US healthcare reforms focus on cost control

Controlling costs is emerging as the Obama administration’s top priority in health as it seeks a reform package that greatly expands coverage of the 47m uninsured Americans.

The White House’s approach is to widen coverage within strict fiscal constraints, rather than increasing coverage at all costs, reflecting the political and economic pressures imposed by record budget deficits, according to healthcare analysts.

Some liberal critics are concerned that Mr Obama is preparing to water down his ambitions to expand coverage and could jettison a promise to include a public healthcare plan. But many supporters recognise the increasingly urgent need to show fiscal discipline.

In an interview with the Financial Times, Peter Orszag, the White House budget director, said: “We have been very clear that a deficit-increasing healthcare reform is neither practical nor desirable.”

A senior administration official told the FT that health reform would have to be deficit-neutral over 10 years and in the tenth year, and promise substantial savings over the longer term.

Health campaigners fear this could make it difficult to achieve near-universal coverage. Bill Galston, an analyst at Brookings, the public policy group, said: “The fact that the administration appears to be leaning towards making cost reductions a priority is consistent with the larger political reality. Remember, 85 per cent of American people have health insurance and there is genuine public concern about rising fiscal deficits.”

Chinalco to restructure Rio Tinto deal

Chinalco will offer material concessions to its proposed $19.5bn investment in Rio Tinto in a late attempt to secure regulatory clearance from the Australian government and win the support of the Anglo-Australian group’s hostile shareholders.

The state-owned aluminium group is prepared to recast the deal to limit its stake in Rio to 15 per cent, down from the 18 per cent it hoped to secure when it agreed to buy $7.2bn of convertible bonds in February. Chinalco’s current stake is 9 per cent and the Chinese group also wants to invest $12.3bn for a large minority stake in Rio’s mining assets.

The concession would not only make it harder for Canberra to block the deal amid a divisive political and business debate that China should not own and buy some of Australia’s top resource assets, but would also appease Rio shareholders by making available the 3 per cent of Rio equity Chinalco is prepared to sacrifice.

Two people close to the situation said nothing solid had been agreed but that the Chinese group recognised changes were required and it wanted to make its position clear.

Chinalco would not be prepared to go below a 15 per cent equity stake and would not sacrifice the minority stakes it has agreed to buy in Rio’s assets, including a 15 per cent stake in the Western Australian iron ore assets, one of the people said.

At the start of the year, Rio had few options than to turn to Chinalco in order to address a balance sheet bloated with debts of close to $40bn. However, improved equity markets and a vocal response from UK and Australian shareholders who have said they would back a large capital-raising have served to undermine the original deal.

Chinalco is also understood to be sticking with its demand to have two Rio board seats but is prepared to offer concessions on marketing provisions, proposed “off-take” arrangements covering iron ore production, and corporate governance conditions relating to the mining assets where it would hold minority stakes.

Australia’s Foreign Investment Review Board has until June 15 to review the Chinalco deal based on Canberra’s “national interest” tests, which includes investments made by sovereign entities. That probe may be extended if a watered-down proposal is made by Chinalco in the coming weeks, delaying shareholder votes to approve a deal planned for July.

Rio declined to comment. The shares fell 7.2 per cent, at £26.57.

Showdown for Chinese steel

China’s steel industry faces a historic moment of truth as it threatens to abandon the traditional “benchmark” for annual iron ore pricing in an apparent fit of pique at the refusal of the miners to share their profits.

The anger is palpable in the voice of China’s chief iron ore negotiator, Shan Shanghua of the China Iron and Steel Association, and from the mills: miners are making big profits but China’s steel industry loses money.

It is only common sense, says Mr Shan, that this situation cannot persist.

The conflict has arisen out of a peculiarity of the iron ore market – for the past 40 years, prices had been settled annually in secretive talks between steelmakers and miners, rather than in the open market, as in other commodities such as crude oil or copper.

The first agreement creates a benchmark price that is followed by the rest of the industry.

The peculiarities do not end there. China’s steel industry is also different: production has remained high even if final demand has slumped, supporting input prices such as iron ore but depressing steel prices and, therefore, margins.

This is explained by Beijing’s desire to avoid job losses in the industry.

Mining executives invol-ved in the talks view Cisa’s argument as an attempt to force them to share the cost of Beijing’s social policies.

But Chinese officials see things differently. The country, the world’s largest iron ore consumer, has led the negotiations since 2005.

Its leadership started as its voracious appetite for ore triggered large price increases, including a record 85 per cent last year.

It was on the back of that increase – seen in China as a humiliation – that Beijing was adamant that, this year, with demand so much lower because of the global financial crisis, it would hold the balance of power. The Chinese side has become increasingly angry as the miners have refused their demands for a 40-50 per cent price cut, which would return prices to the level of 2007, say executives familiar with the talks.

Cisa is not alone in its fight to achieve a large cut. Chinese mills are in a defiant mood, saying they would rather buy cheaper ore on the spot market than accept a benchmark deal with a 30-35 per cent price cut.

The mills dismiss arguments that this is a short- term strategy that leaves them hostage to price rises once ore demand recovers.

But will China abandon the benchmark system, with its advantages of price stability, for an extra 10 percentage points price cut?

The answer, which mixes businesses, economics and politics – and some personal prestige – would influence the global economy as iron ore prices filter into steel costs and ultimately in the prices of goods such as cars and washing machines.

Mr Shan, who is leading the negotiations for the first time, is under heavy pressure and risks losing face if he cannot deliver the price cut he has promised since December, says Xu Zhongbo, a veteran steel analyst at Beijing Metal Consulting. “And Mr Shan has no steel mill,” he adds.

This echoes an argument also used by mining executives involved in the talks when they described Mr Shan as a “politician, not a businessman”.

But at least for this year, the benchmark may survive.

“Mr Shan risks losing face but we are only talking about a 5-10 per cent loss of face,” says a mill executive.

Baosteel, China’s largest steelmaker, which led the talks until rEcently, is also likely to put pressure on Cisa to keep the benchmark.

But even Baosteel seems to be losing its cool. Xu Lejiang, chairman, said last weekend that commodities traders were “possessed by evil” and were pushing up costs for companies such as Baosteel.

Cisa, for its part, continues to play its “bad cop” role, saying yesterday it would not settle at a 30-35 per cent cut, the level at which South Korean and Japanese mills appear close to an agreement with the miners.

China takes tough stance ahead of climate change negotiations

China adopted a hard line yesterday ahead of climate change negotiations, calling on rich countries to cut greenhouse gas emissions 40 per cent by 2020 from 1990 levels and help pay for reduction schemes in poorer countries.

Beijing reiterated its belief that developing countries, including China, should curb their emissions on a purely voluntary basis, and only if the curbs “accord with their national situations and sustainable development strategies”.

China also demanded that developed countries be legally bound to give at least 0.5-1.0 per cent of their annual economic worth to help poorer countries, including China, to cut their greenhouse gas emissions and cope with global warming.

Although it only spells out China’s initial bargaining position, the strident stance will encourage other developing nations to take tougher positions.

It will not be welcomed in Washington and Brussels, where policymakers yesterday made tackling climate change a central theme in bilateral discussions with Beijing.

China’s proposals are one of a series of demands made by developing countries as part of this year’s crucial climate change talks.

Formal negotiations begin officially on June 1 in Bonn, with three or more meetings to follow before the final summit in Copenhagen in December to forge a successor to the Kyoto protocol.

Other developing nations have asked for higher percentages of the rich world’s GDP to be transferred to poorer countries, and have demanded emissions cuts of up to 80 per cent by 2020 from certain rich nations.

Officials in Europe and the US privately dismissed the Chinese demands as posturing. “They’re hoping that if you ask for 1 per cent, you may get a small fraction of a per cent,” said one.

They said China had taken a more helpful stance at the negotiating table, for instance by discussing the many measures the Chinese government has taken and promised to take on improving energy efficiency and expanding renewable energy.

Rich countries accept that China, India and other emerging economies will not agree to absolute cuts in their emissions in the medium term. But before they agree to finance packages to help poor countries tackle global warming, they want commitments from those countries to curb their emissions so that they do not rise to the levels they would reach under “business as usual”.

Turmoil helps deliver job security for CEOs

Tough economic times have not yet translated into a spike in sackings of chief executives of the world's biggest companies.

In spite of financial turmoil and sharp falls in corporate profitability, top job turnover rose only slightly worldwide in 2008, according to a Booz & Company study due to be released today.

Overall, 361 of the world's 2,500 largest public companies, or 14.4 per cent, replaced their chief executive in 2008, up slightly from 347, or 13.8 per cent, in 2007.

But turnover in North America and Europe, the epicentre of the global downturn, declined slightly to 14.8 per cent and 15.1 per cent respectively.

Chief executive tenure, at an average of 7.9 years on the job, is now at its longest, at least in North America, since 2000. Among the newly appointed chiefs, 20 per cent had prior experience at the top, double the average for the prior 11 years.

Turnover in Asia, which has historically been lower than in the west, rose from 10.6 per cent in 2007 to 16.4 in 2008 in Japan and from 9.2 per cent to 13 per cent in the rest of Asia.

China Zhongwang's IPO cools Hong Kong hopes

A two-month rally in Hong Kong's stock market has raised hopes that the exchange could again play host to a steady succession of large Chinese initial public offerings.

Hong Kong was the centre of the IPO universe for several years until the global financial meltdown put paid to the listing ambitions of fast-growing mainland companies.

Amid the ongoing reluctance of the Chinese authorities to re-open the country's domestic bourses to new offerings, there have been signs that the Hong Kong exchange's listing committee could be about to jolt back to life.

But some perspective has been added by the disappointing first-day performance of China Zhongwang, an aluminium products maker that last week raised $1.3bn, making it the world's largest IPO.

It failed to trade above its offer price of HK$7 per share last Friday and closed down 5 per cent, recovering a little yesterday with a gain of 0.8 per cent to HK$6.68.

China Zhongwang followed a handful of smaller listings on the bourse this year that raised a combined $350m, according to Dealogic, the data provider.

Dealmakers in the city say that at least three more Chinese companies are hoping to file listing applications soon, with others watching from the sidelines. Together, the three companies could raise up to $1bn.

People familiar with the situation said the companies included BBMG Corp, a construction material maker, Bawang International, a maker and distributor of personal care products, and Lumena, a sodium sulphate producer.

Issuers and dealmakers have been attracted back to the market by the stock market rebound, in which the benchmark Hang Seng index has soared by 53 per cent since March 9.

Institutional investors who missed the early part of the bull run have been scrambling to reinvest in Asian equities, having fled last year.

During the book-building process for China Zhongwang last month, the institutional book was nearly three times covered and there were real hopes that a company due to benefit from raised infrastructure spending would get off to a solid start.

But the retail tranche of the offering was only 70 per cent covered, signalling public scepticism over pricing.

BEIJING CUTS LOANS AMID FEAR OF ASSET BUBBLES

Chinese bank lending slowed dramatically in April because of fears that loan growth in the first quarter had been excessive and could pave the way for loans of deteriorating quality, so possibly creating a new round of asset bubbles.

China's state-dominated banks gave out Rmb591.8bn ($85.2bn, €62.5bn, £56.3bn) in new loans last month, less than a third of the Rmb1,891bn in new loans extended in March, but still well above the monthly levels of recent years.

In the first quarter, Chinese lenders answered the government's call to open the credit taps and get the economy moving again, extending more than Rmb4,600bn in new loans – more than the entire amount of new lending in 2007.

That led to fears among regulators that money was being funnelled illegally into the stock market and handed out to state- sponsored stimulus projects of dubious commercial value that could become non- performing assets.

Some regulators also worried about the potential for rampant inflation. Those fears were somewhat eased by price measurements released yesterday showing China remained in deflationary territory in April for the third consecutive month.

The consumer price index fell 1.5 per cent from a year earlier in April, compared with a fall of 1.2 per cent in March, while the producer price index fell 6.6 per cent after falling 6.0 per cent in March.

Chinese bank lending is usually strongest in the first quarter and moderates as the year goes on. However, the abnormally steep April drop raises some concerns that China's nascent economic recovery could flounder without the injection of huge volumes of new loans.

Nonetheless, many analysts were sanguine that reduced loan levels would still buoy growth. Wang Tao, economist at UBS, said: “April new lending is much more sustainable than that in Q1 and especially that in March, and the natural tapering off does not mean that growth will slow down. We continue to think that there will be enough liquidity to support an economic recovery (estimated at 7.5 per cent gross domestic product growth) for 2009.”