CHINA'S SHOW OF NAVAL POWER CHALLENGES US

China paraded its growing naval strength yesterday, including previously unseen nuclear-powered submarines, in a military demonstration seen as a challenge to the US, the world's leading maritime nation.

To mark the 60th anniversary of the People's Liberation Army navy, a total of 52 navy vessels and aircraft were shown taking part in manoeuvres off the eastern port of Qingdao. As naval delegations from 29 countries watched, Hu Jintao, president, also reviewed 21 foreign naval vessels.

“You could call this the coming-out party of the Chinese navy,” said Bates Gill, director of the Stockholm International Peace Research Institute.

Mr Hu sought to reassure neighbours and other countries that China would neither seek regional hegemony nor enter into an arms race. He pledged more active participation in international missions such as peacekeeping and anti-piracy moves.

China took a big step in this direction late last year by participating in a multinational anti-piracy campaign in the Gulf of Aden.

“Showing what you have can always also act as a deterrent – that's how it's seen in the US,” said Mr Gill. “When the US navy takes an aircraft carrier to Hong Kong, it also tells the Chinese, have a look, you don't want to confront this.”

China was now doing the same and telling the world that its navy was becoming a more capable force.

“As it is developing anti-ship missiles and quieter and more capable submarines, the PLA navy is moving towards the capability of denying the US navy access to certain waters in the region. First and foremost, that will make a potential US intervention over Taiwan riskier and more complicated,” Mr Gill said.

Analysts said the incident in which, according to Washington, Chinese vessels harassed a US navy survey ship in the South China Sea last month was a sign of things to come because the PLA navy's growing clout would increasingly bring it into contact with the US navy on the high seas.

David Lai, a professor at the US Army War College, said in a recent essay that China's efforts to develop its naval strength would be the most controversial part of its military expansion and modernisation.

Advocates of a strong navy “see that China has the capacity to become a global power”, he said.

That aspiration dominated China's domestic presentation of the celebrations yesterday. Xinhua, the official news agency, established a discussion forum on its website where glowing patriotism and hopes of superpower status were the most common view.

Some observers saw the presentation as a sign the Communist party wanted to show an increasingly nationalist public that it was advancing the nation's global interests and status.

Budget to reveal UK's bleak picture

The bleak deterioration in Britain's public finances will be laid bare in today's annual Budget, in spite of attempts by Alistair Darling, chancellor of the exchequer, to put the emphasis on measures which he claims will prepare for the recovery.

Mr Darling is expected to announce government borrowing will hit 12 per cent of gross domestic product for each of the next two years, in effect setting the agenda for a general election which must be held by June 2010.

The opposition Conservatives are already promising an era of austerity in the next parliament with a severe squeeze on public spending, and Mr Darling will today set out the governing Labour party's plans to fill a £175bn (€198bn, $257bn) annual borrowing hole.

Although public spending cuts and tax rises seem inevitable whoever wins the next election, Mr Darling will argue it makes sense to invest now to offset an expected contraction in the economy of more than 3 per cent this year.

Japan set for bond issue of $110bn

Japan is to issue an extra Y10,800bn ($110bn) of government bonds this fiscal year to help it tackle its worst recession since the second world war.

The bonds will fund the bulk of the government's $154bn stimulus plan and will bring total new issuance for the fiscal year starting this month to a record Y44,100bn, a 33 per cent rise on last year.

This comes as governments around the globe are taking on record debt levels to bail out loss-making banks and bolster economies as they attempt to spend their way out of the downturn.

The US is expected to issue about $2,000bn in the fiscal year starting last October, more than double last year. The eurozone governments are set to raise €800bn ($1,050bn) this calendar year, 23 per cent up on 2008.

The UK government in today's annual Budget statement is expected to announce plans to issue £180bn ($270bn) in the 2009/10 financial year, a 25 per cent rise on last year's record levels.

Investors take heart from signs of stabilisation

Wall Street staged a solid rally and European stock markets steadied yesterday as the heightened risk aversion seen in the previous session appeared to ease.

While the underlying mood among equity investors remained cautious – particularly towards the financial sector – markets took heart from further indications that the worst for the global economy might be over.

“Investors' apprehension over the results of the ‘stress tests' for US systemically important financial institutions has been the catalyst for a wave of profit-taking in risky assets across the board,” said Francesco Garzarelli, strategist at Goldman Sachs.

“Nonetheless, signs of growth stabilisation are spreading, and the consensus for growth is forming a bottom.”

US bank stocks rallied as the worst of the fears over the stress tests were soothed by Tim Geithner, the Treasury secretary.

His remarks that the “vast majority” of banks had more capital than needed helped offset some disappointing earnings from the sector and the International Monetary Fund's latest forecast that global writedowns in the sector could total $4,100bn.

Alan Ruskin, chief strategist at RBS, noted that it was only a year ago that the IMF had suggested aggregate losses of $1,000bn.

“Globally the scale of the problem will continue to undermine the monetary transmission mechanism,” Mr Ruskin said. “This is solidly risk-negative in the medium term.”

GEITHNER SAYS RESULTS OF BAIL-OUT ‘MIXED'

US bank rescue efforts are only showing “mixed” signs of success, Tim Geithner, Treasury secretary, conceded yesterday.

Appearing before a congressional oversight panel, Mr Geithner said it was hard to know how the financial markets would have operated without such programmes. Interbank lending, corporate issuance and credit spreads were showing some signs of a thaw in credit, he added. But he said: “To date, frankly, the evidence is mixed.”

His comments came as the International Monetary Fund issued a report warning that global banks and financial institutions would eventually have to write down assets by $4,100bn before stability was restored.

In its global financial stability report, the IMF forecast total writedowns on US assets would reach $2,700bn, up from the $2,100bn estimate it made in January and almost double the forecast in October last year. When loans originated in Japan and Europe were included, the writedowns would hit $4,100bn, it said.

Financial sector shares rallied in New York after Mr Geithner said that the “vast majority” of banks had sufficient capital.

Speaking ahead of stress test results on the 19 biggest US banks due in the next few days, Mr Geithner indicated that the conversion of the government's preferred equity stakes to common equity could prove part of the solution for those that needed reinforcement at the base of the capital structure.

Jeb Hensarling, a member of the panel, said he worried that such a move would convert “Uncle Sam into a control shareholder of many of our largest financial institutions”.

“That risk worries me too,” said Mr Geithner.

But he said the Federal Reserve needed to conclude the stress tests before deciding who needed more capital. Some institutions were likely to raise capital privately while others could need additional support.

Credit concerns over BofA figures

Bank of America beat expectations by posting $4.2bn in first-quarter earnings yesterday, helped largely by Merrill Lynch, the acquisition blamed for the precipitous collapse of BofA's share price over the past six months.

Despite the strong results, BofA shares fell 19 per cent to $8.54 in early-afternoon trading as investors were spooked by the bank's warning of deteriorating credit quality and its swelling provisions for additional credit losses.

“We understand that we continue to face extremely difficult challenges primarily from deteriorating credit quality driven by weakness in the economy and growing unemployment,” said Ken Lewis, BofA chief executive.

For the quarter, Merrill contributed $3.7bn in net income, and BofA also recorded a $1.9bn pre-tax gain on the sale of China Construction Bank shares.

Chinese shares boosted by Wen's comments

Shanghai shares on Monday reached their highest since the Olympics, leading the region higher as optimistic comments by Wen Jiabao, China's premier, helped momentum in the market.

The Shanghai Composite Index gained 2.1 per cent to 2,557.456, the highest since August 8, led by the mainland's larger companies, including banks.

Speaking at the Boao forum over the weekend Mr Wen said that the country's stimulus package was paying off and that the economy was turning a corner.

China Merchants Bank gained 2.2 per cent to Rmb5.10, while Shanghai Pudong Development Bank gained 2.3 per cent to Rmb22.54. Sinopec rose 4.2 per cent to Rmb9.97 and Cnooc rose 2.2 per cent to Rmb17.45.

Airlines rose on local reports that ticket prices will increase under a new pricing scheme. China Southern gained 5.9 per cent to Rmb6.33. In Hong Kong, China Southern rallied 14 per cent to HK$2.03 and China Eastern gained 16.9 per cent to HK$1.45.

In Hong Kong, other shares benefited from the mainland optimism, and the Hang Seng closed 1 per cent higher at 15,750.91. Ping An Insurance gained 3.3 per cent to HK$52.70 and Bank of China rose 5 per cent to HK$2.95.

China rules out pursuit of African farmland

China has said it will not join the growing trend of outsourcing food production by investing in overseas farmland, particularly in Africa, expressing doubts that such deals could improve its food security.

Niu Dun, China's deputy agriculture minister, said yesterday that Beijing preferred to depend on its own land to maintain self-sufficiency in grain, distancing the country from nations such as Saudi Arabia and South Korea, which are investing in land overseas.

“We cannot rely on [investments in] other countries for our own food security,” Mr Niu told the Financial Times in an interview at the Group of Eight's first meeting on agriculture. “We have to depend on ourselves,” he said in the first comments on the subject by a senior Chinese policymaker.

As the world's biggest agricultural economy and its largest consumer and producer of cereals, any decision by China to invest in African arable land would have large implications. But Mr Niu rejected any move in that direction. “We are in a different situation to other countries, for example South Korea,” he said.

The pursuit of foreign farmland signals how countries are seeking to boost their food security after last year's spike in agricultural commodities prices and trade restrictions led them to believe they could not rely on the global food market.

China's comments were made as the World Bank told the FT on the sidelines of the conference that it planned to publish a code of conduct for investing in overseas farmland as soon as next month. It wants to “avoid pitfalls” in what a senior bank official described as a “quite significant” new investment trend.

China rules out pursuit of African farmland

China has said it will not join the growing trend of outsourcing food production by investing in overseas farmland, particularly in Africa, expressing doubts that such deals could improve its food security.

Niu Dun, China's deputy agriculture minister, said yesterday that Beijing preferred to depend on its own land to maintain self-sufficiency in grain, distancing the country from nations such as Saudi Arabia and South Korea, which are investing in land overseas.

“We cannot rely on [investments in] other countries for our own food security,” Mr Niu told the Financial Times in an interview at the Group of Eight's first meeting on agriculture. “We have to depend on ourselves,” he said in the first comments on the subject by a senior Chinese policymaker.

As the world's biggest agricultural economy and its largest consumer and producer of cereals, any decision by China to invest in African arable land would have large implications. But Mr Niu rejected any move in that direction. “We are in a different situation to other countries, for example South Korea,” he said.

The pursuit of foreign farmland signals how countries are seeking to boost their food security after last year's spike in agricultural commodities prices and trade restrictions led them to believe they could not rely on the global food market.

China's comments were made as the World Bank told the FT on the sidelines of the conference that it planned to publish a code of conduct for investing in overseas farmland as soon as next month. It wants to “avoid pitfalls” in what a senior bank official described as a “quite significant” new investment trend.

Zhong Wang IPO to be marker

The Hong Kong listing of China Zhong Wang, a maker of aluminium products, could raise $1.6bn and become the world's biggest initial public offering since last summer, according to people familiar with the matter.

The planned IPO is easily the largest since the onset of the global financial crisis last September and its progress over the next few weeks will be scrutinised by market participants eager for signs of renewed investor appetite for new issues.

Privately-held Zhong Wang plans to sell 1.4bn shares, or 26 per cent of its enlarged share capital, at HK$6.80-HK$8.80 and could also issue a further “greenshoe” allocation – shares in excess of the original amount offered – depending on investor demand.

If successful, Zhong Wang would become the first company globally this year to raise more than $1bn in an IPO and potentially eclipse the $1.57bn raised by China South Locomotive in August 2008.

Zhong Wang on Monday kicked off a 10-day global investor roadshow and aims to price its shares on April 30, ahead of an expected May 8 listing. It is being advised by UBS, JPMorgan and China's Citic Securities.

According to Thomson Reuters, the biggest listing this year is Mead Johnson, a US paediatric nutrition company, which raised $828m in February on the New York Stock Exchange.

Zhong Wang, based in the north-eastern province of Liaoning, is a leading maker of products such as window frames and railcar components for customers such as China Railway Group.

The company is expected to benefit from Beijing's $585bn economic stimulus package.

The price range values the company at up to 13.5 times forecast 2009 profit, according to people familiar with the matter.

The IPO comes as stock markets show tentative signs of recovery, fuelling a greater risk appetite among investors.

27bn M&A deals in a day

The market for mergers and acquisitions sprung back to life on Monday after deals totalling more than $27bn were announced, with more than half of their total value paid in cash.

After months of deal inactivity, Oracle agreed to buy Sun Microsystems for $7.4bn; GlaxoSmithKline paid $3.6bn to buy Stiefel Laboratories; and PepsiCo offered $6bn in cash and stock to buy out shareholders of its two biggest bottlers.

Bankers said the deals signalled improving business confidence and market conditions for transactions, but cautioned that the market still had a long way to go before it could reach the levels of activity seen during the recent debt boom.

William Vereker, co-head of investment banking at Nomura, said: “Companies are taking advantage of an improvement in markets to execute on strategic transactions which have been in the pipeline. But confidence is still fragile and much will depend on how markets behave over the coming months before M&A volumes increase meaningfully.”

Others said it was encouraging to see deals being struck across several industry sectors. That contrasts with the first quarter which was dominated by the pharmaceuticals industry – one of the few that is relatively stable and has strong cash flows. Pharmaceutical companies have also been forced to consolidate as they come under threat from patent expiries and generic rivals.

However, the value and volume of worldwide deals so far this year remain well below the levels seen during the recent M&A and debt boom. In the year to date, worldwide M&A is down a third to $659.5bn from a high in 2007 when the value of global deals reached $1,424.3bn – the highest year to date total on record, according to Dealogic.

Banks told bail-out repayments must be in US economic interest

Strong banks will be allowed to repay bail-out funds they received from the US government but only subject to a test to determine whether such a move is in the national economic interest, a senior administration official has told the Financial Times.

“Our general objective is going to be what is good for the system,” the senior official said. “We want the system to have enough capital.”

His comments come as Goldman Sachs, JPMorgan Chase and other relatively strong banks are pressing to be allowed to repay their bail-out funds. Yesterday, Larry Summers, President Barack Obama's top economic adviser, told NBC's Meet the Press that repayments could eventually help the government provide further resources to help the sector. Such a move could also allow healthier institutions to differentiate themselves from weaker banks and free them from constraints on executive pay, and other activities, that come with bail-out money.

China demand helps soyabeans hit high

Soyabeans jumped into the spotlight for commodity investors this week with prices reaching their highest levels of the year amid voracious demand from China, production problems in Argentina and rapidly declining global stocks.

CBOT May soyabeans rose 5.3 per cent to $10.60 a bushel this week after reaching a six-month high of $10.73 during Friday's session

Dealers note that open interest (active positions) has risen strongly as capital flows into the market in anticipation of further price gains. China, the world's largest importer, is likely to extend a government buying programme for domestically produced soyabeans for two months from April as it remains about 1m tonnes short of its 6m-tonne target.

Chinese traders have been active in both the Brazilian and US markets this week as imported soyabean costs remain lower than the government's buying price for domestic soyabeans.

In Argentina, the soyabean crop is forecast to fall almost 20 per cent this year owing to drought and pests, raising pressure on US supplies. US stocks are expected to fall below 1m bushels by the end of the current crop year and some traders see further price increases as inevitable to ration demand.

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New English daily will test foreigners' trust in China

China today begins arguably the first test case of whether the country's state-owned and state-censored media can win the trust of a foreign readership as Global Times, one of the country's best-selling newspapers, launches an English-language version.

Global Times claims that its English edition, to be published today for the first time, will offer a whole new experience compared with China Daily, the country's only other national English-language paper.

“China Daily speaks for the government. We will be the voice of the people,” said Hu Xijin, Global Times editor-in-chief, in an interview with the Financial Times.

That is a stretch, for Global Times is an affiliate of the People's Daily, the Communist party's mouthpiece.

Mr Hu insists that will not matter, however, and points to the editorial profile and commercial success of his Chinese-language paper. “For the English edition, making it commercially viable is also the first priority.”

The Chinese edition of Global Times sells more than 1m copies a day by focusing on international news and keeping its coverage of the daily appearances of state and party leaders to a minimum.

The English version of Global Times will focus on China rather than international news. “But our style and our stance will not change,” says Mr Hu.

Part of his formula for success has been to appeal to China's new nationalism, giving big play to advocates of military expansion and to hardline criticism of the west.

One of the new paper's dummies features a front page story with a call for China not to listen to the US in the handling of the North Korea crisis.

“Indeed we found the perceived nationalism to be a problem during our test run,” said Mr Hu. “Maybe we have to adjust the way we express ourselves.”

The bigger challenge, however, will be to convince foreign readers of China's side of the story.

Despite his insistence that this is a commercial project, Mr Hu hopes to receive some of the government funds for the international propaganda plan. “We deserve those because we also serve the public by helping China communicate with the world.”

The paper will start with a 100,000 circulation printed in five cities in China. Once the new venture is on track, distribution in the US is planned.

MEN BEAR THE BRUNT OF JOBS LOST IN RECESSION

The US recession has opened up the biggest gap between male and female unemployment rates since records began in 1948, as men bear the brunt of the economy's contraction.

Men have lost almost 80 per cent of the 5.1m jobs that have gone in the US since the recession started, pushing the male unemployment rate to 8.8 per cent. The female jobless rate has hit 7 per cent.

This is a dramatic reversal of the trend over the past few years, where the rates of male and female unemployment barely differed, at about 5 per cent. It also means that women could soon overtake men as the majority of the US labour force.

“It's almost like a snow globe, the economy's been turned over and we're watching it settle in different ways,” said Gary Field, founder of Career Gear, a non-profit organisation that helps low-income men apply for jobs. He has seen referrals rise 35 per cent.

Men have been disproportionately hurt because they dominate those industries that have been crushed: nine in every 10 construction workers are male, as are seven in every 10 manufacturing workers. These two sectors alone have lost almost 2.5m jobs. Women, in contrast, tend to hold more cyclically stable jobs and make up 75 per cent of the most insulated sectors of all: education and healthcare.

“It shields them a little bit and softens the blow,” said Francine Blau, a labour market economist at Cornell University. “I think we are going to see this pattern until the recovery.”

The widening gap between male and female joblessness means many US families are solely reliant on the income the woman brings in. Since women earn on average 20 per cent less than men, that is putting extra strain on many households.

US airs fear of hunger causing world unrest

A top US agriculture official has warned that unless countries take immediate steps to sharply boost agricultural productivity, food output and reduce hunger then the world risks fresh social instability.

In an interview with the Financial Times, Tom Vilsack, US secretary of agriculture, indicated that food security and global stability were tied, in a sign that Washington's worries about the global food crisis go well beyond its humanitarian implications.

“This is not just about food security, this is about national security, it is about environmental security,” he said on the sidelines of the first meeting of the Group of Eight ministers of agriculture. Although the US has in the past talked about the links, Barack Obama, US president, and his team have made it a priority, officials said.

Last year's spike in food prices caused riots in about 30 countries, from Haiti to Bangladesh. Leading agricultural commodity exporters, including India and Argentina, imposed bans on overseas sales of food products. “I can figure out there are only three things that could happen if people do not have food: people could riot, that they have done, people migrate to places where there is food, which creates additional challenges, or people die,” said Mr Vilsack.

The G8 meeting, which ends today,is expected to release a communiqué highlighting a political consensus to raise global food output and investment in developing countries.

A draft of the communiqué said the world was “very far from reaching” the United Nations' goal of halving the number of people facing chronic hunger by 2015, in the clearest admission yet by leading countries of the failure. This came after the group reviewed what it called “alarming data” on malnourishment. The UN told ministers that for the first time more than 1bn people went hungry every day and that this was set to rise this year due because of persistently high food prices and the economic crisis.

Despite Mr Vilsack's comments, the communique is not expected to produce any concrete measures or financial initiatives to resolve in the short-term the problems he highlighted

The charity Oxfam called the meeting “another nail in the coffin of the goal to reduce world hunger”.

Pyongyang calls rare direct talks with South Korea

North and South Korea are tomorrow to hold rare direct talks, offering hopes of a detente that could defuse tensions that have worsened since Pyongyang's launch of a long-range rocket earlier this month.

North Korea requested the meeting but has not specified the core issue it sought to discuss, saying only that it wanted to deliver an “important message”.

Tensions on the peninsula are at their highest for a decade after Pyongyang riled the United Nations by firing a long-range rocket over Japan, expelling nuclear inspectors and vowing to restart a reactor that makes weapons-grade plutonium.

The meeting will be in Kaesong, a South Korean investment enclave inside North Korea. Pyongyang says it also wants to discuss the trade zone and the choice of venue has led some in the South Korean media to speculate its neighbour could use a detained South Korean worker at Kaesong, arrested three weeks ago on charges of encouraging defection, as leverage. North Korea also holds two US journalists arrested filming near the Chinese border.

The communist state's offer of dialogue has wrong-footed Lee Myung-bak, the conservative South Korean president. He postponed an announcement due at the weekend that Seoul would join the Proliferation Security Initiative, a US-led effort to limit the spread of weapons of mass destruction.

Investors struggle for direction on mixed data

Equity markets put in mixed performances yesterday as investors sifted through the latest batch of economic and corporate reports for signs of recovery.

The day got off to an apparently gloomy start with news that Chinese gross domestic product growth in the first quarter had slowed to its lowest level since records began in 1992.

But most economists took a broadly optimistic view of the figures. “There are signs that the [Chinese] stimulus measures are starting to pay off,” said Jay Bryson at Wachovia. “The Chinese economy probably bottomed in the first quarter and growth should strengthen over the next few quarters.”

But Jonathan Loynes, at Capital Economics, was more cautious. “It seems wishful thinking to conclude, as many are, that China is on the cusp of a rapid rebound,” he said.

“Stabilisation so far is the result of loan-fuelled demand growth – but with officials already concerned that overzealous lending risks stoking asset bubbles and undermining financial sector stability, this will probably not continue.”

There was grim news from the eurozone as industrial production slumped in February – although once again analysts found room for optimism.

“Industrial output is likely to fall at an even faster pace in the first quarter than the record-breaking fall that we saw in the fourth quarter,” said Nick Kounis at Fortis Bank. “However, the pace of contraction should ease significantly in the second quarter as the pace of de-stocking eases and as global demand starts to regain its footing. We should see clearer signs of this in next week's business surveys for the month of April.”

In the US, indications that the housing market might have finally troughed were followed up with news that initial jobless claims had dropped to their lowest level since late January – although continuing claims soared. Meanwhile, the contraction in manufacturing activity in the US mid-Atlantic region slowed this month, according to the Philadelphia Federal Reserve.

“The Philly Fed data definitely play with the grain of other economic numbers that suggest the pace of economic decline is slowing materially,” said Alan Ruskin at RBS.

“Nonetheless, the overall index is still very weak as are most subcomponents even if they have improved substantially from the month before.”

By midday in New York, the S&P 500 had managed to rise 0.2 per cent but the Dow Jones Industrial Average was weaker.

By contrast, the pan- European FTSE Eurofirst 300 index rose 1.6 per cent to close above the 800 level for the first time in two months. In Tokyo, the Nikkei 225 Average inched up 0.1 per cent.

CITI RECORDS FIRST PROFIT IN SIX QUARTERS

Citigroup reported its first profit in six quarters, joining rivals in benefiting from a rise in trading activity.

The US bank said on Friday it made a net profit of $1.6bn compared with a net loss of $5.1bn a year earlier, marking its highest earnings since the second quarter of 2007. Revenue doubled to $25bn amid a boom in trading fixed income and equities. Writedowns of toxic assets were a fraction of last year's in part because of a change in fair-value accounting rules.

The results beat market expectations and Citi shares were up 2 per cent at $4.09 in early trading.

“While we and the industry face challenges in the coming quarters as we work through the weak economy, we will remain focused on strengthening the Citi franchise,” Vikram Pandit, chief executive, said in a statement. “We will continue to reduce our legacy risk, aggressively manage expenses and improve efficiency.”

Citigroup, which needed billions of dollars in state aid after huge losses on mortgage-backed securities, in February agreed to give a 36 per cent stake to the government as part of its partial nationalisation.

Despite its return to net profitability, the bank recorded a loss per share of 18 cents, reflecting a reset in the price of convertible preferred stock in January. This compared with a loss of $1.08 a share in the first quarter of last year. The bank's Tier 1 capital ratio, a key measure of financial strength, was about 11.8 per cent, up from 7.7 per cent last year.

JPMorgan keen to throw off state aid shackles

Jamie Dimon yesterday expressed JPMorgan Chase's desire to be free from government intervention, calling the US Treasury's toxic assets plan “irrelevant” to his bank and saying the lender could immediately repay $25bn in federal aid without raising new capital.

The chief executive's comments underscore the belief at healthier banks, such as JPMorgan and Goldman Sachs, that severing financial ties with the government would give them an edge on weaker rivals.

However, JPMorgan's eagerness to repay the government and unwillingness to participate in the toxic asset plan could deepen investor fears of a polarisation of the US banking sector with some banks recovering and others, such as Citigroup and Bank of America, remaining mired in the crisis.

After JPMorgan reported strong first-quarter results driven by record investment banking profits, Mr Dimon said that being a recipient of government funds was “a scarlet letter” that had brought banks unwanted political and regulatory constraints.

He said his bank could repay “tomorrow” the government aid it received last year. But, unlike Goldman, which raised $5.5bn this week to help repay its $10bn capital injection, JPMorgan needed no extra capital.

JPMorgan keen to throw off state aid shackles

Jamie Dimon yesterday expressed JPMorgan Chase's desire to be free from government intervention, calling the US Treasury's toxic assets plan “irrelevant” to his bank and saying the lender could immediately repay $25bn in federal aid without raising new capital.

The chief executive's comments underscore the belief at healthier banks, such as JPMorgan and Goldman Sachs, that severing financial ties with the government would give them an edge on weaker rivals.

However, JPMorgan's eagerness to repay the government and unwillingness to participate in the toxic asset plan could deepen investor fears of a polarisation of the US banking sector with some banks recovering and others, such as Citigroup and Bank of America, remaining mired in the crisis.

After JPMorgan reported strong first-quarter results driven by record investment banking profits, Mr Dimon said that being a recipient of government funds was “a scarlet letter” that had brought banks unwanted political and regulatory constraints.

He said his bank could repay “tomorrow” the government aid it received last year. But, unlike Goldman, which raised $5.5bn this week to help repay its $10bn capital injection, JPMorgan needed no extra capital.

IMF expects ‘slow and weak' recovery

Recovery from the global economic downturn is likely to be “slow and weak”, even if governments pull out all the stops on fiscal stimuli, monetary policy and financial sector repair, the International Monetary Fund said yesterday.

It said monetary policy had not been very effective in combating recessions associated with financial crises in the past, probably because of the damage to the financial sector. By contrast, fiscal stimuli by countries with moderate debt levels had proved to be “particularly helpful” in fighting such downturns.

“Governments can break the negative feedback between the real economy and financial conditions by acting as spender of last resort,” the IMF said.

But this strategy may not work for countries with high levels of debt, the fund said, weighing into a debate that has divided the pro-stimulus US administration and deficit hawks in Europe.

Beijing struggles to prop up growth

China's economy grew 6.1 per cent in the first quarter – the lowest year-on-year figure since quarterly gross domestic product data was first published in 1992 – as Beijing struggled to prop up activity in the face of the global crisis.

The increase was down from 10.6 per cent growth in the same period a year earlier and 9 per cent for the whole of 2008 but aggressive government stimulus measures begun in the fourth quarter last year have started to yield signs of recovery.

The figure was “indeed quite an achievement” against the background of the worsening global crisis and recession in many of the developed economies that China relies on to buy its exports, said Li Xiaochao, spokesman for the National Bureau of Statistics.

Industrial production growth accelerated 8.3 per cent in March and 5.1 per cent in the first quarter from a year earlier, according to Mr Li.

But aggregate profits at large Chinese enterprises fell 37.3 per cent in the first two months from a year earlier and industrial use of electricity – which is usually closely correlated to industrial production actually fell 8.38 per cent in the first quarter from a year earlier – according to the China Electricity Council.

Mr Li said he had no explanation for the discrepancy between falling power consumption and rising industrial production but insisted that both figures were accurate and the issue required “further study”.

Rapid cooling in the Chinese economy has been led by a collapse in exports and private sector investment. This has prompted the government to fast-track infrastructure projects and spending programmes, and order state-run banks to open the credit taps to flood the system with liquidity.

Although there is still little evidence of new private sector investment, the government's efforts have led to a rebound in investment figures and show signs of stimulating wider demand in the economy.

Sun Mingchun, an economist at Nomura Securities, said economic data released yesterday “showed that the economy has gained significant momentum since February”.

Investors struggle for direction on mixed data

Equity markets put in mixed performances yesterday as investors sifted through the latest batch of economic and corporate reports for signs of recovery.

The day got off to an apparently gloomy start with news that Chinese gross domestic product growth in the first quarter had slowed to its lowest level since records began in 1992.

But most economists took a broadly optimistic view of the figures. “There are signs that the [Chinese] stimulus measures are starting to pay off,” said Jay Bryson at Wachovia. “The Chinese economy probably bottomed in the first quarter and growth should strengthen over the next few quarters.”

But Jonathan Loynes, at Capital Economics, was more cautious. “It seems wishful thinking to conclude, as many are, that China is on the cusp of a rapid rebound,” he said.

“Stabilisation so far is the result of loan-fuelled demand growth – but with officials already concerned that overzealous lending risks stoking asset bubbles and undermining financial sector stability, this will probably not continue.”

There was grim news from the eurozone as industrial production slumped in February – although once again analysts found room for optimism.

“Industrial output is likely to fall at an even faster pace in the first quarter than the record-breaking fall that we saw in the fourth quarter,” said Nick Kounis at Fortis Bank. “However, the pace of contraction should ease significantly in the second quarter as the pace of de-stocking eases and as global demand starts to regain its footing. We should see clearer signs of this in next week's business surveys for the month of April.”

In the US, indications that the housing market might have finally troughed were followed up with news that initial jobless claims had dropped to their lowest level since late January – although continuing claims soared. Meanwhile, the contraction in manufacturing activity in the US mid-Atlantic region slowed this month, according to the Philadelphia Federal Reserve.

“The Philly Fed data definitely play with the grain of other economic numbers that suggest the pace of economic decline is slowing materially,” said Alan Ruskin at RBS.

“Nonetheless, the overall index is still very weak as are most subcomponents even if they have improved substantially from the month before.”

By midday in New York, the S&P 500 had managed to rise 0.2 per cent but the Dow Jones Industrial Average was weaker.

By contrast, the pan- European FTSE Eurofirst 300 index rose 1.6 per cent to close above the 800 level for the first time in two months. In Tokyo, the Nikkei 225 Average inched up 0.1 per cent.

IMF expects ‘slow and weak' recovery

Recovery from the global economic downturn is likely to be “slow and weak”, even if governments pull out all the stops on fiscal stimuli, monetary policy and financial sector repair, the International Monetary Fund said yesterday.

It said monetary policy had not been very effective in combating recessions associated with financial crises in the past, probably because of the damage to the financial sector. By contrast, fiscal stimuli by countries with moderate debt levels had proved to be “particularly helpful” in fighting such downturns.

“Governments can break the negative feedback between the real economy and financial conditions by acting as spender of last resort,” the IMF said.

But this strategy may not work for countries with high levels of debt, the fund said, weighing into a debate that has divided the pro-stimulus US administration and deficit hawks in Europe.

JPMorgan keen to throw off state aid shackles

Jamie Dimon yesterday expressed JPMorgan Chase's desire to be free from government intervention, calling the US Treasury's toxic assets plan “irrelevant” to his bank and saying the lender could immediately repay $25bn in federal aid without raising new capital.

The chief executive's comments underscore the belief at healthier banks, such as JPMorgan and Goldman Sachs, that severing financial ties with the government would give them an edge on weaker rivals.

However, JPMorgan's eagerness to repay the government and unwillingness to participate in the toxic asset plan could deepen investor fears of a polarisation of the US banking sector with some banks recovering and others, such as Citigroup and Bank of America, remaining mired in the crisis.

After JPMorgan reported strong first-quarter results driven by record investment banking profits, Mr Dimon said that being a recipient of government funds was “a scarlet letter” that had brought banks unwanted political and regulatory constraints.

He said his bank could repay “tomorrow” the government aid it received last year. But, unlike Goldman, which raised $5.5bn this week to help repay its $10bn capital injection, JPMorgan needed no extra capital.

GM manoeuvres to protect parts suppliers in event of bankruptcy

General Motors is prepared to argue that hundreds of its suppliers are “critical vendors” who require timely payments if it seeks bankruptcy protection, setting the stage for what would be the most sweeping attempt ever to win special treatment for such contractors, people close to the matter say.

Companies often request special treatment for a limited number of suppliers as part of bankruptcy petitions. Bankruptcy experts say GM would stand a good chance of winning protection for more suppliers than is usual because of the large number that provide “just-in-time” car parts to the company.

“On its face, the justification for critical trade appears very strong here, as strong if not stronger than in most other cases,” said James Sprayregen, a bankruptcy partner at Kirkland & Ellis. “It's hard to see how it's going to be in anybody's interest to shut the supply chain down.”

Executives at Rio face wrath of investors

Rio Tinto executives faced disgruntled shareholders yesterday with conciliatory attention as they indicated that compromises were not out of the question on the terms of the miner's fund-raising deal with Chinalco.

Rio had redoubled efforts to listen to shareholders, said Paul Skinner and Tom Albanese, chairman and chief executive respectively, during three hours that included shareholders accusing Rio of “selling off part of the company silver”, being “totally unreasonable to agree to forget investors' pre-emption rights” and involving the company in a “strategic mire”.

Rio's shareholder base remains divided two months after the company proposed to raise $19.5bn from Chinalco.

It will receive part of those funds by selling asset stakes to Chinalco, and another part by offering Chinalco a bond that the Chinese group will later convert to shares, enhancing its position as Rio's largest shareholder.

A point of contention for many UK shareholders remains their exclusion from the bond, which not only converts to equity but pays a 9 per cent coupon.

Asked if there was room for compromise with shareholders on the bond offer, Mr Skinner said it was too early to speculate. But he added: “We hope to be in a position to offer something that pleases everyone.”

Any changes to the deal terms would require assent from Chinalco. A person close to its thinking has indicated that the Chinese miner is more flexible on bond terms being altered than asset stakes being changed.

Rio executives implied there would be a shareholder listening campaign in the final months before the Australian government rules on the Chinalco deal this summer, a precursor to Rio shareholders voting to approve or reject it in a special meeting.

A softened tone about the deal is new to Mr Skinner, who will soon leave the chairmanship. The commodities boom made Rio very profitable and inspired it to pay $38bn for alumin

US prices drop for first time since 1955

Prices in the US fell in the year to March, marking the first annual decline since 1955 and easing fears that aggressive government stimulus measures could kick-start inflation.

The drop in prices could ease pressure on consumers who have seen their wealth savaged by the economic downturn, but companies remain under severe pressure to cope with eroding demand.

Official figures revealed separately yesterday showed industrial production plunging 12.8 per cent in the year to March while manufacturing output fell at the fastest rate since the end of the second world war.

Consumer prices were down by 0.4 per cent year-on-year, the labour department said yesterday. Last month prices fell 0.1 per cent owing to weak energy and food prices following two months of increases.

The monthly figure trailed the 0.1 per cent rise economists had expected and compared with a 0.4 per cent increase in February.

The drop in prices could renew fears of deflation, which were stoked after prices were flat or declined during the final five months of 2008. As the economic recession deepened in the second half of last year companies slashed prices to clear stocks.

UBS losses trigger jobs cull

UBS confirmed investors' worst fears yesterday as it unveiled an estimated loss of almost SFr2bn ($1.75bn) for the first quarter and a cull of more than 11 per cent of its workforce.

The figures, which were worse than market expectations, punctured growing optimism about a recovery in global banking stocks after this week's better than forecast results from Goldman Sachs, and reminded investors of the considerable risks still confronting big banks in the credit crisis.

The results were delivered by the bank's new chief executive, Oswald Grübel, the veteran Credit Suisse boss who emerged from retirement to run UBS just seven weeks ago.

UBS said it expected to lose about SFr3.9bn through writedowns on remaining illiquid positions and credit losses. The figure took its total writedowns to more than $50bn since the start of the credit crisis and included a final SFr300m valuation adjustment on the SFr39bn package of toxic assets transferred last year to the Swiss National Bank.

The expected loss would result in a 1 percentage point reduction in the bank's Tier 1 capital ratio from the 11 per cent reported at the end of December.

The group signalled further big job cuts to adjust to reduced business, with 8,700 jobs to go by 2010. That would lower the total workforce to 67,500 – down almost 16,000 from the early 2008 peak of more than 83,000. Mr Grübel said the layoffs and other savings would lower costs by SFr3.5-4bn by the end of next year, compared with 2008.

He gave no details of which jobs would go, but warned not even the core Swiss market would be spared. Although previous cuts had been focused on investment bankers in New York and London, about 2,500 jobs losses were expected in Switzerland this time.

He reaffirmed the company's commitment to its three core businesses of private banking, investment banking and asset management, but clearly stressed the first of the three. “We see no reason to question the fundamental attractiveness of our integrated business model,” he said.

Data warn against grasping at green shoots of recovery

Yesterday's news that US retail sales fell 1.1 per cent in March is a blow to the idea that green shoots in the world economy herald the start of recovery.

The report is still consistent with the idea that the rate of decline has slowed from the precipitous pace seen in the final months of 2008, when it looked as if the world economy was falling off a cliff.

But it offers a reminder that the economy could continue to decline at a slower pace for some time and that the shape of the eventual recovery remains uncertain. There remains a risk of an extended period of weak growth punctuated by periods of contraction, as seen in Japan in the 1990s.

“The sense of a ball falling off the table,” is drawing to a close, Lawrence Summers, director of the White House National Economic Council, said last week. But “how strong, how rapid the turn will be – that is a less clear question”.

The green shoots story is pegged on an inventory cycle. Production fell so sharply globally in late 2008 that it is now running below final sales.

That is allowing companies to liquidate excess inventories. As ratios of inventories to sales return to more normal levels, they are likely to increase output again – and employment should follow, with a lag.

Since the downswing of the inventory cycle was unusually brutal, the inventory-led element of the upswing could be quite vigorous too.

However, this is not a normal inventory-led business cycle. It combines a financial crisis with balance sheet adjustments in both the household and financial sectors.

Moreover, even the inventory cycle is unlikely to turn until there is some stabilisation in sales and final demand.

The Barack Obama fiscal stimulus will fill some of the gap left by contracting private demand. But with consumer spending still accounting for more than 70 per cent of the US economy, US consumption remains critical. In the last two quarters of 2008, the US consumer suddenly pulled back – with consumption falling at an annualised rate of roughly 4 per cent.

In January and February consumer spending suddenly appeared to stabilise, with retail sales up in both months. This raised hopes that consumer spending could be bottoming out – providing a firm foundation for an inventory-led turn in output. However, the 1.1 per cent fall in retail sales in March – with declines in almost every category – raises fresh doubts.

Not too much should be read into any one month's data. “We should look at the quarter as a whole,” said Steven Wietling, an economist at Citigroup. “Spending has been very weak but stabilising.”

Confidence has edged higher from rock-bottom levels. The household credit squeeze, while still intense, may not be getting tighter. Spending on cars may be artificially depressed. Mortgage rates at multi-decade lows are allowing households to refinance debts at lower rates.

However, consumption could still fall further. The economy is losing more than 600,000 jobs a month. Total hours worked are falling sharply and resilient wage growth could also weaken, resulting in ongoing declines in labour income.

The boost to consumers from lower energy prices and early tax rebates is fading, though stimulus tax cuts and other government transfers will provide non- labour income.

Moreover, the US household savings rate is still only just above 4 per cent. That is up from about zero. But it is likely to move higher, given the destruction of household wealth and high debt levels.

From mid-2007 to the end of 2008, US household wealth fell by $12,885bn. Since then it has probably fallen further.

A gradual drift up in the savings rate – particularly one accommodated within rising incomes – is perfectly consistent with stable or slowly rising consumption.

But if the savings rate rises quickly when incomes are not growing, all bets are off. Even in a less extreme case, multi-year fiscal stimulus may be required to underpin recovery.

SHRINKING SINGAPORE

Singapore, one of the world's most open economies, fittingly expects to be one of its fastest sinking. After a ghastly first quarter the government forecasts full-year shrinkage of between 6 and 9 per cent.

What to do? By “recentring” the policy band that pegs the Singapore dollar to an (undivulged) basket of currencies, the Monetary Authority of Singapore gains a pitifully modest devaluation – estimated by analysts at about 1-2.5 per cent. MAS was careful to attach some suitably tough language, in effect putting currency traders on notice that more aggressive action will not follow. In truth, there is not much more Singapore can do. Sharper depreciation may help exporters, but any gains would be modest so long as global demand is in hibernation. Meanwhile, a weak currency would encourage capital flight, the Asian leitmotif of global risk aversion. Net capital outflows for the region as a whole were $145bn in the second half of 2008, according to the World Bank, or more than net inflows in the whole of 2007.

The city state has few other tools at its disposal. It has already pushed the boat out on fiscal stimulus, where it is among Asia's biggest spenders with a $13.7bn package worth about 8 per cent of gross domestic product. The breakdown of first-quarter output illustrates the difficulty of stimulating demand in an island of under 5m people. Swooning external demand resulted in the manufacturing sector falling 29 per cent, almost treble the contraction in the fourth quarter of 2008. Construction bucked the trend, up 26 per cent, due in part to a strong pipeline of housing projects. But falling house prices, down 14 per cent in the first quarter according to official data, mean this offers limited comfort. Scariest of all, of course, is Singapore's role as a leading indicator for the Asian economy. Expect more downgrades to follow.

US consumption

On the same day that Federal Reserve chairman Ben Bernanke said there were “tentative signs” that the US economy was regenerating, bad retail sales numbers sprayed a hefty dose of defoliant over arguments that the worst is behind us. But why were markets so surprised that sales wilted by 9.4 per cent year on year in March? After all, households are deleveraging and, notwithstanding a blip-up in activity recently, the days of homes-as-ATMs are over.

It is impossible to understate how important surging house prices were to consumption. McKinsey Global Institute reckons that from 2003 to the third quarter of 2008, US households sucked $2,300bn of equity from their dwellings. About $890bn was used for personal consumption or for home improvements – a sum exceeding the Obama administration's emergency stimulus package. Another fifth of the total paid down debt, thus boosting spending indirectly, while 45 per cent was invested.

Of course, houses were not the only source of shopping fuel – consumers were also spending a bigger proportion of their disposable income. McKinsey estimates that if the US savings rate had remained steady at the level seen in 1980, a trillion dollars less would have been spent in 2007 alone. That trend has now reversed. But savings are being rebuilt alongside – and in large part because of – a massive reduction in household wealth caused by falling property and other investment prices.

Quantifying the effect that crumbling wealth will have on consumption is inexact. Already since its peak in 2007, household net worth has fallen by $13,000bn, almost equivalent to one year of US output. McKinsey reckons that could be worth about $650bn of consumption. Pretty hefty, but it pales next to the risk to spending from household deleveraging. Assuming no income growth, each 5 percentage point fall in the debt-to-income ratio equates to about $500bn less consumption. With debt-to-incomes currently at 130 per cent, even getting back to 100 per cent will be very painful indeed. Rising incomes would help, but who is asking for a pay rise these days?

China issues human rights action plan

China issued what it called a human rights action plan on Monday, trying to anticipate criticism of its human rights record as the anniversary of the 1989 crackdown on the Tiananmen student demonstrations nears.

Beijing had announced late last year it would present such a document. But its publication now comes just two days ahead of the anniversary of the death of Hu Yaobang, a former reformist leader whose demise in 1989 triggered the student protests ultimately quelled by soldiers with guns and tanks on June 4.

As this year features a series of such sensitive anniversaries, propaganda institutions have taken the initiative since late last year by launching a number of blanket campaigns to highlight the government's achievements and cover dissenting voices with the Communist Party's view of things.

The “Human Rights Action Plan of China (2009-2010) was distributed through state media. Almost half of the lengthy document concentrates on social and economic rights, spelling out government pledges such as to extend social security cover to all citizens and to protect childrens' rights.

The widespread violation of basic political rights such as detentions without trial and torture of detainees is not recognized as a problem outright. The document just states that illegal detentions and the extortion of confessions through torture are forbidden.

This follows a series of jail deaths publicized over the past half year, and repeated harsh criticism from foreign institutions of the practices of China's security authorities and in its legal system. The government has tried to calm the resulting public outcry through pledges to address malpractice by personnel in detention houses, but there has been no open debate of the larger problem of police brutality and extralegal punishments.

Last November, the United Nations Committee against Torture stated that torture was systemic in China and criticized the country's extralegal system of punishments, the so-called re-education through labour – findings angrily rejected by Beijing.

The action plan also pledged to improve the situation of freedom of speech in China, however also without addressing issues of censorship. The government would “ensure that all channels are unblocked to guarantee citizens' right to be heard,” it said. This comes after Youtube, the online video sharing platform owned by Google, remains blocked in China following the uploading of videos last month showing police brutality in Tibet.

Since last year, the government has stepped up its attempts to counter what it perceives as a hostile international media environment with its own version of the story.

The human rights document was put together under the auspices of the Foreign Ministry and the State Council Information Office, one of the main government institutions in charge of propaganda. Despite the pledges to protect detainees' rights and strengthen the legal system, the police and prosecutors' office are not part of the group working on the document.

Xinhua, the official news agency, sent out more than 60 takes on the action plan over the wires on Monday.

China recovery hopes spark rise in copper

Copper prices hit a near-six- month high yesterday as the base metals sector staged a broad advance amid mounting optimism that China's economy was on course for a rapid recovery, helped by its government's stimulus package.

Copper rose 2.4 per cent to $4,670 a tonne after spiking to $4,925 a tonne in Asian dealing hours.

Traders said there had been exceptionally heavy volumes traded in Shanghai, equivalent to 4.75m tonnes, following news of record Chinese copper imports in March, up 13.8 per cent compared with the previous month.

Shanghai copper prices continued at a substantial premium to global prices. This arbitrage opportunity has continued to draw metal into China, where merchants and traders expect further buying by the Chinese government to replenish strategic stockpiles.

Optimism about the outlook for China's economy has been fuelled by a strong rise in bank lending, suggesting the government's support package is being implemented aggressively.

“The surge in credit growth has been mainly driven by the policy stimulus, which requires a large amount of funding for investment projects,” said Goldman Sachs. “The government will be in no rush to impose strict lending controls at this stage, given the recovery is still at a very fragile stage.”

Bank profits

Banks remain riddled with toxic assets. This is true however much one chooses to ignore it. One reason for the recent rally in bank stocks was a shift in focus from balance sheets towards the sector's renewed earnings power. Fair enough – banks are making oodles of cash from strong flows and a steep yield curve, and will probably muddle though the upcoming results season.

But the bigger issue for investors is whether banks' new earnings potential can counteract the inevitability of further writedowns. That depends on forecasts for revenues and the extent, and timing, of losses. Oliver Wyman and Morgan Stanley have taken a stab at estimating the former. They reckon global wholesale banking revenues in 2010 will be about $220bn, helped by “volatility products” such as foreign exchange, fixed income, money markets and commodities. And thank goodness: the same research estimates that 60 per cent of Credit Suisse's 2006 revenues, for example, were from products the Swiss bank will probably not even touch in future, such as highly structured derivatives.

How does that compare to losses? Many, including the IMF, expect total global credit losses to approach $4,000bn as the economic slowdown means that more traditional forms of lending become toxic. Assuming banks account for three quarters of losses, and they have already torched $915bn, according to Bloomberg, that equates to 14-odd years of revenues (other things, such as capital ratios, being equal).

Some writedowns will turn up beyond the big wholesale banks, of course. And if the economy improves or a liquidity discount does prove to exist in some assets, estimates for losses will be far smaller. But on the flip side, $200bn-odd of forecast global revenues only takes banks back to 2005 levels. It would be a brave soul who thinks the sector will be let off that lightly. No wonder delaying writedowns for as long as possible – an even worse option – seems attractive.

Afghan nation-building is a long shot

Troops at Nato headquarters in Kabul can buy T-shirts with a blunt message for the folks back home: “While you were chilling, we were killing.”

Over the next year in Afghanistan, there is likely to be a lot more killing – or “kinetic activity” as Nato's top brass prefer to call it. The Americans are sending 17,000 more troops to bolster Nato's fight against the Taliban insurgency.

Butthe new conventional wisdom is that, as Joe Biden, US vice-president, puts it: “There is no military solution.” Instead western leaders are talking about a “comprehensive approach” that, alongside fighting, must include economic development, improved government, regional diplomacy and peace feelers to elements of the Taliban.

A new approach is clearly much needed. Seven years after western troops arrived, the Taliban insurgency is gaining strength. Many in the west are tempted to give up and get out.

That would be a mistake. The country would slip back into civil war, with terrible consequences for the Afghans. Western interests would also suffer. The Taliban might win outright control of Afghanistan or regain unchallenged command of large parts of the country – so Nato would have failed to ensure it could never again be a base for Islamist terrorism.

But, while the new “comprehensive” strategy needs to be tried, there is no guarantee that it will work. In fact, there are many reasons for thinking that it is likely to fail.

Delivering development and economic growth in the middle of an insurgency is difficult. In Logar province, 40km south of Kabul, Colonel David Haight has just arrived with about 3,000 fresh American troops. Col Haight, a veteran of Iraq, says: “My skill set is very kinetic.” His units are fighting regular battles to resecure the highways to the capital and push back the Taliban.

They are also simultaneously trying to protect a team of Czech civil engineers and social workers who are building infrastructure in the area. The Czechs are very proud of a new police station and footbridge they have constructed. But it is not encouraging that visitors can inspect these good works only if they travel in a mine-resistant armoured car and are ringed by machine-gun toting US troops.

Local Afghans find it easier to do development work. But there is still a huge shortage of skilled labour in a country that has gone through 30 years of war and has illiteracy rates of about 70 per cent and little rural electricity. Mohammed Ehsan Zia, Afghanistan's development minister, complains that the few Afghan engineers and teachers he can find are often luredby western charities or governments offering better money. In Logar, Col Haight is nostalgic for the modernity of Baghdad. “It's biblical out there,” he says, gesturing towards the Afghan mountains.

The west has belatedly discovered the virtues of nation-building in Afghanistan, but there may be no real nation to build. After several years in the country, one senior Nato officer concludes that, for most Afghans, loyalty to the nation is much less powerful than loyalty to the family, the tribe and Islam. The rise of the narco-economy has created another powerful countervailing force to the national government.

And yet the west's exit strategy rests on building up the national government, army and police to take over the jobs of security, justice and development. The Afghan army, in particular, is being expanded rapidly. But, ominously, it is having huge trouble recruiting in the Pashtun areas of southern Afghanistan, where the Taliban is strongest.

The fact that the Taliban has safe havens across the border in Pakistan is also a huge problem for Nato's nation-builders. The American military are already expecting an intensification of fighting, as their newly arrived troops clash with Taliban forces crossing over from Pakistan for their traditional spring offensive in Afghanistan.

Afghan nation-building is a long shot

Troops at Nato headquarters in Kabul can buy T-shirts with a blunt message for the folks back home: “While you were chilling, we were killing.”

Over the next year in Afghanistan, there is likely to be a lot more killing – or “kinetic activity” as Nato's top brass prefer to call it. The Americans are sending 17,000 more troops to bolster Nato's fight against the Taliban insurgency.

Butthe new conventional wisdom is that, as Joe Biden, US vice-president, puts it: “There is no military solution.” Instead western leaders are talking about a “comprehensive approach” that, alongside fighting, must include economic development, improved government, regional diplomacy and peace feelers to elements of the Taliban.

A new approach is clearly much needed. Seven years after western troops arrived, the Taliban insurgency is gaining strength. Many in the west are tempted to give up and get out.

That would be a mistake. The country would slip back into civil war, with terrible consequences for the Afghans. Western interests would also suffer. The Taliban might win outright control of Afghanistan or regain unchallenged command of large parts of the country – so Nato would have failed to ensure it could never again be a base for Islamist terrorism.

But, while the new “comprehensive” strategy needs to be tried, there is no guarantee that it will work. In fact, there are many reasons for thinking that it is likely to fail.

Delivering development and economic growth in the middle of an insurgency is difficult. In Logar province, 40km south of Kabul, Colonel David Haight has just arrived with about 3,000 fresh American troops. Col Haight, a veteran of Iraq, says: “My skill set is very kinetic.” His units are fighting regular battles to resecure the highways to the capital and push back the Taliban.

They are also simultaneously trying to protect a team of Czech civil engineers and social workers who are building infrastructure in the area. The Czechs are very proud of a new police station and footbridge they have constructed. But it is not encouraging that visitors can inspect these good works only if they travel in a mine-resistant armoured car and are ringed by machine-gun toting US troops.

Local Afghans find it easier to do development work. But there is still a huge shortage of skilled labour in a country that has gone through 30 years of war and has illiteracy rates of about 70 per cent and little rural electricity. Mohammed Ehsan Zia, Afghanistan's development minister, complains that the few Afghan engineers and teachers he can find are often luredby western charities or governments offering better money. In Logar, Col Haight is nostalgic for the modernity of Baghdad. “It's biblical out there,” he says, gesturing towards the Afghan mountains.

The west has belatedly discovered the virtues of nation-building in Afghanistan, but there may be no real nation to build. After several years in the country, one senior Nato officer concludes that, for most Afghans, loyalty to the nation is much less powerful than loyalty to the family, the tribe and Islam. The rise of the narco-economy has created another powerful countervailing force to the national government.

And yet the west's exit strategy rests on building up the national government, army and police to take over the jobs of security, justice and development. The Afghan army, in particular, is being expanded rapidly. But, ominously, it is having huge trouble recruiting in the Pashtun areas of southern Afghanistan, where the Taliban is strongest.

The fact that the Taliban has safe havens across the border in Pakistan is also a huge problem for Nato's nation-builders. The American military are already expecting an intensification of fighting, as their newly arrived troops clash with Taliban forces crossing over from Pakistan for their traditional spring offensive in Afghanistan.

SHORT VIEW

Spot oil prices, now just above $50 a barrel, usually attract all the attention. Recently, however, the price movements in some far forward contracts have been more dramatic, with prices hovering at a five-month high of about $80 a barrel. Take the West Texas Intermediate contract for delivery in December 2015, a relatively liquid future used as a proxy for long-term prices, which closed last week at $79.8 a barrel, the same level as 18 months ago. Spot prices, meanwhile, are at levels of four years ago.

The strength of forward oil prices reflects the concern that while the credit crisis has an impact on demand, supply-side impacts will lag behind and become evident only from next year. The International Energy Agency, the western countries' oil watchdog, estimates that spending on exploration and production of oil this year is likely to drop by 20 per cent, double the initial forecast. “Non-Opec project cancellations and slippage out of the 2009-2010 start-up horizon alone stand at 1m barrels a day or more,” it says, adding that supply losses could be even bigger as oil companies curtail maintenance in mature fields in the key regions of North America, the North Sea and Russia.

The investment thesis in forward oil prices says that when the economy starts to recover next year it will discover that supply is falling, pushing prices sharply higher. It also reflects higher costs in areas such as deep water or oil sands and Opec's desire to lift prices towards $75 a barrel in the medium term. It is a plausible investment scenario. But it could still suffer if the natural sellers of forward oil contracts – companies seeking to secure their cash flow to finance projects, which until now have been almost absent – return to the market, taking the opportunity of high forward prices to raise finance, bringing prices down. For investors, it is still a two-way street.

SHORT VIEW

Spot oil prices, now just above $50 a barrel, usually attract all the attention. Recently, however, the price movements in some far forward contracts have been more dramatic, with prices hovering at a five-month high of about $80 a barrel. Take the West Texas Intermediate contract for delivery in December 2015, a relatively liquid future used as a proxy for long-term prices, which closed last week at $79.8 a barrel, the same level as 18 months ago. Spot prices, meanwhile, are at levels of four years ago.

The strength of forward oil prices reflects the concern that while the credit crisis has an impact on demand, supply-side impacts will lag behind and become evident only from next year. The International Energy Agency, the western countries' oil watchdog, estimates that spending on exploration and production of oil this year is likely to drop by 20 per cent, double the initial forecast. “Non-Opec project cancellations and slippage out of the 2009-2010 start-up horizon alone stand at 1m barrels a day or more,” it says, adding that supply losses could be even bigger as oil companies curtail maintenance in mature fields in the key regions of North America, the North Sea and Russia.

The investment thesis in forward oil prices says that when the economy starts to recover next year it will discover that supply is falling, pushing prices sharply higher. It also reflects higher costs in areas such as deep water or oil sands and Opec's desire to lift prices towards $75 a barrel in the medium term. It is a plausible investment scenario. But it could still suffer if the natural sellers of forward oil contracts – companies seeking to secure their cash flow to finance projects, which until now have been almost absent – return to the market, taking the opportunity of high forward prices to raise finance, bringing prices down. For investors, it is still a two-way street.

Goldman stockpiles $164bn for purchases of distressed securities

Goldman Sachs has amassed a war chest of $164bn (€124bn, £110bn) in cash and liquid assets that could be used to buy distressed securities and loans as its rivals clear their balance sheets, Goldman's chief financial officer said yesterday.

David Viniar spoke as the bank completed the sale of $5bn in common stock – at $123 per share – which it plans to use to pay back some $10bn from the government's troubled asset relief programme (Tarp). The sale price represented a 5.5 per cent discount to Monday's close. Goldman shares yesterday were down 6.3 per cent at $121.92 in midday trading in New York.

Speaking a day after Goldman reported $1.81bn in first-quarter earnings, Mr Viniar said the bank's liquid assets, which rose more than $50bn in the first quarter, could also be put to defensive use if the crisis worsened.

Goldman's earnings were helped by a record $6.5bn in revenues in fixed income, commodities and currencies (FICC) activities. It made money taking advantage of the wide difference between buying and selling prices in those markets.

“The environment in the first quarter was such that, you know, there were so many opportunities in truly liquid assets that there was no need to use liquidity to buy illiquid assets and there weren't a lot of good illiquid assets for sale”, Mr Viniar said, adding that strong liquidity made sense “from a defensive and offensive point of view”.

He acknowledged the liquidity position was a drag on earnings and return-on-equity ratios but said in the current environment “prudence is the better path”. He warned that his firm's record- setting FICC performance would be hard to repeat. But he noted overall activity in the capital markets was gaining momentum, pointing to two dozen equity offerings last week and a pair of initial public offerings this week.

In an interview with the Financial Times, Mr Viniar said Goldman wanted to pay back the $10bn in Tarp funds as soon as possible so it could pay bankers, invest money abroad and hire foreign workers without generating criticism it was using taxpayer money for such purposes.

By Sarah O'Connor in Washington

The IMF is to overhaul its lending facilities in an attempt to propel more money into emerging market countries and lessen the stigma attached to tapping the fund.
国际货币基金组织(IMF)将改革其放贷安排，此举旨在促使更多资金流入新兴市场国家，并减轻与利用IMF贷款相关的污名。

Spurred into action by growing strain in emerging markets and calls from the G20 for the fund to take a bigger role in the crisis, the IMF said yesterday it would bring in a new lending facility and modify the conditions and repayment structure for its other loans.
新兴市场日益加大的压力以及20国集团(G20)要求IMF在危机中发挥更大作用的呼声，促使IMF展开行动。IMF昨日表示，将引入一种新的放贷安排，并修改其它贷款的条件和偿还结构。

The new “flexible credit line” facility would act like an insurance policy: countries would sign up to the fund for a fee, but only choose to access money when they needed it. The IMF wants the facility to be largely preventative, encouraging countries to draw on its money early rather than waiting until a full-blown crisis drives them into the hands of the lender of last resort.
新的“灵活信贷安排”(flexible credit line)类似保单：各国将支付一定费用与IMF签约，但只有在它们需要时才选择利用这笔贷款。IMF希望这一安排主要起到防范的作用，鼓励各国及早利用这笔资金，而不要等到危机全面爆发，把它们推向最后贷款人。

It is aimed at essentially strong and well-run emerging market economies suffering as exports drop and external financing dries up.
这一放贷安排主要针对那些强大且治理良好的新兴市场国家，由于出口下滑和外部融资枯竭，这些国家正陷入困境。

There has been deep reluctance among such countries, especially in Asia and Latin America, to turn to the IMF for help because of fears the news would spark market panic.
这些国家，特别是亚洲和拉美国家，一直非常不愿求助于IMF，因为它们担心这种消息将引发市场恐慌。

The IMF's last attempt to help these countries was soundly rebuffed. Its “short-term liquidity facility” (SLF) has failed to attract a single borrower since its launch last year, and is now being shut down.
IMF帮助这些国家的上一次努力遭到彻底拒绝。其“短期流动性安排”(short-term liquidity facility)自去年推出以来，未能吸引一个借款方，如今该安排正被关闭。

By Julie MacIntosh in New York , Richard Waters in San Francisco

IBM is in advanced talks to acquire rival Sun Microsystems for roughly $6.5bn in cash, in a deal that could trigger wider consolidation across the technology industry as the recession shakes out weaker companies.
IBM正就以约65亿美元现金收购竞争对手Sun微系统公司(Sun Microsystems)进行深入谈判，随着经济衰退淘汰较弱企业，该交易有可能在整个科技行业引发更多整合。

The acquisition would enable IBM, one of a handful of cash-rich companies to navigate the downturn so far largely unscathed, to cut costs sharply and bolster its computer hardware business in the slow-growing server market.
IBM是少数几家迄今几乎安然度过经济低迷的现金充足的企业之一。该收购将使IBM得以大幅削减成本，并在增长缓慢的服务器市场提振自己的计算机硬件业务。

It would also loosen Microsoft's strong grip on parts of the server business and save Sun, a former Silicon Valley darling, from its struggle against shrunken demand and an over-reliance on hardware – the physical components of a computer system.
该交易还会松动微软(Microsoft)对部分服务器业务的强势控制，并使Sun这个昔日的硅谷宠儿免于苦苦应对需求萎缩及对硬件（计算机系统的物理组件）的过度依赖。

IBM and Sun were in talks yesterday over the possible acquisition – which would value Sun at about $10 per share, including the cash already on its balance sheet, according to people close to the matter. Sun would be IBM's biggest acquisition.
IBM与Sun昨日就可能的收购进行了商谈。据知情人士表示，IBM的收购估价为每股约10美元，包括Sun资产负债表上的已有现金。该交易将会是IBM最大的一笔收购。

Analysts said any deal would face intense antitrust scrutiny. The two companies account for two-thirds of the $25.5bn global market for high-end servers. “People have been speculating about this one for years,” one dealmaker said. “IBM can take out an enormous amount of costs and there are also great synergies in terms of technology.”
分析师表示，任何交易都会受到严密的反垄断审查。这两家公司占据全球255亿美元高端服务器市场的三分之二。一名交易撮合者表示：“人们多年来一直在设想这一组合。IBM能够降低大量成本，而就技术而言，这也会产

TEN PRINCIPLES FOR A BLACK SWAN-PROOF WORLD

1. What is fragile should break early while it is still small. Nothing should ever become too big to fail. Evolution in economic life helps those with the maximum amount of hidden risks – and hence the most fragile – become the biggest.

THE PRIVILEGE OF LIVING IN EXTRAORDINARY TIMES

How do you know you are not sleeping enough? When the clerk at the phone shop gleefully informs you that your Blackberry's battery died because a mere four hours of recharging every night is not enough to keep it healthy.

What about the health of my internal battery? Things move fast at business school, and even faster at Chicago Booth.

It is exam week and the famed Chicago rigour is in full evidence. I have been averaging less sleep than I was as a Wall Street investment banker, and that was not much. Tomorrow, I have my economics final exam.

The great thing about studying economics at the University of Chicago is that most of what you learn in class was invented, or was in some way affected significantly, by research done within one square mile of where your are. This immediacy of cutting-edge research electrifies academic life here.

Two other things I have come to love are the discipline-based approach and the flexible curriculum. The former ensures that I get a complete toolkit of skills – a bit like a Swiss army knife – with thorough preparation in economics, finance, accounting, strategy, marketing and so on.

It is very reassuring to know that, as a Chicago MBA, I will walk away with a solid foundation in all these disciplines, to be used as needed throughout my career.

The flexible curriculum ensures that I can decide which “tool” of the Swiss army knife I want to emphasise and become a real ninja at using.

At the moment, I am leaning towards economics and strategy, although finance and marketing also have me interested.

This term we also started our formal career services module.

It began with a “self-discovery” process where each of us was put through a series of tests to determine what it is we truly love doing.

From there, given our individual inclinations, a systematic approach of discovery led to an examination of career paths that would fulfil those.

The entire approach was scientific and customised.

I discovered that management, strategy and entrepreneurship are the areas that best suit me. I hope to use the summer internship as a means to further test this hypothesis.

I bought two T-shirts this term. One reads “Obama: Yes We Can!” and the other “Chicago Booth”, and I am proud to wear them both. This has been a historic time to be in Chicago.

On the balmy night of November 4, I walked a few blocks from my apartment on Michigan Avenue to Grant Park to hear Barack Obama's acceptance speech. I still get goosebumps when I think of it.

Historical moments don't get any bigger than that. This is something I will be able to tell my grandchildren about.

As I saw tears streaming down cheeks – black, white, Asian, Hispanic, rich, poor – all gathered in Grant Park to underline that, “yes, we can”, it reinforced for me that there really is no place like the US – in no other country would a Barack Obama have been possible.

Suddenly, Chicago, Obama's adopted home, had became the epicentre of change.

To me, it was another confirmation that I had made the right choice by coming to the most progressive and forward-thinking city in the US and to a university where, until recently, Obama was a lecturer.

A second historic moment I lived through this term was David Booth's unprecedented $300m gift and the renaming of the school as Chicago Booth.

Investment gurus

You can't just bang your fists on the table. You have to bang them harder than everyone else. Such is the first law of investment punditry during a boom or bust. For example, few made more noise about the wonders of the technology boom in the late nineties than Abby Joseph Cohen of Goldman Sachs. As stocks soared higher, investors rushed to her rallying cry.

Every period of market madness, whether up or down, has its figureheads. Jim Rogers and Marc Faber led the charge on commodities earlier this decade, while David Lereah, chief economist of the National Association of Realtors, was constantly on screens to expound the virtues of home ownership. During this crisis, economists and pundits have clambered over themselves to become the kings and queens of gloom. New York University's Nouriel Roubini, for one, is already near-synonymous with the current meltdown.

Of course all gurus only became so because they were right for a while. If things were different, other names would have come to the fore. And a turn in the sun does not last for ever. The question then is: what does an “expert” do next? Unfortunately, the second law of punditry, which covers this problem, is often ignored. It says that upon suddenly becoming spectacularly wrong, you should not bet the investment house again.

Ms Cohen is no longer the lead index forecaster for Goldman. Responsibility for guessing the S&P's trajectory was passed a year ago to a colleague. Others, however, keep the predictions coming. Fortunately, one does not have to remain a committed bull or bear. Economist Harry Dent, having famously predicted in 2000 and again four years later that the Dow would reach 40,000, has just written a book called The Great Depression Ahead. Battered investors perhaps need look no further for a buy signal than that.

Trade sourcing

No Logo was a siren call to antiglobalisation. For trade sourcing companies, it's a fundamental reason to load up on their stock. In a recession, consumers tend to trade down to less expensive alternatives. No one knows this more than retailers, which tend to stuff their shelves with own-brand products – at a discount of at least 20 per cent – alongside the big brands. That plays to the strengths of supply chain managers, which can direct their vast networks of factories to pump out more private label jeans and T-shirts.

This is the new, more prosaic reality for Li & Fung, the world's largest supply chain specialist. In recent years it rode a wave as western brands and retailers shifted production out east without really knowing what they were doing. Based in the entrepôt of Hong Kong since 1937, the company filled the knowledge gap. Revenues and net income more than tripled this decade. Now, as debt-fuelled consumerism enters a sticky patch, Li & Fung is hoping its basic pitch – better goods, for less – is even more compelling.

That is a risk. Outsourcing the sourcing of small-ticket items makes sense, intuitively. But price deflation is tightening its grip in China, which accounts for just over half of revenues – and thus commissions. The company is budgeting for flat organic revenues this year, when most of its customers expect 5-10 per cent declines. That is quite a stretch while global demand is sluggish: clothing sales in Hong Kong, for example, were down almost 7 per cent in the first two months this year. Other targets, such as lopping 10 per cent off the cost base in 2009, are similarly ambitious.

The combination of a cash-rich balance sheet and a 6 per cent yield remains attractive. But this year's strong rally in Li & Fung's shares – up 48 per cent, against a flattish local benchmark – has probably gone far enough.

Obama hints at hopes for recovery

President Barack Obama and Federal Reserve chairman Ben Bernanke yesterday voiced wary optimism that the US economy is no longer in freefall, even as new data showed retail sales fell in March.

In a speech at Georgetown University, Mr Obama reiterated that he detected “glimmers of hope” in the economy. He said the $787bn stimulus, the $700bn bank recapitalisation programme, $70bn housing plan and extra federal aid to Detroit auto-companies were “starting to generate signs of economic progress”.

Meanwhile, Mr Bernanke said: “We have seen tentative signs that the sharp decline in economic activity may be slowing.” He added that “a levelling out of economic activity is the first step toward recovery” – though he did not say when he thought this levelling out would take place.

The comments by Mr Obama and Mr Bernanke underscore a shift in US official rhetoric, with policymakers now prepared to draw attention to the slowing in the rate of economic decline.

In a speech late last week, Lawrence Summers, director of the National Economic Council, said the “sense of freefall” will be over within the next few months.

However, while top officials in both the US administration and central bank think the economy will probably bottom out in the second half of this year, they remain wary of calling the turn in the economic cycle.

They regard recent signs of green shoots as hopeful but far from definitive, and do not want to undermine support for continued extreme fiscal and monetary measures that may still be needed to support growth. March retail sales figures released yesterday raised questions as to whether US consumer spending has yet found a floor following a sharp plunge in late 2008. Sales fell 1.1 per cent from February, with declines in every category apart from food and health.

Mr Bernanke said “we will not have a sustainable recovery without a stabilisation of our financial system and credit markets” – though he said “we are making progress on that front.”

Offering his lengthiest defense of his administration's handling of the crisis to date, Mr Obama rebuffed criticism that it was running excessively large deficits, saying the “last thing a government should do in the middle of a recession is to cut back on spending”.

Global ad spending to fall 7%, Publicis unit warns

Declines in global advertising will be much worse than expected, says a leading media buyer PublicisGroupe, which will today unveil the grimmest forecasts yet seen for the advertising market and traditional media companies.

Worldwide advertising spending, a barometer for economic confidence, will fall 6.9 per cent in 2009 to $453bn, compared with 1 per cent growth last year, predicts Zenith Optimedia, the media buying unit of Publicis, the world's fourth-largest advertising group.

The forecasts outstrip rivals' figures released last month. Group M, owned by WPP, expects a 4.4 per cent decline this year and Carat, owned by Aegis, expects a 5.8 per cent drop.

The outlook is gloomiest for newspapers. Spending is projected to fall 12 per cent. Radio and magazines are also grappling with double-digit declines.

Real estate ‘swordsman' predicts halving of China property prices

Property prices in China are likely to halve over the next two years, a top government researcher has predicted, in a strong sign that the country's economic downturn faces further challenges despite recent positive data.

The property market and exports were leading drivers of the booming Chinese economy over the past decade and the slumps in both have taken a heavy toll.

Cao Jianhai, professor at the Chinese Academy of Social Sciences, a leading government think tank, said an apparent rebound in the property market was unsustainable over the medium term and driven by a flood of liquidity and fraudulent activity rather than real demand.

He told the Financial Times he expected average urban residential property prices to fall by 40 to 50 per cent over the next two years from their levels at the end of 2008. “Prices may not fall in the near term but I expect a collapse starting next year, followed by many years of stagnation,” said Mr Cao, known as one of the “three swordsmen” of the real estate market because of his influence as an official economist.

Average urban housing prices across 70 cities in China fell 1.3 per cent in March from a year earlier but were up 0.2 per cent from February, according to figures released yesterday by the National Bureau of Statistics.

That broke seven months of sequential declines and was accompanied by a rebound in transaction volumes. Residential property sales rose 8.7 per cent from a year earlier in the first quarter in terms of floor space sold, compared with a fall of 20.3 per cent for the whole of 2008.

Real estate agents in the residential property bellwether of Shanghai said the market seemed to have bottomed out as a result of government stimulus measures, falling prices and pent-up demand from owner-occupiers.

But Mr Cao said preliminary government investigations had turned up numerous examples of real estate developers using fake mortgages to offload apartments on to the books of state-run banks facing enormous pressure from Beijing to rapidly increase lending to boost the economy.

At a national level, average housing prices tripled between 2003 and the peak in mid-2008 and are now 10-12 times the average income, Mr Cao said.

China outperforms

Chinese and US equities offered contrasting performances yesterday as trading in currencies, US and emerging market bonds was subdued by the closure of most European markets and parts of Asia for Easter Monday.

Oil prices sank more than $3 a barrel to below $50 a barrel after the International Energy Agency said that demand in 2009 might decline to its lowest level for five years.

Chinese data released over the weekend showed that banks had continued to lend for new investment projects with record new loans of $277bn in March. China's latest trade numbers revealed signs of stabilisation for both exports and imports over the past year to March.

The news boosted Chinese equities, with the Shanghai Composite gaining 2.8 per cent to reach its highest level in eight months. There were gains elsewhere in Asia, with Taiwan up 1.3 per cent and Singapore 2.6 per cent higher.

Japan's Nikkei 225 Average slipped 0.4 per cent but the broader Topix index gained 0.4 per cent as investors were also encouraged by the record lending in China and by hopes that the global economic outlook was stabilising.

With Europe and the UK closed, US equities began the week on the back foot as investors awaited a string of first-quarter earnings from banks and other leading companies and some key economic releases.

Yesterday at lunchtime in New York the S&P 500 was 1 per cent lower. But the benchmark has rallied some 25 per cent during the past five consecutive weeks, with the S&P financials recording a 60 per cent bounce. It is the S&P's first such winning streak since August 2002.

Accompanying the rally in stocks has been a steady decline in equity volatility, with the S&P's main gauge of risk, the Vix index, now below 40 – its lowest level since last September.

Jack Ablin, chief market strategist at Harris Private Bank, said the Vix had broken down and that “while there are certainly economic challenges ahead, I view the steady decline in implied market volatility a positive signal”.

Chief among the pending challenges for equity markets are earnings and data, led by March retail sales figures due today, with industrial production and consumer price reports tomorrow.

Financials will dominate the attention of investors. Citigroup, JPMorgan and Goldman Sachs are due with earnings this week. Trading gains from a low interest rate environment will be balanced against the scale of further writedowns of securities and loans linked to falling home prices and the weaker consumer.

Wariness over financials will also continue until investors get a better sense of how the US Treasury's public-private investment plan proceeds amid ongoing stress tests being conducted on major banks.

US government bond prices rallied as Wall Street extended its early losses. The yield on the 10-year note fell 7 basis points to 2.85 per cent. The yield is well above the 2.50 per cent seen last month when the US Federal Reserve announced it would start buying Treasury debt.

ICBC takes top slot for deposits

Industrial and Commercial Bank of China, the world's largest lender by market capitalisation, is now the biggest by deposits as well.

The latest symbolic milestone underlines how Chinese banks have emerged relatively unscathed from the global crisis to become the largest and most profitable lenders in the world while western peers they used to try to emulate have been humbled. It also highlights the growing affluence of Chinese citizens, who have historically saved a large portion of their incomes rather than relying on credit.

ICBC's customer deposits reached Rmb8,900bn ($1,300bn) by the end of March after increasing by Rmb950bn from the start of the year, the bank said in a statement yesterday.

It overtook JPMorgan Chase, which had about $1,000bn in deposits at the end of last year, and Japan's Mitsubishi UFJ Financial Group, which held $1,290bn in deposits at the end of March, according to Bloomberg.

In the US, deposit growth is limited by rules preventing any single bank from controlling more than 10 per cent of the country's total deposits. Both JPMorgan and Bank of America are close to the cap following recent acquisitions.

Investors will get an updated picture of the deposit base of US banks as the first-quarter results season begins today with Goldman Sachs' earnings. Markets will question Goldman on its plans to raise capital to repay government aid and on the future of its investment banking business model.

JPMorgan and Citigroup report later this week, while BofA goes next week.

Germany warns on global inflation after crisis

The world could face high inflation and a “crisis after the crisis” when the global economy recovers, Peer Steinbrück, German finance minister, has warned.

The comments, in a weekend interview, are the latest sign of concern from Germany at the extra-loose monetary policies conducted by central banks around the world and the ever-larger fiscal stimuli being unveiled by governments.

“I am concerned that the countermeasures we are seeing around the world, financed by enormous amounts of debts, could be paving the road to the next crisis,” Mr Steinbrück told Bild, a tabloid daily.

“So much money is being pumped into the market that capital markets could easily become overwhelmed, resulting in a global period of inflation in the recovery.”

Mr Steinbrück's warning comes after Angela Merkel, chancellor, told the Financial Times last month that pumping too much money into reviving global growth would create an unstable recovery.

China tries to block takeover of Lucite

Chinese competition authorities are holding up the acquisition of Lucite, a UK acrylics maker, by a Japanese materials group in the latest example of Beijing's flexing its muscles over international deals.

Mitsubishi Rayon had agreed to the $1.6bn (£1.09bn) takeover in November and said it expected to complete the deal by January.

Several people involved told the Financial Times that China's ministry of commerce (Mofcom) had withheld its approval – the sole antitrust regulator worldwide to do so.

China drew criticism last month by rejecting a $2.4bn takeover by Coca-Cola of Huiyuan, the largest Chinese juice producer. Last year it extracted concessions from InBev, the Belgian brewer, in return for approving its acquisition of Anheuser-Busch of the US.

Neither party in the Mitsubishi Rayon-Lucite deal is based in China but both have sales and manufacturing operations there and require Mofcom's approval to combine them.

Foreign observers said a move by the Chinese government to block or impose conditions on the Mitsubishi deal would create new concerns over protectionism.

“Following the InBev/Anheuser-Busch and Coke/Huiyuan cases, we have come to assume that the government will watch out for perceived threats to Chinese brands,” said an adviser to a foreign industrial group in China. “But if we are now talking about rayon producers, we get into the much broader field of protecting domestic enterprises against foreign competition no matter what.”

Mofcom was not available for comment.

If the takeover were completed, Mitsubishi Rayon would control about 40 per cent of the global production capacity an acrylic used to make resins and plastics.