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.