Obama gets tough on US car industry

Barack Obama yesterday condemned “a failure of leadership” from Washington to Detroit for the decline of the US car industry and demanded new sacrifices from debtholders, unions and executives at General Motors and Chrysler in return for fresh bail-out money.

The US president, adopting a more interventionist approach, yesterday announced tax incentives for new car purchases and said he would support so-called “cash for clunkers” legislation, which has stimulated the German car market with incentives to trade in old cars.

But Mr Obama said that his auto taskforce, which was set up to study the companies' request for an additional $21.6bn of government funds, had decided that neither of them had gone far enough in cutting debt or benefits to workers and that no money would be given without more fundamental reform.

GM, whose chief executive Rick Wagoner on Sunday stepped down under pressure from the White House, has 60 days to come up with a tougher restructuring plan in return for more government support. Both companies will receive working capital before the deadlines.

Mr Obama extended a 30-day window to Chrysler to reach a partnership deal with Fiat in return for up to $6bn of additional taxpayer money. Chrysler, controlled by Cerberus Capital Management, said yesterday that it had reached a deal with the Italian carmaker although there were still “hurdles”.

The increased threat of bankruptcy at GM and Chrysler contributed to a steep fall in US share prices, choking off a rally that had prompted talk that the stock market might be bottoming out and which had helped lift the political fortunes of Tim Geithner, Treasury secretary.

OECD SEES 1 IN 10 OUT OF WORK BY NEXT YEAR

One in ten workers in advanced economies will be without a job next year “practically with no exceptions”, the head of the Organisation for Economic Co-operation and Development said yesterday.

In a graphic indication of the global recession's transmission from the financial sector to the rest of the economy, Angel Gurría warned that the ranks of the unemployed in the 30 advanced OECD countries would swell “by about 25m people, by far the largest and most rapid increase in OECD unemployment in the postwar period”.

The misery of joblessness, what Mr Gurría described as “rapidly turning into a jobs and social crisis”, would come as he said the OECD expected advanced economies to contract by 4.3 per cent in 2009 with little or no growth expected in 2010. The forecast is significantly worse than the International Monetary Fund's most recent estimate of a 3-3.5 per cent contraction for 2009.

US ECONOMY SHRINKS AT FASTEST RATE SINCE 1982

The US economy shrank in the fourth quarter at its fastest rate since 1982, revised official figures showed yesterday, as corporate profits fell at the sharpest pace in 55 years and jobless claims continued to climb.

Updated commerce department data showed US gross domestic product contracting at an annualised rate of 6.3 per cent in the fourth quarter of last year, compared with last month's estimate of 6.2 per cent. That previous 26-year record came after an overly optimistic January projection that the economy contracted by just 3.8 per cent in spite of anecdotal evidence of a more severe downturn.

The final GDP figures were expected to show a contraction of 6.6 per cent, but the results signal that a deeper contraction could be coming this quarter. The revision was due to a draw-down of inventories and a slowing of construction and exported services. The downgrade was blunted by reduced imports, an uptick in exports and an infusion of government spending.

US ECONOMY SHRINKS AT FASTEST RATE SINCE 1982

The US economy shrank in the fourth quarter at its fastest rate since 1982, revised official figures showed yesterday, as corporate profits fell at the sharpest pace in 55 years and jobless claims continued to climb.

Updated commerce department data showed US gross domestic product contracting at an annualised rate of 6.3 per cent in the fourth quarter of last year, compared with last month's estimate of 6.2 per cent. That previous 26-year record came after an overly optimistic January projection that the economy contracted by just 3.8 per cent in spite of anecdotal evidence of a more severe downturn.

The final GDP figures were expected to show a contraction of 6.6 per cent, but the results signal that a deeper contraction could be coming this quarter. The revision was due to a draw-down of inventories and a slowing of construction and exported services. The downgrade was blunted by reduced imports, an uptick in exports and an infusion of government spending.

Kingfisher to pare China outlets after profits tumble

Kingfisher, Europe's biggest home improvement chain, is planning to reduce its shop space in China by 40 per cent in the next two years as it overhauls its loss-making operation.

Ian Cheshire, the chief executive, who reported a 75 per cent plunge in pre-tax profit for the year after notching up £230m ($333m) of exceptional charges linked to the Chinese venture, said the business was salvageable but had to be pared back after over-expansion.

Mr Cheshire said that while the retailer had suffered at the hands of a collapsing Chinese housing market, it had also caused many of its woes by becoming too reliant on the booming apartment design and installation market without developing other services or product ranges, such as soft furnishings and home decoration.

Kingfisher, which operates 63 stores – or 600,000 sq m – will close 22 of those sites, which are loss-making, by the middle of 2010.

N Korea missile on launch pad

North Korea has placed a long-range missile capable of reaching the US on a launch pad, suggesting that the Stalinist state intends to go ahead with a planned satellite launch in early April.

A US official confirmed to the Financial Times that Pyongyang had erected a Taepodong-2 intercontinental ballistic missile [ICBM] at the Musudan-ri launching site in eastern North Korea.

In 2006, North Korea fired a three-stage Taeponong-2, which has the technical range to reach the continental US, but the rocket failed shortly into flight. While Pyongyang insists the pending launch is a satellite, some experts believe they simply want to test the ICBM.

“It does appear that a Taepodong-2 missile has been placed on the launch pad, which suggests that the North Koreans may be nearing a launch, although the precise timing of such an event—if a decision is made to go through with it—remains unclear,” said a US counter-proliferation official.

“I can't rule out the possibility of a launch within the coming days.”

North Korea previously said it would launch a satellite between April 4 and 8. South Korea, Japan, and the US have warned North Korea not to launch a rocket – even one carrying a satellite – saying it would breach a UN resolution, which was introduced after the 2006 Taepondong-2 test.

A Pentagon spokesman declined to say whether the US has turned its nascent missile defence system into operational mode. The US switched on the system in 2006 after spy satellites detected activity at Musudan-ri.

“We stand ready to defend US territory, our allies and our national interests,” said Major Stewart Upton, the Pentagon spokesman. “The US closely monitors threats to international security and is ready to respond when appropriate to crises wherever they may arise.”

Fears of secrecy crackdown spur Swiss banks to ban foreign travel

Switzerland's private banks have started to ban their top executives from travelling abroad, even to neighbouring France and Germany, because of fears they will be detained as part of a global crackdown on bank secrecy.

The head of one leading private bank in Geneva said the growing determination of countries such as the US and Germany to tackle tax evasion and secrecy meant banks felt they had to take extra measures to protect employees.

“Some banks have taken this precaution,” he said. “If today I go to Germany to visit two banks I deal with . . . German customs can take me in and question me.”

The travel bans, which have not been brought in by all banks, have focused on those visiting the US, following the detention there last year of a senior private banker from UBS, Switzerland's biggest bank, as part of a federal tax investigation.

Former AOL CEO Set to Oversee Digital Strategy at News Corp.

By SHIRA OVIDE
Former AOL chief executive Jon Miller is close to taking a new role overseeing digital strategy at News Corp., according to people familiar with the matter.

In the position, Mr. Miller is expected to help coordinate digital strategies across News Corp.'s businesses, and he will oversee the company's MySpace social networking site and its investment in Hulu, the online video site. News Corp., which owns Dow Jones & Co., publisher of The Wall Street Journal and Dow Jones Newswires, also operates the Fox television network, cable-TV channels including FX and Fox News and a stable of film studios.

Based in New York, Mr. Miller would report to Rupert Murdoch, News Corp.'s chairman and chief executive.

Peter Levinsohn, who is president of News Corp.'s Fox Interactive Media, the division which houses MySpace, is expected to take a top post in the film and television studio, according to people familiar with the matter.

The expected appointment of Mr. Miller continues News Corp.'s overhaul of its leadership after President and Chief Operating Officer Peter Chernin announced he is leaving the company when his contract expires at the end of June. Mr. Chernin has played a key role overseeing News Corp.'s entertainment and digital operations.

News Corp. earlier this month combined its film and television production businesses and promoted two of the company's movie executives, Jim Gianopulos and Tom Rothman, to run the business. All of the Fox TV-entertainment networks will be folded under cable executive Tony Vinciquerra.

Mr. Levinsohn is expected to report to Messrs. Gianopulos and Rothman.

Mr. Miller, a partner at investment firm Velocity Interactive Group, ran AOL from 2002 to 2006, and has been hanging closely on the sidelines of the media and technology world since then. Mr. Miller formed Velocity, which specializes in digital-media investments, with Ross Levinsohn, who used to run Fox Interactive Media. Ross Levinsohn and Peter Levinsohn are cousins.

Write to Shira Ovide at shira.ovide@wsj.com

China Currency Call A Red Herring

Timothy Geithner seems to suffer from China syndrome. In January, the Treasury Secretary offended Beijing with accusations of currency manipulation. Wednesday, he caused a brief dollar selloff by failing to dismiss radical proposals from China's central-bank governor regarding a new global reserve currency. Mr. Geithner later clarified his remarks, emphasizing his continued fandom of the greenback.

Fittingly, therefore, rhetoric was met with rhetoric. Reserve currencies are begotten, not made. The dollar's pre-eminence, like sterling's before it, stems from a range of factors including deep capital markets and military power. A cooked-up replacement would be the monetary equivalent of Esperanto -- an artificial curio. Beijing's proposal, therefore, looks more like a shot across Washington's bow, reflecting concern about the impact of U.S. profligacy.

China's options look limited, however. U.S. Treasurys constitute arguably the only market deep enough for China to invest its surpluses without causing huge distortion or unleashing rampant protectionism. Dumping Treasurys to punish Washington would trash the value of Beijing's own reserves -- and cause upheaval in the U.S., still the buyer of last resort for China's exports.

Faced with such symbiosis, it is understandable that Beijing keeps jawboning Washington to show some fiscal restraint, even if the response is less than concrete.

Obama To Woo Public On Europe Trip

Barack Obama, heading overseas for the first time as president next week, aims to use a combination of summit protocol and campaign flash to corral support for his programs.

Facing political headwinds but with a European public still on his side, Mr. Obama will attend three high-profile international events -- the meeting of Group of 20 nations that kicks off Wednesday evening in London, a North Atlantic Treaty Organization meeting at the end of the week, and a European Union-U.S. summit in Prague on April 5.

But Mr. Obama also intends to extend his efforts beyond official meetings. He will hold a town hall-style meeting at a sports arena in Strasbourg, France, European diplomatic officials said. And the White House is looking for a site in Prague for the first public foreign-policy speech of Mr. Obama's presidency, according to Petr Kolar, the Czech Republic's ambassador to the U.S.

Turkish press reports say Mr. Obama's visit to Istanbul after the Prague summit will include a stop at the Hagia Sophia, a Byzantine-era church converted to a mosque under the Ottomans, and a stop at the national Sultan Ahmed Mosque.

The emphasis on including public events, a deliberate nod to Mr. Obama's successful tour through Europe as a presidential candidate, stands in contrast to the divisions that have opened on policy since he took office.

Czech Prime Minister Mirek Topolanek, who resigned on Thursday after an earlier parliamentary vote of no-confidence, this week called Mr. Obama's economic prescriptions 'the road to hell.' Paris and Berlin have been openly hostile to the U.S. president's calls for more fiscal stimulus. And his pleas for more troops for Afghanistan have given way to more modest calls for help in propping up Afghanistan and Pakistan's civilian governments.

A senior administration official shrugged off those concerns. 'If there's a positive receptivity to the president, it does help enhance America's image abroad and moves along the agenda,' the official said. 'We're not afraid to be a world leader, and people want to be seen with our president. That's a good thing.'

Mr. Obama spent much of his campaign lamenting his nation's diminished status and influence after eight years under President Bush. On his trip, President Obama will meet leaders from more than 40 countries and will see first hand whether the damage he spoke of is there and lasting.

'President Obama has been talking for many months, if not a year or more, about the need to restore U.S. leadership around the globe,' said Reginald Dale, a senior fellow at the Center for Strategic and International Studies' Europe program. 'This trip is the first chance, actually, to start doing something about that.'

In a news conference Tuesday, Mr. Obama said the steps he has taken have been aimed at 'restoring a sense of confidence and the ability of the United States to assert global leadership.'

Such trips are carefully choreographed and many of the tensions evident before the meetings will have been defused ahead of time.

Mr. Obama's star may have dimmed slightly in the U.S., but politicians in Europe hope some of his stardust rubs off on them. 'Everybody's jockeying to be seen by his side,' says one person familiar with the preparations for the NATO summit. 'People are squabbling to be in the camera shot with him and be seated next to him.'

ICBC secures Goldman pledge

Industrial and Commercial Bank of China yesterday secured a promise from Goldman Sachs that the US bank would hold the majority of its stake in the Chinese lender for at least another year.

Goldman, which holds 4.9 per cent of the Chinese lender, some on behalf of investors, said it would sell no more than 20 per cent of that stake before April next year, even though the lock-up for its shares ends in April and October this year. Its stake is worth about $8.75bn at current prices.

“Goldman Sachs does not need to raise cash as a firm so we see no pressure to sell a large stake at this time,” said Michael Evans, vice-chairman of Goldman. “We want to demonstrate our commitment to ICBC given the uncertainty in the market.”

ICBC said Allianz, which holds nearly 2 per cent of the Chinese lender, and American Express, which owns 0.4 per cent, had also expressed willingness to “remain long-term partners of ICBC”, but had made no commitments on how long they would hold shares.

Goldman's comments came as ICBC, the world's largest financial institution by market capitalisation, yesterday reported a 35.2 per cent rise in full-year net profit to Rmb111bn ($16.2bn).

Hutchison reports 3 Group progress on track

Hutchison Whampoa, the Hong Kong conglomerate controlled by tycoon Li Ka-shing, yesterday reported continued improvement at its 3G telecommunications unit, despite nagging problems at the company's Italian arm.

Losses before interest and tax at Hutchison's 3 Group narrowed 39 per cent in 2008, to HK$10.857bn ($1.4bn).

“The most difficult time has passed,” said Canning Fok, Hutchison managing director. The company added that its 3G networks are on track to achieve positive earnings before interest and tax this year.

Losses were reduced in four of the unit's five markets last year, with Italy being the exception. Revenues at 3 Italia fell 15 per cent in 2008, contributing to a 16 per cent increase in LBIT.

“It's quite tiresome but the explanation [for Italy] is still the effect of the Bersani decree,” Mr Fok said, referring to a regulatory ruling that reduced operators' fee income. “Italy did not have a good year in 2008 so we have to pay attention.”

WILL CHINA'S COKE MOMENT SPARK RETALIATION?

The US gets worked up over ports and oil. France is sensitive about its strategic yoghurt reserves. China, it seems, gets particularly touchy when it comes to beverages.

Last November China's ministry of commerce, which oversees anti- monopoly issues, cleared the $52bn (€38bn, £36bn) acquisition by InBev of Anheuser-Busch but laid down several conditions restricting the combined group's freedom to increase its presence in China. The ruling sent the message that Beijing's anti-monopoly law, passed last August, would hold sway even over non-Chinese deals that might affect China's increasingly significant market. Last week the ministry rejected Coca-Cola's $2.4bn bid for Huiyuan Juice, killing what would have been the biggest foreign takeover of a Chinese company.

Coca-Cola has taken what some are calling China's Smoot-Hawley moment on the chin. Although privately taken aback, in public it expressed disappointment but respect for Beijing's decision, which some fear could trigger retaliatory protectionism. The US reaction too, insofar as it opines on anything other than AIG bonuses these days, has been low-key. The only people to have displayed raw emotion have been Australian MPs opposed to China's onslaught on their country's mining assets. For them, Beijing's rejection has been manna from heaven, providing another reason to block Chinese bids.

Bankers and lawyers working on the takeover of Huiyuan were convinced until recently that the agreement had Beijing's approval. But after making soothing noises for months, the ministry recently began to raise what it said were antitrust concerns. Although Coke would gain only about a 20 per cent share of juice sales, the ministry suggested it might abuse its position by “bundling” its carbonated and juice offerings to retailers. It also expressed fears that Coke might not buy its fruit from Chinese farmers, and wondered aloud what the Atlanta company intended to do with the Huiyuan brand.

Some lawyers have taken those objections at face value. But most regard them as spurious. The objection to possible bundling, for example, could easily have been dealt with by a simple stipulation that Coke refrain from such tactics. Advisers say Coke had no need to buy its fruit anywhere other than China.

That has led commentators to speculate on what might have been Beijing's real motive. Most assume the bid was struck down on national interest, rather than on competition, grounds. First, the proposed takeover was deeply unpopular with much of the Chinese public, which poured forth its anger on the internet at the prospect of a beloved brand disappearing down an American gullet. Rival drinks-makers lobbied the government, saying they would lose market share to a juiced-up Coke. Beijing may have judged that, at a time of job losses and potential social unrest, it was prudent to throw a bone to nationalist sentiment.

Second, China has recently taken a more assertive attitude towards the US. It has lectured Washington on the need to keep Beijing's massive holdings of US Treasuries safe, and even suggested that the dollar might be replaced as a reserve currency by a new global unit. With Washington desperate for Beijing to keep financing its debt, Beijing may have calculated that the US would simply have to suck up its decision without protest.

China may be feeling confident. But it is not far-fetched to suggest that its actions could help set off a round of tit-for-tat protectionism. World leaders' supposed commitment to keeping their economies open already looks pretty hollow: no fewer than 17 of the Group of 20 countries that earnestly pledged their commitment to free trade have taken protectionist measures.

US reveals sweeping regulatory overhaul

The Obama administration wants to force a wide range of large financial institutions to hold more capital as part of a sweeping regulatory overhaul that Tim Geithner, US Treasury secretary, yesterday called the “new rules of the game”.

Mr Geithner told Congress that the US needed a fresh approach to regulating risk that identified problems across the financial system as a whole if it were to prevent a repeat of the current financial crisis.

The heaviest demands would be placed on institutions deemed to be systemically important – ranging from large banks to insurance companies, financial groups such GE Capital and, potentially, hedge funds of sufficient size. But regulations would also be tightened for an even broader range of institutions and products, including over-the-counter derivatives.

Appearing yesterday before the House financial services committee, Mr Geithner said “our system failed in basic fundamental ways” and needed “not modest repairs at the margin, but new rules of the game”.

“The most simple way to frame it is: capital, capital, capital,” said Mr Geithner. “That's something we have to impose through standards set in regulation.”

Bankers said the more stringent rules on capital and liquidity, coupled with changes that would stop the practice of letting financial groups choose their regulators, would cause profound changes in the industry.

Senior Wall Street executives said they expected tougher regulation, after the government used billions of dollars of taxpayers' money to rescue the sector. But they added that the proposed changes would add to pressure on banks' profits.

The Treasury has not decided on the plan's specifics, notably which institutions would be categorised as systemically important and how much more capital they would be obliged to hold. But insurers such as AIG, which was bailed out with $173bn of public money, would be included.

Night work cancer theory prompts compensation fears

Governments and employers worldwide are set to face pressure for compensation and changes to working patterns following research suggesting night shift work may cause cancer.

Cancer patients' groups, researchers and trade unions are studying evidence of the link after Denmark's National Injuries Board approved compensation of up to DKr1m ($181,000, €134,000, £123,000) for 38 women who developed breast cancer after working one or more nights a week for at least 20 years.

A review of recent studies by the International Agency for Research on Cancer concluded that night work disrupted the body's circadian rhythms, inhibiting the production of melatonin, a hormone important in fighting cancer. “Shift work that involves circadian disruption is probably carcinogenic to humans,” it concluded, putting the risk at the same level as chemicals containing lead, anabolic steroids, creosote, diesel exhaust and sun lamps.

Ahead of the full IARC findings to be published later this year, Australia's National Breast and Ovarian Cancer Centre cautioned that some studies indicated a “small increase in breast cancer risk . . . in limited groups of women . . . after 20 years or more of shift work”, findings were inconsistent and some “open to questions of bias and confounding”.

But Grete Christensen, deputy president of the Danish Nurses' Organisation, seven of whose members won compensation, said: “Now you can be compensated for working night shifts just as if you were working with poisonous chemicals in some factory.”

Other European countries including the Netherlands, Belgium and the UK are also examining looking at the link between night work and breast cancer and may move to granting compensation.

The Cancer Society of Finland said a forthcoming study on work and cancer in Nordic countries would add to the evidence of a link between shift work and breast cancer in both men and women.

Up to a fifth of employees in Europe and the US work shifts including nights. More than 30 per cent work at night in healthcare, manufacturing, mining, transport, communication and the leisure and hospitality sectors.

“There is sufficient evidence that night work is causing damage to men's and women's health,” says Laurent Vogel, director of the health and safety department of the European Trade Union Confederation's Institute. “The point is to limit night work to social or technical reasons . . . [not] just for reasons of profitability.”

Denmark's injuries board looked at 75 cases last year and approved compensation in 38. The board said it might recognise night working as an occupational disease once the full IARC report was published, speeding up approval of pay-outs.

The board's decision has already prompted some Danish employers to change policy. SAS, the leading Scandinavian airline, took action when one of its Danish stewardesses won compensation for developing breast cancer after more than 20 years of long-haul flights. “We have given our crew members the option of not flying long haul if they are not comfortable doing that,” SAS said.

Kingfisher to pare China outlets after profits tumble

Kingfisher, Europe's biggest home improvement chain, is planning to reduce its shop space in China by 40 per cent in the next two years as it overhauls its loss-making operation.

Ian Cheshire, the chief executive, who reported a 75 per cent plunge in pre-tax profit for the year after notching up £230m ($333m) of exceptional charges linked to the Chinese venture, said the business was salvageable but had to be pared back after over-expansion.

Mr Cheshire said that while the retailer had suffered at the hands of a collapsing Chinese housing market, it had also caused many of its woes by becoming too reliant on the booming apartment design and installation market without developing other services or product ranges, such as soft furnishings and home decoration.

Kingfisher, which operates 63 stores – or 600,000 sq m – will close 22 of those sites, which are loss-making, by the middle of 2010.

US ECONOMY SHRINKS AT FASTEST RATE SINCE 1982

The US economy shrank in the fourth quarter at its fastest rate since 1982, revised official figures showed yesterday, as corporate profits fell at the sharpest pace in 55 years and jobless claims continued to climb.

Updated commerce department data showed US gross domestic product contracting at an annualised rate of 6.3 per cent in the fourth quarter of last year, compared with last month's estimate of 6.2 per cent. That previous 26-year record came after an overly optimistic January projection that the economy contracted by just 3.8 per cent in spite of anecdotal evidence of a more severe downturn.

The final GDP figures were expected to show a contraction of 6.6 per cent, but the results signal that a deeper contraction could be coming this quarter. The revision was due to a draw-down of inventories and a slowing of construction and exported services. The downgrade was blunted by reduced imports, an uptick in exports and an infusion of government spending.

Pentagon reports more missiles on Taiwan Strait

China continued deploying more missiles across the Taiwan Strait over the past year in spite of a decline in tensions since the election of a new Taiwanese president, the Pentagon said yesterday.

In its annual report on the Chinese military, the Pentagon said China was “rapidly developing coercive capabilities” to deter Taiwan – which Beijing considers a renegade province – from seeking de jure independence.

“These same capabilities could in the future be used to pressure Taiwan toward a settlement of the cross-Strait dispute on Beijing's terms while simultaneously attempting to deter, delay, or deny any possible US support for the island in case of conflict,” the report said.

“This modernisation and the threat to Taiwan continue despite significant reduction in cross-Strait tension over the last year since Taiwan elected a new president.”

The congressionally mandated report comes just weeks after an incident in the South China Sea where five Chinese naval, fisheries and fishing ships, harassed the USNS Impeccable, a US navy ship that is used for detecting submarines. Defence experts say the Chinese navy is increasingly trying to challenge the US Seventh Fleet, which has long been the dominant naval power in the region.

Hawks in the US are concerned that China is expanding the capabilities of its military to become more aggressive in Asia and elsewhere. Other officials say it is natural for China to develop its military as it grows into a big power, but they raise questions about a lack of transparency.

“There are legitimate reasons for them to grow a ‘blue water' navy mostly to help the rest of us to ensure the stability and prosperity of this globalised world of ours,” said one US defence official.

“So we're okay with that and we want to engage with them going forwards and partner where it makes sense. It's the other things that they are doing on the way that leaves you baffled, like this incident with the Impeccable.”

After several days of heated rhetoric, both the US and China have attempted to ratchet down the tensions. The US sent a destroyer to protect the Impeccable after the incident, but the White House was later annoyed that the Pentagon revealed the move, to avoid the perception that the US was trying to escalate the incident.

While the Chinese military budget has seen double-digit growth for a number of years, the Pentagon said the People's Liberation Army still had “limited” ability to sustain military power at a distance. But it said the Chinese continued to develop “disruptive technologies”, such as missiles that would hinder adversaries from entering a battle zone, that “are changing regional military balances and that have implications beyond the Asia-Pacific region”.

The term disruptive technology describes products or processes that marginalise older technologies. In the military, cyber warfare can disable computer-based weapons systems. In 2007, China destroyed one of its weather satellites in space with a kinetic weapon, leading to questions on the safety of US surveillance and communications satellites.

The Pentagon said China's lack of transparency on its military spending and capabilities “poses risks to stability by creating uncertainty and increasing the potential for misunderstanding and miscalculation.”

Buyers gain upper hand with Chinese exporters

The prices of China-made goods are falling again as bargaining power shifts back to overseas buyers, according to executives at Li & Fung, the world's largest trade sourcing company.

A deflationary price trend has re-established itself after 3½ years of steady increases in the so-called “China price” – a once unbeatable benchmark for global manufacturers – and coincides with double-digit falls in the country's exports during recent months.

The value of China's exports fell 25.7 per cent year on year in February, beating a 17.5 per cent decline in January.

Hong Kong-based Li & Fung, whose revenue reached HK$110.7bn ($14.2bn) last year, said export prices for Chinese manufactured goods began to fall in the second half but stayed flat for all of 2008.

“This year prices are falling considerably and I expect that to continue for the full year,” said Bruce Rockowitz, president of Li & Fung's trading arm. He added that prices were down “at least 5 to 10 per cent” compared with 2008.

Slump in Japan's exports fuels fear

Japanese exports have nearly halved from a year ago, official figures showed yesterday, stoking fears that the world's second largest economy is heading even deeper into recession.

The country's dismal February trade performance was the latest in a string of bleak economic figures. It fuelled expectations that Japan was on course to suffer a steep fall in output in the first three months of 2009 that could match or even exceed the 3.2 per cent quarter-on-quarter decline recorded in the final three months of last year.

Japan, which is highly dependent on exports for growth, achieved a slim trade surplus of Y82.4bn ($844m) last month, after suffering a record deficit of more than Y950bn in January.

However, it did so only because of a record 43 per cent drop in imports to Y3,443bn. That fall underscored the nation's fast diminishing appetite for raw materials and weakening domestic consumer demand.

Exports fell 49.4 per cent year-on-year to Y3,525bn, their worst performance since Japan began keeping comparable trade statistics in 1980.

Bank of China

Here is one sign of improving market sentiment: money is heading east again. Over the past fortnight, foreign investors have ploughed more than $500m into Asian equity funds, reports EPFR Global. And why wouldn't they? One of the most popular barometers of risk appetite – the MSCI Asia ex-Japan index – has gained almost a fifth since touching a four-year low at the end of October. Over the same period, the S&P 500 has shed a 10th. Nine of the top 10 stock indices this year are in emerging markets, led by China's 28 per cent surge. Templeton's Mark Mobius, among other luminaries, says it is time to back up the truck and chase bargain assets.

Beware the rallying bear. In January 1998, when Asian markets had halved from their July 1997 peak, flows into regional funds also turned positive, points out Citi. But those who got in then lost about a third of their money before markets finally bottomed in early September. Back then, the proportion of assets held in cash in Asian-focused funds also peaked at 17 per cent – five times higher than current levels. Other indicators, such as price/book value, are scarcely more tempting now. So far, real estate is the only sector marked down to the lows reached during the last recession.

The most intense phase of the financial crisis may well be over. But the economic crisis is only just limbering up. Take China: in the past week alone, steel prices slipped further, foreign direct investment contracted sharply, coal sales tumbled, power demand remained anaemic, fixed investment in property hit a multi-decade low, and the finance ministry ordered big cuts to travel and entertainment budgets to arrest a rising budget deficit.

Investors sorely want China to save the world: almost all the new money into Asian funds was into exchange traded funds tracking China and other China-focused funds. But a more reliable indicator than the Shanghai market, off limits to most foreigners, are the H-shares that trade in Hong Kong, down 6 per cent this year. Hardly the hallmark of a dawning bull market.

Bank of China

Chinese banks are kicking off the reporting season in old-fashioned style: with profits, growth and a long list of awards. But the writing is on the wall, as demonstrated by Tuesday's results from Bank of China, the world's third biggest lender by market value and winner of, among other honours, best care for children institution.

While net profits rose 14 per cent to $9.4bn on a year-on-year basis, fourth quarter income was one-third that of the previous quarter. Even on an annual basis growth evaporated at the pre-tax level, illustrating the fillip provided by lower taxes. Banking in China is relatively simple stuff: about four-fifths of revenues come from lending money at mostly government-set rates. Beijing is firmly in stimulus mode and banks are rallying to the cause, increasing year-on-year lending in excess of 20 per cent in January and February. But volume gains are partially offset by margin contraction, the result of lower interest rates and savers switching into higher-yielding time deposits. Bank of China's net interest margin dropped 13 basis points to 2.63 per cent. And more loans are turning bad; credit costs doubled to $2.5bn. Since almost one quarter of the group's loan book is to the struggling manufacturing sector, and almost one-third of loans are unsecured, there is plenty of scope for that number to increase again this year.

So much for the home turf: Bank of China's woes are heightened by its role as the country's most externally focused lender. That gives it a relatively large foreign currency book and exposure to structured products – and explains the $4bn impairment losses on “other assets”. The carrying value of remaining subprime and other discredited US assets is $16.3bn. This feature largely explains Bank of China's 30-40 per cent discount to its peers: the Hong Kong listed shares trade just above book. The bank is as safe as houses compared with its wobbly western peers, but its heyday is over.

Tata plans to sell Nano in US

Tata Motors has started work on plans to launch the Nano, the world's cheapest car, in the US in a change of strategy made possible by the deep recession there.

Ratan Tata, head of the Tata group, said that tough times in the world's largest car market had convinced the group to start designing a version of the Nano for possible export to the US as early as 2011 or 2012.

Mr Tata said he had once viewed the US, with its exacting consumers and obsession with large cars, as unsuitable for the diminutive Nano. However, he said: “In this economic situation, we see perhaps there is a place [for the Nano in the US].”

The Nano was launched in India yesterday with a starting price of Rs100,000 ($1,980) before transport charges and tax. Tata plans to sell a version of the Nano in Europe from 2011.

Equities rally on details of asset plan

Equities, led by banking shares, rallied sharply yesterday as investors digested details of the US Treasury's plan for removing impaired assets from the financial system.

After opening higher, US stocks extended that rally. By midday, the S&P 500 was up 4.6 per cent and set to close above 800 for the first time since mid-February.

“The market is cautiously optimistic about the Treasury plan,” said Michael Kastner, portfolio manager at Sterling Stamos. “It's encouraging to see that the opening rally in stocks has not faltered, but continued during the session.”

Credit spreads for corporate bonds and credit derivatives also improved yesterday, with the US investment grade credit derivatives index at its best level since early February.

The dollar rallied 1.7 per cent against the Japanese yen. US government bond yields had edged higher at midday in New York.

Geithner plan welcomed

Big-name investors yesterday warmly endorsed the Obama administration's plan for public-private partnerships to deal with toxic assets in the financial system and stocks rallied after Tim Geithner, the US Treasury Secretary, detailed the proposals.

Bill Gross, chairman of Pimco, the bond fund manager, said “this is perhaps the first win/win/win policy to be put on the table and it should be welcomed enthusiastically. We intend to participate.”

Larry Fink, chairman of BlackRock, the asset management company, said his company would also take part. “I think it is a very important step that the government is assisting private capital and creating new demand for these troubled assets.”

Investors appeared particularly enthused by the prospect that the government would arrange financing for the joint ventures on generous terms.

The only criticism came from economists such as Paul Krugman, the Princeton professor and New York Times columnist, who said the non-recourse government loans would allow the private partners to make large profits if the bets went well, while suffering only limited losses if the bets soured.

Political analysts said the embattled Mr Geithner had won himself a reprieve and regained some control of the economic debate, which had been dominated by political rage over bonuses at AIG, the crippled insurance group. But Mr Geithner remains the lightning rod on Capitol Hill for the perceived failure of the administration to control behaviour at financial institutions.

He said yesterday he understood the public rage, but added that the government had to work with the private sector to fix the financial system.

“This will make it easier for banks to raise capital privately because they will have a cleaner balance sheet,” he said. The government will allocate a total of $75bn to $100bn to the partnerships, which will be leveraged up with loan financing from the Federal Deposit Insurance Corporation and the Federal Reserve.

GEITHNER FACES CRITICAL TEST WITH TOXIC ASSET PLAN

Tim Geithner, America's beleaguered Treasury secretary, faces a critical test of his credibility when he unveils a much awaited plan to take toxic assets off bank balance sheets – in an announcement that could come as soon as tomorrow.

Mr Geithner, whose initial announcement last month on the troubled asset purchase plan disappointed the market, has become the target of harsh criticism in Washington and on Wall Street with some questioning whether he can deliver.

Speaking on condition of anonymity, several senior Democratic figures questioned whether Mr Geithner would have the credibility with the markets and Capitol Hill to push through a new request for funds. “The more time passes the more convinced I am that Tim Geithner is becoming a liability for the administration,” said one lawmaker.

Analysts say Barack Obama would face steeper odds persuading Congress to authorise more money to recapitalise the banking sector if Mr Geithner was the one making the request. Mr Obama included a $250bn financial sector bail-out item in the budget he announced last month implying that the administration will need up to $750bn more in troubled asset funds.

“I don't think Tim Geithner will last beyond June – he has no credibility with the markets,” says Chris Whalen, managing director of Institutional Risk Analytics, a financial research group. “Given what we already know about the toxic asset purchase plan I very much doubt he is going to turn this situation around.”

Treasury officials could not be reached for comment. But defenders of Mr Geithner, who remains the only official at the Treasury department to have been confirmed by the Senate, say that he is being unfairly singled out as the lightning rod for the growing public anger Wall Street's misuse of emergency taxpayer funds. They say the Obama administration would have a difficult time requesting new bailout funds from Congress, whoever the Treasury secretary was.

US toxic assets plan biggest test for Obama

The Obama administration faces its biggest test today when US Treasury secretary Tim Geithner unveils a plan to take hundreds of billions of dollars of toxic assets off banks' balance sheets.

The Treasury plan, on which the credibility of the administration hinges, will subsidise private investors to buy up such assets through a Public Private Investment Programme it hopes will unfreeze credit markets.

“We can't let our anger over mistakes that happened last year block the fact that we've got to save the economy; we have to fix this problem,” Austan Goolsbee, one of President Barack Obama's top economic advisers, told CBS yesterday, referring to public and congressional outrage about $165m in bonuses paid to executives at insurer AIG.

Another administration official told the FT: “This is not the silver bullet. It is part of our larger programme to increase lending and support economic recovery. Taking troubled assets off bank balance sheets is the next step in the process.”

Other elements in the administration's approach include tests next month to determine banks' recapitalisation needs and principles Mr Geithner is expected to set out this week to cut down on systemic risk to the financial sector. His approach would open the door to regulation of hedge funds and include greater transparency and internal company oversight to align financial executives' pay with institutions' long-term health rather than with short-term performance.

The White House said that the administration's regulatory efforts included “establishing new resolution authority to deal with companies that pose risks to our broader financial system”.

Private money to buy toxic assets is expected to be a small fraction of government resources made available for the purpose.

Christina Romer, chairman of Mr Obama's council of economic advisers, said Treasury funds to buy toxic assets would be bulked up by resources from the Federal Reserve and the Federal Deposit Insurance Corporation. She stressed the role of private financial institutions in helping price toxic assets and preventing taxpayers from paying too much.

Beijing drives consolidation of automobile and steel sectors

Beijing is encouraging its biggest carmakers – Shanghai Automotive Industry Corp, FAW, Dongfeng and Changan – to lead consolidation of its automobile industry.

Detailing plans announced in January to support the automobile and steel sectors in the face of the global financial crisis, the state council, China's cabinet, pledged to increase the degree of concentration in both industries.

The move raises expectations that the government could also start spelling out policy targets for the other eight industries it has pledged to support during the past three months.

The automobile industry plan is likely to attract global attention because the plight of several ailing carmakers in the US and Europe has repeatedly triggered rumours that Chinese carmakers could come to the rescue. Geely, for example, is rumoured to have considered a bid for Ford's Volvo brand. Dongfeng and Changan, which produces Volvo cars in China in a joint venture with Ford, are also thought to have expressed interest in the marque.

While the state council called on carmakers to develop their brands and pledged support for cross-border mergers as one possible means of doing that, the plan's focus is clearly on domestic industry consolidation.

The cabinet's blueprint said it would seek major progress in restructuring the industry during the next three years and wanted “to create two to three big carmaking groups with output of more than 2m vehicles a year, [and] four to five carmaking groups with output of more than 1m vehicles” by the end of 2011.

In addition, the number of players that control a combined 90 per cent share of the market should drop from 14 to 10.

The state council also said it wanted Beijing Automotive Industry, Guangzhou Automobile Group, Chery Automobile and China National Heavy Duty Truck to lead regional consolidation.

Beijing drives consolidation of automobile and steel sectors

Beijing is encouraging its biggest carmakers – Shanghai Automotive Industry Corp, FAW, Dongfeng and Changan – to lead consolidation of its automobile industry.

Detailing plans announced in January to support the automobile and steel sectors in the face of the global financial crisis, the state council, China's cabinet, pledged to increase the degree of concentration in both industries.

The move raises expectations that the government could also start spelling out policy targets for the other eight industries it has pledged to support during the past three months.

The automobile industry plan is likely to attract global attention because the plight of several ailing carmakers in the US and Europe has repeatedly triggered rumours that Chinese carmakers could come to the rescue. Geely, for example, is rumoured to have considered a bid for Ford's Volvo brand. Dongfeng and Changan, which produces Volvo cars in China in a joint venture with Ford, are also thought to have expressed interest in the marque.

While the state council called on carmakers to develop their brands and pledged support for cross-border mergers as one possible means of doing that, the plan's focus is clearly on domestic industry consolidation.

The cabinet's blueprint said it would seek major progress in restructuring the industry during the next three years and wanted “to create two to three big carmaking groups with output of more than 2m vehicles a year, [and] four to five carmaking groups with output of more than 1m vehicles” by the end of 2011.

In addition, the number of players that control a combined 90 per cent share of the market should drop from 14 to 10.

The state council also said it wanted Beijing Automotive Industry, Guangzhou Automobile Group, Chery Automobile and China National Heavy Duty Truck to lead regional consolidation.

Nike

Unable to keep outrunning the recession, sportswear behemoth Nike has shown the first impact of the global slowdown in its fourth-quarter sales. These fell by 2.3 per cent. Impairment charges pushed earnings below expectations, and margins slipped slightly from their lofty level. Even so, the numbers still looked surprisingly healthy for a company that sells premium goods to the mass market. Its “futures” growth, however, – the value of pre-sold merchandise – is pointing to a sharper slowdown in coming months, and management has signalled that there will be more margin pressure coming too.

Nike's great strength has come from cultivation of its brands, masterful logistics and smart cash flow management. Return on invested capital was nearly 25 per cent last year – quite an achievement for a company with net cash and heavy working capital requirements. Even as many of its suppliers and retailers suffer, Nike's relative dearth of hard assets and the ability to charge premium prices for its products have kept it insulated. The question is for how much longer?

Nike is cutting centralised costs to respond to the slowdown, but its peculiar cost structure leaves it exposed if it needs to start discounting. The procurement cost of a $160 pair of basketball shoes made in China is already small and cannot be pared by much. If consumers start trading down to lesser brands that are a fraction of the cost, Nike will have to choose between lower market share or competing on price alone. Neither is an attractive option.

Of course, Nike has navigated past slowdowns well, but this one is sharper and, as some analysts suggest, comes at what may be the tail end of a decade-long “sports bubble.” With spending on every other aspect of sports from tickets to star salaries slumping, the prospect of customers paying substantially less for an endorsement by Tiger Woods or LeBron James must be truly worrying for Nike's management.

UK regulator lays down blueprint for reform

Britain's main financial regulator yesterday launched a bold attempt to seize the initiative in the debate over the future of financial regulation.

The long-awaited review from Lord Turner, chairman of the Financial Services Authority, is probably the most comprehensive attempt yet to set out a detailed blueprint for regulatory reform in the wake of the financial crisis.

Though the FSA's authority is limited to the UK, Lord Turner's report sets out possible responses to a host of international issues, ranging from the appropriate level of capital for banks, changes to accounting standards and the role of credit rating agencies, and the level of pan-European regulation required to preserve a functioning single European market for financial services.

Lord Turner also spelled out the FSA's intention to broaden the scope of regulation to include hedge funds and other entities that posed systemic risks. “If an activity looks like a bank and sounds like a bank, we have to regulate it like a bank,” he said.

The timing of the 120-page report is no coincidence. Published just a fortnight before the G20 group of developed and developing nations are due to meet in London to discuss the response to the crisis, it represents an attempt by Britain to frame the debate over future financial regulation.

However, it is also a recognition of the FSA's inability to act independently in many of these areas. For example, banking regulations will be drawn up by the Basel Committee on Banking Supervision, while the Financial Stability Forum will be responsible for co-ordinating the oversight of large multinational banks.

Most striking, however, is Lord Turner's support for the creation of a new European Union financial body to focus on cross-border supervision and standard-setting. The FSA has long been opposed to the idea of pan-European regulation.

Bashir rallies forces to fight warrant

Since the International Criminal Court indicted Omar al-Bashir on war crimes charges two weeks ago, the Sudanese president has become ever more defiant of the west.

Regional officials now draw parallels to the diplomatic impasse between the west and Saddam Hussein's Iraq.

Reverting to form from the 1990s, Mr Bashir's regime is seeking the support of radical Islamic elements, some of whom are threatening - on Sudanese websites - to conduct a bombing campaign across Europe and the US. It has also expelled aid workers, bringing potentially fatal consequences for refugees in war-torn Darfur.

The United Nations says 1.1m people will be left without food, 1.5m without healthcare and 1m without drinking water. now the regime has threatened western diplomats that if they protest too much they could be thrown out too.

In Europe and the US, officials are aghast. But short of intervening militarily, they have few sticks left with which to beat Mr Bashir's regime. The dilemma is more acute still for Sudan's neighbours in both the Arab world and Africa.

CHINA BAN ON COKE TAKEOVER CRITICISED

China's rejection of Coca-Cola's planned $2.4bn takeover of Huiyuan Juice is based on questionable logic and could be retaliation for previous US protectionism, say competition lawyers.

China's ministry of commerce (Mofcom) stunned bankers, lawyers and investors on Wednesday by blocking the deal, which would have been the largest foreign takeover of a Chinese company. The decision was based on competition grounds, namely that Coke might abuse its dominant position in China's fizzy drinks industry by imposing bundled sales of juice drinks.

Mofcom also said the deal would have had an adverse impact on China's smaller domestic juice makers.

The single-page ruling has prompted a barrage of comment from competition lawyers, who say China is using the anti-monopoly regime – beefed up last August – to thwart politically-sensitive foreign investment.

Lovells, the law firm, said: “There are question marks as to the logic behind such reasoning as is provided in the decision.” Kirstie Nicholson, a Beijing-based lawyer with Lovells, said concerns about bundling could have been dealt with by imposing behavioural conditions or penalties should it occur.

However, some lawyers said other anti-trust regimes have used concern over bundling to try to stop deals, and that China's evolving anti-trust rulings would mature. An example was the European Union trying to block General Electric's takeover of Honeywell in 2001, a ruling that was later overturned in court.

Allen & Overy, the London-based international law firm, criticised the explicit defence of Huiyuan's smaller rivals, noting that “the fundamental goal of competition law is to protect competition, not any select group of competitors”.

John Taladay, partner in the Washington practice of Howrey, said the anti-trust unit within Mofcom was not an independent agency like in the US and the European Union, and was therefore “not immune to political pressure”. He added: “You have to wonder if [the decision] isn't pay-back for resistance that Cnooc faced when it tried to acquire Unocal.” China National Offshore Oil Corp withdrew its 2005 bid for Unocal, the US oil company, after a political backlash in Washington.

CHINA SHORT VIEW

It is a commonplace that the bad news on the world's financial system is already reflected in market prices. That in turn implies that markets should be ready to recover.

But the world is about to get a lot of news about the Chinese economy. China was once central to hopes that the world could muddle through the credit crisis without a recession. Forecasts remain optimistic. So there is a risk of bad news that the market has not priced in.

As 2009 started there was a broad consensus that the worst that could happen to Chinese economic growth would be a annual growth rate of 6 per cent. This would equal its lowest growth rate, according to official figures, of the past two decades. Much less than this would make it harder for the authorities to keep meeting the aspirations of the population.

However, various measures of economic activity suggest that an outright contraction in the Chinese economy is now at least thinkable. To take one widely discussed example, electricity production in November was down 7.8 per cent from a year earlier. This was the sharpest decline on record. Typically, electricity production has grown at more than 10 per cent.

Chinese imports in December were down 21.3 per cent from a year earlier. Falling commodity prices explain some of this. China may also be cutting its reliance on importing parts from other countries in favour of building and assembling everything itself. This might explain the torrid decline in exports for Korea and Taiwan. But it still looks as though China is suffering a significant fall in domestic demand.

Today sees a pile of Chinese data, including inflation, sales, industrial production and growth, which is expected to come in at 6.8 per cent.

With a Chinese economic contraction now thinkable, that data could stoke the fears that already stalk the financial system.

FINANCIAL ALCHEMY FAILS TO HIDE RISK

While western governments argue over how to revive their ailing financial institutions, China's state- controlled banks have been relatively unscathed by the global financial turmoil.

That is partly because Beijing decided a decade ago to set up four bad banks, or asset management companies, to manage toxic assets. The move allowed the country's commercial banks to be transformed quickly into more market-oriented institutions.

“China's banking system is very healthy and has even been able to withstand such a huge global financial crisis,” says Tian Guoli, chief executive of Cinda Asset Management Corporation, the largest and most successful of the bad banks.

However, many analysts say although the establishment of the AMCs cleaned up the state banks, the transferred assets have become hidden risks within the financial system – at a time when Beijing is ordering banks to make huge loans as part of a fiscal stimulus designed to shore up crumbling economic growth.

The banking system's problems started in the late 1970s, when China's leaders began using financial institutions as piggy banks to fund pet projects.

In the wake of the Asian financial crisis in 1997 many of these projects were unable to service their debts and the country's banking system teetered on the brink of collapse.

In 1999 and 2000 China's largest banks transferred a combined Rmb1,400bn ($205bn, €163bn, £144bn) to the AMCs at full face value and in return mostly received 10-year bonds paying 2.25 per cent per annum – a clever piece of financial alchemy that allowed them to turn holes in their balance sheets into interest-bearing assets.

According to government estimates, the AMCs lowered the aggregate non- performing loan ratio at the big commercial banks by 10 percentage points, from well over 30 per cent, and helped lower the debt to asset ratio of the state-owned industrial sector by 30 percentage points.

“The benefit of the Chinese model is that it happened virtually overnight but the full liability went to the government and the taxpayer,” says Charlene Chu, a Beijing-based banking analyst at Fitch Ratings. “That's a little harder to do politically in the west.”

In the wake of the initial bail-out two things quickly became clear. First, there would need to be another large transfer of toxic assets from the banks as more non-performing loans appeared on their books, and second there was no way the AMCs would ever be able to repay the principal on the bonds they had issued to the banks.

“At the beginning there was an unrealistic expectation that they could quickly reduce the magnitude of the problem but they eventually realised the quality of the assets were abysmal,” says Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics, a think-tank, in Washington.

Beginning in 2003, the government carved out another Rmb1,000bn of non-performing loans from the banks and handed them to the AMCs, this time in exchange for a variety of government-backed bonds, often at discounts to their face value. Cinda says it has received about Rmb1,000bn in bad loans. The AMC says it made a profit last year of Rmb1.2bn, compared with combined profits for all four bad banks of Rmb2.3bn.

This is a rare insight into the finances of these entities, which have not released public figures for years but it is unclear how the profits are accumulated, or what the asset base of the AMCs is.

Until three years ago the AMCs were reporting aggregate returns of about 20-22 fen on the renminbi – a 20 per cent to 22 per cent return on the face value of the assets they received from the banks. However, they have since been much less forthcoming.

“These AMCs must by now be massively insolvent because all the better assets have been sold and they have used the proceeds to pay the interest on the bonds they issued,” says Mr Lardy.

CITIC SECURITIES TO EMBARK ON JOINT VENTURE WITH EVERCORE

Citic Securities, China's largest securities company, is teaming up with Evercore Partners, the US investment bank, in a joint venture that will make direct investments and advise clients on both sides of the Pacific.

The new company, Citic Securities International Partners, will be headed by Donald Tang, the former vice-chairman of Bear Stearns.

In forming their new relationship, the two sides are hoping that China's increasing integration with the world economy and financial markets will not be derailed by the meltdown in the markets. China's exports have been hard hit by the consumer- led recession in the west and its economic growth has slowed sharply in recent months.

In addition to providing advice, the new firm plans to raise a $500m private equity fund to provide growth capital and consolidation capital to Chinese companies, with shareholders committing some of the funds and outside investors the rest.

Wang Dongming, Citic Securities' chairman, has long harboured ambitions to transform Citic Securities into a truly international company. Mr. Wang has considered listing Citic Securities outside China, and recruiting expats who can transform the culture of his company into a global player.

Mr Wang, for example, has studied Japanese brokerage firms, which he says never made that transition and whose importance in the world shrunk during Japan's “lost decade”.

The relationship also enables Evercore to build up a presence in Asia commensurate with its growing profile in Latin America and Europe.

NO DIM SUMS

Boasting about size may be poor form and the sign of an arriviste. Yet perhaps China can be forgiven any lapse of decorum. The country now boasts three of the world's top 10 companies by market capitalisation. It has the world's biggest bank, Industrial and Commercial Bank of China, and the world's largest telecoms operator, China Mobile. PetroChina is second only to Exxon, while life assurer China Life is second to none.

Some of this is down to recent market movements. After racking up a terrible performance in 2008, the Shanghai Composite index is up by 17 per cent this year. Thus dual-listed ICBC, worth $180bn based on its Shanghai price (over 70 per cent of the bank is held by the Chinese government), can now buy HSBC twice over and still have enough change for several of the biggest American banks.

Chinese and US banks have switched places in other ways. Remarkably, the US has a bigger proportion of banking assets in state hands and also more red ink. ICBC, by contrast, made more net profits than any other bank in 2007, and earned nearly $14bn in the first nine months of 2008.

Indeed, three of the 20 in 2007 biggest earnings hauls came from Chinese companies. The net profits that China Mobile made then, its latest full year, would buy British Telecom outright, throwing in Telecom Egypt for good measure. Six years ago, the country did not get a look in.

Size, however, can generate its own momentum. Fund managers move in packs, while index trackers have no option but to load up on the likes of ICBC and PetroChina. But size, like sentiment, can turn on a sixpence.

No country knows this better than Japan, home to eight of the 10 biggest companies by market capitalisation in 1989. After all, 20 years ago, the eight were worth $550bn – more than the value of Japan's entire banking and communications sectors today.

WHY SAVING THE WORLD ECONOMY SHOULD BE AFFORDABLE

Can we afford this crisis? Will governments destroy their solvency, as they use their balance sheets to rescue over-indebted private sectors?

The debate, as it has so often been, is between the US and Germany. Thus, in a speech last week, Tim Geithner, US Treasury secretary, noted that, “The IMF has called for countries to put in place fiscal stimulus of 2 per cent of aggregate GDP each year by 2009-10. This is a reasonable benchmark to guide each of our individual efforts. We think the G20 should ask the IMF to report on countries' stimulus efforts scaled against the relative shortfall in growth rates.” Needless to say, no such firm pledge was forthcoming, with Germany particularly resistant.

Nevertheless, a great deal of fiscal stimulus has occurred. This is what readers of recent research on the aftermath of financial crises by Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard would expect. These authors concluded from studying 13 big financial crises that the average rise in real public debt in the three years following a banking crisis was 86 per cent. In some of these cases, the increase was more than 150 per cent*.

So, is there good reason to expect huge increases in public sector indebtedness across the globe, not least in triple A rated sovereign borrowers ? The answer is: yes. If so, does this guarantee defaults of some kind? The answer is: no. In a recent paper, the staff of the International Monetary Fund suggest why these are the right answers**.

By 2012, suggests the IMF, the ratio of gross public debt to gross domestic product could be 117 per cent in Italy; 97 per cent in the US; 80 per cent in France; 79 per cent in Germany; and 75 per cent in the UK. In Japan, still scarred by the legacy of a huge bubble, the ratio could hit 224 per cent. Current forecasts are evidently much higher than those made before the crisis hit.

Yet the jumps in indebtedness are not particularly onerous, provided the willingness of governments to avoid default is not in question. Assume, for example, that the real interest rate these highly rated countries pay is 1 percentage point higher than the long-term growth rate of their economies. Then the requirement for stabilising a ratio of public debt to GDP at 100 per cent is a primary budget surplus (surplus before interest) of just 1 per cent of GDP.

Nevertheless, three counter-

arguments can be advanced.

First, in some cases, primary fiscal deficits are very large. Among bigger advanced countries, this is particularly true for this year – in the US, forecast at minus 9.9 per cent of GDP; Japan and the UK, both forecast at minus 5.6 per cent; and Spain, forecast at minus 4.9 per cent. The primary deficits of France, Germany and Italy are far smaller, at minus 3.6 per cent; minus 1.1 per cent; and plus 1.1 per cent, respectively. So stabilising debt requires large fiscal adjustment in some countries.

Second, the political willingness to curb deficits, by raising taxes or cutting spending, may come into question. This could become a self-fulfilling prophecy, with flight from debt raising interest rates, necessitating ever more costly (and so less plausible) fiscal tightening.

Third, the ultimate rise in indebtedness could be far bigger than the IMF forecasts. This would be consistent with experience. The primary explanation would be that the world economy is embarked on a prolonged balance-sheet deflation, comparable to Japan's in the 1990s.

I would argue against these points.

First, markets are optimistic about the fiscal prospects: expected inflation remains well contained in the US and UK and interest rates on conventional 10-year US and UK government bonds are still below 3 per cent.

Second, the cost of meeting the added burden of ageing is far higher than any plausible cost of the crisis. On IMF forecasts, the present value of the fiscal costs of ageing in the US is 15 times the cost of the crisis.

GRADUATES RETREAT TO RURAL CHINA

Xiao Lisheng had big ambitions when he entered university four years ago. He expected a bright future in an export company in the booming coastal metropolis of Shanghai.

But now, as he prepares to graduate with a degree in international economics and trade, his future looks as if it may lie with the Communist party's educational league in the far-flung and impoverished north-west region of Ningxia.

Faced with the impact of a slowing global economy on its coastal export base and 6m university students set to graduate alongside Mr Xiao this June, China is once again sending young university graduates back to the countryside.

“We encourage graduates to serve in rural areas, taking posts such as village officials, teachers and volunteers in west China,” Yin Weimin, minister of human resources and social security, said last week as he outlined government plans to address unemployment among graduates.

The Communist party has a long tradition of sending young intellectuals into China's vast rural hinterland, often causing terrible suffering and disastrous economic consequences. But Chinese officials and analysts insist that, this time, things are different.

“In the 1950s and during the Cultural Revolution this happened with ideological motives,” says Cai Jiming, head of the Centre for Political Economy at Tsinghua University, who spent three years on a farm himself after graduating from high school in 1975. “If we can find a way to make this benefit both the graduates and the target regions, then it would make economic sense.”

The government has called the unemployment problem among graduates “grave” and made clear that it is almost as worried about the fate of university graduates as it is about the millions of migrant workers who have lost jobs in coastal factories.

For many provincial governments the graduates' woes are presenting an opportunity, and some have been sending delegations to big cities to recruit graduates who are failing to find work elsewhere. At such an event held by the Ningxia government last weekend, close to 1,000 students lined up to apply for more than 300 mostly low-paid jobs in a region many of them would not even have considered moving to a few years ago.

Such is the case with the post Mr Xiao is interviewing for. The Communist party's Educational League sends lecturers around the country to “refresh the enthusiasm for socialism and spread Marxism-Leninism and Mao Zedong thought,” says Gao Yadong, the Ningxia branch head. “A masters degree in philosophy and a patriotic mind” are the main qualifications for the job, which will pay about Rmb20,000 ($2,900, €2,270, £2,100) a year.

But Mr Xiao makes it quite clear that, as far as he is concerned, any job will do. “In past years, 80 per cent of students in their final year would have signed contracts by now, but this year it's only 20 per cent in our class,” he says.

“So the priority right now is to find something with a salary – I can always move on later.”

China Mobile

A day after competition regulators tossed out an inbound acquisition by the world's biggest drinks company, the world's biggest mobile phone company – China Mobile – reiterated that it is on the hunt for outbound deals.

certain bluster is forgivable. CM has yet to feel the full force of China's overhaul of its telecoms sector last May. The carrier posted its slowest annual growth in profit in more than four years on Thursday, but that was caused mainly by the cost of upgrading networks in rural areas – just 30m people, of over 1.3bn, are now out of reach. Total subscribers were up by almost a quarter last year, to 457m – equivalent to adding the population of Greater London every month.

The industry restructuring was a leg-up to the country's two fixed-line operators, China Telecom and China Unicom, which had struggled as consumers embraced wireless.

Both will start 3G services in the first half. While neither has the network quality, the distribution power or the operating efficiency to put a real dent in CM's 73 per cent share of subscribers, or 80 per cent share of revenues, the rivalry comes at a tricky time.

CM's rate of customer additions slowed by just over 10 per cent in the first two months of this year. More worryingly, a key measure of customer elasticity – the extent to which falling tariffs are offset by increased usage – more than halved over 2008.

Still, with a very lightly-geared balance sheet – 8 per cent, versus a global average of about 50 – CM is in a position of undeniable strength. Historically it has had two conditions for deals: a controlling stake, and in an emerging market. Taking 89 per cent of Pakistan's Paktel two years ago ticked both boxes. Now it has dropped the requirement for control, expect rumours of a move on South Africa's MTN to linger.

Investors rush for inflation protection

Commodities prices surged yesterday as investors sought protection against the risk of higher inflation by buying everything from oil and gold to copper and sugar.

Plans by the Federal Reserve to buy $300bn of US government debt triggered the stampede into commodities markets, which had suffered sharp price falls on worries that the world was heading for a depression. For the first time in almost a year, traders looked to oil and other raw materials as a hedge against an unexpected jump in prices.

The benchmark S&P GSCI index, a basket of raw materials, rose 6 per cent as oil prices soared to $51 a barrel, up 7 per cent on the day, to their highest level since December. Copper reached a four-month high.

The switch into commodities was triggered by concern that the US central bank might find it difficult to manage down the country's money supply when its economy turned. That could lead to sharply rising prices for many goods and services.

Hussein Allidina, head of commodities research at Morgan Stanley in New York, said: “Investors are buying commodities as protection against inflation and as a hedge against a weaker US dollar.”

The price rises gained extra momentum from a weakening dollar. The US currency extended its fall against the euro to 4.5 per cent over the past two days, hitting a low of $1.37 per euro.

Gold rose to $960 a troy ounce, up 8 per cent since the Fed's announcement on Wednesday.

CHINA BAN ON COKE TAKEOVER CRITICISED

China's rejection of Coca-Cola's planned $2.4bn takeover of Huiyuan Juice is based on questionable logic and could be retaliation for previous US protectionism, say competition lawyers.

China's ministry of commerce (Mofcom) stunned bankers, lawyers and investors on Wednesday by blocking the deal, which would have been the largest foreign takeover of a Chinese company. The decision was based on competition grounds, namely that Coke might abuse its dominant position in China's fizzy drinks industry by imposing bundled sales of juice drinks.

Mofcom also said the deal would have had an adverse impact on China's smaller domestic juice makers.

The single-page ruling has prompted a barrage of comment from competition lawyers, who say China is using the anti-monopoly regime – beefed up last August – to thwart politically-sensitive foreign investment.

Lovells, the law firm, said: “There are question marks as to the logic behind such reasoning as is provided in the decision.” Kirstie Nicholson, a Beijing-based lawyer with Lovells, said concerns about bundling could have been dealt with by imposing behavioural conditions or penalties should it occur.

However, some lawyers said other anti-trust regimes have used concern over bundling to try to stop deals, and that China's evolving anti-trust rulings would mature. An example was the European Union trying to block General Electric's takeover of Honeywell in 2001, a ruling that was later overturned in court.

Allen & Overy, the London-based international law firm, criticised the explicit defence of Huiyuan's smaller rivals, noting that “the fundamental goal of competition law is to protect competition, not any select group of competitors”.

John Taladay, partner in the Washington practice of Howrey, said the anti-trust unit within Mofcom was not an independent agency like in the US and the European Union, and was therefore “not immune to political pressure”. He added: “You have to wonder if [the decision] isn't pay-back for resistance that Cnooc faced when it tried to acquire Unocal.” China National Offshore Oil Corp withdrew its 2005 bid for Unocal, the US oil company, after a political backlash in Washington.

UK regulator lays down blueprint for reform

Britain's main financial regulator yesterday launched a bold attempt to seize the initiative in the debate over the future of financial regulation.

The long-awaited review from Lord Turner, chairman of the Financial Services Authority, is probably the most comprehensive attempt yet to set out a detailed blueprint for regulatory reform in the wake of the financial crisis.

Though the FSA's authority is limited to the UK, Lord Turner's report sets out possible responses to a host of international issues, ranging from the appropriate level of capital for banks, changes to accounting standards and the role of credit rating agencies, and the level of pan-European regulation required to preserve a functioning single European market for financial services.

Lord Turner also spelled out the FSA's intention to broaden the scope of regulation to include hedge funds and other entities that posed systemic risks. “If an activity looks like a bank and sounds like a bank, we have to regulate it like a bank,” he said.

The timing of the 120-page report is no coincidence. Published just a fortnight before the G20 group of developed and developing nations are due to meet in London to discuss the response to the crisis, it represents an attempt by Britain to frame the debate over future financial regulation.

However, it is also a recognition of the FSA's inability to act independently in many of these areas. For example, banking regulations will be drawn up by the Basel Committee on Banking Supervision, while the Financial Stability Forum will be responsible for co-ordinating the oversight of large multinational banks.

Most striking, however, is Lord Turner's support for the creation of a new European Union financial body to focus on cross-border supervision and standard-setting. The FSA has long been opposed to the idea of pan-European regulation.

WORLD BANK LOWERS FORECAST ON CHINA GROWTH AFTER EXPORT FALLS

The World Bank yesterday lowered its economic growth forecast for China this year to 6.5 per cent, down from 7.5 per cent at the end of last November, after huge falls in exports and shrinking private sector investment.

The downgrade widens the gap between the generally pessimistic forecasts emerging from international economists and estimates published within China, which mainly predict that the country will hit its official government target of 8 per cent growth.

Fewer than a third of 73 Chinese economists surveyed last month by the National Bureau of Statistics said they expected gross domestic product to grow by less than 8 per cent this year. The average forecast was exactly 8 per cent.

Many independent economists say the constant repetition of the government's target could lead officials at lower levels to falsify figures or to try to meet growth targets through wasteful infrastructure projects.

In its quarterly report released yesterday, the World Bank praised China for its efforts to stimulate the economy but warned that exports were likely to shrink this year and that government spending would not entirely replace falling market-based investment.

“We don't see a major rebound happening in China until the world economy rebounds,” said Louis Kuijs, senior economist in the World Bank's Beijing office.

Apart from exports, the other main driver of China's economy in recent years has been real estate investment, which appears to have hit a wall as prices and sales volumes slump.

The World Bank predicts the property market will remain weak “for much of 2009”, limiting the spending power of local governments, which rely heavily on revenues from land sales and bear much of the responsibility for health, education and social security.

According to official figures, local government's income from land transfers fell 20 per cent last year to Rmb960bn ($140bn, €107bn, £100bn).

In order to fund their portion of Beijing's much-vaunted Rmb4,000bn stimulus package, local governments are expected to turn to state-run banks for help, raising fears that the banks will be expected to act as piggy banks for pet political projects.

“Banks should not be pressured to ramp up lending beyond prudent levels,” said the World Bank report. “This would risk creating new [non-performing loans] . . . and would also be seen as rolling back significant progress in moving to more market-based allocation of credit.”

Chinese banks have been largely unscathed by the global financial crisis, but are likely to feel the effects indirectly as recent investments in the export and real estate sectors go bad and companies default on loans.

Despite the problems facing the economy, officials recite the mantra that 8 per cent growth is likely this year, and to make upbeat remarks on an imminent rebound. The optimism appears partly related to a campaign of confidence by Wen Jiabao, the premier, who has repeatedly said that “confidence is more precious than gold and currency” in dealing with the crisis.

FINANCIAL PRESSURE SET TO HARRY F1 CIRCUS

There are only 10 days to go before the Formula One motor racing season begins, with the Australian Grand Prix in Melbourne. But pre-race nerves this year are afflicting the sport as a whole as much as the drivers themselves.

The pressure is coming from two sides. On the one, F1's biggest sponsors – notably struggling financial groups such as Royal Bank of Scotland and ING – are backing away from long-standing financial support in an attempt to cut costs and disassociate themselves from the sport's image of lavish spending.

On the other, income from ticket sales – reflected in the “hosting fees” F1 levies from race organisers – is declining as recession-hit motor racing fans stay at home.

Figures released this month show that the Belgian Grand Prix, which took place last September, made a loss of €3.8m ($4.9m) in 2008. It had an attendance of 52,000 for the race; 10,000 fewer spectators than in 2007. According to some reports, sales for the Australian Grand Prix are 15,000 lower than last year. Even the cheapest F1 tickets of the season – $31 apiece for the Malaysian Grand Prix, compared with an average across all races of $150 – are selling poorly, with sales in Malaysia down 20 per cent year-on-year.

Some GPs have even been dropped altogether, because the finances have stopped adding up. This year, there will be no races in France or in Canada, and Germany has said it can only continue if it is bailed out, although there will be a new one in the oil-rich state of Abu Dhabi.

F1's third big revenue stream, television rights, looks more secure, thanks to multi-year deals, although if more teams follow the example of Honda and pull out of the sport, TV interest could shrink, too.

It all adds up to a squeeze on profits for F1's ultimate owner, CVC, the private equity firm, making it tougher for the company to service its $2.7bn of debt.

CVC owns F1 via the holding company Delta Topco, run by billionaire Bernie Ecclestone. The business was acquired in 2006 in a leveraged buy-out backed by Lehman Brothers and RBS, which subsequently syndicated the debt to other investors.

Debt repayments at Delta Topco totalled $257m in 2007, compared with estimated revenues of $1.3bn.

It is unclear what impact that had on the bottom line of the business, which is Jersey-registered, but Delta 3, the biggest of Delta Topco's subsidiary holding companies, made a loss of $409m, after $230m of debt repayments. The debt matures in 2014.

Overall, some pundits estimate that F1's revenues this year could be down by 20 per cent or more.

In January, Max Mosley, president of F1's governing body, the Fédération Intenationale de l'Automobile (FIA), told a German magazine: “I cannot envisage that Formula One management's [undisclosed] forecast earnings still hold in the economic crisis.”

Some of the most dramatic declines will be in the money coming from commercial backers, particularly in the form of corporate hospitality.

F1's Paddock Club, a glitzy travelling circus of entertainment that provides clients with gourmet banquets, track tours and champagne buffets, costs an average $3,000 per person per day.

In recent years at the Australian GP, BMW has entertained up to 400 clients with its own grandstand and bar and restaurant area costing it close to £450,000 ($634,000). However, the company is axeing this entirely this year.

Fosters is also cutting its spending on the race. ING said its budget for the season would be cut by at least 40 per cent. And RBS will all but eliminate corporate hospitality. Such cutbacks threaten the whole profitability of the Paddock Club business model, given the vast overheads of transporting catering equipment around the world. One of F1's debt holders says: “Although this isn't the largest of F1's revenue streams, it is the most at risk.”

The two troubled banks are also axeing a combined $30m of trackside advertising

GEITHNER FACES CRITICAL TEST WITH TOXIC ASSET PLAN

Tim Geithner, America's beleaguered Treasury secretary, faces a critical test of his credibility when he unveils a much awaited plan to take toxic assets off bank balance sheets – in an announcement that could come as soon as tomorrow.

Mr Geithner, whose initial announcement last month on the troubled asset purchase plan disappointed the market, has become the target of harsh criticism in Washington and on Wall Street with some questioning whether he can deliver.

Speaking on condition of anonymity, several senior Democratic figures questioned whether Mr Geithner would have the credibility with the markets and Capitol Hill to push through a new request for funds. “The more time passes the more convinced I am that Tim Geithner is becoming a liability for the administration,” said one lawmaker.

Analysts say Barack Obama would face steeper odds persuading Congress to authorise more money to recapitalise the banking sector if Mr Geithner was the one making the request. Mr Obama included a $250bn financial sector bail-out item in the budget he announced last month implying that the administration will need up to $750bn more in troubled asset funds.

“I don't think Tim Geithner will last beyond June – he has no credibility with the markets,” says Chris Whalen, managing director of Institutional Risk Analytics, a financial research group. “Given what we already know about the toxic asset purchase plan I very much doubt he is going to turn this situation around.”

Treasury officials could not be reached for comment. But defenders of Mr Geithner, who remains the only official at the Treasury department to have been confirmed by the Senate, say that he is being unfairly singled out as the lightning rod for the growing public anger Wall Street's misuse of emergency taxpayer funds. They say the Obama administration would have a difficult time requesting new bailout funds from Congress, whoever the Treasury secretary was.

China's worries over juice brand may sink $2.4bn Coca-Cola deal

Coca-Cola may abandon its proposed $2.4bn takeover of China's leading juice company after anti-trust regulators signalled it would have to relinquish the China Huiyuan Juice brand after the acquisition, according to people familiar with the matter.

The planned deal, the largest ever foreign takeover of a Chinese company, is the first major test of the country's revamped anti-monopoly regime which was given extra teeth last August. Its failure would be a blow to multi-national companies seeking to make acquisitions in China.

Regulators in Beijing have been assessing the anti-trust implications of the deal since it was announced last September and recently told the US company that approval depended on a number of conditions.

People familiar with the matter said that China's ministry of commerce did not want Coca-Cola to acquire the brand rights of Huiyuan, a Hong Kong-listed company that boasts a 42 per cent share of the domestic market in pure fruit juices.

The demand is regarded by some as a potential deal breaker because Coke offered to pay a huge premium partly on the basis of Huiyuan's strong brand image.

Coke's offer is HK$12.20 a share in cash, almost treble that of Huiyuan's last closing share price prior to the announcement of the deal. The shares closed down 2 per cent yesterday at HK$10.30, reflecting ongoing concerns that the deal will not be completed.

The ministry of commerce also wants Coke to agree to a number of other conditions, including future investments in the country. “If Coke can't own the Huiyuan brand it is difficult to be optimistic about a successful completion of this deal,” said one person close to the matter.

However, others cautioned that a solution acceptable to all sides could yet be reached, although they admitted that time was fast running out. Coke declined to comment.

The ministry this week said that it had until Friday to decide whether to extend the probe, or approve or reject the application. The deal has a “longstop” date of March 23, after which Coke has the right to renegotiate the terms.

The selling consortium comprises Zhu Xinli, Huiyuan founder chairman, who owns 36 per cent of the company and France's Danone, which owns 23 per cent. Warburg Pincus, the US private equity firm, owns 6.8 per cent.

NO DIM SUMS

Boasting about size may be poor form and the sign of an arriviste. Yet perhaps China can be forgiven any lapse of decorum. The country now boasts three of the world's top 10 companies by market capitalisation. It has the world's biggest bank, Industrial and Commercial Bank of China, and the world's largest telecoms operator, China Mobile. PetroChina is second only to Exxon, while life assurer China Life is second to none.

Some of this is down to recent market movements. After racking up a terrible performance in 2008, the Shanghai Composite index is up by 17 per cent this year. Thus dual-listed ICBC, worth $180bn based on its Shanghai price (over 70 per cent of the bank is held by the Chinese government), can now buy HSBC twice over and still have enough change for several of the biggest American banks.

Chinese and US banks have switched places in other ways. Remarkably, the US has a bigger proportion of banking assets in state hands and also more red ink. ICBC, by contrast, made more net profits than any other bank in 2007, and earned nearly $14bn in the first nine months of 2008.

Indeed, three of the 20 in 2007 biggest earnings hauls came from Chinese companies. The net profits that China Mobile made then, its latest full year, would buy British Telecom outright, throwing in Telecom Egypt for good measure. Six years ago, the country did not get a look in.

Size, however, can generate its own momentum. Fund managers move in packs, while index trackers have no option but to load up on the likes of ICBC and PetroChina. But size, like sentiment, can turn on a sixpence.

No country knows this better than Japan, home to eight of the 10 biggest companies by market capitalisation in 1989. After all, 20 years ago, the eight were worth $550bn – more than the value of Japan's entire banking and communications sectors today.

Beijing to boost spending in Africa fund

China is to pump a further $2bn into its African investment fund earlier than planned to snap up opportunities left by the hasty retreat of western investors from the continent.

Since its launch in late 2006, the China-African Development Fund has invested $400m (€309m, £286m) and expects to have spent most of its initial capital of $1bn by the end of the year, as much as two years ahead of schedule, said Chi Jianxin, the fund's chief executive.

Observers of China's flourishing relationship with Africa have noted that Beijing has been known to deliver less than its prodigious promises. Indeed, anecdotal evidence suggests that recent Chinese arrivals on the continent, particularly miners, have been heading home in their droves as commodity prices plunge.

However, speaking ahead of the opening of the fund's first representative office in Johannesburg, the commercial capital of South Africa, the continent's biggest economy, Mr Chi said: “We are moving faster. Because other [investors from] markets are not coming, [African companies] need more money from us.”

The fund was created following the November 2006 Africa-China summit in Beijing, a landmark in China's burgeoning political and economic relationship with a continent that is replete with the minerals it has needed to fuel its growth.

It receives all its capital from the China Development Bank, which had 2,261bn renmimbi ($331bn, €256bn, £236bn) in assets at the end of 2007 and which is directly controlled by the State Council, China's highest decision-making body.

A prospectus lists initial investments in agriculture ventures in Ethiopia, Malawi and Mozambique; a share of a $450m power station in Ghana; and Egyptian, Nigerian and Mauritian industrial zones, among other projects. Mr Chi added that the fund had also invested in Zimbabwe. The fund says the $400m it has spent so far ”will drive Chinese enterprises to make investments of more than $2bn”.

From next year it would embark on a second, $2bn phase of investments, accelerating towards its goal of $5bn, Mr Chi said.

Beijing's critics have attacked its willingness to invest heavily in countries with repressive regimes, citing close ties with Sudan and Zimbabwe. Its supporters accuse its western critics of hypocrisy, pointing to cosy relations between Washington and countries such as Equatorial Guinea, an oil-producer with a poor human rights record.

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