China's Debt Soars to 250% of GDP

China's debt has soared to two and a half times its economy, Standard Chartered estimates, highlighting the difficulties Beijing faces in balancing growth with the risk of bubbles forming in its economy. Total financial credit has surged to 251 percent of gross domestic product from 147 percent at the end of 2008, the bank said. "The economy will continue to leverage up, and the market will remain concerned," said Stephen Green, chief China economist at Standard Chartered. Since the financial crisis of 2008, China has relied heavily on credit to spur its high growth rates, but the alarming pace of credit growth has triggered worries for investors, especially as rapid build-ups in debt have signaled the onset of financial crises in other economies.

 

As a result, policy makers in China have faced the difficult task of trying to slow economic growth to more sustainable levels without causing a hard landing scenario - when an economy rapidly shifts from growth to slow growth to no growth. In recent months the government has implemented a number of easing measures designed to mildly stimulate the economy. But many analysts remain concerned about China's growing level of credit and the risks it poses to the country's economic health. China's debt to GDP level is still lower than other major world economies, however. The U.S. had a total debt-to-GDP ratio of about 260 per cent by the end of last year, while the U.K.'s ratio was at 277 per cent. Japan topped the world table at 415 per cent, according to Standard Chartered. (Agency)

 

Japan Cuts Economic Growth Outlook 

The Japanese Government on Tuesday, 22nd July downgraded the nation’s economic growth forecast for the current financial year to 1.2 per cent from 1.4 per cent amid concerns about the impact of a tax increase. The government predicted consumer spending, which accounts for about 60 per cent of gross domestic product, to grow 0.3 per cent in the financial year through March, revised down from a 0.4-per cent rise estimated in December. Tokyo raised the nation’s sales tax in April to 8 per cent from 5 per cent — the first hike in 17 years. Policymakers were concerned that the impact of the hike would continue to dampen consumer demand. The average monthly consumption spending per household fell 3.1 per cent in May for the second consecutive month. The income of Japanese workers’ households also dropped 4.6 per cent in May for the eighth consecutive month despite reported pay raises at big companies.

 

Meanwhile, the government maintained its forecast on the consumer price index for the current financial year at 1.2 per cent, excluding the impact of the tax hike. In April 2013, the Bank of Japan decided to take aggressive monetary easing steps to achieve an inflation target of 2 per cent within about 2 years as the banks as well as the government vowed to combat years of deflation. (Agency)

 

Federal Reserve Plans to End Stimulus in October

The Federal Reserve will end its stimulus programme in October if US economic growth continues at its current pace, according to minutes from its June meeting. The Fed has been buying bonds to lower long-term interest rates and boost growth since September 2012. An end to stimulus efforts indicates the Fed believes the US economy can continue to grow without its support. Currently, the bank is buying USD 35 billion of bonds monthly. That is down from a high of USD 85 billion in January, when the US central bank first began trimming its monthly bond purchases by USD 10 billion a month.

 

The minutes from the 17-18 June meeting of the Federal Open Market Committee (FOMC) revealed that the central bankers planned to continue their USD 10 billion cuts until one final USD 15 billion trim in October. "If the economy progresses about as the Committee expects...this final reduction would occur following the October meeting," the minutes said. (Agency)

 

BRICS to Create Development Bank and Currency Reserve

The leaders of the five Brics countries have signed a deal to create a new USD 100 billion development bank and emergency reserve fund. The Brics group is made up of Brazil, Russia, India, China and South Africa. The capital for the bank will be split equally among the five participating countries. The bank will have a headquarters in Shanghai, China and the first president for the bank will come from India.Brazil's President, Dilma Rousseff, announced the creation of the bank at a Brics summit meeting in Fortaleza, Brazil on Tuesday, 15th July.

 

At first, the bank will start off with USD 50bn in initial capital. The emergency reserve fund - which was announced as a "Contingency Reserve Arrangement" - will also have usd 100bn, and will help developing nations avoid "short-term liquidity pressures, promote further Brics cooperation, strengthen the global financial safety net and complement existing international arrangements". The creation of the Brics bank will almost surely create competition for both the World Bank and other similar regional funds. Brics nations have criticised the World Bank and the International Monetary Fund for not giving developing nations enough voting rights. (Agency) 

 

Citigroup to Pay USD 7 bn in Mortgage-Backed Securities Probe

Citigroup will pay USD 7 billion to settle an investigation into its sale of residential mortgage-backed securities prior to the financial crisis and global recession that started in 2008, the company and the US Justice Department (DOJ) had announced on Monday, 14th July. The settlement includes a $4-billion civil penalty, which the DOJ said was the largest to date under a reform of the banking sector that followed the crisis. “As part of the settlement, Citigroup acknowledged it made serious misrepresentations to the public... about the mortgage loans it securitised in [residential mortgage-backed securities],” US Attorney General Eric Holder said.

 

“This historic penalty is appropriate given the strength of the evidence of the wrongdoing committed by Citi.” The bank’s activities “contributed mightily to the financial crisis that devastated our economy in 2008,” he said, adding that the settlement does not absolve Citigroup or its employees from facing possible criminal charges. Citigroup and other US banks have been probed for allegedly misrepresenting the quality of loans before they were bundled into mortgage-backed securities and sold to investors. In addition to the USD 4-billion civil penalty, Citigroup will pay USD 500 million to the federal government. The remaining USD 2.5 billion will be paid in various forms of consumer relief and will be distributed by the end of 2018, according to Citigroup and the DOJ. The settlement resolves civil claims by DOJ, several state attorneys general and the Federal Deposit Insurance Corporation (FDIC) relating to residential mortgage-backed securities issued, structured and underwritten between 2003 and 2008, Citigroup chief executive Michael Corbat. “We believe that this settlement is in the best interests of our shareholders, and allows us to move forward and to focus on the future, not the past,” Corbat said.

 

Time Warner Rejects Fox Takeover Bid

US media giant Time Warner has rejected an initial takeover approach from rival 20th Century Fox estimated at USD 80 billion. The takeover approach by the Rupert Murdoch owned company was made last month, it was revealed.

 

Twentieth Century Fox confirmed in a statement on Wednesday, 16th July that its offer for Time Warner had been rejected. It added it was not currently in talks with Time Warner about pursuing the deal further. "21st Century Fox can confirm that we made a formal proposal to Time Warner last month to combine the two companies," the company said. "The Time Warner board of directors declined to pursue our proposal. We are not currently in any discussions with Time Warner." (Agency)