China Move Calms Credit Concerns

China's central bank has pumped $ 5bn into the banking system to ease concerns over a credit squeeze that has caused rising interest rates. The People's Bank of China did not explain its actions, but over the last few days there has been growing concern over the availability of credit. That has been reflected in the interest rates banks charge each other. On 23rd December, Monday one important benchmark rate rose to its highest level since June, the height of China's credit crunch. The seven day bond repurchase rate hit 8.93% but fell back to 6.56% after the central bank added funds to the banking system.

 

Analysts are blaming China's current cash crunch on a number of factors. In a process known as "window dressing" banks typically conserve cash at the end of the year to keep their balance sheets looking healthy.

 

However this year they have been doing that in a different financial environment. Chinese authorities have been trying to discourage excessive lending by curbing official credit lines and slowing government spending. "The banks are being forced to adapt to regulatory changes - so they are being forced to hold additional capital. Banks that have been used to operating on very easy and loose conditions are now finding that those conditions are starting tighten," said Jeremy Stretch, market strategist at CIBC.

 

In June banks suffered a more serious credit squeeze and the benchmark interbank lending rate jumped to a record 13.4%.

 

2014 will be 'Breakthrough' for US Economy : Obama

Citing stronger growth figures, US President Barack Obama says 2014 will be a 'breakthrough year' for the US economy. Economic growth in the US was revised upwards to its fastest pace since late 2011. The Commerce Department said GDP grew at an annualised rate of 4.1% between July and September, up from an earlier 3.6% estimate. That gave shares a boost and the Dow and S&P 500 indexes closed at records.

 

In his last press conference of the year, the US President highlighted the improving data as promising for the year ahead. "We head into next year with an economy that's stronger than it was when we started the year [and] more Americans are finding work and experiencing the pride of a paycheck," he said.

 

Much of the revision was due to stronger consumer spending, which accounts for two-thirds of the economy. Business spending was also stronger than previous estimates.

 

On 18th December, Wednesday, the US central bank, the Federal Reserve, announced it would start to slow its economic stimulus programme because of the improving economy - in particular the falling unemployment rate. The central bank said it planned to scale back - or "taper" as it is known in the financial world - its $85bn a month bond buying programme by $10bn a month.

 

Japan Approves Record $922 bn Budget

Japan approved its biggest-ever budget on 24th December, Tuesday, as an improving economy and a sales tax hike made room for more defence spending and the first step towards achieving a balanced budget. Prime Minister Shinzo Abe’s cabinet rubber-stamped a plan that will see the government spend ¥95.88 trillion ($922 billion) in the year from April 2014, up from ¥92.61 trillion in the previous year. The figure is the largest in Japan’s history due to changes in accounting rules and a sales tax hike, which will rise from five per cent to eight per cent on April 1.

 

The lion’s share of the extra revenue is earmarked for spending on snow-balling medical fees and other social welfare costs.

 

Even so, the projected primary balance deficit — the shortfall between what the government gets and what it spends on everything apart from debt-servicing — is expected to shrink by ¥5.2 trillion to ¥18.0 trillion.

 

That means Japan’s national debt — already the highest proportionately in the industrialised world — will continue to rise, albeit at a slower pace. The government’s official policy is that Japan’s primary balance should be in surplus by 2020, although most analysts expect that target to be missed.

 

In line with defence policies announced last week that are intended to shore up the way Japan protects its remote islands at a time of rising tensions with China, military spending will increase for the second consecutive year.

Overall it will rise 2.8 per cent to ¥4.88 trillion, accounting for 5.1 per cent of the whole budget.

 

Swiss Banks Sign Up to Reveal Hidden Accounts

Swiss banks are scrambling ahead of a December 31 deadline to decide whether to join a US programme aimed at zooming in on lenders that helped Americans dodge taxes. Around 40 of Switzerland's some 300 banks have already said publicly they will take part in a US programme set up to allow Swiss financial institutions to avoid US prosecution in exchange for coming clean and possibly paying steep fines.

 

"What are the others going to do? That is the very big question," Swiss business lawyer Douglas Hornung told AFP. Washington alleges that Swiss banks have helped US citizens hide billions of dollars in assets from tax authorities, in a row that has soured relations between the two in recent years. The two countries reached a deal in August aimed at ending the dispute, piercing a significant hole in the tradition of secrecy upon which the Swiss banking industry was built. The banks have until the end of the year to decide whether to fess up to potential wrong-doing and hand over their files to US authorities, and thereby shield themselves from legal action, or take their chances outside the programme.

 

UK to be Europe's 'Largest' Economy by 2030

The UK will be in a position to overtake Germany as Europe's largest economy, according to the think tank the Centre for Economic and Business Research (CEBR). The CEBR predicts that Germany will lose its current top spot in Europe by 2030. It cites the UK's population growth as an aid to economic acceleration. The report echoes the recent confidence of other business groups such as the British Chambers of Commerce (BCC). Earlier this month the BCC said that the UK economy will surpass its pre-recession peak in 2014.

 

In its annual World Economic League Table, where it ranks the ups and downs of global economies, and forecasts their future position, the CEBR said in addition that China will overtake the US in 2028, which is later than some analysts have suggested. The UK will overall perform second best of all advanced economies, the CEBR said. Yet, this performance will still lag behind growth in emerging countries such India and Brazil. The CEBR in its report added that in addition to the UK's population growth boosting economic expansion, that "lesser dependence on other European economies" would also aid progress, as well as "relatively low taxes by European standards."

 

However, as far as Germany, the group said that should the euro "break up", that "Germany's outlook would be much better." As for France, The CEBR said it will be one of the "worst performing" of the Western economies, and will be overtaken by the UK by 2018. This is because of slow growth due to "high taxation" in addition to the general issues of eurozone economies.

 

Japan Close to Escape Deflation

Japanese consumer prices have risen at the fastest pace in five years, showing government policies to end its deflation problem may be taking effect. Core inflation excluding food rose 1.2% in November from the previous year, surpassing market expectations. Japan is now more than half-way towards meeting the central bank's goal of achieving 2% inflation by about 2015.

 

This has been due to a massive monetary stimulus policy aimed at weakening the currency and spurring more spending. Bank of Japan (BOJ) Governor Haruhiko Kuroda said earlier this week that policymakers have been looking to break the country's "deflation equilibrium". Japan has faced nearly two decades of stagnant growth and falling prices because companies and households have held off on spending, based on the assumption that prices will not rise. "The BOJ's monetary policy differs from that of other central banks in that it focuses on changing public expectations," Mr Kuroda said on 25th December, Wednesday. "We're seeing broad improvements in the economy, markets, public sentiment. This is the best opportunity to end deflation."

 

Other economic data released on Friday added to signs that the recovery in Japan is gathering momentum under Prime Minister Shinzo Abe. Regular wages stopped falling after 17 months of declines, while factory output rose for a third straight month, and retail sales jumped. Buoyed by positive investor sentiment, the Nikkei stock average hit a six-year high on 27th December, Friday to close at 16,178.94 points. The benchmark index has gained about 56% this year, and is headed for its best annual performance since 1972. The Japanese yen also breached a key level of 105 yen to the US dollar for the first time in five years due to the positive economic data. Due to the government's money printing programme, the yen has lost a quarter of its value against the dollar so far this year. This has been a key part of Mr Abe's plan to revive the world's third-largest economy by making the value of its exports cheaper abroad.