior portfolio manager in Dublin at Pioneer Investments, which oversees $236 billion in assets. “Brazil’s growth will accelerate from here. The currency at these levels looks attractive.”

Brazil’s economy will expand 6.46 percent this year, the fastest pace since 1986, according to a central bank survey of about 100 economists published today.

Syzdykov said the currency will rise to 1.75 per dollar in coming months and he may invest more in local-currency bonds. The real will strengthen to 1.72 by year-end, according to the median forecast of 18 analysts surveyed by Bloomberg.

Even after this year’s decline, the real is about 10 percent “overvalued,” according to Nick Chamie, global head of emerging-markets research at RBC Capital Markets in Toronto.

Traders are expecting the currency’s fluctuation to increase in the coming month. One-month implied volatility on real options jumped to 21.8 percent on May 21, the highest level since July, and climbed to an all-time high of 70.9 percent in October 2008, one month after the collapse of the Lehman Brothers Holdings Inc. led the real to fall to 2.62 per dollar.

Fibria

The increase in volatility and the real’s decline in 2008 contributed to losses at Brazilian companies such as Fibria Celulose SA that made wrong-way currency bets through derivatives. Sao Paulo-based Fibria, the world’s largest pulp producer, will make its final payment tied to $3 billion of debt from wrong-way currency bets by this week, Chief Executive Officer Carlos Aguiar said on May 20.

Derivatives, financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in the weather, are used by companies and investors to hedge against, or speculate on, price changes.

Brazil’s central bank is buying dollars daily, extending a practice it adopted in March 2009, even as the real depreciates. Foreign reserves increased 1.3 percent in the past month to about $250 billion, the fastest growth since November.

“My perception is that in the shorter term we could see it weaker because of the external factors,” said David Beker, head of Latin American economics at Bank of America Merrill Lynch in New York. “Moving forward — the central bank won’t allow the currency to appreciate — 1.70 is floor.”

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net ; Tal Barak Harif in New York at tbarak@bloomberg.net

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Deutsche Bank, UBS Executives Say FSB Rules Have ‘Design Flaws’

May 24 (Bloomberg) — Executives from the world’s biggest banks, including Deutsche Bank AG, UBS AG and Standard Chartered Plc, pushed back against international proposals for banks to hold more capital and liquidity.

Labeling plans by the Basel Committee on Banking Supervision for banks to increase capital as having “serious macroeconomic consequences” in two reports published today, the Institute of International Finance, whose members include Barclays Plc and Citigroup Inc. executives, criticized unilateral moves by governments to curb banks’ risk, and called on policy makers to look beyond size when designing regulations.

Nout Wellink, the Basel committee’s chairman, estimated that its proposals may slow worldwide economic growth by 1 percent, and UBS analysts say the plans may cost banks $375 billion in fresh capital. Banks face a barrage of regulations in the wake of the financial crisis, including a U.S. Senate bill banning deposit-taking banks from proprietary trading.

“Regulatory iron-cladding hampering recovery and growth is a real risk,” one IIF report said, presented in London by Standard Chartered Chairman Peter Sands and Credit Suisse Group AG Vice Chairman Urs Rohner. “The current proposals as formulated by the Basel Committee have significant design flaws.”

Basel Committee

The IIF reports respond to plans by the Basel committee and the Financial Stability Board, which guides policy for the Group of 20 Nations, for banks deemed too big to fail; and on proposals for the largest banks to draw up living wills to plan for their demise. The Basel committee sets minimum standards for banks in 27 countries, including China and the U.S.

The largest firms shouldn’t have to pay a surcharge, which could risk creating a special category of bank that wider markets consider are too big to fail, the IIF report said. Capital and liquidity requirements as currently designed by the Basel committee are too onerous and may push companies seeking funds to look at lending alternatives.

Plans to limit banking activity — like the so-called Volcker Rule that was approved as part of legislation in the U.S. Senate — “represent an arbitrary and retrograde response that would be likely to do more harm than good,” the IIF report said. “The focus should be on disincentivizing activities that pose a risk and provide no economic usefulness.”

International Task Force

An “international task force,” acting under a G-20 mandate should be established to create a framework within six months to deal with failing global firms the report said. It would need to work alongside national “resolution regimes,” to allow firms to leave markets in an orderly way and “avoid a retreat into national markets,” the report said.

The Basel committee has a group, led by Bank of England Deputy Governor Paul Tucker, that is looking at living wills, while U.K. Financial Services Authority Chairman Adair Turner heads an FSB sub-committee examining what should be done about systemically important banks. Reports are scheduled to be issued by November.

Authorities that resolve corporate failures should seek to ensure losses are borne by shareholders, rather than taxpayers, and should have the power to replace senior management and restructure firms, the IIF said.

China’s Stock Market Has Become a Poor Man’s Casino: Andy Xie

May 24 (Bloomberg) — A bartender at my neighborhood pub recently asked me how the Shanghai stock market was performing. I said it was at about 2,600 points. He jumped and said, “No! The Communist Party wouldn’t let that happen.”

He spent the next 10 minutes trying to convince me that the Communist Party would make the market rise to 8,000 in the next three to five years.

“Look, the Hong Kong market is at 20,000,” he said. “Shanghai at 8,000 would be very reasonable.”

China’s stock market involves more investors than any other market in the world. There are 124 million brokerage accounts. From what I can gather, the collective enthusiasm of the investing community is still quite strong. The market capitalization is small at 53 percent of gross domestic product and 31 percent of money supply. Prices are at a historical low of 2.5 times book value. Why is the market still going down?

When the central government introduced tightening measures for the real-estate market, many were hopeful the money would flow out of property into the stock market. A popular yo-yo theory says money travels only between property and the stock market, never anywhere else. The property market hasn’t dropped much, while the stock market is down 20 percent.

Soft Landing

Politics and liquidity drive China’s stock market. Neither is favorable. Though the government desires a soft landing, the bubble debate over the property market is over: Tightening is the consensus. The question is speed. When the government squeezes liquidity in the property market, it inevitably decreases it for the stock market. Both markets lose.

The stock-market pain isn’t just collateral damage. Real-estate price appreciation is the biggest source of profit for businesses, especially in the financial industry. The total stock of properties, work-in-progress, and land banks may exceed three times GDP in value. When the price rises 20 percent, the gain is 60 percent of GDP.

In a normal economy, corporate profit is about 10 percent of GDP. When capital appreciation is six times that, businesses try to play financial games to turn appreciation into accounting profit. When property prices stop rising, or even fall, very profitable companies suddenly become unprofitable.

The state-owned banks are lining up for mega fund-raising of as much as 500 billion yuan ($73 billion) in the stock market. While two-thirds is supposed to be raised in Hong Kong, one-third is still a lot for the A-share market on the mainland to bear. About 456 billion yuan was raised in all of 2009.

Bank Shares

Banks are normally profit machines. But in one day they can lose it all. A good moment to buy bank stocks is right after a banking crisis. But when lenders are trying to raise so much capital to prepare for a property-market correction, it may not be the best moment to purchase shares in banks.

Valuations have never presented a strong case to enter China’s stock market. They are now getting there. The current price-to-book ratio isn’t cheap, but it’s reasonable by international standards. I advise you not to pay too much attention to price-earnings ratios. Asset bubbles can distort them so much. The decline in valuation, however, may just be part of a normalization process.

For a long time, China’s stock market behaved like an Internet stock with a small free float. The recent reforms have made all the shares liquid. Maybe China’s valuations are becoming normal because stocks aren’t valued by off-market trading at a discount anymore. It is a sign of progress. The conclusion: The Shanghai market won’t head back to its record of almost 6,000 points anytime soon. That will disappoint many.

Market Crash

Rich people aren’t in the stock market anymore. They are in the property market. An overwhelming majority believe real- estate prices only go up, not down. The people in the market today have no recollection of the market crash of 1997.

The stock market, on the other hand, experienced a crash in 2007-08 — from 6,000 points to less than 1,700 in one year. Those who can afford to play the property market find the stock market a bad place to be. This is why real estate has kept booming since 2007, while equities have been struggling. Of course, when the property market drops like shares did in 2007, the stock market will be treated more fairly.

Stock-market investors in China often can’t afford to enter the real-estate market in big cities. They wish to get lucky, make enough money, and move on to the property market. This force caps the market upside, but not the downside.

My bartender finally asked me to recommend a stock. He said he had 70,000 yuan and wanted to make enough money to buy a car.

“I can’t buy a car with my wage income,” he said. “Look at how hard my job is. But, if I make 200,000 yuan in the stock market, I can buy a nice car.”

As long as property prices don’t collapse, ordinary investors can forget about getting free lunches and new cars from the Chinese stock market.

(Andy Xie is an independent economist based in Shanghai and was formerly Morgan Stanley’s chief economist for the Asia- Pacific region. The opinions expressed are his own.)

To contact the writer of this column: Andy Xie at andyxie88@yahoo.com.hk

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HSBC Suffers Euro Collapse as Greek Debts Roil Banks

May 24 (Bloomberg) — Europe’s credit crisis is punishing Spanish and U.K. companies as if they were Greek, luring investors with valuations that suggest risk is the same everywhere in the region.

The price-earnings ratio of London-based HSBC Holdings Plc, Europe’s biggest bank by market value, slipped below Greece’s EFG Eurobank Ergasias SA last week, according to data compiled by Bloomberg. Spain’s Banco Santander SA trades at 8 times projected profit, the lowest relative to Athens-based Piraeus Bank SA in more than three years. The Stoxx Europe 600 Index fell 4.6 percent last week, heading toward its biggest monthly retreat since February 2009.

“I have had Greek stocks in the past but at the moment there are much better things to do elsewhere,” said Katherine Blunden at HSBC Private Bank in Paris, whose $346 million Europe Value fund is outperforming the Stoxx 600 for an eighth year. “I have Spanish or Italian positions and I keep them because they are attractive. I’m very definitely keeping Santander and may even reinforce it as its valuation improves.”

European equities are the cheapest in a year after rising concerns about sovereign defaults wiped out $2.04 trillion from the region’s market value this month. While the Athens Stock Exchange General Index has fallen 27 percent in 2010, shares in countries with less default risk are trading at bigger discounts to their earnings, according to data compiled by Bloomberg.

The Stoxx 600 rose 1 percent to 239.41 at 8:06 a.m. in London today, poised for its first daily advance in four days.

Pair Trades

HSBC, which has $2.4 trillion in assets and branches in 88 countries, fell 9.6 percent since December, giving it an earnings multiple of 13.1, Bloomberg data show. Santander, Spain’s largest bank, has slid 23 percent since December. The Santander, Spain-based lender, which employs more than half of its 171,000 staff in Latin America, will post a 3.1 percent rise in net income to 9.2 billion euros ($11.6 billion) in 2010, according to the average estimate in a Bloomberg survey of 19 analysts.

Intesa Sanpaolo SpA, Italy’s second-biggest bank, costs 10 times projected profits. Milan-based Intesa forecast higher profit for 2010 on May 14 after posting better-than-estimated net income of 688 million euros for the first quarter.

Cutting Estimates

Eurobank, trading at 13 times predicted earnings, saw its valuation climb above HSBC’s on May 19 for the first time since January 2008. The Athens-based lender has a market capitalization that is one fiftieth of HSBC’s and generates about two thirds of its revenue in Greece, with the rest coming from former communist countries in eastern Europe. Analysts have cut their estimates for Eurobank and now say profit may slump 23 percent to 236 million euros from a year earlier instead of increasing 51 percent as they predicted as recently as January, according to data compiled by Bloomberg.

Eurobank commanded a premium even after Greek equities tumbled the most this year among 93 countries tracked by Bloomberg except for Venezuela, on concern the nation won’t be able to rein in its budget deficit, which touched 13.6 percent of gross domestic product in 2009. The slump has left the ASE Index valued at 8.6 times its members’ estimated profits, compared to 13 times for the MSCI World Index, Bloomberg data show.

As contagion from the Greek crisis has spread around Europe, valuations for markets outside of Greece have become compressed. The U.K.’s FTSE 100 Index is valued at 10.2 times this year’s estimated earnings, down from 12.7 times in January, the data show. The ASE now trades at just a 7.4 percent discount to Spain’s benchmark IBEX 35, down from 25 percent in January.

‘Cheap as Greece’

“Other markets are as cheap as Greece, probably with more stability,” said Dietmar Schmitt at SAM Capital Partners Ltd., a London-based manager whose long-short European equity hedge fund made money in 16 of the last 18 months. “In Spain, at least you know the exchange is going to open if the market collapses.”

Greek workers staged their fourth general strike last week with thousands marching in Athens to protest spending cuts that Prime Minister George Papandreou must push through to qualify for international aid. Three people were killed on May 5 after demonstrators set fire to a bank in the Greek capital. Greece’s economy will shrink 4 percent this year, according to government and EU estimates.

Rising Profit

Spain’s government approved the first public wage reductions last week since returning to democracy in 1978 and cut its forecast for economic growth for next year to 1.3 percent as it seeks to tame the euro region’s third-largest budget deficit.

“My current position is out of Greece and Portugal, but we are still in the large international banks in Spain and Italy on the basis that they have diversification into overseas markets,” said Mark Bon, who helps oversee about $750 million at Canada Life Ltd. in London and recently added to holdings of Santander. “Some of the valuations are attractive relative to other banks. Greece should be cheaper than the international financials.”

Credit-default swaps on National Bank of Greece SA, which pay holders in the event the issuer fails to pay its debt, show a 39 percent possibility of default by the largest Greek bank, according to prices from CMA DataVision. Contracts on Santander and HSBC suggest 16 percent and 8.4 percent chances, respectively.

Mispriced Shares

“We’re getting to a situation where now is a very good time for investors to be looking around, not necessary buying the region, but certainly looking at companies and asking, ‘Is this mispriced?’” said Andrew Milligan, the Edinburgh-based head of global strategy at Standard Life Investments, which oversees about $221 billion. “Investors are still looking for growth opportunities.”

Standard Life is bullish on Lisbon-based Jeronimo Martins SGPS SA, Portugal’s biggest retailer, Bagsvaerd, Denmark-based Novo Nordisk A/S, and Munich-based MAN SE, Europe’s third- biggest truckmaker, Milligan said. Jeronimo Martins has an estimated P/E of 17.4, compared with 20.3 for Novo Nordisk and 21.2 for MAN.

Germany, France, Switzerland

Coca-Cola Hellenic Bottling Co., the world’s second-largest supplier of Coke beverages and Greece’s biggest company by market value, trades at 13.8 times estimated earnings, the highest level relative to Group Danone SA’s 15.6 and Nestle SA’s 15.8 since the second quarter of 2008. Paris-based Danone bottles Evian and Volvic water while Nestle, in Vevey, Switzerland, owns the Perrier and San Pellegrino water brands.

“The companies in Germany, France and Switzerland, those are the places where the sovereign situation is not as bad, but the overall selloff is making those places attractive,” said Wasif Latif, vice president of equity investments at USAA Investment Management Co., which oversees $45 billion in San Antonio. “This isn’t the time to back up the truck, but if the weakness persists or gets worse, investors need to start taking a look at the high quality, fundamentally sound companies and start adding because they can probably get some bargains.”

Europe’s banks remain too exposed to the worsening debt crisis, which makes spotting value harder, said Colin Mclean, who helps manage 650 million pounds ($936 million) at SVM Asset Management Ltd. in Edinburgh.

No Visibility

“The problem with banks is the same as in 2008, that it’s very difficult to get visibility in the underlying metrics,” Mclean said. “It is quite difficult to ascertain what true value is. We don’t hold long positions in either Spain or Greece. We still have remaining short positions.” SVM is underweight European banks, meaning the stocks represent a smaller slice of assets than their weighting in benchmark indexes.

Credit Suisse Group AG’s London-based strategist Andrew Garthwaite says southern European lenders should trade at 0.5 times their tangible book value, a measure of what the company would be worth in liquidation, as the countries may experience falling consumer prices.

Alpha Bank AE and Piraeus Bank, based in Athens, trade at an average of 0.85 times tangible book, twice as high as the 0.4 ratio for Edinburgh-based Royal Bank of Scotland Group Plc, according to Bloomberg data. The valuation is in line with that of Barclays Plc, the London-based bank that analysts estimate will report 2010 net income of 4 billion pounds, and about 31 percent more expensive Paris-based Credit Agricole SA, France’s biggest bank by branches.

With Europe’s Stoxx 600 closing last week at its lowest level in more than six months, valuations are becoming increasingly attractive for Hans-Peter Schupp, manager of Fidecum AG’s $77 million Contrarian Value Euroland fund near Frankfurt, which has outperformed the market this year.

“Spanish companies are starting to pop up in our screens,” said Schupp, who looks for the cheapest shares in Europe’s equity markets and already owns Credit Agricole. “We don’t find opportunities in Greece.”

To contact the reporter on this story: Alexis Xydias in London at axydias@bloomberg.net .

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European Stocks Rebound From Six-Month Low; Mining Share Rally

May 24 (Bloomberg) — European stocks rebounded from a six- month low, led by gains in mining shares, amid speculation equities may have fallen too far on concern about the region’s debt crisis.

Rio Tinto Group led gains in basic-resource producers as base metals climbed in London. Barratt Developments Plc rallied 2.1 percent after JPMorgan Chase & Co. recommended Britain’s biggest homebuilder by volume. Banco Bilbao Vizcaya Argentaria SA led Spanish lenders lower after a regional bank was placed into under the administration of the government’s bank restructuring fund.

The Stoxx Europe 600 rose 0.3 percent to 237.92 at 3:27 p.m. in London, after tumbling last week to the lowest level since November. The gauge is trading at less than 15 times the reported earnings of its companies, near the cheapest valuation since 2008.

“Valuation investors will come in but won’t come in with all their chips right now,” Mark Tinker, a portfolio manager at Axa Framlington Ltd. in London, said in a Bloomberg Television interview. “The political response to what is going on in Europe is dangerous and that is why the market is nervous.”

National benchmark indexes rose in 4 of the 11 western European markets open today. The U.K.’s FTSE 100 and France’s CAC 40 rose 0.1 percent. Germany’s DAX dropped 0.6 percent.

Markets in Switzerland, Austria, Norway, Denmark, Luxembourg, Iceland and Greece are closed for public holidays.

Europe Divided

The Stoxx 600 has erased all the gains that followed the European Union’s unveiling of a 750 billion-euro ($927 billion) loan package on May 10 aimed at stopping the euro region’s weakest members from defaulting. Since the year’s high on April 15, the gauge has dropped 13 percent amid concern that Europe is divided on how best to deal with spiraling debt levels.

“Sentiment is extremely fragile,” JPMorgan’s London-based strategist Mislav Matejka wrote in a report to clients today. “The volatility continues, but we advise adding to stocks on dips. The markets are of course a lead indicator, but they can sometimes overact as well.”

Rio Tinto climbed 2.6 percent to 2,984.5 pence as zinc, nickel and tin rose on the London Metal Exchange. Xstrata Plc, the world’s fourth-largest copper producer, increased 1.5 percent to 964 pence. Anglo American Plc gained 1.6 percent to 2,519.5 pence.

Barratt Upgrade

Barratt Developments increased 2.1 percent to 109.6 pence after JPMorgan upgraded the homebuilder to “overweight” from “underweight.” Rival Taylor Wimpey Plc climbed 3.5 percent to 33.9 pence as the bank reiterated its “overweight” recommendation. Analysts cited “deep value” for both companies which are “strongly geared” to a housing recovery.

BBVA, Spain’s second-largest bank, retreated 2.3 percent to 8.53 euros after the Bank of Spain put CajaSur, a savings bank in the city of Cordoba crippled by defaults on property loans, under a provisional administrator.

Banco Santander SA lost 1.5 percent to 8.48 euros and Banco Popular Espanol SA, Spain’s third-largest bank, lost 2.7 percent to 4.32 euros.

BP Plc, Europe’s second-largest oil company by market value, dropped 3.1 percent to 490.95 pence, leading a retreat in energy shares. The company said its costs to date from an oil leak in the Gulf of Mexico have reached about $760 million, or $22 million a day. That compares with an initial estimate of $6 million a day last month.

Europe’s credit crisis is punishing Spanish and U.K. companies as if they were Greek, luring investors with valuations that suggest risk is the same everywhere in the region.

The price-earnings ratio of London-based HSBC Holdings Plc, Europe’s biggest bank by market value, slipped below Greece’s EFG Eurobank Ergasias SA last week, according to data compiled by Bloomberg. Spain’s Banco Santander SA trades at 8 times projected profit, the lowest relative to Athens-based Piraeus Bank SA in more than three years.

To contact the reporter on this story: Sarah Jones in London at sjones35@bloomberg.net .

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Geithner, ‘Uncle’ Wang to Spar Over Yuan in China

May 24 (Bloomberg) — The Chinese official who is facing Timothy Geithner in Beijing today jokingly calls himself the Treasury secretary’s “uncle” because of a family connection. Geithner may one day call him “Premier.”

Vice Premier Wang Qishan leads the delegation meeting with Geithner and Secretary of State Hillary Clinton at the Strategic and Economic Dialogue, which is discussing yuan revaluation, Europe’s debt crisis and North Korea’s nuclear program. Wang, who oversees China’s financial sector, is mentioned for membership in the ruling Politburo Standing Committee and as a successor to Premier Wen Jiabao, two China experts say.

Geithner says Wang is China’s “definitive preeminent troubleshooter, firefighter, problem solver.” He is also a high-level emissary to business leaders: During a three- month stretch this year, Wang met with Citigroup Inc. Chief Executive Officer Vikram Pandit, JPMorgan Chase & Co. CEO Jamie Dimon and UBS Investment Bank Vice Chairman Leon Brittan.

“Wang has done everything and he’s very good at it,” said Robert Hormats, the U.S. undersecretary of state for economics, energy and agriculture and a former Goldman Sachs Group Inc. banker who first met Wang in the 1980s. “He knows the American relationship inside and out. He has had great relations with a number of American officials for decades.”

China’s Firefighter

China’s top leaders regularly tap him to extract the country from crises, including the 1998 collapse of a provincial investment company and the 2003 outbreak of a deadly virus in Beijing. As mayor, Wang also headed the Chinese capital’s preparations for the 2008 Olympic Games.

Dimon said in an e-mail that Wang was “extremely smart, engaged and deeply knowledgeable about issues, finance and history.”

Yesterday Wang met Federal Reserve Chairman Ben S. Bernanke, where they talked about the global economy, the official Xinhua News Agency reported. Wang also dined with Geithner last night. Today, in opening remarks for the talks, Wang said the European debt crisis has caused a “chain reaction,” affecting market confidence.

Next Premier?

Li Cheng, director of research at the Brookings Institution’s John L. Thornton China Center in Washington, says Wang’s experience means he’ll likely be named to the standing committee in 2012, giving foreign bankers a familiar face at the top of China’s power structure.

Wang, 61, is also being mentioned within the party as a possible candidate to succeed Wen in 2013, when the country will be looking for a seasoned hand to guide China to full yuan convertibility, said Li and Victor Shih, a professor at Northwestern University in Evanston, Illinois, who studies Chinese politics and finance.

“He would help push for the convertibility of the yuan in a very positive way,” Shih said.

Geithner nudged Wang on the yuan from the outset of the meeting today in opening remarks at the Diaoyutai State Guest House in western Beijing.

“Allowing the exchange rate to reflect market forces is important” for China to maintain low inflation and to help shift resources to “more productive higher value- added activities,” Geithner said.

The yuan’s value has been fixed to about 6.83 to one U.S. dollar for almost two years.

Resisting Pressure

Wang won’t have the final say. He is one member of the 25-person Politburo, which sets policy for the government and the ruling Communist Party. And up to now, the government has resisted U.S. pressure to end or loosen the peg.

“Only the authorities of a sovereign country have the right to decide how to form the exchange rate,” Assistant Finance Minister Zhu Guangyao said in Beijing on May 20.

Li Keqiang, the executive vice premier, is one of nine current members on the standing committee, and is the front-runner to succeed Wen, Brookings’ Li said.

Yet Wang’s experience, which includes stints as head of China Construction Bank Corp. and China International Capital Corp., the country’s first investment bank, as well as deputy governor of the central bank, outshines Li’s resume, said Brookings’s Li.

‘Can-Do’ Leadership

Hormats said Wang had the “can-do” leadership style of former Premier Zhu Rongji, who led a drive to sell shares of the country’s biggest state-run companies to foreign investors and shepherded China’s 2001 entry into the World Trade Organization.

Wang, as vice governor of southern China’s Guangdong province, was tapped by Zhu to oversee the bankruptcy of Guangdong International Trust & Investment Corp. after its 1998 collapse due in part to soured real-estate investments.

A native of northern China’s Shanxi province, Wang often speaks without notes when giving speeches, peppering his remarks with anecdotes. He didn’t respond to a request for an interview.

In a Washington speech last July, Wang called himself Geithner’s “uncle,” referring to ties he had with the Treasury secretary’s father, Peter, who headed the Ford Foundation’s office in Beijing in the 1980s. Geithner, 48, who pronounces Wang’s name with the correct Chinese tones, was a Dartmouth College student in Beijing in the early 1980s.

Autographed Basketball

On the same trip, Wang met with President Barack Obama at the White House. The vice premier received an autographed basketball.

A year earlier, speaking at Washington’s Wardman Park Marriott, Wang’s sense of humor came out as he explained that while China’s economy was large — it is now No. 3 in the world — its per capita gross domestic product was a fraction of that of the U.S. He told Finance Minister Xie Xuren to check out then-Treasury Secretary Henry Paulson.

“Look at his wallet,” Wang said. “He has a really fat wallet.”

For Related News and Information: Yuan vs. U.S. Dollar Chart: CNY GP D GITIC bonds: GITIC DES China’s Leaders: PRCH CH MGMT

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Euro Falls as Bank Failure in Spain Fuels Global Growth Concern

May 24 (Bloomberg) — The euro declined, erasing all of last week’s advance against the dollar, as the Bank of Spain’s takeover of a failed lender drove concern that the region’s sovereign debt crisis may stall global growth.

The 16-nation currency dropped versus the greenback for the first time in four days as World Bank President Robert Zoellick told CNBC the European Union’s crisis may slow the U.S. economic recovery. The euro traded as low as $1.2349 as investors sold the currency to buy higher-yielding assets. Yuan forwards appreciated as President Hu Jintao said China will move gradually and independently in making changes to its exchange- rate mechanism.

“The larger concern is that growth is going to slow down,” said Brian Kim, a currency strategist at UBS AG in Stamford, Connecticut. “Sentiment is still negative. Whether people are looking for a straight line down or choppiness going down, it’s still pointing to more euro weakness ahead.”

The euro fell as much as 1.8 percent before trading at $1.2361 at 9:47 a.m. in New York, from $1.2570 on May 21. Last week’s advance of 1.7 percent from $1.2358 on May 14 was the biggest since September. Japan’s yen strengthened 1.3 percent to 111.64 per euro, from 113.13, and traded at 90.29 per dollar, compared with 90.

The 16-nation euro fell all of its most-traded counterparts after the Bank of Spain said on May 22 it appointed a provisional administrator to run CajaSur, a savings bank crippled by property-loan defaults.

Spain’s ‘Revelations’

“Weekend revelations that the Bank of Spain has acted to support a regional lender are likely to weigh on the euro,” Gareth Berry, a currency strategist at UBS in Singapore, wrote in a research note. “This will probably revive concerns about the broader stability of the euro-zone banking system.”

Brazil’s real appreciated 1.8 percent to 2.2885 versus the euro and Australia’s dollar advanced 1.5 percent to A$1.4883 as the fastest convergence in short-term interest rates in almost a year is making the euro an addition to currencies used to finance investments in higher-yielding assets.

Borrowing in euros to finance an investment in the Australian dollar, New Zealand dollar, Brazilian real and Norwegian krone returned 10 percent in the past six months, according to data compiled by Bloomberg. The same trade using the dollar instead of the 16-nation currency resulted in a 7.5 percent loss.

Europe’s currency has lost 6.9 percent this year, based on Bloomberg Correlation-Weighted Indices. The dollar has risen 9.6 percent, and the yen has advanced 13 percent.

Yuan Forwards

Yuan forwards advanced from near their weakest level in eight months after Hu said as talks with the U.S. opened in Beijing today that China will continue to “steadily advance” reform “under the principles of independent decision-making, controllability and gradual progress.”

Non-deliverable 12-month yuan forwards strengthened 0.2 percent to 6.7250, while the yuan was little changed at 6.8287. The forwards traded at to 6.7750 on May 20, the weakest since September 2009.

U.S. Treasury Secretary Timothy F. Geithner will tell his Chinese counterparts this week that Europe’s debt crisis should have only a small effect on the recovery, a U.S. official told reporters in Beijing.

Sterling appreciated 0.8 percent to 86.25 pence per euro as the U.K.’s Chancellor of the Exchequer George Osborne announced 6.25 billion pounds ($9 billion) of spending reductions to contain a budget deficit that is the biggest in the Group of Seven nations. Concern that Britain will struggle to cut the shortfall has contributed to a 3.6 percent decline in the pound this year, according to Bloomberg Correlation-Weighted Indices.

‘Stay of Execution’

“The market’s giving the new government a reasonable stay of execution, wanting to see how definitive they are in the budget-deficit stakes,” said Jeremy Stretch, a senior currency strategist at Rabobank International in London. “The 6 billion pounds of cuts today are a step in the right direction. For now, markets are cautiously rewarding sterling.”

The Dollar Index rose for the first time in four days, increasing 1.1 percent to 86.310 before U.S. reports forecast to show the housing market is improving and consumers turned the most optimistic in 20 months.

Existing home sales rose to an annual rate of 5.65 million in April, from 5.35 million in the previous month, according to a Bloomberg survey before the National Association of Realtors report today. The Conference Board’s confidence index climbed to 59 this month from 57.9 in April, according to another survey before tomorrow’s data. That would be the highest since September 2008.

“The U.S. is experiencing a V-shaped recovery,” said Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney. “Against this backdrop, the greenback is likely to be supported.”

To contact the reporters on this story: Oliver Biggadike in New York at obiggadike@bloomberg.net ; Matthew Brown in London at mbrown42@bloomberg.net .

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Brazil Coffee Crops May Face Frost Next Week, Forecaster Says

May 24 (Bloomberg) — Coffee crops in Brazil, the world’s largest producer and exporter of the bean, may be harmed by frost next week as a cold air mass approaching the southeast of the country pushes temperatures down, a forecaster said.

The cold front from the South Pole may damage arabica coffee plantations in some areas of the South of Minas Gerais, the country’s biggest coffee-producing region, said Expedito Rebello, head of research at the government’s Meteorology Institute, known as Inmet.

“It’s probably the strongest polar mass of this autumn in Brazil,” Rebello said today in a telephone interview from Brasilia.

To contact the reporter on this story: Lucia Kassai in Sao Paulo at lkassai@bloomberg.net

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Fees Drop 17% in Europe for Bankers as Deals Pulled

May 24 (Bloomberg) — Investment banking fees in western Europe are falling victim to the Greek debt crisis, as companies from London to Dusseldorf pull stock and bond offerings and put takeovers on hold.

Income from advising on mergers and selling shares and bonds in the region dropped 17 percent from a year earlier to $5.9 billion in the first four months of 2010, the lowest in six years, according to estimates from New York-based research firm Freeman & Co. Fees in Europe are at about the same level as in 1999, the year the euro started, the data show.

“Companies have been held back from tapping primary markets because of the volatility and uncertainty driven by concerns over sovereign debt,” said Ivor Dunbar, London-based co-head of global capital markets at Deutsche Bank AG, the top- ranked adviser on corporate bond sales and mergers in Europe this year.

The decline in fees in Europe contrasts with a 53 percent jump in revenue in the U.S. and a 68 percent increase in Asia, Freeman said. The sovereign debt crisis, which led to an unprecedented bailout package of almost $1 trillion, sapped confidence among European companies. New York University Professor Nouriel Roubini said May 18 that Greece is the “tip of the iceberg” and European governments may still fail to fix their finances.

“We won’t see a move towards normal M&A and capital markets financing volumes until there is clarity on the scale of the issues facing the euro zone,” said Paulo Pereira, a partner at Perella Weinberg Partners LP in London and former head of European mergers at Morgan Stanley.

‘Doesn’t Look Good’

European leaders announced the loan package and a program of bond purchases on May 10 to stop concern that Greece will default on its debt from spreading to Portugal, Italy and Spain. Amid the turmoil, ex-Federal Reserve Chairman Paul Volcker said last week he’s concerned the single European currency may break up.

“It doesn’t look good,” said Simon Maughan, a banking analyst at MF Global Securities Ltd. in London. European fees may stay depressed until the fourth quarter, he said.

The fallout may be lasting, with sluggish growth in Europe being compounded by a regulatory crackdown on banks that may drive some capital markets business away from London to Asian financial centers like Hong Kong, said Tom Troubridge, head of the London capital markets group at PricewaterhouseCoopers.

Gross domestic product in the 16-nation euro region may rise 0.9 percent this year after shrinking 4.1 percent in 2009, according to the European Commission.

Britain’s coalition government, formed this month, plans to introduce a tax on banks and started a commission that will decide how to separate retail banking from investment banking. European Union finance ministers last week approved draft rules to tighten regulations for hedge and private equity funds.

U.S., Asia Fees Rise

In the U.S., fees rose to $10 billion in the first four months, from $6.5 billion in the year-earlier period, driven by revenue from stock offerings and sales of high-yield bonds, according to the Freeman data. Revenue in the Asia-Pacific region jumped 68 percent from a year earlier to a record $5.6 billion in the first four months of 2010, Freeman said. At that rate of growth, Asia will become more lucrative than the whole of Europe by next year, the data show.

“Asia’s share of global volumes will continue to rise,” said Farhan Faruqui, head of Citigroup Inc.’s Asia-Pacific global banking division in Hong Kong. “Asia is home to a growing list of domestic corporate champions who are keen to move to global champion status” and in doing so will need to make acquisitions and raise funding, he said.

China Fee Boom

Fees in China and Hong Kong surged 161 percent, according to Freeman, as the country’s economy boomed. China’s economy expanded 11.9 percent in the first quarter, the fastest pace in almost three years.

Western banks are adapting to China’s rising importance. HSBC Holdings Plc, Europe’s largest bank, moved its chief executive officer to Hong Kong in February, and is seeking permission to sell shares in Shanghai. JPMorgan Chase & Co., the second-biggest U.S. bank by assets, is setting up a securities joint venture in China with First Capital Securities Co., people with knowledge of the matter said in March.

“Investment banks which have invested heavily in China and some emerging markets are finally seeing the fruits of their labor,” said Scott Moeller, a former Deutsche Bank dealmaker and now a professor at London’s Cass Business school. “The West will go into decline for the next few years.”

Greece’s debt crisis froze bond and stock sales as well as takeovers in Europe, said Frank Aquila, a partner in Sullivan & Cromwell LLP’s mergers team in New York.

Takeovers Drop

The value of European takeovers completed in the first four months dropped 68 percent to $62.4 billion, according to data compiled by Bloomberg. Royal Bank of Scotland Group Plc, Britain’s biggest government-controlled bank, abandoned a sale of its aviation-finance unit and Germany utility E.ON AG decided to pull an auction of its Italian natural gas grid last month.

Bond sales also fell, tumbling 44 percent from the same period last year to 271 billion euros. Towergate Partnership Ltd., Europe’s largest independent insurance broker, postponed a 665 million-pound sale of high-yield bonds this month, citing market volatility. National Express Group Plc, the U.K. rail and bus operator, postponed its bond sale in late April.

Companies raised $9.1 billion in 28 IPOs in western Europe in the first four months, compared with no offerings in the year-earlier period, the data show. Still, the sovereign debt crisis forced Russia’s fertilizer maker UralChem Holding Plc and Germany’s GSW Immobilien AG to shelve IPOs worth a combined $1.23 billion in the past four weeks.

Siemens AG shelved a possible sale of its hearing-aid unit in March after bids fell short of the 2 billion euros sought, two people familiar with the plan said at the time.

“Confidence has returned to issuers in Asia and the U.S., but that has not been the case in Europe,” said Philip Keevil, senior partner at advisory firm Compass Advisers LLP in New York. “Many of them are quite concerned about the recovery, and so haven’t wanted to raise equity or debt to finance expansion or make acquisitions.”

To contact the reporters on this story: Ambereen Choudhury in London at achoudhury@bloomberg.net

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Grupo Mexico Sees Copper Prices Rising on Demand From China

May 24 (Bloomberg) — Grupo Mexico SAB, the largest mining company in Mexico, sees copper prices extending their recovery amid “very strong demand from China.”

“In May, we expect an extremely good copper import demand from China,” Chief Financial Officer Daniel Muniz said in an interview May 21. Possible Chinese monetary policy changes “will not impact Chinese copper demand,” he said.

Demand from China, the largest consumer of the metal used in power cables and electrical wire, has helped copper prices to more than double since 2004. The metal’s production will remain weak, Muniz said.

There are only a few copper developments “and these are facing increased regulations, labor challenges,” Muniz said in a conference room with a copper-colored ceiling at the company headquarters in Mexico City. “Most of the copper companies will be pleased if they can keep their production level.”

Copper has dropped 8.5 percent this year, partly on concerns that China’s government will act to cool its economy and damp metal demand. On May 20, the price touched $2.9005, the lowest level since Feb. 9, as global equities tumbled.

Muniz said there will be a copper deficit this year, without elaborating. “Inventories keep falling,” he said. “The inventories are very low in respect of global demand.”

Inventories monitored by the Shanghai Futures Exchange dropped for a third straight week, the longest slide since October. China imported 309,772 metric tons last month, the second-biggest amount since June, the government said.

No Hedges

“In order to be congruent with our positive vision, we’re not hedging this year,” Muniz said. “We believe there are very strong fundamentals to support the price.”

In 2008, Grupo Mexico hedged about 35 percent of its copper production. The Mexican company didn’t buy any copper hedges last year. Companies hedge against fluctuations in prices for commodities.

Copper futures for July delivery climbed 11.65 cents, or 4 percent on May 21, to $3.061 a pound on the Comex in New York, the biggest gain for a most-active contract since Feb. 16.

He said the company forecasts the price of copper to rise above $3.25 a pound this year.

To contact the reporter on this story: Carlos M. Rodriguez in Mexico City at carlosmr@bloomberg.net .

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