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Broadgate: Weekly Briefing 23/3

23 March 2012

China – International Monetary Fund (IMF) head Christine Lagarde has said that China must stop its economy being too dependent on exports and investment.

She also said the yuan could become a global reserve currency if China implemented market-oriented changes.

“What is needed is a roadmap with a stronger and more flexible exchange rate, more effective liquidity and monetary management, with higher quality supervision and regulation, with a more well-developed financial market, with flexible deposit and lending rates, and finally with the opening up of the capital account,” Ms Lagarde said.

“If all that happens, there is no reason why the renminbi will not reach the status of a reserve currency occupying a position on par with China’s economic status.”

China – The Chinese housing market and wider economy will descend into a soft landing according to a senior official with the IMF with in-depth knowledge of the Chinese economy. Even though the latest data shows apartment prices falling in 45 out of 70 cities and zero growth across the board, Zhu Min a deputy managing director at the IMF and former deputy governor of China’s central bank believes that the increasing investment in social housing will counter the downward pressure on house prices leading to a more balanced market landing softly.

At the same conference, Reserve Bank of Australia Governor Glenn Stevens also expressed confidence in an economy he said is closing in on that of the U.S. “It seems likely that the Chinese economy will grow pretty strongly on average for a while yet,” he said, adding that officials have “the will and the capacity” to spur the expansion as needed.

Japan – Japan posted a surprise trade surplus in February, after a record high deficit the previous month, as external demand picked up.

The surplus stood at YPY32.9bn (USD394m), the Ministry of Finance said. In January the deficit stood at JPY1.5tn.

Japan has had to increase energy imports, as most of its nuclear reactors remain shut.

Analysts said this was not necessarily a sign of a swing to surplus for Japan.

India – India’s Finance Minister Pranab Mukherjee unveiled the country’s annual budget this week, saying that the economy is turning around.

The government’s plans for development have been hampered by a slowdown in the economy. During the last three months of 2011, India’s economy grew at its slowest pace in three years.

Growth was 6.1percent in the fiscal third quarter, though on Friday Mr Mukherjee explained that it was only a temporary slowdown. He forecast that the economy would expand by 6.9percent in the current fiscal year ending in March, with growth accelerating to 7.6percent in the financial year running from 2012 to 2013.

Brazil – Brazil’s finance minister has vowed to hold down the value of the real and enact new measures to protect domestic industries, in an attempt to revive the country’s slumping economic growth.

“We don’t want to lose our manufacturing sector,” Guido Mantega told the Financial Times in an interview. “Brazil is not merely an exporter of commodities. We are not going to just sit by and watch while other countries devalue their currencies to give them a competitive advantage.”

But like China and India, the country`s economy is slowing. In Brazil`s case an influx of cheap imports, especially from China, has punished its manufacturing sector. Industrial production fell 2.1percent in January compared with December, led by a 30percent decline in automotive production.

Europe – European Central Bank President Mario Draghi said the worst of the sovereign debt crisis is over.

“The worst is over, but there are still risks,” Draghi said. “The situation has stabilized. The important indicators for the euro zone, like inflation, current account and above all the budget deficits, are better than, for example, in the U.S.”

Investor confidence has returned and “the ball is now with governments,” Draghi said. “They must sustainably secure the euro zone against crises.”

Portugal – Portugal managed to borrow almost EUR2bn (USD2.65bn) at sharply lower prices in a short-term debt auction Wednesday, despite concerns about its chances of escaping a recession.

The government debt agency said it sold 12-month Treasury bills at an interest rate of 3.6percent, down from 4.9percent last month, and 4-month bills for 2.16percent, lower than the previous 3.8percent.

“This really is good news for Portugal,” said Filipe Silva, debt manager at Portuguese financial group Banco Carregosa. “Rates are very significantly down, indicating the risk perception of Portugal is improving a lot.”

Commodities – Global oil demand will hit a record high this year, the International Energy Agency (IEA) said on Tuesday, revising up consumption estimates as the world economy recovers from recession.

“There are signs of oil demand picking up in North America and the Pacific, Asia and the Middle East although consumption in Europe still looks weak,” David Fyfe, head of the IEA’s Oil Industry and Markets Division, told Reuters.

The IEA said refineries around the world would process nearly 1 million barrels per day (bpd) more oil in the second quarter than in the same period last year with China and Asian countries raising output most. This is up 300,000 bpd over the last estimate.

Spotlight on: Fund Manager Sentiment

Asset managers’ sentiment towards Europe improved last month, a keenly-watched survey suggests, despite Greece confirming massive debt restructuring.

The Bank of America Merrill Lynch (BofA ML) European Fund Manager Survey also shows that asset allocators are becoming increasing concerned by commodity prices and the health of the Chinese economy.

The survey finds that 38percent of those polled regard E.U. sovereign debt funding as the biggest tail risk during March.

Although this was investors’ largest concern of the month, it has fallen significantly from February when 59percent of respondents cited European sovereign debt funding as the strongest risk.

Gary Baker, European equity strategist at BofA ML, says it is interesting how Greek confirmed a debt swap with the majority of its bondholders during March yet the markets were relatively unmoved.

Baker claims the European Central Bank’s EUR529.5bn liquidity injection into the banking system through its longer-term refinancing operation (LTRO) at the end of February is one of the drivers of this improving sentiment.

“That’s testament to the fact that two years have been bought to allow banks to write down their exposure to Greek debt,” he says.

“LTRO has done an awful lot more than just kicking the can down the road, it arguably prevented a catastrophe in the short term and enabled banks to fund themselves. I think it’s more of game changer than a can-kicking exercise.”

BofA ML’s survey shows that commodity price inflation has emerged as the second largest tail risk for asset allocators. In February, about 4percent of fund managers highlighted this risk, but 16percent flagged it in March’s poll.

Baker says investors view oil especially as being “very overvalued”. Brent has been pushed persistently above the USD120 a barrel mark recently and is expected to remain at a high price in the coming months.

China was also found to be a growing concern among managers. Some 14percent said the Chinese real estate market is the largest risk in this month’s survey, growing from 10percent in February.

“If you look across the globe, you’ve got broad-based improvement and recovery in pretty much every region apart from China,” Baker adds. “There’s some ambivalence on what the prospects for the Chinese economy are.”

Thus it would appear that the debate regarding the apparent ‘hard/soft’ landing of China continues to split fund managers, investors and economists alike.

The information set out herein has been obtained from various public sources and is by way of information only. Broadgate Financial can accept no liability of any sort in relation thereto and readers should obtain their own verification of any statement before making any decision which may have any financial or other impact.

Neither the information nor the opinions herein constitute, or are they to be construed as, an offer or a solicitation of an offer to buy or sell investments.

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