China Shows the World How to Stimulate
Australia bails out economy - Bad.

US bails out economy - Bad.

Europe bails out economy - Bad.

China bails out economy - Good.

Well, not quite. For a start, the AU$849 billion ’stimulus package’ proposed by the Chinese sounds like a lot of money. And it is. It is more than the US government is spending on its TARP initiative to bail out the credit market.

But at least the Chinese money might be spent on something useful. The US government is spending nearly the same amount just to buy dodgy debt.

The one thing we don’t know about this package is how much of the USD$586 billion is additional money to what had already been promised.

For instance, back in July US investment firm Merrill Lynch estimated Chinese infrastructure spending to be USD725 billion per year over the next three years. Sure, things have changed a bit since July, but there is no evidence yet that this is entirely new money.

Even so, it is still significant. So if we suppose the USD586 billion is added funds then it will likely take Chinese infrastructure spending to north of USD$1 trillion per year.

The upside is twofold. First it is being spent on things that country needs. Second, if it wants to, China can pay for it in cash, unlike in the US, Europe and now Australia where ’stimulus’ packages will have to come from debt.

And then we have the Australian government version of a stimulus. Give the money to a basket case industry and hope for the best.

The one positive about the hand-out to the three Australian based car manufacturers is that it involves them spending $3 to get $1 of government funding. To be honest, we’re not sure that is likely so the taxpayer’s $6 billion should be safe.

The automotive industry in Australia employs about 60,000 people directly and up to another 200,000 in related industries. It is a big employer. But does it warrant special treatment by the government on this basis alone? We don’t think so.

Our guess is that government’s view vehicle manufacturing the same way as they view national airlines: a ‘badge of honour.’

The contrast was telling: there was India’s central bank sending a strong signal that it will not tolerate high inflation by announcing a larger than expected increase in its key lending rate and threatening more measures to come.

And there was US ratings agency; Standard & Poor’s lifting China’s credit rating one notch to A-plus from A, despite all the poor publicity about the Olympics.

They are not directly related, but they do point to the de-coupling going on in the so-called cornerstones of the emerging economies. 

China, for all its problems is still travelling fairly well with growth and exports slowing, but inflation falling; India is gripped by surging inflation and falling growth.

Surging oil prices and subsidies are undermining the Government’s economic record and boosting inflation, in China firm price controls remain in place, but a black market continues and when the games finish, the question is whether the controls will be relaxed.

And if that happens, will inflation return to the upswing, from the present 7.1% annual level?

But Standard & Poor’s said it upgraded China’s debt ratings because of the improved fiscal and external positions in the world’s fastest-growing major economy.

The long-term sovereign credit rating was raised to A+, the fifth highest on its scale, from A, and the outlook is stable. The short-term rating was increased to A- 1+, the highest notch, from A-1.

That means China has the same short term rating as the heavily indebted US economy.

“The ratings upgrade is motivated by China’s improving fiscal and external position,” Standard & Poor’s said in a statement.

China’s economy grew 10.1% in the second quarter from a year earlier, but that was the fourth straight quarter of slowing growth as exports slowed.Growth ran at 11.9% last year

But in India a very different story, for all the positive news about growth and business opportunities.

The Reserve Bank of India’s increase in the benchmark “repo” rate by 0.50% to a seven-year high of 9% represents the third time in two months that the bank has raised interest rates to try and bring inflation under control.

Inflation is at a 13-year high of nearly 12%, much higher than China, or its other emerging economy rival, Brazil.

The RBI also increased the cash reserve ratio by 0.25% to 9%. 

That’s the amount of funds banks must keep on deposit at the central bank and is the same mechanism China’s central bank is using to try and slow activity. China’s rate is around 17.5%.

The Reserve Bank of India cut its forecast for economic growth this financial year by 0.50% to 8%.

Rising oil and food prices have given India a big headache with inflation that is nearly triple its levels at the beginning of the year and more than double the RBI’s target of under 5.5%.

A national election has to be held before May next year and the government has been under pressure from bans on exports of essential food items and raw materials and cancelled futures trading of important commodities to try to rein in prices. 

These moves have been done to try and hit inflation, but they seem to have backfired, as inflation has risen regardless of these attempted control measures.

RBI governor Yaga Venugopal Reddy said in the statement that it was critical to demonstrate “a determination to act decisively” against inflation.

But he said he was confident India could still sustain a relatively high rate of growth of 8%, which doesn’t seem to be possible, given what’s happening in the wider economy.

The Governor has lowered his forecast by one percentage point to 7.2% for the year ending March 2010 and the central bank conceded that it had lost ground in its battle against inflation, saying while it would prefer to see it at 5%, while a more realistic target for the end of the March 2009 financial year would be 7%.

The RBI has been raising borrowing rates since 2004 to try and control cost pressures.

India’s inflation rate is 11.91% as higher prices of gasoline and diesel fed into the economy.

The central government will pay around $US43 billion in oil subsidies, even though it has allowed prices to rise by a small amount.

Standard & Poor’s said this month that India’s BBB- credit rating, the lowest investment grade, may be cut to junk if the faster inflation and higher government spending ahead of the election increases the budget deficit.

The Indian government has waived $US17 billion of farm debt and kept those oil subsidies.

There’s a long way from India’s rating and China’s which now reflects that it is approaching advanced country status.

Aug. 1 (Bloomberg) — China is restricting approvals for share sales to keep new supply of equities from putting additional pressure on the world’s worst-performing major stock market, two people familiar with the matter said.

The China Securities Regulatory Commission is delaying the issuance of written approval documents, the final regulatory stage, to companies preparing initial public offerings, said the people. They declined to be identified because they aren’t authorized to speak publicly on the matter.

Shang Fulin, chairman of the securities watchdog, is trying to cushion a market that plunged 47 percent this year, making the CSI 300 Index the worst performer among the 20 biggest benchmarks. About a third of IPO applications were rejected last month, compared with 8.3 percent when stocks peaked in October, based on data from the regulator’s Web site.

“Controlling share sales is an important tool for CSRC, and it’s effective in the short term,” said Leo Gao, who helps manage the equivalent of $2.3 billion at APS Asset Management Ltd. in Shanghai. “More stock sales in a bear market is bad news” for investors.

There were 91 billion yuan ($13.3 billion) of IPOs in China in the first half, a 26 percent drop from the same period a year earlier, according to data compiled by Bloomberg. The CSI 300 fell 0.9 percent at 9:35 a.m. local time today.

Great Wall Motor Co., China’s largest maker of sport- utility vehicles, had its application for a secondary sale in Shanghai rejected by regulators on July 14.

Olympic Jitters

Olympic jitters may have added to the urgency of supporting the stock market, said Leslie Phang, Singapore-based head of investment at the private-client unit of Schroders Plc, which oversees about $260 billion globally.

“The CSRC is trying to stabilize the market ahead of its hosting of the Olympics this summer for reasons of face,” Phang said. “But these measures can only provide a short-term boost and it’s fundamentals, such as higher oil prices and production costs, that will affect China’s stock market.”

The Olympics, China’s $70 billion coming-out party, kick off on Aug. 8 with the opening ceremony. The run-up to the games has been marked by complaints about air pollution and restrictions on press freedom.

Shang vowed July 30, during the regulator’s semiannual supervision working meeting, to make the market more stable. He said in June that he will “rationally balance supply and demand in the capital market and adjust the pace of financing in an orderly way,” without elaborating.

A CSRC spokesman, who declined to be identified, said he had no comment.

Share Sale Queue

Stock markets around the world have been falling as global growth faltered, a 60 percent gain in the price of crude oil in the past year fanned inflation, and the subprime crisis led to about $470 billion in losses and writedowns at financial firms.

The Chinese government has implemented measures to curb inflation and rein in liquidity. The government capped the amount banks are allowed to lend this year, and the central bank raised the proportion of deposits banks must set aside in reserve five times in 2008 to a record 17.5 percent.

There is a queue of companies waiting for written approval documents from the CSRC’s general office before they can proceed with share sales, and no timetable for giving them the go-ahead, said the people. The watchdog applies these internal controls based on its perception of market performance and the outlook.

Still, the CSRC is open to letting smaller share sales proceed, one of the people said.

Tepid Demand

On top of delays to the final approvals process, the CSRC has also stepped up scrutiny of share sale clearance given by the Public Offering Review Committee, one step before the final document that allows the sale to go ahead is issued.

CSRC’s listing panel on April 14 rejected the IPO application of Jincheng Blue Flame Coal Industry Co., according to a statement posted on the regulator’s Web site. China’s second-largest anthracite coal producer by 2006 output had planned to sell shares to help fund 9.5 billion yuan of investments.

China State Construction Engineering Corp. has yet to obtain the green light to start its Shanghai IPO after gaining the CSRC listing panel’s approval June 5.

Sales that were approved have met flagging demand. Haitong Securities Co. ended up the biggest shareholder of Shanghai Pudong Road & Bridge Construction Co. last month after failing to sell three-quarters of a stock offering it underwrote.

Citic Securities Co., China’s second-biggest brokerage by market value, had to buy 407.4 million yuan of shares in Shanxi Taigang Stainless Steel Co. this week that it couldn’t sell in an additional stock offering.

* Dollar rises against yen after U.S. durable goods

* Housing, sentiment data to come

* Oil recovery, equities remain in focus (Adds comments, byline, updates prices)

By Wanfeng Zhou

NEW YORK, July 25 (Reuters) - The dollar rose against the yen on Friday after a government report showing an unexpected rise in durable goods orders eased worries over the U.S. economy.

The solid reading lifted sentiment on stocks and spurred a recovery in risk appetite, putting pressure on the low-yielding yen. The dollar also pared some of its losses against the euro.

Durable goods orders were up 0.8 percent in June, after a revised 0.1 percent gain in May, the Commerce Department said on Friday. When volatile transportation orders were excluded, orders climbed 2 percent last month, the sharpest rise since December. For details, see [ID:nN24332112].

“All in all, a strong piece of data for the U.S., in contrast with fresh signs of weakness in Europe and the UK,” said Brian Dolan, chief currency strategist at Forex.com in Bedminster, New Jersey. “I think stocks will like it, yen crosses will too, and the dollar also.”

In early trading in New York, the dollar rose 0.3 percent to 107.72 yen

The euro traded 0.2 percent higher at $1.5700 <EUR=>, still roughly 3 U.S. cents below a record high set in mid-July.

The euro also jumped 0.5 percent to 169.05 yen <EURJPY=>.

MORE U.S. HOUSING, CONSUMER DATA

Despite getting a boost from the much-stronger-than-expected durable goods orders data, sentiment on the greenback remained cautious as market participants awaited more U.S. data later in the day, including new home sales for June and a consumer sentiment poll for July.

Against a basket of six major currencies, the dollar remained 0.2 percent lower at 72.791, retreating from Thursday’s two-week high .DXY.

The Commerce Department’s housing data will be closely watched after disappointing news on existing home sales released on Thursday sent the dollar down sharply against the yen.

But some analysts said that the scope for weak U.S. data to hurt the dollar was limited as a fairly negative U.S. picture is already priced in, and euro zone economic data has also been coming in on the weak side.

“The expectations are for lower readings across the board, but the impact of FX trade may depend on the degree of the decline,” Boris Schlossberg, senior currency strategist at DailyFX.com, said in a research note.

“With markets already so preconditioned to bad economic news from the U.S., the greenback may not weaken much further unless the data shows substantial deterioration from the prior month.”

The euro edged higher on Friday despite figures showing a slowdown in money supply growth [ID:nFAE002362].

The single currency hit a two-week low against the dollar on Thursday after data showed German business sentiment suffered its biggest drop since September 2001, while euro zone PMIs pointed to contraction in both the services and manufacturing sectors. (Additional reporting by Gertrude Chavez-Dreyfuss in New York and Naomi Tajitsu in London, Editing by Jonathan Oatis)

China’s actual growth rate is now irrelevant: like all statistics it’s essentially a backward looking system of measuring growth in Gross Domestic Product. China’s growth remains solid, but it is slowing: the 10.1% annual rate in the June quarter was the slowest since 2005 and it had an immediate impact on global markets, pushing oil down to its lowest level in six weeks and under $US130 a barrel. The question we now have to wonder about is: is this temporary, structural, or simply the Chinese economy slowing after several years of pell-mell growth. And, remember, ’slowing’ is relative. China is not slowing like the Australian economy, nor will it end up like the Japanese, US or European economies. It could be just a normal reaction to a tightening of monetary policy by the authorities to prevent a highly inflationary bubble developing. It matters here in Australia because if it’s slowing sharply (to a level that will still be solid by any measurement), it will have a knock-on effect here on share prices, on economic growth, inflation and interest rates over the next year, at least. Figures released yesterday show that China’s GDP grew 10.1% in the second quarter from the second quarter of last year; down from 10.6% in the March quarter, and noticeably lower than the upwardly revised 11.9% average for all of 2007. And, as ‘leaked’ to Western newsagencies late last week, inflation slowed to 7.1% in June, from 7.7% in May and over 8% in earlier months.  However factory-gate inflation accelerated to 8.8% – the fastest annual rate since the mid-1990s – from 8.2% and possibly a more accurate signal on the price pressures in the Chinese economy, given the extensive price controls. The economy is clearly slowing and it raises the following questions: do the official numbers acknowledge this slowdown fully? And what does this slowdown mean for the sharp appreciation in the Chinese currency, which is up 21% since it floated three years ago; with a noticeable acceleration in the rate of increase in recent months. That appreciation has helped cut the cost of imports, enabling Chinese steel mills for instance to pay huge price rises for Australian iron ore and coal. RBA Governor, Glenn Stevens made the significant point in his speech this week in Sydney that emerging economies should be taking action to slow growth to help take the pressure off western economies and central banks. He said that emerging economies had been running loose and accommodating monetary policies, and even though growth was still strong, so was price inflation. That’s a view that was supported by the International Monetary Fund overnight which urged emerging economies to fight inflation by lifting interest rates. Central banks in Thailand, Vietnam, Indonesia, India, The Philippines and South Korea have all tightened policy in recent months as inflation has soared, driven by accelerating oil and fuel costs and a surge (now easing) in food prices. China has been trying to slow its economy through old-fashioned attempts to restrict credit growth through quantitative controls like increase the size of the reserve asset ratios banks must use to quarantine more assets from

Interest rates have not risen and still remain negative, even as inflation eases. Loan quotas are also being used, and outright bans have been reported.

Like its neighbours, China is walking a tightrope between slowing growth and surging inflation.

Price controls remain in place even though there are reports that China faces a tough summer of power shortages because of soaring coal prices and inadequate pricing has forced many small, polluting power stations to shut down. Lead, zinc and aluminium processors have cut production for the next quarter to try and help limit their demands on power supplies, but also to try and bolster sinking world prices.

Much might change later in the year, after the Beijing Games are over and foreigners have left China. Price controls might come off and then there’s the rebuilding of the earthquake hit parts of Sichuan which will boost the economy (which should in turn boost Australian resource suppliers because more steel will be needed).

The question for after the games is: will the Government allow China kick higher, having had the economy settled with some tightening, or will the slide continue (the stockmarket is depressed, compared to the seemingly endless boom of last year)?

If China rebounds towards the end of this year, where will oil copper and a host of other commodity prices end; higher?

We should not underestimate the fear the Chinese Government has of social unrest, driven by rising food costs and scattered examples of dissent (Tibet and Muslim separatists are the current groups of interest for the security authorities).

Those fears are why price controls were imposed last year, despite their distorting effect on oil prices, profits, demand and the market; its why controls were imposed on power charges, food prices and a host of other state costs.

Second quarter growth was the slowest since 2005. Exports are easing because of slowing demand in the US and to a lesser extent Europe and Asia. Imports are soaring because of the impact of the more expensive Yuan and price rises for oil, coal, iron ore, grain and oilseeds.

Second quarter GDP growth cooled for the fourth straight quarter.

China’s export growth slowed to 21.9% in the first half from 25.7% for all of 2007, as US demand weakened, and prospects for the rest of the year have deteriorated.

Price pressures have has eased from February’s 12-year high of 8.7% on smaller gains in food prices and those price controls.

Will the government relax controls straight away or phase them out? Phasing them out would allow a slower rebound in prices.

And, will the Games mean another slowdown in growth as businesses are closed for a month in and around Beijing?

Post-games, there could be a rebound in the 4th quarter simply for that reason, while inflation could rise as well.

Japan’s wholesale inflation rate rose to a 27-year high last month companies raised prices to counter record oil and commodity costs, the country’s trade balance narrowed; Singapore’s economy has slowed and the central bank in South Korea left its key rate steady at a seven year high…it was another mixed day economically from the fastest growing region of the world. And China’s exports slowed in June in the first of a series of updates due over the next week on how the Chinese economy is travelling. Reports on inflation, industrial production for June and the first half of 2008 are expected, along with retail sales. China’s Customers Bureau said overseas shipments rose 17.6% in June from the same month a year ago, down on the faster 28.1% growth rate of May. China’s export growth in the first half was the slowest for five years; just 7% - down from sustained growth rates above 20% in the same half of 2007. The June figure for this year for export growth was much slower than the 25%-plus rate in June of last year. Economists said the slowdown reflected the appreciation of the Yuan, which has now risen 21% against the US dollar since being allowed to float (sort of) almost three years ago.  It also reflects the slowing demand from the US and Europe for Chinese goods. The Chinese authorities are allowing the currency to move higher more quickly to help put a lid on the surging cost of raw materials like oil, coal, iron ore and grains. But this has come at a cost of slowing exports gains. The Customs Bureau said this resulted in a sharp fall in the trade surplus which shrank 20% from June 2007 to last month when a surplus of $US21.4 billion was posted. That was third monthly fall in a row and followed an acceleration in imports which rise 31% in June, compared to June last year. That was after a 40% jump in May. The Yuan has gained 21 percent against the dollar since a fixed exchange rate was scrapped in 2005. It has risen 14 percent against the yen and fallen 7 percent versus the euro. One of the more important statistics to be released in the next week or so (besides inflation) will be the quarterly growth figure and the figures for the first half of 2007. China’s economy has slowed each quarter since hitting an annual growth rate of almost 12% in the middle quarters of Calendar 2007. First quarter growth this year was 10.6% and the figure is expected to be a touch down on that rate when released next Thursday. The slowing in China’s trade can be seen from the 21.9% annual rate for the June half, and the 30.6% growth rate in imports. That knocked 11.8% from the trade surplus for the June six months which still was an impressive $US 99 billion.   In Japan producer prices surged at an annual rate of 5.6% in June, compared to June 2007, up from the 4.85% revised rise in the year to May. Higher prices for oil, wheat and soybeans, coal, iron ore, natural gas are driving the rise in costs for business: some have double din the past year: the Bank of Japan’s overseas commodity index is up 71% higher than it was in June of 2007. The higher producer costs are feeding into consumer prices, and inflation excluding fresh food will probably exceed 2% within the next month or so, according to Tokyo economists. Core consumer inflation rant at 1.5% in May. Compared to Australia, (4.2% (Europe 4%) and the US (4%), Japan’s inflation doesn’t look to be a problem. But in the context of the Japanese’s economies long battle with deflation it is. The surge in steel and other costs are likely to have fed through into the prices of cars and other goods within the next month or so and that will produce consumer inflation at the core level (without fresh food or oil) compared to the 0.1% drop in prices in May. Meanwhile the surging cost of oil and the slowing economic growth in its major markets has again squeezed Japan’s trade account.

For the third month in a row, Japan’s trade surplus shrank under the pressure of record oil prices pushed up the import bill and export growth slowed.

Imports rose 4%, compared with 13.4% in May and exports rose 4.2% compared to the 4.9% in the year to May.

Gross Domestic Product rose by 1.9% in the June quarter, sharply slower than the 6.9% annual rate in the three months to March. The figure was much slower than forecasts from the market.

Surging fuel and food costs, which have pushed Singapore’s inflation to a 26-year high, have also left consumers with less to spend.

The Bank of Korea last week raised its 2008 inflation forecast to 4.8% from December’s prediction of 3.3%. Economic growth will slow to 4.6% this year from 5% in 2007. 

Inflation hit an annual rate of 5.5% in May and yesterday the Bank of Korea left its key interest rate unchanged despite the sluggish economy and ailing trade performance.

In Malaysia the country’s central bank has warned that soaring food and energy prices may hurt household spending and restrain economic expansion in this year to below its March forecast of 6%. 

New growth estimates for Malaysia will be released later this month.

Judging by Singapore’s experience, that’s highly possible.

Singapore’s Government still expects annual growth in 2008 of between 4% and 6%, so an up turn in this half is anticipated.

Manufacturing fell in the quarter from a year ago, compared to the 12.7% rise in the first quarter.

Trade figures show Singapore’s electronics exports have fallen for 16% months in a row and pharmaceutical exports fell in April and May. 

Electronics account for about 30% Singapore’s manufacturing and drugs an estimated 22%, so when both are in trouble the sector as a whole suffers, as we saw in the June quarter.

Final growth figures will be released next month for the quarter and will include more up to date numbers for the whole quarter, with final for June included.

Elsewhere in Asia, the Philippine Economic Planning Secretary Augusto Santos warned this week that the government may lower its 2008 growth target for a second time with inflation at a 14 year high.

Bank Indonesia, which has raised interest rates for three consecutive months, has now warned that might impose extra non-cash reserve requirements on lenders to slow inflation which is now at a 21 month high.

The central bank reckons that year-on-year inflation will start dropping this month from a 21-month high of 11.03% and fall to around 6.5% by the end of 2009, if no further shocks hit the economy.

Inflation has spiked since the government raised prices for subsidised fuel by 28.7% in May in the wake of soaring global oil prices .Indonesia now imports more than half its petrol and diesel needs.

A record rice crop is expected to take pressure off inflation as well, and that will also help ease social pressures.

The Indonesian Government believes economic growth is slowing, but still running above 6% annually.

America was closed, Europe and Asia sagged, oil retreated a little, and other commodity prices were leaderless: American holidays continue to emphasise the primacy of US markets in setting global price levels in a wide range of products. European markets fell 2.7% (some individual markets were off more, some less); US markets were off around 1.2% or a bit more (but closed on Friday), Asia was down more than 3% and Australia was off 3%-plus as well, despite Friday’s rise. Our market will be flat to slightly weaker today judging by the futures market Friday night. Friday’s rise here was a bit of a ‘con job’ by punters looking to exploit higher commodity prices, and not worrying that the US markets were closed or the European markets were unsettled. There was this belief that the poor US jobs figures were ‘good news’ because the 62,000 jobs lost meant US interest rates were not rising any time soon. Jobs losses in the US are going to worsen in coming months.  US investors and some local optimists still don’t understand that 2008 earnings in the US, Europe and here are going to worsen, before they get better and that forecasts for a big rebound in 2009 are off the planet. Some forecasts have US earnings rising 20% in 2009. The AMP’s chief strategist, Dr Shane Oliver said in a note on Friday that “It’s anyone’s guess as to where it will go in the short term. If the oil price continues to surge then shares will remain under pressure, if it falls back then shares will have a great rebound. “The high and still surging oil price along with slowing growth virtually everywhere, inflation worries and high bond yields are all short term headwinds for shares. Furthermore, the period out to September/October is often rough for shares.  “As such, it remains a time for investor caution and this is likely to be the case for the next three or four months. “Although the next few months are likely to remain rough with further falls possible, we still see shares rallying sharply in the December quarter as the oil price falls back to a level more in line with supply and demand fundamentals, the economic outlook starts to improve and investors start to take advantage of attractive share valuations. The last quarter of the year is normally strong. “Australian shares are now trading on their lowest forward PE since 1996 and their highest dividend yields since 1991, when bond yields were above 10%. See the above chart.  “While industrial companies are likely to see profit downgrades, current share prices are implying a greater than 20% slump in overall profits and this seems very unlikely. Prices from their highs last year they are currently trading on an 8.8% distribution yield, which is their highest since June 1996.  “Even if average distributions are cut by 10%, this still makes for a very attractive yield. “After the sharp rise in yields in the last few months, made worse by recent inflation fears, bonds should provide better returns over the next six months as yields decline if as we expect global growth keeps slowing and inflation fears abate. “While the ride for the $A will remain volatile, Australia’s strong terms of trade and high relative interest rates are supportive of further gains.  “We remain of the view that it is only a matter of time before parity is reached. The elimination of the monthly trade deficit on higher iron ore and coal prices will also likely be a positive for the $A.” But Goldman Sachs JBWere said in a commentary during the week: “During FY08 the Energy and Resources outperformed significantly and the only sectors to post positive returns.

“The brunt of the selling was experienced in Consumer Discretionary, REIT’s, Industrials and Financials which experienced declines exceeding 25%, the majority of this occurring over the last 6 months.

“To date the share price declines have been driven largely by PE deratings in anticipation of increasing earnings risk with relatively little by way of negative earnings revisions coming through outside of those companies with excessive leverage.

“The economic data flow during June provided further evidence that the domestic economy is slowing, with retail sales, building approvals and credit growth all continuing to soften. 

“Employment growth turned negative, recording the first fall in 18 months while the RBA kept rates on hold after confirming inflation is high and demand will need to slow.

“The AUD remained strong ending the month at 96.6¢ (+1¢).

“The key issue for investors remains the trade-off between risks to corporate earnings in light of a rapidly deteriorating domestic economic outlook and increasing inflation risks; versus increasingly attractive valuations for equities.

“We continue to favour defensive sectors over domestic leverage heading into the key August reporting period, particularly given the increasing uncertainty in the domestic earnings outlook over the next 6 months. 

“The potential for the USD to find support as sentiment around credit availability improves, suggests stocks with offshore earnings could outperform during FY09.”

The UK index has fallen 19.6% from its peak in October, leaving it just short of the 20% fall from a recent high that defines a bear market. (It dipped into the bear’s den briefly, before a small recovery.)

Friday’s 1.2% fall in London though capped a miserable week for shares around the globe: earnings are under pressure, especially in retailing; the credit crunch hasn’t gone away and continues to devour housing; oil is the big imponderable and that is making inflation more dangerous than it has been for 20-30 years.

According to figures in the weekend media in London the retail investors have deserted European markets in recent months, with $A65 billion of shares sold in the first five months of this year (that was after $A70 billion was sold off in the last five months of 2007).

The Dow joined the FTSE Eurofirst 300, Japan’s Nikkei 225 and the MSCI Emerging Markets index in bear territory.

National indices fell in all 18 western European markets. Germany’s Dax Index fell 2.3% and France’s CAC 40 3%. The FTSE 100 lost 2.1% over the week.

The MSCI Asia Pacific Index was down for a loss overall for a fourth successive week that has seen the index shed more than 12% in that time.

Futures on the Standard & Poor’s 500 Index fell 0.7% in European trading.

The MSCI World Index had its fifth weekly drop. Bloomberg reckons that more than $US11 trillion has been cut from the value of global sharemarkets so far in 2008.

Credit crunch related losses from subprime failures and dodgy securities, write-downs, bonds, corporate deals and other high leverage products are estimated to have topped $US400 billion so far, but the surging oil price, high food costs, slowing economies and accelerating inflation have combined to cut market values in every corner of the world.

The MSCI Asia Pacific Index fell 3.1% last week and Tokyo’s Nikkei fell 2.3% last week, the 12 straight days of losses is the longest losing streak since 1954.

The MSCI Asia Pacific Index is down 16% so far this year.

BEIJING (AFP) - - China’s inflation rate was 7.7 percent in May, easing from April’s 8.5 percent, the government said Thursday, as analysts cautioned that some prices had been kept artificially in check.

Food prices have eased but, at the same time, price controls meant pent-up inflation had accumulated in the world’s fastest-growing major economy, according to economists.

“While agriculture seems now to be responding… there are other price pressures out there that are being severely repressed,” Standard Chartered economist Stephen Green said in a statement.

Inflation has become a global concern, with the US Federal Reserve now putting it on the top of its agenda in view of soaring energy and food prices.

The prices of food, a main driver of inflation in China since last year, continued to be an important factor last month, although they were rising at a less steep rate, according to the statistics bureau.

Food prices were up 19.9 percent in May from a year earlier, while the price of pork, the staple meat for hundreds of millions of Chinese, had soared 48 percent, it said.

But pork had risen a staggering 68.3 percent in April, suggesting there was now a more plentiful supply in response to government incentives.

At the same time, energy prices were being kept under control by the government, meaning local oil companies had not been permitted to pass rapidly rising global crude prices on to the consumers.

“We all know about fuel and electricity controls, but we hear reports of firms in the food and construction industries also being told not to raise prices,” said Green.

“There is a lot more bottled up inflation in this economy than meets the eye.”

In the first five months of the year, the consumer price index was up 8.1 percent from the same period in 2007, the National Bureau of Statistics said.

China has set an inflation target of 4.8 percent in 2008, an objective many observers believe will be almost impossible to achieve, given factors the government has little control over such as the price of imported goods.

The consumer price data was released a day after the government said producer prices had risen 8.2 percent in May, the fastest rate in nearly four years.

China should fight inflation by raising the interest rate at a “proper time”, the Bank of China, one of the nation’s main commercial lenders, said this week.