China: Ningxia Hui Autonomous Region,the New Economic Inland Pilot Zone

The Chinese government has recently approved the establishment of a new economic inland pilot zone in the Ningxia Hui Autonomous Region and a comprehensive bonded area in Yinchuan, according to Vice Premier Li Keqiang on Wednesday.

The pilot zone and bonded area aim to stimulate the country's domestic demand and to broaden the opening-up of China's western inland area, Li said in his speech

"While further opening coastal regions to the east, China will also boost its opening to the west at the same time, and special economic zones, pilot zones and key border ports are being established to serve as vanguard," he said.
Their establishment also demonstrates China's policies of developing the west and opening the west, and will help expand the country's opening-up range to developed countries as well as developing countries, according to Li.

"China continues to expand market scale and improve its industrial system to provide more cooperation opportunities for China and other countries as well as opportunities for the world's development," the vice premier said.

Source:Xinhua

Martin Feldstein. Why easy money didn't ment high inflation,but that Experience doesn´t exclude higher inflation in a longer term

"Why has quantitative easing coexisted with price stability in the United States? Or, as I often hear, “Why has the Federal Reserve’s printing of so much money not caused higher inflation?” Martin Feldstein
 Inflation has certainly been very low. During the past five years, the CPI has increased at an annual rate of just 1.5%.
  By constrat,the Fed bought more than $2 trillion of Treasury bonds and mortgage-backed securities, nearly ten times the annual rate of bond purchases during the previous decade. In 2012 the stock of bonds on the Fed’s balance sheet has risen more than 20%.

 From the experiences in Germany hyperinflation in the 1920's and in Latin America in the 1980's(e.g. Bolivia and Perú) it shows that rapid monetary growth does fuel inflation.
  Even America's own experience shows that even with a more moderate increase in money growth it has 
ended in high inflation rates."In the 1970’s, US money supply grew at an average annual rate of 9.6%, the highest rate in the previous half-century; inflation averaged 7.4%, also a half-century high. In the 1990’s, annual monetary growth averaged only 3.9%, and the average inflation rate was just 2.9%
That is why the absence of any inflationary response to the Fed’s massive bond purchases in the past five years seems so puzzling. But the puzzle disappears when we recognize that quantitative easing is not the same thing as “printing money” or, more accurately, increasing the stock of money'' says Feldstein.
Because since 2008 the Fed started to pay interest rates on excess banks reserves.This policy induced the banks
to keep and maintain this excess reserves in safe and liquid deposits,and didn´t lead after 2008 to a much larger deposit growth and much larger stock of money.
So, while M2 grew by more than 6% from 2008 to 2012, nominal GDP grew by just 3.5% and the GDP price index rose by only 1.7%.
So it is not surprising that inflation has remained lower, than in any decade since the end of World War II. And it is also not surprising that QE has done so little to increase nominal spending and real economic activity.

The absence of significant inflation in the past few years does not mean that it won’t rise in the future. When businesses and households eventually increase their demand for loans, commercial banks that have adequate capital can meet that demand with new lending without running into the limits that might otherwise result from inadequate reserves. The resulting growth of spending by businesses and households might be welcome at first, but it could soon become a source of unwanted inflation.
The Fed could, in principle, limit inflationary lending by raising the interest rates.
But the Fed may hesitate to act, or may act with insufficient force, owing to its dual mandate to focus on employment as well as price stability. Or because it gets more broadly thought that for the purpose of higher growth Central Banks can raise their inflation targets as U.K. and Japan are doing now.

 The growing concern is that the Fed will hesitate if the rate of unemployment remains high even as  the inflation rate rises.

   So investors are right to think that inflation could be higher in a more longer term, even as it has not
happened in times of throwing money from a helicopter.

Japan's Core Consumer Price Flat in May

Japan's core consumer prices were flat in May from a year before, the Ministry of Internal Affairs and Communications said Friday.

The result matched the median forecast among 24 economic research institutes polled by Jiji Press.The core consumer price index, which excludes fresh food prices, stood at 100.0 against 100 for the base year of 2010, the ministry said. Compared with April, the index was up 0.2 pct.

Breaking Bad Habits, Better Now than Later

As Stephen Roach says "It was never going to be easy, but central banks in the world’s two largest economies – the United States and China – finally appear to be embarking on a path to policy normalization". Addicted to an open-ended strain of extreme monetary accommodation, that was established in the depths of the crisis of 2008-2009,as recent developments have shown the return by US and China Central Banks to less expansionary monetary policies,financial markets are now gasping for breath
The Fed and the Central Bank of China are on the same path, but for very different reasons. For the Fed there seems to be a sense that the emergency scenario where  unorthodow monetary policies in special circumstances was appropriate,today given the latest economic indicators of the U.S, it is not anymore. China instead    is attempting to ensure stability by reducing the excess credit leverage that has long supported the real side of an increasingly credit-dependent Chinese economy.

Both actions are correct and long delayed. While the Fed’s first round of quantitative easing helped to end the financial market turmoil that occurred in the years 2008-2009, two subsequent rounds  QE2 and QE3 ,  have done little to alleviate the lingering pressure on over-extended American consumers. Indeed, household debt is still in excess of 110% of disposable personal income and the personal saving rate remains below 3%, averages that compare unfavorably with the 75% and 7.9% norms that prevailed, respectively, in the final three decades of last century.

  Real consumer demand has remained stuck on an anemic 0.9% annualized growth trajectory since early 2008, keeping the US economy mired in a decidedly subpar recovery. Unable to facilitate balance-sheet repair or stimulate real economic activity, Quantitative Easing, instead, has become a dangerous source of instability in global financial markets.

 The recent spasms in financial markets leave little doubt about the growing dangers of speculative excesses that had been building. Fortunately, the Fed is finally facing up to the downside of its grandiose experiment.Recent developments in China in terms of less growth in GDP and less expansive monetary policies have equally powerful implications. There, credit tightening does not follow only from  independent central bank; rather, it reflects an important shift in the basic thrust of 

the state’s economic policies. China’s new leadership, headed by Premier Li Keqiang, seems determined to end past targets of rapid pace of economic growth and to refocus policy on the quality of growth,diminishing 
inequalities in the chinese economy(See Past Posts in this Blog)
 "Financial markets are having a hard time coming to grips with the new policy mindset in the world’s two largest economies. At the same time, investors have raised serious and legitimate questions about Japan’s economic-policy regime under Prime Minister Shinzo Abe, which unfortunately relies on quantitative easing and yen depreciation rather, than on a new structural-reform agenda.
As financial markets come to terms with the normalization of monetary policy in the US and China, while facing up to the shortcomings of the BOJ’s efforts, the real side of the global economy is less at risk than are asset prices. In large part, that is because unconventional monetary policies were never the miracle drug that they were supposed to be. They added bubbles to financial markets but did next to nothing to foster vigorous recovery and redress deep-rooted problems in the real economy''says Roach.

 Breaking bad habits, is hardly a painless experience given the price distortions that easy money creates. "But better now than later, when excesses in asset prices and credit markets would create new and dangerous distortions on the real side of the global economy. That is exactly what pushed the world to the edge in 2008-2009, and there is no reason why it could not happen again"says Roach

List of Countries by GDP Year 2012 Part I

                                                              Nominal GDP                         Year
           Country/Region                         Million of  US$                        2012

           World                                           71,707,302
            European Union                          16,584,007
            USA                                             15,684,750
            China                                             8,227,037
            Japan                                             5,963,969
            Germany                                       3,400,579
            France                                           2,608,699
            United Kingdom                            2,440,505
            Brazil                                             2,395,968
            Russia                                            2,021,960
            Italy                                               2,014,079
            India                                              1,824,832
            Canada                                          1,819,081

            Australia                                        1,541,797

            Spain                                              1,352,057
            Mexico                                           1,177,116
            South Korea                                   1,155,872
           
            Source:  FMI
           
    

Timing of the Fed or who gets out first from the(once) safe bond market.

Part I

 Several Federal Reserve officials, according to the WSJ have been speaking this week,trying to convince traders and investors and speculators, that they didn´t hear what they heard, and didn´t saw what they saw.
After the FOMC meeting, Fed Chairmain said undoubtedly, that if the economy improves as it expects,the Fed will start to taper, Central Banks purchases of Bonds.
Markets globally heard that,and the investor community started to unwind positions in Bonds.
The timing of the Fed tap program of bonds wasn’t the most important factor, as a number of Fed officials  seem to think. What matters is the timing of each traders’ own exit from a one-sided bet. It’s the old market saw about not being the one left holding the bag, and it kicked in High Frecuency Trade-style. The Fed either didn’t understand or appreciate this, and it’s been in damage-control mode ever since. The exit from the accomodative monetary policy,will not be as easy as the money printing.
 The unconventional measures for monetary expansion brings misallocation of resources,uneven
increase of asset classes prices,appreciation of currencies in emerging markets and developing economies,where credit and property prices have been rapidly growing. A slower growth in China
and the gradual exit from easy money in the U.S.

Bonds Quotes

  Government Bonds                                                       Price Change   Yield

U.S. 3 Month			0/32	0.056
U.S. 2 Year			-0/32	0.375
U.S. 5 Year			-6/32	1.422
U.S. 10 Year			-13/32	2.521
U.S. 30 Year			-5/32	3.543
Germany 2 Year			-0/32	0.194
Germany 10 Year			-2/32	1.735
Italy 2 Year			1/32	2.311
Italy 10 Year			7/32	4.544
Japan 2 Year			0/32	0.136
Japan 10 Year			-3/32	0.852
Spain 2 Year			-2/32	2.254
Spain 10 Year			-2/32	4.724
U.K. 2 Year			0/32	0.408
U.K. 10 Year			-3/32	2.442

Precious metal Prices

Precious Metal Prices Futures 3 months

Gold                 1,216.49

Silver                     19.33

The end of easy maybe will take longer than Central Banks Initial Plans

Central banks are in a deep easy-money hole of their own digging that they will have to start filling in at some point. But that day still looks quite some way off.

Indeed, the Bank of Japan and the Bank of England are staking out a much bolder stance, brushing aside warnings from some that they might be stoking currency wars by depreciating their currencies or sowing the seeds of asset bubbles and inflation.

For Japan, inflation would be a solution, not a problem, after years of gently falling prices. The country's nominal gross domestic product is no higher than it was 20 years ago, saddling the government with a debt-to-GDP ratio of 235 percent and climbing.

Britain seems simply to have concluded that higher inflation is a price worth paying to revive economic growth.

Three of the Bank of England's nine-member Monetary Policy Committee, including Governor Mervyn King, voted this month to buy more bonds under its quantitative easing (QE) program even though inflation has been above target for five years and is unlikely to fall back to its 2 percent goal for another three years.

There are clear signs of a softening of the commitment to inflation control in these two countries.

HSBC lowers Global growth forecast

HSBC downgraded its global growth forecast on Friday, citing risks to emerging markets from the slowdown in China and the prospect of a scaling back of the Federal Reserve"s bond purchasing program.

"The Fed might be thinking of monetary tapering but, for us, the only tapering is of our growth forecasts," warned Stephen King, HSBC's chief economist, and Madhur Jha, HSBC's global economist, in their third quarter global outlook.

HSBC cut its forecast for world growth to 2.0 percent in 2013, down from an earlier prediction of 2.2 percent. It also downgraded its 2014 outlook to 2.6 percent. 

In a blow to those hopeful that emerging markets can propel global economic growth and boost anemic demand in the developed world, King and Jha said the downgrade was entirely due to concerns about the outlook in developing countries.

"While dominated by the reduction in our forecasts for China, the new numbers also reflect further sizable reductions in our projections for Brazil and India, among others. They are consistent with the idea that, even allowing for the emerging nations' obvious long-term growth advantages, there is no easy escape from deteriorating near-term economic fundamentals."

Dramatic Rise in Real State Prices in Big Cities a dangerous alert.

Dramatic home price gains in some of America's largest cities point to a potentially new housing bubble in those areas, according to Robert Shiller, who helped create a closely watched gauge of U.S. housing prices.

Shiller said big price gains in Las Vegas, Los Angeles, San Francisco, Miami and Phoenix, fueled in part by a large influx of outside investor money, are a possible sign of trouble ahead.

"There is a risk of bubbles in these cities," Shiller, a co-founder of the S&P/Case-Shiller Home Price Index, told Reuters on Wednesday. "House prices increases have been dramatic. It looks like the beginning of the last bubble."

There is a risk that prices could rise for another year in these areas and then fall back, hurting newer buyers as they try and compete in markets where low inventory and all-cash Wall Street investors were pushing prices upwards.

The latest Standard & Poor's Case-Shiller index report showed that prices of single-family homes in 20 U.S. metropolitan areas jumped 12.1 percent in April, marking the biggest annual gain in seven years. The gains were led by price increases of 24 percent in San Francisco, 22.3 percent in Las Vegas, 21.5 percent in Phoenix, 19 percent in Los Angeles and 13 percent in Miami.

Shiller said "it is still too early to predict how healthy the housing recovery is, and he was unsure if prices overall would continue to rise after another year.

But a property crash was unlikely in the near term,  because lending rules have tightened and government oversight of the mortgage industry has been strengthened.

 There were clear signs of buying behavior in some major cities that pointed to a housing market, that was already overheating, despite the 2008 crash''.

Chicago business barometer falls to 51.6

Growth in Chicago-area manufacturing decelerated in June, as the Chicago business barometer fell to a 51.6 reading from 58.7 in May. That's the largest monthly drop in over four years, though economists had noted that May's reading was unusually strong. Economists polled by MarketWatch had expected a 55.0 reading. 

Source: Marketwatch

From Xinhua: U.S. monetary policy to remain "data-dependent": Fed official

The path of U.S. monetary policy will remain "fully data-dependent" in line with the developments of economic growth, unemployment and inflation, and the current large-scale bond purchase program "will continue for some time," a senior Federal Reserve official said Thursday.

U.S. economic recovery will "continue to benefit from the knowledge that the Federal Reserve is committed to supporting growth as long as necessary," U.S. Fed Governor Jerome Powell said at the Washington-based thinktank Bipartisan Policy Center.

Last week, U.S. Fed policymakers painted a brighter picture of U.S. economy.

U.S. Fed Chairman Ben Bernanke jolted global financial market when he said later this year the central bank would start scaling back its massive bond-buying program, the so-called QE3, if the economy improves as expected and may end it by mid-2014 altogether.

"Recent volatility in markets is in part related to concerns about the possibility of a reduction in asset purchases," Powell said.

Asset purchases are being deployed to add near-term momentum to the economy. After the completion of those purchases, the purchased assets will remain on the Fed's balance sheet for some time and continue to put downward pressure on interest rates, he said

China's Central Bank will have a prudent monetary policy

China's central bank will continue to implement prudent monetary policies, but will conduct preemptive adjustments and fine tuning in an appropriate way when necessary, said its chief Zhou Xiaochuan on Friday.

He said the bank will work with other departments to guide financial institutions to maintain reasonable lending level, and will use multiple tools to adjust liquidity and keep the market overall stable, he said at the ongoing Lujiazui Forum in Shanghai.

Quotes of precious metals

Precious Metals  3 months futures

Gold                    1191.71

Silver                      18.77

Reducing Bond Porfolios

Investors pulled about $20 billion from mutual funds and exchange-traded funds (excluding money market funds) for the week ended Wednesday, according to Thomson Reuters unit Lipper, marking the biggest weekly net outflows since August 2011, when markets were roiled by the U.S. debt downgrade and Europe’s debt crisis.

The outflows followed Fed Chairman Ben Bernanke’s comments last week, in which he outlined a preliminary timetable for the wind down of the central bank’s bond-buying programs. “Investors continue to be spooked by the thought of ‘tapering,’” says Matthew Lemieux, an analyst at Lipper.

Investors pulled a net $4.5 billion from weekly reporting municipal-bond mutual funds and ETFs, the largest such outflow on record. Investment-grade corporate-bond mutual funds and ETFs saw their second-highest net outflow on record, with about $2.32 billion exiting these funds.

Fund flows related to the stock market offered a mixed message. Investors pulled $6.6 billion from U.S. stock ETFs, with the bulk of the outflows ($3.6 billion) coming from the ETF market’s largest fund, the SPDR S&P 500 (SPY). ETFs often attract a hefty dose of “hot” money that flows in and out from traders and hedge funds. The weekly outflow was the biggest since April 24.

Conversely, investors sent $282 million into U.S. stock mutual funds, illustrating how mom-and-pop — the retail investors who predominantly invest in mutual funds — stuck with stocks amid the recent turbulence

Japan´s May Unemployment Rate 4.1%

Japan's seasonally adjusted unemployment rate stood at 4.1 pct in May, unchanged from the previous month, the Ministry of Internal Affairs and Communications said Friday.

The number of jobless people dropped by 10,000 from April to 2.7 million after seasonal adjustment.

China's Economic Restructuring

Chinese Premier Wen Jiabao told citizens on Feb. 27, 2010 that to secure a steady and fast economic development, the most important thing is to well treat the relationship among economic restructuring, the transformation of development pattern and inflation control. Following are some facts about the country's economic restructuring: China has pledged more efforts to accelerate economic restructuring this year to make its growth more sustainable, after its economy posted a strong recovery of 8.7 percent growth in 2009, exceeding its target of 8 percent. Growth of the world's third largest economy slowed to 6.1 percent from a year earlier in the first quarter of last year, led by a slump in exports caused by the global financial crisis starting in 2008. The Political Bureau of the Communist Party of China Central Committee issued a statement Monday which vowed that the government would accelerate economic restructuring and push forward substantive progress in changing the mode of economic development this year, while continuing the proactive fiscal policy and moderately loose monetary policy. The nation's top leaders have reiterated the need for economic restructuring, which analysts said, would be the focus of this year's macro policy. Chinese President Hu Jintao said on Feb. 3 that "on the surface, the global financial crisis impacted on the speed of China's economic growth, but in essence it was the economic growth pattern that was worst hit." "The transformation of economic development mode brooks no delay based on a comprehensive judgement on international and domestic economic situation," Hu said. The key for the transformation was to achieve it "at an accelerated speed" and with practical effects, he noted. Chinese Premier Wen Jiabao said on Feb. 4 that development of science, education and culture was key to the transformation of China's economic growth mode and its sustainable development. He urged traditional industries should be upgraded with the latest technologies to enhance their efficiency and competitiveness. On Feb. 5, Chinese Vice Premier of China said that the country entered a key period of time when adjusting economic structure was the only approach to advance the country's sustainable development. To achieve the end, China should further promote domestic consumption, he said, emphasizing the important roles that employment and the social security net play in fuelling domestic demand. On Feb. 21, Li Yizhong, Minister of Industry and Information Technology, noted China's economic growth should shift its dependence to consumption, investment and exports from mainly on investment and export. Scientific advancement, labor quality and management innovation should replace resource investment to sustain economic growth, he said. To prop up growth, Chinese government has put in place several stimulus packages. Some aimed to push forward economic restructuring while striving to ensure growth. Source: Xinhua

3 Months Quotes for Precious Metals

Precious Metal Prices Quotes 3 Months

   Gold                  1,202.98

   Silver                     18.83

   Platinum             1,238.20

From BNN: Precious Metals Slump

Gold hit its lowest point in almost three years on Wednesday and was on course for a record quarterly loss after U.S. data reinforced expectations for an end to ultra-loose monetary policy.

Prices could slide to levels below $1,000 US per ounce, investors and analysts said, with stock markets rising and scant potential for U.S. or European data or developments to reverse an accelerating move out of bullion.

"Equities are up again. People want risk-on and gold is therefore seen as a source of cash and not as a safe haven, because that's not needed," said Simon Weeks, head of precious metals at the Bank of Nova Scotia.

Strong gains in U.S. orders for durable goods, the largest annual rise in house prices in seven years and rising consumer confidence fuelled speculation the Fed would rein in its $85 billion monthly bond-buying programme, which had helped push gold prices to record highs in recent years.

Spot gold slumped to its lowest since August 2010 at $1,223.54 an ounce and was down 3 percent at $1,237.81 an ounce at 1431 GMT. U.S. gold futures for August delivery were also down 3 percent at $1,236.70, having hit a low of $1,223.20.

"We bought gold for two reasons - because we were worried about the inflationary impact of policy and because we thought the financial system was going to fall apart," said Sean Corrigan, chief investment strategist at Diapason Commodities Management.

"Although it may be completely the wrong judgement, the market has decided that none of those at the moment is a concern."

Spot prices have fallen more than a quarter this year and by 22.8 percent this quarter, their biggest quarterly loss since Reuters data began in 1968.

"If you look at yields, they are going higher, and people are more bullish on the dollar - all of this creates a difficult environment for gold," UBS analyst Joni Teves said.

European share markets were up Wednesday. Gains in global stock markets this year will be a signpost of

more losses in gold, analysts say.

ASIA DEMAND EYED

The world's largest gold-backed exchange-traded fund, New York's SPDR Gold Shares (GLD-N), reported the biggest one-day drop in its holdings in more than two months at 16.23 tonnes on Tuesday. That brought the fund's total outflow for the year to 381 tonnes.

"There has been 550 tonnes of gold sold out of ETFs since mid-February," Natixis analyst Bernard Dahdah said. "That's the equivalent of saying we've added to the gold market an additional 11 percent on top of 2012's gold (mine) output."

Demand in number one consumer India is likely to fall this quarter as the government has  curbed gold imports to reduce a record current account deficit.

In the latest move, India's central bank told rural regional banks on Tuesday they could no longer provide loans against gold jewellery and coins.

Worries about a liquidity crunch in China, the world's second-largest gold consumer, drove down share prices despite attempts by the Chinese central bank to soothe markets. Physical gold demand could be hurt by a slowdown in Chinese growth, analysts said.

Silver prices fell further than gold, shedding more than 5 percent to its lowest since August 2010 at $18.39 an ounce. Spot prices were later down 3.5 percent at $18.88 an ounce.

From BNN Canada. Cooling Housing Market

The risk to the Canadian financial system from consumer indebtedness and the heated housing market has abated over the past year but is still present and merits monitoring, a Bank of Canada official said on Wednesday.

"We are seeing a moderation over the last year in both the buildup of household indebtedness and also the related imbalances in the housing market," said Bank of Canada Deputy Governor Timothy Lane in response to an audience question following a speech in Toronto.

"At the same time ... that's not to say that the risk has suddenly disappeared, and it's still a risk that we're watching very closely," he said.

Honda Motor will enter the market of business jets

Honda Motor Co., preparing to enter the market for business jets, said it's won two to three years of orders for what it calls "flying sports cars" and signaled the business will turn profitable before the end of the decade.

The aviation business is on track to turn profitable five years after it begins delivering planes as soon as next year, Michimasa Fujino, president of Honda Aircraft, said in an interview in Tokyo on Wednesday.Deliveries of the Honda jets, originally planned to begin this year, have been delayed because the company is awaiting approval from the U.S. Federal Aviation Administration, Fujino said. After four to five years, Honda may begin fleet sales as the increase of chartered flights turns business jets into forms of "air taxis," he said.

China Complains of Trade Protectionism

Chinese exporters have undergone an increasingly unfavorable trade climate this year as trade protectionism and yuan appreciation pressure have been on the rise amid the global financial crisis.

The following are major relevant cases, quotes and figures:

-- On Dec. 22, the European Union (EU) made a decision to extend dumping duties on leather footwear from China for another 15 months.

-- On Dec. 21, Zhou Xiaoyan, a Chinese Ministry of Commerce official, said as of the end of November, 19 countries and regions have launched 103 trade remedy investigations against Chinese products. Both the number of the cases and the money involved hit record high.

-- On Nov. 29, Chinese Premier Wen Jiabao said in Nanjing when meeting with three Euro Group leaders that China had maintained the stability of the exchange rate of the currency yuan, making an important contribution to global financial stability and economic development.

Wen said China would continue to enhance the flexibility of the yuan exchange rate, acting on its own initiative and in a controllable and gradual manner, and keep it basically stable at reasonable, balanced levels.

-- On Nov. 24, the United States made a decision to impose duties ranging from 10.36 percent to 15.78 percent on Chinese oil well pipes for alleged unfair subsidies.

-- On Nov. 15, Nobel economics laureate and New York Times columnist Paul Krugman pushed for a stronger yuan in an article entitled "World Out of Balance". He wrote, "China's weak-currency policy siphoned much-needed demand away from the rest of the world into the pockets of artificially competitive Chinese exporters."

Shaun Rein, founder and managing director of the China Market Research Group, a strategic market intelligence firm, said revaluing the yuan right now would "jeopardize the world's fledgling economic recovery". Rein argued, "It is better for American businesses for China to maintain current yuan rates until the worldwide recovery is on a firmer footing."

He stated that if the yuan were to appreciate, billions of U.S. dollars of purchasing power would be taken from American consumers, which he said satirically would not make the upcoming holiday season "such merry time"

IMF Paper. Subsidies on Fuel Products are fiscally costly and socially regressive

A recent working paper of the IMF shows that many countries subsidize the consumption of fuels,however the study shows that fuel subsidies are fiscally costly and socially regressive.

At a global level, a major cross-country study by the IMF showed that fuel subsidies generally crowd out high priority public spending, like health, education and infrastructure. They also put pressure on current account deficits, distort productive investment toward energy-intensive sectors and technologies, and contribute to global warming. Fuel subsidies are the opposite of carbon taxes, after all. But the study also showed that fuel subsidies are regressive, meaning that they actually benefit the rich much more than the poor.

Averaged across a large number of low-and middle-income countries, the study found that the top 20% of households capture six times more in benefits from fuel subsidies than the poorest 20%. Why? Because upper income households consume a lot more fuel products than poor ones, especially gasoline, which is the most regressive fuel product to subsidize. The image of a millionaire zooming by in his big SUV comes to mind. By contrast kerosene, which poor families are more likely to consume, is the least regressive product to subsidize.

Recognizing that fuel subsidies were reaching the neighborhood of 2% of GDP, and  crowding out more productive public spending, India’s government has taken bold steps over the past nine months to reduce fuel subsidies. Diesel prices have systematically been rising, there are plans to cap the number of subsidized Liquefied Petroleum Gas cylinders per household, and state electricity boards have been encouraged to set more cost-reflective power tariffs. These measures are welcome, as they also help to take pressure off the worsening current account deficit.

But what less widely understood is that reducing fuel subsidies is a pro-poor measure. In per capita terms, the top 10% of Indian households spends more than 20 times as much on fuel as the poorest 10%.  This includes both direct and indirect consumption – the latter being when producers transport food to market, for example,   using subsidized fuel. Low-income households consume mainly kerosene, while upper income households predominantly use petrol and LPG. 

The bottom 40% of families could be fully compensated for the move to market prices for less than a fifth of what government now spends on fuel subsidies, leaving significant savings to invest in roads, schools, and hospitals.

India´s Reform on Energy

According to The WSJ , price controls and quasi monopoly of state-owned Coal India, has produced lower investment in the Energy Industry.
 As a result of that policies India´s economic growth fell to 5% in the year ended in March,nearly half the rate growth it was five years ago.
"A major blackout last summer deprived 600 million Indians of electricity for about 48 hours. Rolling outages are common. Peak-hour power demand outstripped supply by 8.7% for the 12 months that ended March. Power sector stocks have lost 18% in the past year, even as the broader market gained 10%"
 The immediate problem is inadequate supply of coal. More than half of India's electric power comes from coal, most of it supplied by state-owned Coal Company, but it hasn´t met the
growing demand in past years.

But the government's now is beginning to address these problems.

Last week, lawmakers said generators that have supply agreements with Coal India can reduce the amount of coal they buy from the state-owned miner to about 65% from 80% earlier, importing the difference. The government also said power generators can pass on the additional cost of imported coal to distributors.

Separately, power distributors owned by eight provincial governments have hiked end-consumer prices by up to 24% this year. This should help power generators sell more expensive power to distributors.

The power sector will attract more investment. In the year to March 31, investment in infrastructure like power grew at only 7.8%, half the average rate since 1991.

 The latest measures may signal New Delhi is willing to move further on power pricing reform,and the end of India´s power shortages.

China's Foreign Minister Wang Yi,countries seeking help from third parties, for their territorial claims in the South China Sea are doomed

Countries with territorial claims in the South China Sea that look for help from third parties will find their efforts "futile", China's Foreign Minister Wang Yi warned on Thursday, adding that the path of confrontation would be "doomed".

Beijing's assertion of sovereignty over a vast stretch of the South ChinaSea has set it directly against Vietnam and the Philippines, while Brunei, Taiwan and Malaysia also lay claim to other parts of the sea, making it Asia's biggest potential military troublespot.

At stake are potentially massive offshore oil reserves. The seas also lie on shipping lanes and fishing grounds.

Wang didn't name any third countries, but the United States is a close ally of Taiwan and the Philippines, and has good or improving relations with the other nations laying claim to all or part of the South China Sea.

"If certain claimant countries choose confrontation, that path will be doomed," Wang said after a speech at the annual Tsinghua World Peace Forum.

"If such countries try to reinforce their poorly grounded claims through the help of external forces, that will be futile and will eventually prove to be a strategic miscalculation not worth the effort."

Source: Reuters

China fights corruption

The National Audit Office (NAO) on Thursday said it has found that some state-owned financial institutions have violated lending regulations.

NAO said 27 branches of state-owned financial institutions provided loans worth a combined total of 28.44 billion yuan (4.6 billion U.S. dollars) for projects without proper procedures or necessary guarantee.

Nine branches charged extra fees totaling 421 million yuan for small business loans and export credit services, auditor general of NAO, Liu Jiayi, said in an auditing report presented to the country's top legislature.

Meanwhile, 18.39 billion yuan was embezzled by clients and 2.2 billion yuan was transferred to private financial markets for usurious loans, NAO said.

NAO said 22.03 billion yuan in illegal or embezzled loans has been retrieved and authorities have prosecuted 693 people in relation.

Source Xinhua

Transition from Easy Money to less Easy,is a matter of Communication to Calm Markets

The comments by Fed Chairman, that they will start to taper the accomodative monetary policy, has send bond markets in to a shock,and has affected negatively the bond of Governments,Corporate, and emerging market debt.
The key question for investors is to assess whether central banks have changed the way they react to incoming data, or whether the incoming data have changed. This is particularly difficult in an environment where unorthodox policies like quantitative easing have become prevalent.
The Bank of England's Financial Stability Report this week warned in two consecutive sentences of the risks arising both from sharply higher interest rates and an intensification of the search for yield that has driven rates down.
Fed Chairman Ben Bernanke has been at pains to argue that the shift in Fed thinking is down to a better economic outlook, but that monetary policy will remain extremely loose.
Economic data will be the determining factor. If the data suggest a sustainable, accelerating U.S. recovery, then it could be painful for fixed-income investors. The degree to which the Fed can secure the short end of the curve will be vital. But weaker data might not be a panacea either: It will test the Fed's ability to communicate how the longer-term outlook, and hence the policy reaction, is changing. Either way, volatility is likely to stay high.


Excerpts from the WSJ

Price of Bonds Stabilizing after GDP growth Data. And Fed Officials Speeches to Calm Markets.

U.S. Treasuries prices gained
on Thursday as bond markets showed signs of stabilizing after a
dramatic selloff and before the Treasury's auction of $29
billion of seven-year notes, the final sale of $99 billion in
new coupon-bearing supply this week.

Downward revisions to first quarter gross domestic product
data on Wednesday led some investors to speculate that a
pullback of stimulus may still be far away. Speeches from
Federal Reserve officials in recent days have also sought to
soothe the markets with statements that the removal of stimulus
is likely to be slow and depend on the strength or weakness of
data.

Source. Reuters

From WSJ. Bonds Quotes

  Goverment Bonds                                                         Change%    Yield

U.S. 3 Month			0/32	0.058
U.S. 2 Year			1/32	0.363
U.S. 5 Year			1 29/32	1.398
U.S. 10 Year			15/32	2.484
U.S. 30 Year			27/32	3.532
Germany 2 Year			1/32	0.194
Germany 10 Year			17/32	1.710
Italy 2 Year			15/32	2.271
Italy 10 Year			1 9/32	4.537
Japan 2 Year			0/32	0.141
Japan 10 Year			9/32	0.841
Spain 2 Year			6/32	2.214
Spain 10 Year			27/32	4.705
U.K. 2 Year			1/32	0.403
U.K. 10 Year			12/32	2.411