G20 Calls for Exchange Rate Flexibility

Finance Leaders Call for Exchange Rate Flexibility; IMF Says a Few Bearing Brunt of Turbulence.

Finance leaders of the world's 20 biggest economies called Sunday for greater exchange rate flexibility from countries with large current account surpluses in an apparent reference to China.

China, a member of the group known as the G20, had been expected to come under pressure at the group's two-day meeting in South Africa to re-value its tightly controlled yuan, which has remained stationary while other currencies, such as the Canadian dollar, the euro and Brazil's real, have soared.

But France's finance minister, Christine Lagarde, said that in the group discussions "we did not specifically point a finger at any particular currency."

Meanwhile, the new managing director of the International Monetary Fund, Dominique Strauss-Kahn, promised to resolve or make substantial progress within months on developing countries' two-year-old demands for a bigger voice in that institution.

The Group of 20 warned of a likely slowdown in global economic growth but said it was expected to be modest. "Its extent and duration remains difficult to predict," said a communique ending the two-day summit of finance ministers and central bank governors from the world's most developed and emerging economies.

They resolved to work in concert to resolve the currency problems but provided no prescription. "We also agreed that an orderly unwinding of global imbalances, while sustaining global growth, is a shared responsibility," the communique said.

The global imbalance, driven partly by the huge current account deficit of the United States and higher commodity prices, has produced large current account surpluses and benefited currencies in several emerging economies, especially China.

The United States, with the dollar slumping to historic lows, has said China must ease its control of the yuan and was expected to be joined in that demand for the first time by European leaders at the conference.

"The currencies need to be in such an equilibrium where it facilitates trade," Lagarde, the French finance minister, told reporters. Strauss-Kahn said, "Another concern is some countries have on their shoulders a much larger part of the burden than they should -- the Canadian dollar, the euro, the Brazilian currency."

To rebalance the global economy, the G20 recommended:

- Steps to boost national saving in the United States.

- Further progress on growth-enhancing reforms in Europe.

- Further structural reforms and fiscal consolidation in Japan.

- Reforms to boost domestic demand in emerging Asia, together with greater exchange rate flexibility in a number of countries with current account surpluses.

- Increased spending in oil-producing countries.

The group called for better financial supervision and management of financial risks. It appointed a committee to study the current economic turbulence, saying there are "important new lessons" to be learned from understanding the origins and the way financial shocks are transmitted.

Delegates said they were pleased by the resilience of emerging markets and other developing countries to the recent economic trouble. Lagarde said it could be a result of IMF oversight and suggested developing countries could benefit from this.

The meeting also discussed the economic implications of climate change. South Africa's finance minister, Trevor Manuel, pointed to climate change affecting wheat production in Australia and said there was global concern about higher food and energy prices.

Strauss-Kahn said the G20 was agreed that developing nations should have a bigger quota and voice in the IMF, where, under a system devised 63 years ago, richer countries have more power. The weight of each nation's vote is tied to its quota, or financial commitments to the institution, which are determined by the sizes of their economies and currency reserves and openness to trade and capital flows.

"The fund needs to be reshaped," Strauss-Kahn said. "Times have changed. Some emerging countries have much more economic influence than they had." What could not be agreed was which nations would give up quotas and votes, he said. "The result must be a shift in quotas from developing countries to emerging ones. The question is how big is this shift going to be -- who is going to lose (some quotas), who's going to win."

The G20 brings together developed and emerging economies that together represent two-thirds of the world's population, 90 percent of gross domestic product and more than 80 percent of world trade.

Chinese Banks Hit the Acquisition Trail

As financial institutions in the developed world become ever more mired in the credit crisis, China's bankers are scouring the world for acquisition targets.

Flush with cash from some of the world's largest public share sales and with the explicit backing of the ruling Communist party in Beijing, the banks are looking abroad to diversify out of the highly competitive Chinese market and to buy foreign expertise that can improve their still-basic management structures.

The situation is a far cry from that prevailing two years ago when foreign banks were lining up to buy shares in Chinese banks to bestow the legitimacy that they needed to sell shares to the world through Hong Kong listings.

Apart from providing a vote of confidence in China's much-maligned and previously insolvent banking sector, foreign investors such as Goldman Sachs, Royal Bank of Scotland, Bank of America and Temasek were supposed to provide the much-needed foreign expertise, particularly in the area of risk management.

But according to numerous people familiar with the deals, the foreigners promised little and have delivered even less, in part because the Chinese banks have not been willing or able to make the most of what their strategic investors offer.

Then the Chinese banks decided they would get that expertise by turning the tables and making their own offshore acquisitions. This has been gathering pace with varying degrees of success.

At the start of this year, Bank of China was the undisputed ambassador for Chinese banking on the international stage, with branches all over the world and a long history as the government's designated foreign exchange lender.

In November 2006, BoC paid $965m for a Singaporean aircraft-leasing business, making it the first of its peers to make a significant offshore equity investment outside Hong Kong. But only one year later and BoC is scrambling to find another large acquisition target to match Industrial and Commercial Bank of China, China Development Bank, Minsheng Bank and Citic Securities, all of which have struck deals to acquire stakes in overseas financial institutions this year.

"BoC is starting to look a bit lame and will have to do something soon," said one senior foreign banking executive. BoC is at present competing with China Construction Bank for the government's approval to go after Standard Chartered but CCB appears to have a stronger case.

The government wants the state-owned banks to compete hard with each other but will not let any of them fall too far behind. While more than 20 per cent of BoC's business is international, CCB's overseas business makes up just 1 per cent of its total and the government has decided it must make a large offshore acquisition to boost its international presence.

The other bank showing interest in Standard Chartered is ICBC, China's largest commercial lender, but the government is - perversely - unlikely to pick it as the designated buyer because it is already doing too well in its foray abroad.

ICBC is the only Chinese bank to have outlined a clear offshore expansion strategy - featuring an emphasis on emerging markets and areas bordering China - and then implemented it, by buying stakes in banks in Indonesia, Macau and Africa in the space of one year. Perhaps coincidentally, ICBC is the only large Chinese bank whose chairman is not a former official from China's central bank.

Weekend's Special: The Grand Canal of China

The Grand Canal is the world's longest man-made waterway, being 1,800 kilometers long. The canal connects the present cities of Beijing in the north and Hangzhou in the south, which served as dynastic capitals in the past, and contains 24 locks and 60 bridges. Since most of China's major rivers flow from west to east, the fact that the Grand Canal runs north and south provides it as an important connector between the Yangtze River valley and the Yellow River valley, and other minor river systems. It is being restored as a water-diversion conduit.

The series of waterways in eastern China is not only very long, but also very old, which makes the Grand Canal a masterpiece of both the ancient and the new. The oldest section, that between the Yangtze River and the Huang He, was constructed during the 4th and 5th centuries B.C.

The building of the canal began in 486 B.C. during the Zhou Dynastry. It was extended during the Qi Dynastry, and later by Emporor Yangdi of the Sui Dynasty during six years of furious construction from 605-610 A.D.

The shifting of China's "breadbasket" from the wheat and millet producing regions of the north to the rice fields of the south prompted Sui Dynasty emperors in the 6th century to construct the canal linking this productive southern region to the northern captials. Beginning in 584, existing portions of the canal, dating as far back as the Zhou danasty, were linked together into a unified system that streched some 1800 kilometers.

The southern section connected the north to Yangzhou on the Yangtze river. A branch built in 608-609 that led to the Beijing region was designed to supply the armies protecting the north and northeastern frontiers. The Grand Canal greatly improved the administration and defense of China and served to increase the economic interdependence of the north and south.

The political unity under the Sui made it possible to build the Grand Imperial Canal. Building techniques were primitive, and the peasants, who did most of the work, endured much suffering. About half of the six million men recruited to build the Canal died at their work. This contributed to the downfall of the shortlived Sui Dynasty (589-618).

This "artificial Nile" accomplished for China what the real Nile had done for Egypt thousands of years ago. It integrated the north and the south and formed the basis for a unfied national economy. It also restored the authority of the imperial officials who were needed for the administration and maintenance of the Canal. Hence the foundations were laid for the brilliant epoch of the Tang Dynasty (618-907) as China emerged as the most powerful state in the world.

The Grand Canal is divided into seven parts with different names: Tonghui River (Beijing - Tong County), North Canal (Tong County - Tianjin), South Canal (southern Tianjin - Linqing, Shandong), Lu Canal (Linqing - Taierzhuang), Middle Canal (Taierzhuang - Huaiyin, Jiangsu), Li Canal (Huaiyin - Yangzhou), and finally, Jiangnan Canal (Zhenjiang - Hangzhou, Zhejiang).

Grand Canal Scenery

There are many famous tourist cities scatted along the Grand Canal, including Jining, Xuzhou, Huai'an, Yangzhou, Wuxi, Suzhou, and Hangzhou. No matter in which city, the Grand Canal is picturesque with its banks full of cultural relics.

In Zaozhuang, Shandong, the Grand Canal passes Weishanhu Lake and forms a marvellous sight. In the lake, there is the river; and in the river, there is the lake. Here, visitors can see men fishing, casting their nets into the river on the boats floating on the lake. Some of them are angling at ease and some are driving cormorants sitting in their boats. It is a place where visitors can have a look at the oldest way of fishing.

In Huai'an, Jiangsu, there is an ancient wharf, and the museum reflects the Grand Canal's water transportation history. The spectacular scene of the Grand Canal, the old Yellow River and Huaihe River meeting together is also within the view.

In Yangzhou, Jiangsu, there is a spectacular scene formed as the Yangtze River and the Grand Canal meet. Lots of historical relics and human landscapes are found scatted along the banks of the Canal. The Shuidou Gate and Dongguan Ancient Ferry are the witnesses of the ancient harbour. There are also irrigation works and the buildings of Yangzhou, and the housing of the merchants dealing with salt business such as the Ge Garden can be admired.

In Suzhou, Jiangsu, visitors can travel along in a painted boat and appreciate the Grand Canal scenery for about 16 kilometres. There are ten land and water city gates, together with eighteen ancient bridges, to greet visitors cruising along the river.

Hangzhou Section Scenery: Landscapes along the Grand Canal in Hangzhou section provide numerous sceneries and can be admired. Among them there are the newly-built China Grand Canal Museum, two landscape belts along the banks of the Grand Canal; two squares - the West Lake Cultural Square and the Grand Canal Cultural Square; three parks - Genshan Park, Qingsha Park and Beixing Park, and six bridge ports and fifteen bridges.

The China Grand Canal Museum, which opened to visitors on Oct. 1st, 2006, is the first museum in China with the theme of the Grand Canal. The Genshan Park is featured with the waterscape, while Qingsha Park presents the traditional streets to visitors. The mysterious Beixing Park brings out the best scene, with the adjacent Grand Canal Cultural Square. The fifteen bridges over the Grand Canal are very characteristic, with each full of its unique scene, especially at night. Visitors can also have a look at the site of Fuyi Granary, which is the famous granary in the Qing Dynasty (1644 - 1911) in Hangzhou.

A visitor can admire the moon of the West Lake, the tidewater of the Qiantang River, and boating on the Grand Canal. This is a fantastic evening in Hangzhou.

Grand Canal Cruise

The most popular section to cruise on the Grand Canal is the section that passes through Jiangsu and Zhejiang Provinces. The first cruise line on the Grand Canal was launched in Wuxi City, Jiangsu Province in the early 1980s, and has attracted numerous visitors worldwide. The line later expanded to more cities including Suzhou, Changzhou, Yangzhou and Hangzhou.

There are Cruise ships on the Grand Canal from Yangzhou to Suzhou. In Hangzhou section, there are hydro-busses leaving from different wharfs that offer visitors a chance to admire the Grand Canal scenery in less than two hours.

Weekend's Featured: ASEAN Summit: Singapore Pushes Economics, Environment

Singapore Prime Minister Urges ASEAN Nations to Boost Economic Ties; Address Environment Woes.

Southeast Asian countries must jointly build a cohesive economic community to compete with China and India -- but not at the expense of the environment -- Singapore's prime minister said Saturday. Addressing a business leaders' meeting ahead of the annual Association of Southeast Asian Nations summit starting Monday in Singapore, Prime Minister Lee Hsien Loong said ASEAN should be the root of Asian economic growth.

"Our countries offer complementary advantages to businesses, and a neutral core around which the rest of Asia can build economic ties, and a regional framework of cooperation," Lee said in his keynote address at the ASEAN business summit. "To sustain this, ASEAN has to become more integrated and cohesive. Only thus can we keep up with larger and stronger economies like China and India," he said.

Foreign investments flowing into Southeast Asia hit a record high last year and the region has moved toward freer trade. Still, it grapples with pockets of poverty and protectionism, as well as daunting competition from China and India.

ASEAN countries agreed last year to form by 2015 an ASEAN Economic Community -- a single market and production base with a free flow of goods, services, investments and skilled labor.

Member nations will sign a blueprint for the creation of the European Union-style single market in the coming week, Lee said. "The blueprint sets out clear milestones for removing trade barriers among member countries and for implementing smooth and efficient business processes across borders," Lee said.

ASEAN has a market of more than half a billion people with a combined gross domestic product -- the sum of all goods and services -- in excess of $500 billion. The blueprint, a draft of which was seen by The Associated Press, allows for some flexibility in the enforcement of free-trade obligations.

Lee said a more integrated ASEAN would be better able to strengthen relations with its trading and investment partners. He noted that the regional bloc has been negotiating free trade agreements with China, South Korea, Japan, India, Australia and New Zealand, as well as the European Union.

The prime minister also said ASEAN must strengthen efforts to address energy security and climate change, although he acknowledged that would be a challenge for many countries. "Unbridled growth without heed to environmental consequences will ultimately be disastrous. But neither can countries lightly sacrifice economic growth and higher living standards for our peoples," he said.

He urged member countries to "play their part" as responsible members of the international community and participate in global efforts to tackle environmental problems.

ASEAN's members are Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.

Saudi Minister Discourages Citing Dollar

Saudi Arabia Seeks to Protect Dollar by Not Mentioning Its Decline in OPEC Declaration.

The accidental airing of a closed OPEC session Friday provided a surprise glimpse into a sensitive debate over the weakening U.S. dollar, with Saudi Arabia's foreign minister warning that even talking publicly about the currency's decline could further hurt its value.

The high-profile blunder ahead of a rare OPEC summit showed the debate as Iran attempted to convince other member countries to express concern over dollar depreciation in the meeting's final declaration.

Oil is priced in dollars on the world market, and its depreciation has concerned oil producers because it has contributed to rising crude prices and has eroded the value of their dollar reserves. Cartel officials have resisted pressure to increase oil production to ease prices.

"The reality is that we have this problem. I think we should draft the declaration to reflect our concerns," Iranian Foreign Minister Manouchehr Mottaki said during a pre-summit meeting here with fellow ministers from the Organization of Petroleum Exporting Countries.

But Saud al-Faisal, foreign minister of U.S. ally Saudi Arabia, came out against the proposal with unusually frank comments. "In my feeling, the mere mention that the OPEC countries are studying the issue of the dollar is itself going to have an impact that endangers the interests of the countries," he said. "We all should be worried if any action that we take will lead us to do some injury to our returns on our product," said al-Faisal. "Nobody wants to have less money than more money. I am sure that we all agree on that."

The closed meeting was accidentally broadcast to journalists and after approximately 40 minutes, an official rushed into the press room and yanked the television cable out of the wall.

A public declaration by OPEC expressing concern about the falling value of the dollar could send the currency even lower, putting at risk the vast dollar holdings oil producers have generated as crude prices have soared to record levels.

Iran and Venezuela have proposed trading oil in a basket of currencies to replace the historic link to the dollar, but they have been unable to generate enough support from fellow OPEC members. Both nations have antagonistic relationships with the U.S., suggesting their proposals may have a political motivation as well.

Following the meeting, OPEC Secretary General Abdalla Salem el-Badri said the group had decided not to mention concern over dollar depreciation in the declaration. "We discussed it among ourselves, but I will tell you, you will not see it in the final declaration," said el-Badri. "I told you ... many times that we are concerned, but this is a member country policy."

Saudi Foreign Minister al-Faisal suggested during the meeting that OPEC analyze the impact of dollar depreciation without documenting its efforts or concern. "This is not new. We have done this in the past, decide to study something without putting down on paper that we are going to study it so that we avoid any implication that will bring adverse effect our countries' finances," said al-Faisal.

Not everyone agreed with the Saudi foreign minister in the meeting. Nigerian Finance Minister Shamsuddeen Usman suggested accommodating Iran's proposed addition to the declaration. "While underlining our concern for the continued depreciation of the dollar and its adverse impact on our revenues, we instruct our finance ministers to study the issue exhaustively and advise us on ways to safeguard the purchasing power of our revenues, of our members' revenues," Usman suggested the statement should read.

Although the issue of dollar depreciation took center stage on the eve of the upcoming summit, the run-up to the meeting was also dominated by speculation over whether OPEC would raise production following recent oil price increases that have closed in on $100.

The record oil prices prompted U.S. Energy Secretary Samuel Bodman to call on OPEC to increase production earlier this week, but cartel officials have said they will hold off any decision until the group meets next month in Abu Dhabi, United Arab Emirates.

Fed and Markets Set to Clash on Rates

The risk of a collision between the Federal Reserve and the markets grew on Friday after Fed governor Randall Kroszner made it clear he believed that the US central bank was not planning to cut interest rates at its next policy meeting, but was largely ignored by investors.

He said: "The downside risks to growth now appear to be roughly balanced by the upside risks to inflation." Data and information received since the Fed's October meeting "have not changed my thinking in this regard", he added.

However, the federal funds futures market on Friday priced in a more-than 80 per cent probability that the Fed would cut rates in December, while the yield on two-year Treasuries fell.

The standoff came as Hank Paulson, US Treasury secretary, kept up his increasingly vocal advocacy of the "strong dollar policy" in an apparent bid to reassure global investors that the US was not indifferent to the fate of its currency. The Treasury secretary told reporters in South Africa that he "very much" supported a strong dollar and believed that the ­"fundamental, long-term strengths" of the US economy "will be reflected in currency markets".

The dollar, which has shown some tentative signs of stabilisation this week, rose against the yen but fell against the euro and sterling.

Mr Kroszner said that in the near-term "the economy will probably go through a rough patch" with fresh falls in house prices, fewer homes being built and subdued spending by ­consumers. However, he said the Fed had anticipated this when it cut rates in September and October. "Looking further ahead, the current stance of monetary policy should help the economy get through the rough patch during the next year, with growth then likely to return to its longer run sustainable rate," he said.

While Mr Kroszner formally speaks only for himself, his views are shared by many other senior Fed officials.

Peter Hooper, chief economist at Deutsche Bank securities, said he was "troubled" by the gap between what Fed officials were saying and what the market was ­pricing. Vincent Reinhart, a former chief monetary economist at the Fed, said the central bank was clearly stating that it "views the risks as balanced and is reluctant to ease further".

Andrew Balls, central bank strategist at Pimco, said market participants appeared more focused than Fed policymakers on problems in the financial sector that could lead to tighter credit conditions. Larry Meyer, a former Fed governor, said the central bank "has put itself in a box to some degree." He said credit markets had clearly deteriorated since the last Fed meeting.

Barclays, Others See More Write-Downs

Another Day, Another Batch of Write-Downs: Barclays Says Portfolio Has Taken $2.7 Billion Hit.

Checking to see which bank is revealing billion-dollar losses in its portfolio has become something of a daily routine on Wall Street. On Thursday, traders fretted about Barclays' multibillion dollar write-down over their morning coffee.

The British bank estimated it would write down $2.7 billion for losses on securities linked to mortgages for borrowers with poor credit. Barclays, along with Wells Fargo & Co., SunTrust Banks Inc. and General Electric Asset Management joined the slew of financial companies anticipating, in total, more than $30 billion in losses this quarter.

That figure doesn't exceed the approximately $44 billion written down by financial institutions in the third quarter, but the fourth quarter is only half-way over -- leaving investors wondering how many more write-downs are on the way. Deutsche Bank analysts estimate that over the next few years, the current credit crisis will have led to about $300 billion to $400 billion in losses for companies with investments exposed to subprime loans.

Wells Fargo and SunTrust executives said Thursday they anticipate more losses from defaulting mortgages this quarter, although they have little exposure to the problematic debt instruments known as collateralized debt obligations. "We have not seen a nationwide decline in housing like this since the Great Depression," said Wells Fargo CEO John Stumpf.

Stumpf's assessment helped push stocks down Thursday. The Dow Jones industrial average lost more than 120 points. Also Thursday, General Electric Asset Management said outside investors have withdrawn $600 million from a $5.6 billion fund involving mortgage-backed securities. Late Wednesday, NovaStar Financial Inc. said it lost about $252 million due to mortgages.

Many investors are bracing for UBS AG to report a substantial write-down -- a Lehman Brothers analyst is reportedly estimating a write-down of $7 billion to $8 billion. However, the Swiss bank said it expects to post a fourth-quarter profit.

Earlier this week, Britain's HSBC said it would write down $3.4 billion; Bear Stearns Cos. announced a write-down of $1.2 billion; and Bank of America reported a $3.3 billion write-down. Those followed even larger estimates a few weeks ago from Citigroup Inc. and Merrill Lynch & Co., which expect write-downs as much as $11 billion and $6 billion, respectively.

A write-down is a calculation of how much one's debt holdings -- in either actual mortgages, or instruments like CDOs that have mortgage exposure -- have lost value.

Because it's so hard to know how much some investments are worth in the tight credit markets, Wall Street remains uncertain how high losses really are. Certain accounting rules require companies to price their holdings according to the market value; when there is no market, they have to estimate.

Neri Bukspan, chief accountant for Standard & Poor's credit market services, likened the process to figuring out how much your house is worth when no one in your neighborhood can sell theirs -- a scenario many U.S. homeowners can relate to right now. "Some argue this is highly judgmental, that management could introduce their own bias," Bukspan said.

Furthermore, if the credit markets worsen, banks will inevitably have to write down their portfolios further. The credit markets tightened up in August, when concerns about plummeting home prices and missed mortgage payments came to a head.

Industry experts say home prices will likely keep falling because lending standards were the most lax in late 2006 and early 2007. The adjustable-rate mortgages issued then won't reset until late 2008 or early 2009, so investors should brace for a couple more years of increasing foreclosures -- and in turn, scarce demand for mortgage-backed securities.

Banks appear to be erring on the side of caution, said S&P bank analyst Scott Sprinzen. "But one thing to keep in mind, under accounting rules, you can't deliberately build in a downside cushion."

Barclays Capital chief executive Bob Diamond said there was no risk of further write-downs of Barclays' residential mortgage-backed CDOs, but declined to say if it would make additional write-downs from exposure in other parts of its business.

Banks can hedge, but not all techniques are successful. A recent estimate of the S&P 500 financial services sector showed a net drop in third-quarter profits of 33 percent. Banks are generally not selling their distressed securities to cut losses, because they're betting that eventually, demand will return and the portfolios will rebound, which may lead to a windfall.

Renewed Stress Apparent in Money Markets

Persistent credit market concerns, worries about liquidity and a mixed bag of economic data ensured the mood in financial markets remained nervous on Thursday.

Barclays, the UK bank, unveiled a £1.3bn writedown on securities linked to US subprime mortgages. While this was much less than had been rumoured last week, the news failed to soothe lingering fears about the impact of the credit squeeze.

Renewed stress was apparent in money markets on both sides of the Atlantic, suggesting banks remain very reluctant to lend to each other. The two-month sterling Libor rate rose to a two-month high, while three-month sterling Libor moved to 48 basis points above the expected level of UK base rates in three months' time. Overnight dollar Libor rose 18bp to 4.955 per cent from 4.774 per cent on Wednesday.

Investors also had to get to grips with a barrage of US economic reports. "Today's mix of data was positive for the economy on net, with a particularly strong Empire State index that continued to defy credit turmoil effects," said Rick MacDonald at Action Economics.

The New York Fed's index of manufacturing activity slipped only moderately to 27.4 in November from 28.8 last month, which was the highest reading since July 2004. Data on the labour market were not quite so encouraging, however. Initial jobless claims rose by a bigger-than-forecast 20,000 to 339,000, while the four-week moving average held steady at 330,000, the highest since April. "If this soft trend extends into next week's report, it will point to a weak outcome for November payrolls," said Ted Wieseman, economist at Morgan Stanley.

US inflation figures were more benign. Headline US consumer prices rose 0.3 per cent last month while the core rate - which excludes food and energy prices - advanced 0.2 per cent. Both increases were in-line with expectations.

"Overall, core inflation remains at a level the Fed will likely be comfortable with," said Drew Matus, economist at Lehman Brothers. "While a weakening dollar and elevated commodity prices have increased inflation concerns, soft growth, weak rents and well-anchored inflation expectations suggest a turn higher in the inflation trend remains unlikely."

Headline inflation in the eurozone was confirmed at an annual rate of 2.6 per cent in October, up from 2.1 per cent in September. Core inflation edged up to 2.1 per cent. "The European Central Bank will obviously be far from happy with the October data; and it will note that even though core inflation is currently only edging up, it is nevertheless now atits highest level since mid-2004," said Howard Archer, economist at Global Insight. "Even so, we still expect the ECB to hold off from raising interest rates further."

Equity markets were broadly weaker. The Dow Jones Industrial Average took a plunge during afternoon session and closed down 0.9 per cent, while the S&P 500 was down 1.3 per cent and the Nasdaq Composite was down 1 per cent.

There were bigger losses for European and Asian stocks. The FTSE Eurofirst 300 index fell 1.1 per cent, while in Tokyo, the Nikkei 225 Average slipped 0.7 per cent and most other markets in the region shed between 1 and 2 per cent. In Shanghai, the composite index ended 0.9 per cent lower amid concerns that Chinese interest rates might be raised as early as Friday.

The uncertain mood surrounding equity markets underpinned gains forgovernment bonds. The yield on the rate-sensitive two-year US Treasury fell 6bp to 3.44 per cent; the 10-year yield was 2bp lower at 4.23 per cent.

On the currency markets, the yen staged a broad rally as weaker equities encouraged an unwinding of carry trades in which investors sell the Japanese currency to fund purchases of higher-yielding assets. The pound remained under pressure after weak UK retail sales data increased the likelihood of cuts in UK interest rates.

In commodities, oil prices retreated sharply after weekly US inventories data showed an unexpected increase in stockpiles last week. December West Texas Intermediate was hovering around the $92 a barrel mark after closing on Wednesday at $94.09. Gold fell below the $800 a troy ounce level.

BoE King Warns of Slowing Growth

Two interest rate cuts will be needed next year to stem an economic slowdown, the Bank of England indicated yesterday in its most gloomy inflation report for years.

Mervyn King, the Bank governor, said the global credit squeeze would hit UK growth hard early next year, with risks of a further fallout from falling share prices and currency tensions in the world economy.

Money market investors and economists interpreted his comments as a clear signal that rates would soon come down. Mr King said decisions on rates would be difficult in the coming months and the important question was whether "the slowing we expect to see, or we're going to see, [is] bigger than the slowing that we have wanted to see".

The Bank's forecasts showed inflation falling well below its 2 per cent target in two years if UK interest rates were held at 5.75 per cent but on target if the Bank cut rates twice in 2008. Mr King said the forecast slowdown was "certainly sharp compared with a very small movement that we have seen over the last 10 years".

The pessimistic outlook for growth at the start of 2008 results from the Bank's judgment that credit conditions will tighten for companies and households. More expensive borrowing would hit corporate investment, the property market and construction, while also encouraging households to shift from borrowing to saving.

Mr King also made it clear that he thought equity markets had not adequately priced risk yet and warned that a significant risk to the world economy lay in the threat of falling equity prices. He said the tensions in global currency markets would continue as the huge trade imbalances began to unwind.

"I came away from the IMF meetings in Washington recently more concerned about the implications of these tensions precisely because the unwinding of the imbalances is not just a hypothetical prospect out there, but is happening now and I think this is a major concern," he said.

Economists were united in their expectation of rate cuts after listening to the governor. Malcolm Barr, of JP Morgan, said the MPC had opened the door to lower rates before February by "signalling a willingness to act reasonably swiftly to limit downside risks to growth".

Alan Clarke, of BNP Paribas, said the report was so pessimistic on growth he now believed the MPC would cut rates in December, especially if mortgage approval figures and service sector surveys continued to be weak.

Asked whether the retail run on Northern Rock was something that had made him consider resignation, Mr King said: "No." He again refused to be drawn on whether he sought another term as governor, now saying that it was a matter for the new year.

The US Federal Reserve, meanwhile, unveiled a shake-up of its communications strategy, adopting many of the features of an inflation-targeting approach to monetary policy without actually stating such a target. The Fed will start publishing more frequent, more detailed and longer-range economic forecasts including, for the first time, forecasts for inflation including food and energy.

China and India Plan to Stick to Coal

China and India Expected to Stick With Coal Despite Calls to Reduce Carbon Emissions.

China and India are under pressure to reduce their carbon emissions, but energy executives and government representatives agreed Wednesday that the two booming economies will be sticking with coal -- whether the rest of the world likes it or not.

The international community must help the two countries develop cleaner coal operations and offer them incentives to move away from the cheap and abundant fuel, or risk a serious blow to efforts to fight climate change, said officials at an energy conference in Rome.

"In terms of power generation, for those two countries it will be primarily coal, because that's what they have, it's lower cost and it's reliable," John Krenicki, president and chief executive of GE Energy said. "These countries are going to get richer and will face issues that are similar to Western Europe and the United States on environmental challenges. They're going to have to invest in alternative technologies," such as nuclear and wind, Krenicki said.

Nuclear energy has returned to vogue as an alternative to coal-fired power plants amid concerns about greenhouse gas emissions. New nuclear reactors are being built or planned in the U.S. and abroad -- growth on which GE Energy, which also designs nuclear reactors, hopes to capitalize.

Coal has become the fuel of choice in much of the world, driven by economic growth in China and India and a return to coal for electric power generally, including in the United States. But the growth of coal-burning is also contributing to global warming, and is linked to environmental and health issues ranging from acid rain to asthma.

Indian officials at the World Energy Congress acknowledged that coal remains the most affordable source for their country.

"India and China need cleaner coal technology ... that is the technology they are going to use for generating power, whether the rest of the world likes it or not. That's the only fuel that they can afford at the moment," said Anil Razdan, secretary of the Indian Ministry of Power. While India is increasing investments in nuclear and wind power, coal developments are essential as the country works to bring electricity to some 500 million people that have no access, he said.

Worldwide demand for coal is projected to rise by about 60 percent through 2030 to 6.9 billion tons a year, most of it going to electrical power plants. China is due to overtake the United States as the world's biggest emitter of carbon dioxide this year, while India will become the third-biggest emitter around 2015, according to estimates by the International Energy Agency.

"We have no right to blame India" or China, said Fatih Birol, the IEA's chief economist. "Coal is currently the cheapest energy source to produce electricity and least vulnerable in terms of energy security."

Bernanke Lifting Curtains at Fed

Federal Reserve Chairman Moves to Open Agency Business More to Public Scrutiny.

Federal Reserve Chairman Ben Bernanke moved Wednesday to break down even further the aura of secrecy that historically has enshrouded the institution that sets interest rates, taking steps to keep Main Street and Wall Street more closely wired to decisions that can make or break lives and businesses.

In the job since February 2006, Bernanke said in his announcement that the time has come for the Fed to tell the country four times a year -- not twice -- what its projections are for the health of the economy. And when it gives that forecast, it will say what it thinks the business environment will be for the following three years -- not two.

These forecasts -- a kind of Fed report card to consumers and businesses -- will state the expected pace of economic growth, the anticipated unemployment rate and whatever policymakers can divine about inflation. However, the Fed also will say expressly -- and in unprecedented detail -- what the thinking of the policymakers was on a given issue and will furnish more details about whatever risks are in play.

Bernanke called the changes an "important advance" in the Fed's communications strategy.

The first expanded set of reconfigured projections will be released Tuesday at the same time the Fed turns loose to the public the minutes of the policymakers' October meeting.

The announcement marked the biggest move yet by Bernanke to put his imprint on the Fed after succeeding the venerable Chairman Alan Greenspan. One Bernanke mark -- given a punctuation point Wednesday -- has been his stated desire to make the Fed a more open institution. Greenspan made progress on that front in his 18 1/2 years, but Bernanke has sought to kick open the door even further, providing investors, businesses and individuals with more insights into the thinking of Fed policymakers.

Doing that, said Bernanke, helps the Fed do its job -- keeping the economy and inflation on an even keel.

Improving the public's understanding of the Fed's objectives and strategies reduces uncertainty, allowing businesses and people to make more informed financial decisions, Bernanke explained. If investors have a better understanding of how Fed policy is likely to respond to incoming information, stock prices and bond yields will tend to respond to economic data in ways that further the central bank's objectives, he added.

"The changes will provide a more timely insight into the (Fed's) outlook, will help households and businesses better understand and anticipate how our policy decisions respond to incoming information and will enhance our accountability for the decisions we make," the Fed chief said in a speech to a conference on monetary policy held at the Cato Institute.

Fielding questions after his speech, Bernanke stressed that he is especially interested in getting feedback from investors, companies and members of the public on the Fed's communications changes. "We'll consider all suggestions as we go forward," he said.

In 2008, the expanded projections will be published in the minutes released after the Fed's meeting on interest rates. The forecasts will be included in the minutes of the Fed meetings scheduled for January, April, June and October, Bernanke said. The projections will continue to be described in the Fed's twice a year economic report to Congress, he said.

In his speech and in brief remarks afterward, Bernanke did not discuss the future course of interest rates. The Fed in late October sliced a key interest rate to 4.50 percent. It marked the second cut in six weeks to help the economy survive the strains of a severe housing slump and a credit crunch. At that meeting, Bernanke and his colleagues hinted that those two rates cut may be all that is needed to keep the economic expansion intact, although some investors and economists are still looking for another rate cut at the next meeting, on Dec. 11.

At the time of Bernanke's speech, a separate statement outlining the changes was released by the Federal Open Market Committee, the Fed's chief policymaking group.

As part of the Fed's effort to provide more economic information, policymakers will make forecasts of both overall inflation -- which affects and is closely watched by consumers -- as well as "core" inflation, which excludes food and energy prices, Bernanke said. Adding a projection on overall inflation, which covers a wide variety of goods and services, is especially important to consumers as they make financial decisions, prepare household budgets and plan for the future.

"Ultimately, households and businesses care about the overall, or headline, rate of inflation. Greater insights into Fed policymakers' thinking also will be revealed with the expanded projections," Bernanke said. "Accompanying the numerical projections will be a discussion -- a projections narrative if you will -- that summarizes participants' views of the major forces shaping the outlook, discusses the sources of risk to that outlook and describes the dispersion of views among policymakers," he said.

Wall Street Leads Rebound for Equities

A rebound in financials and technology stocks and a sharp fall in oil prices sparked a solid rally on Wall Street on Tuesday, while the dollar resumed its long-term downward trend.

Investors were buoyed when Wal-Mart, the world's biggest retailer, unveiled forecast-beating third-quarter profits and Goldman Sachs said it did not expect any significant asset write-downs.

In New York, the Dow Jones Industrial Average - which had fallen in the prior four sessions - closed up 2.5 per cent. The S&P 500 index rose 2.9 per cent as financials rose nearly 5 per cent, and the investment bank index surged 6.8 per cent. The Nasdaq composite gained 3.5 per cent as investors scooped up big tech names.

"While we agree that the economy, represented by the Wal-Mart news, so far continues to shrug off housing and financial market problems, we are less sanguine about bond insurers or banks, cash infusions and Goldman's outperformance, notwithstanding," said TJ Marta, fixed income strategist at RBC Capital Markets.

Wall Street's positive start boosted equity markets in Europe after they were lower in early trade. The Eurofirst 300 index ended 0.25 per cent higher at 1,516.07.

Government bonds fell back as the rally in equities gathered pace. The yield on the 10-year US treasury bond, which touched a two-year low overnight, rose5 basis points to 4.27 per cent, while the 10-year German Bund yield was 3bp higher at 4.13 per cent.

In spite of the broad improvement in equities on Tuesday, the underlying mood remained one of extreme caution. "The subprime crisis, the credit crunch, geopolitical concerns, high oil prices, the weak dollar and fading economic confidence remain right at the heart of investor concerns right now," said David Brown, chief European economist at Bear Stearns. "Risk aversion, safe haven and flight to quality remain the dominant themes. There may be occasional respites, but they remain just that while structural risks remain so embedded."

Peter Hooper, chief US economist at Deutsche Bank, said: "Many observers now expect that it will take much longer than initially anticipated for the losses suffered by financial institutions to be fully disclosed and digested." He added that there was likely to be a lasting structural change in the behaviour of banks as they became more selective in the extension of credit. In our view, "This will lead to a significant steepening of the yield curve and widening of corporate credit spreads from levels prevailing before the credit bubble burst."

Data releases on Tuesday raised concerns about the prospects for the eurozone and Japanese economies. German investor sentiment, as measured by the ZEW index, plunged this month to its lowest level for nearly 15 years.

Japanese growth data were slightly better than forecast, though analysts were far from optimistic about the country's economic outlook. "Even though headline third-quarter gross domestic product figures were stronger than expected, the main message in our opinion is that domestic demand has decelerated and Japanese growth yet again is being driven mainly by exports," said Flemming Nielsen, senior analyst at Danske Bank. "Hence, the Japanese economy is very vulnerable to slower growth globally."

The Bank of Japan left interest rates unchanged at Tuesday's policy meeting, and Toshihiko Fukui, BoJ governor, gave no hint as to when borrowing costs would rise. On the currency markets, comments from Yasuo Fukuda, Japan's prime minister, that the yen was appreciating "too fast" snuffed out the previous day's rally in the Japanese currency that had pushed it to an 18-month high against the dollar.

As the yen lost ground against most other leading currencies, the dollar was weaker elsewhere amid continued expectations that the Federal Reserve would bow to pressure to cut interest rates. Sterling got a boost from stronger than forecast UK inflation figures.

In commodities, the benchmark West Texas Intermediate crude contract closed below $92 a barrel after the International Energy Agency lowered its forecast for world demand due to the recent spike in prices. Last week, WTI hit a record $98.62. Gold fell below $800 an ounce, well shy of last week's 28-year high of $845.50.

Asian markets are following Wall Street today with Nikkei advanced over 350 points and HangSeng rallied over 1,000 points so far.

Wal-Mart Profit Up, Expects Good Holiday

Good Third-Quarter Results, Refocus on Price Cuts, Spell Glad Tidings for Wal-Mart's Holiday.

A year after its worst holiday sales season ever, Wal-Mart Stores Inc. may rebound to have a good season after finding the right mix of merchandise and marketing to complement its return to a focus on low prices.

A whiff of this already showed up when the nation's largest retailer posted third-quarter earnings Tuesday of $2.86 billion, an 8 percent rise that beat Wall Street expectations. The company earned 70 cents per share, up from 62 cents per share in the same period a year ago. The 70 cents includes an after-tax gain equal to 1 cent per share. Analysts surveyed by Thomson Financial had forecast earnings of 67 cents per share on revenue of $91.67 billion.

Wal-Mart had revenue of $91.95 billion in the period ending Oct. 31, up 8.8 percent from $84.47 billion a year ago. Wal-Mart shares spiked $2.65, or 6.1 percent, to close at $45.97 Tuesday.

Retail experts say Wal-Mart's flagship U.S. stores may be in the midst of a turnaround after two years of a zigzag course between upscale and discount goods that has slowed sales growth. Third-quarter sales at stores open at least a year, not counting fuel, were up 1.5 percent in the company's U.S. stores, same as a year ago. The company expects same-store sales for the fourth quarter to rise no more than 2 percent.

Michael P. Niemira, chief economist and director of research for the International Council of Shopping Centers, said an uncertain economy will send more shoppers to discounters for holiday purchases. Even if Wal-Mart's core lower income shoppers spend less, consumers with more money are likely to switch to discounters including Wal-Mart, he said. At the same time, Niemira said Wal-Mart is working to address past problems. "I actually think they may perform remarkably well this holiday season," Niemira said.

Last November, Wal-Mart reported its first negative monthly same-store sales in a decade as a push into higher-end fashion and home decor sold poorly and muddied its low-price image. For the period November through January, which includes most sales from gift cards redeemed after the holidays, same-store sales growth slowed to 1.3 percent last year from 7.2 percent in 2001-02.

Wal-Mart's early start in this year's holiday came under a cloud when it reported October same-store sales were flat for the namesake stores, minus Sam's Clubs, on the back of unseasonably warm weather that hit sales of clothes and other seasonal goods.

But Craig R. Johnson, president of consultancy Customer Growth Partners, said Wal-Mart has started a turnaround that is based in part on attractive prices on name-brand items in electronics and toys, two key holiday categories. "My sense is that they are on the turnaround trail and that they will have a decent, a solid if not spectacular Christmas," Johnson said.

Even some Wal-Mart skeptics are coming around. Portfolio manager Patricia Edwards from Wentworth, Hauser & Violich in Seattle, which sold most if its Wal-Mart stock in 2005, said she now believes the chain is getting it right after a period of losing its edge. Edwards said Wal-Mart is finding the right mix of merchandise that people want at competitive discount prices and doing so in remodeled stores with friendlier service. It has also changed its marketing to advertise those points, she said.

"The interesting thing is that they have it right, and they have it right at what I believe is going to be the right time," she said. As the housing and credit crunch squeeze middle income consumers, they will probably stretch their dollars by trading down to discount stores, like they did when the tech bubble burst in 2000, Edwards said.

President and Chief Executive Officer Lee Scott said the company is showing improving trends in sales of home and apparel, an area in which Wal-Mart unsuccessfully sought to market to higher-income shoppers. Wal-Mart has switched back to its emphasis on price. "During the Christmas and holiday season, our price leadership position will benefit both our customers and the company. We have set the stage for a successful fourth quarter," Scott said in a recorded call Tuesday.

Wal-Mart expects earnings for the fourth quarter to be between 99 cents per share and $1.03 per share. Earnings for the full year should be between $3.13 and $3.17, including a $40 million restructuring charge, the company said. Analysts project quarterly earnings per share of $1.02 and full-year profit of $3.09 per share.

Johnson from Customer Growth Partners said a good example for Wal-Mart's improved approach this year was its first round of holiday specials launched the Friday after Halloween, as several large retailers tried to jump-start consumer demand by offering early doorbuster specials. Wal-Mart's specials included a Toshiba high-definition DVD player for $98.97. Johnson said it was an excellent move because it offered something people actually want at a steep discount to previous pricing upward of $250. "These are not last-minute sales because merchandise was not moving. This was planned long in advance with the buyers to get great deals from suppliers," Johnson said.

Best Buy reacted by offering the same high-definition DVD player for $99.99, according to Web site Consumerist.com, and when it ran out filled orders with the more expensive successor model at the same discount price.

Johnson said that shows that Wal-Mart has not lost its impact on the rest of retail. "Any retailer who underestimates Wal-Mart does so at its own peril," he said.

Other chains, like Toys R Us and KB Toys, may not match all of Wal-Mart's "rollbacks", but that doesn't mean they're not watching and shaping their marketing and pricing plans with some eye to the competition, said Steve Hoch, professor of marketing at the University of Pennsylvania's Wharton School. "Part of that might be that experience has taught them that trying to fight Wal-Mart with aggressive prices is not worth it since Wal-Mart will not be undercut," Hoch said.

Big Spenders Plan a Designer Christmas

Luxury items are in hot demand this Christmas as consumers shrug off the cooling housing market, interest rate rises and credit squeeze to splurge on designer handbags and fine wine.

Research published on Tuesday by Deloitte, the consultancy, suggests resilient consumer attitudes in the run-up to Christmas - particularly for luxury products - but warns that the determination to spend on the festive period could lead to a painful hangover in the new year.

Some 19 per cent of consumers intend to purchase a designer handbag or shoes, according to a survey of 1,000 adults, while 16 per cent plan to buy food from a farmers' market - which compares with 6 per cent purchasing upmarket foods last Christmas.

"The rich are getting richer at a faster rate than the less well-off," said Tarlok Teji, analyst at Deloitte. "There is an underlying trend for 'premiumisation', or trading up."

In all, consumers intend to spend 7 per cent more on Christmas gifts, socialising and food and drink, the report found.

Price has also diminished in importance for shoppers deciding where to shop. In 2005 some 37 per cent of consumers listed price as a main reason for choosing a particular store; last year it fell to 23 per cent and fell further to 20 per cent this year.

"Value for money" has declined as a reason over the same period, while "convenience" has risen from 50 per cent of shoppers in 2005 to 62 per cent this year - evidence, according to Deloitte, of our so-called "cash rich, time poor" society.

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Deloitte decided to repeat its survey this year after concerns that spending would be hit by the credit squeeze. But the November survey differs little from the September version, finding that consumers intend to spend an average of £706 compared with £662 a year earlier, or £33.6bn overall.

But Mr Teji warned that, although Christmas should defy doom merchants, the following months might tell a different story: "It could be the last hurrah before ... a downward trend."

One company more sensitive than most to a potential retail hangover is Majestic Wine, which reported interim resultson Monday.

Tim How, chief executive, noted "challenging" trading conditions, but said customers' thirst for fine wines was continuing unabated. "Last week somebody in our Mayfair store bought an Imperial [6 litres] Latour 88" for £2,500, he said.

If growing expectations of a serious slowdown do become reality, retailers are aiming to supply so-called luxury products for less.

Asda intends to make "the inaffordable affordable" by selling cheap truffles grown on a farm in Pontefract, Yorkshire. The only catch is that there will be a three- to five-year wait before the truffles will be ready to be harvested.

In the meantime, luxury lovers who have fallen on hard times can rely on Lidl, the German discount chain that has been supplying cheap food to the UK since 1994. For a second Christmas, Lidl's lobsters are selling for less than £5 each.

China Says Oct. Inflation Up 6.5 Percent

China Says October Inflation Rose 6.5 Percent Despite Efforts to Restrain Price Rises.

China's consumer prices rose sharply in October, tying a decade-high monthly inflation rate of 6.5 percent, the government reported Tuesday, adding to pressure for measures to cool a politically sensitive surge in food prices.

Food prices jumped 17.6 percent in October over the same month last year, while the price of pork, China's staple meat, soared 54.9 percent, according to the National Bureau of Statistics. The overall October inflation rate was higher than the 6.2 percent reported in September and matched August's 6.5 percent, the highest rate in 11 years.

"We expect more monetary tightening to rein in inflation, including further rate hikes," Lehman Bros. economist Mingchun Sun said in a report to clients.

Inflation has surged in recent months due to double-digit increases in food prices blamed on shortages of pork and other basic goods. The food price spike is especially sensitive for the communist government, because China's poor majority spends as much as one-third of its income on food.

A deputy central bank governor said last month the government expects inflation for the full year to be 4.5 percent, overshooting the official target of 3 percent. Inflation for nonfood items in October was just 1.1 percent, the statistics bureau said.

Beijing froze prices of cooking oil and other basics in September, and is pressing farmers to raise more pigs, promising free vaccinations and other aid. Economists say price pressure should ease when a new grain crop is harvested and more pigs come to market. Farmers had been reluctant to raise more pigs in part because of an outbreak of blue ear disease, which killed 70,000 animals and prompted the government to destroy thousands more. The government declared last week it had brought the outbreak under control.

An official of China's top planning agency, the cabinet's National Development and Reform Commission, said in October that the government would considering investment curbs and other unspecified "measures to adjust prices." The government said in October that pork prices fell in August due to increased supplies. There was no immediately explanation Tuesday for the sharp price increase in October.

Regulators raised state-set prices for diesel and gasoline by 10 percent on Nov. 1 in an effort to curb demand amid a fuel shortage. But the government said that should add only 0.05 percentage point to the monthly inflation rate.

The government has raised interest rates repeatedly this year to curb a boom in construction and investment that regulators worry could lead to financial problems. Economists say the recent inflation spike is due to food shortages and has nothing to do with those concerns.

Bank of Japan Holds Rate at 0.5%, 3rd Quarter GDP Rose 2.6%

Japan's Central Bank Holds Benchmark Interest Rate at 0.5 Percent.

Japan's central bank kept its benchmark interest rate unchanged at 0.5 percent Tuesday after a two-day meeting policy meeting amid deepening concerns about slower growth in the U.S. economy, a key export market.

The Bank of Japan's latest monthly meeting came after Asian markets tumbled Monday on renewed worries about the U.S. subprime mortgage crisis and its effect on the American economy.

Japan's benchmark Nikkei index fell again Tuesday after briefly touching its lowest point since July 2006 on Monday. On Tuesday afternoon, the index was down 0.84 percent to 15,069.75 points.

Japan also faces lingering signs of deflation. The core consumer price index fell 0.1 percent in September for the eighth monthly decline; housing starts fell 44 percent in September from a year ago for the third straight month of decline. The jobless rate also worsened to 4.0 percent in September from 3.8 percent in August.

The central bank last hiked its key rate in February to 0.5 percent, still the lowest among major industrialized countries.

Japan Third-Quarter GDP Rose 2.6 Percent

Japan's economy grew at an annualized rate of 2.6 percent in the July-September quarter on strong exports, the government said Tuesday, but the outlook for exports was clouded by sluggish economic signs in the United States.

Gross domestic product grew a price-adjusted 0.6 percent from the previous quarter, according to preliminary data released by the Cabinet Office. On an annualized basis, the July-September GDP increased by 2.6 percent. The figures beat the annualized 1.8 percent gain forecast by economists surveyed by Dow Jones Newswires. In the April-June quarter, Japan's GDP declined 1.2 percent on an annual basis, marking the first contraction in growth for three quarters.

Although the latest results suggest Japan's economy is still recovering, there are also worrying signs. Exports, which accounted for much of the third-quarter growth, are at a risk of decelerating because of a slowdown in the U.S. economy.

Another sign is that housing investment, though its contribution is small, is declining. Private residential investment plunged 7.8 percent -- the largest drop since a 11.1 percent tumble in the April-June 1997 quarter -- likely hurt by tighter building regulations that came into force in late June. That was the third straight quarter of declines, after a revised 4.1 percent fall in the April-June period.

Although housing investment accounts for only 3 percent of the GDP, its decline is a cause for worry because it could hurt factory output and business investment by cooling demand for construction materials and durable goods such as refrigerators and TVs. Such a slowdown in internal demand would mean that the Bank of Japan will likely have to wait until next year to lift short-term interest rates from the current 0.5 percent level.

In the July-September period, consumer spending, which accounts for more than half of Japan's GDP, rose 0.3 percent on quarter, better than a revised 0.2 percent rise in the April-June period. Solid sales in the travel industry attributed to the rise. Business investment rose 1.7 percent, rebounding from a revised 2.1 percent decline in the April-June period. Companies bought more general industrial machinery, according to the Cabinet Office.

The data, meanwhile, indicate that Japan has so far withstood the impact of the slumping U.S. housing sector, which since August has roiled global stock markets, sank some hedge funds and caused the leaders of major U.S. banks to be sacked.

Exports rose 2.9 percent, up for the 10th straight quarter and much faster than a revised 0.9 percent gain in the April-June quarter as Asian nations bought more Japanese goods, such as cars and motorcycles. Imports were up 0.5 percent, after gaining 0.8 percent in the second quarter, due in part to higher oil and natural resource prices.

Europe to Press China on Trade Gap

Europe to Press China on Trade Gap, Currency at Summit This Month.

European Union leaders will press China for faster action on its swelling trade gap and currency controls at a summit this month, the EU ambassador to China said Monday.

The comments reflect growing European urgency over China's multibillion-dollar trade surpluses, an area where Washington long took the lead in lobbying Beijing for reforms. "We want more attention to our specific needs, our specific concerns, in intellectual property, in product safety, in opening Chinese markets which are still not fully open, in welcoming our investment," Ambassador Serge Abou said at a news conference.

An EU delegation led by Prime Minister Jose Socrates of Portugal, which holds the presidency of the 25-nation group, is due in Beijing on Nov. 28 to Chinese leaders. A day earlier, finance officials from the two sides meet to discuss currency concerns.

European leaders will press Beijing for action to lower barriers to foreign investment and to let its currency, the yuan, rise more quickly in value, Abou told reporters. Despite contentious trade issues, Abou said EU-Chinese relations are positive. He said the meeting was taking place in an air of "optimism and self-confidence" on both sides. The wide-ranging agenda also includes discussion of closer European-Chinese cooperation in science, environmental protection and combatting global warming, according to Abou.

The European Union is China's biggest foreign trading partner, ahead of the United States and Japan, but Europe has seen its deficit with China swell quickly in recent years. China ran a US$13.9 billion (euro9.5 billion) surplus with Europe on total two-way trade of US$31.4 billion (euro21.4 billion) in October, according to Chinese data released Monday. That was just behind China's US$15.7 billion (euro10.7 billion) surplus with the United States on total two-way trade of US$26.7 billion (euro18.2 billion).

Many complaints by European companies and officials echo those made earlier by their U.S. counterparts. European companies say Chinese officials appear to be blocking them from expanding in finance and other industries in an attempt to nurture China's own companies, violating Beijing's free-trade pledges.

Beijing is under pressure from Brussels and Washington to ease controls that its trading partners say keep the yuan undervalued, giving Chinese exporters an unfair price advantage and adding to the country's surpluses.

On Nov. 27, the top European currency officials -- European Central Bank President Jean-Claude Trichet, EU Economic and Monetary Affairs Commissioner Joaquin Almunia and the head of the euro-zone finance ministers, Jean-Claude Juncker -- are due in Beijing for talks on exchange rates, Abou said.

Asked whether the EU would coordinate more closely with Washington and imitate the United States in filing more complaints against China in the World Trade Organization, Abou said Europe had no fixed group of allies and sometimes was opposed by the United States on trade issues.

Europe and China are negotiating a new framework treaty that will govern political and economic relations for at least the next decade and hope it can be signed at the summit, Abou said. The EU expects to sign an agreement to lend euro500 million (US$730 million) to Chinese banks to finance projects to fight climate change, the ambassador said. He said EU officials also hope to sign an agreement to open a clean-energy research center in Beijing.

The two sides will talk about a meeting next month in Indonesia where environment officials from 80 countries are to discuss a replacement to the 1997 Kyoto Protocol on emission reductions, Abou said. China and other developing countries are exempt from Kyoto's mandatory emissions caps, which expire in 2012.

Washington is insisting that China, which is about to overtake the United States as the biggest source of heat-trapping gases, must be part of any pact. But a Chinese deputy foreign minister last week said developing countries must be allowed to raise emissions, indicating that China might reject binding limits.

"I'm sure we will have a very intense discussion," Abou said.

Investors Brace for More Bad Bank News

Wall Street, Bracing for More Bad News From Banks, Also Awaits Retail Sales, Price Indexes.

The stock market this week is hoping for signs that the economy is surviving the problems in the financial sector -- and that the Federal Reserve will come to the rescue if it's not. Investors are slowly getting a clearer picture of how much in risky and deteriorating debt securities the world's major financial institutions are holding, and they don't like what they see.

Wall Street already expects banks' portfolios to lose at least $20 billion in the fourth quarter, after announcements of anticipated writedowns of mortgage-backed securities and other debt instruments by such financial institutions as Citigroup Inc., Morgan Stanley and Wachovia Corp.

Investors have been bracing for fourth-quarter writedowns for a while, but the amount was larger than many were prepared to hear. As a result, volatility has returned to virtually all corners of Wall Street. After huge swings in either direction, the Dow Jones industrial average finished last week down 4.06 percent, and the Standard & Poor's ended down 3.71 percent.

The Nasdaq composite index was hit the hardest last week, as investors' optimism vanished about the technology sector being isolated from the slowing economy and problems in the financial markets. The Nasdaq ended the week down 6.49 percent. Meanwhile, gold lifted further above $800 an ounce to its highest levels since 1980, and crude-oil briefly breached $98 a barrel, as the dollar plunged.

The combination of shaky financial markets and inflationary triggers has worried investors that the Fed's hands are tied. An interest rate cut could send the dollar down even further, but keeping rates where they are might translate to even wider losses for the world's major financial institutions.

On Oct. 31, the Fed lowered key interest rates by a quarter point, as expected, after reducing rates by a half-point in September. But the central bank suggested that it may stop cutting rates when it meets Dec. 11.

Mild readings on producer prices and consumer prices -- which will be reported on Wednesday and Thursday, respectively -- could help calm the market. As of last Friday, economists surveyed by Thomson/IFR predicted, on average, that both the core Producer Price Index and the core Consumer Price Index will have risen by 0.2 percent.

Wall Street will also want to see strong October retail sales detailed in the Commerce Department's Wednesday report, and solid readings on October industrial production and capacity utilization on Friday.

And there are still a few major earnings reports left for investors to read to gauge U.S. business growth and the health of the consumer. Tyson Foods will post its quarterly results on Monday; Home Depot Inc. and Wal-Mart Stores Inc. release their third-quarter results Tuesday; Macy's Inc. reports Wednesday; and Starbucks Corp. reports Thursday.

The bond market is closed Monday for Veterans Day, but the stock market is open.

Weekend's Astronomy Special: Voyager - A Journey to the Stars

Leaving the solar system, bound for interstellar space.

The starship Enterprise it's not. Voyager 1 is a spidery contraption with less computer memory than some calculators and barely enough power to light three 100-watt bulbs. Yet this 1970s-vintage space probe will soon become humanity's first envoy to the stars.

Now hurtling at nearly 40,000 miles an hour well past the orbit of Pluto, Voyager has traveled farther than any other spacecraft. In late 2004 it passed a space boundary called the termination shock, a milestone near the outer limits of the solar system where the thin wind of particles blasted from the sun begins to collide with winds from interstellar space. In another ten years Voyager will leave the last vestiges of the solar wind and venture into the space between the stars. "Interstellar space, for the first time!" exults Eric Christian, Voyager's NASA program scientist.

For as long as NASA funds it and its decades-old technology holds out, Voyager will continue its epic journey of exploration. Launched in 1977, Voyager 1 and its companion, Voyager 2, made a 12-year tour of the outer solar system, visiting planets and moons all the way out to Uranus and Neptune - places never reached before or since. Along the way it transformed our view of the solar system. "Voyager really was the transition from the basic nine planets to an incredibly mixed plethora of worlds," says Louis Friedman, executive director of the Planetary Society.

The probes have revealed that Jupiter has faint rings, that Saturn's rings - more intricate than anyone imagined - are peppered with moonlets, and that 900-mph winds churn Neptune's atmosphere. The moons of the outer planets had long been expected to be pitted and dead like our own, but Voyager found they were a study in diversity: seething with volcanic activity, swathed in hydrocarbon smog, crusted with ice floating atop what may be a hidden ocean. Says one scientist: "NASA in the 20th century is going to be remembered for two things: Apollo moon landings and Voyager."

Yet Voyager started out as a compromise. It was conceived in the early 1970s after NASA abandoned its plans to take advantage of a rare alignment of planets by sending a costly fleet of four spacecrafts on a "grand tour" from Jupiter out to Pluto. The two Voyagers were designed to go no farther than Saturn.

"Of course, we all had our hopes that the mission could go on," says Ed Stone, the Voyager chief scientist since 1972. He and his colleagues knew that if they sent a spacecraft careering past Saturn at just the right angle, Saturn's gravity would fling it straight toward Uranus and Neptune. After Voyager 1 explored Saturn and its moons, perhaps Voyager 2 could be vectored toward more distant planets.

Stone and his colleagues got their wish; in 1981 NASA extended the mission. In the following years Voyager 2 dazzled with close-ups of Uranus, Neptune, and their moons. Leaving Saturn, Voyager 1 climed out of the plane of the planets and headed directly toward interstellar space.

As the decades passed, both Voyagers stayed healthy in spite of brutal cold and a barrage of cosmic rays. The spacecraft had been built to survive intense radiation near Jupiter. "In a sense radiation is a very rapid aging effect," says Stone. After Jupiter, he notes, the additional aging over 28 years didn't make much of a difference.

As the planets dwindled behind it, Voyager 1 had a quiet journey until mid-2002, when it detected bursts of particles apparently sprayed from a nearby shock wave. On December 16, 2004, it reached the source. A sudden strengthening of the solar wind's magnetism indicated that the wind had slowed and piled up - just what was expected at the termination shock. Voyager 2, on a slower route out of the solar system, is expected to reach the shock in as little as two years.

In another decade Voyager 1 should finally cross the heliopause, the last gasp of the solar wind, then sail out among the stars. With some 15 years left in its plutonium power source, it may still be alert and talkative. If cash-strapped NASA can keep finding 4.5 million dollars a year - a bargain compared with other missions - Voyager will give scientists on-the-spot reports from interstellar space.

It will be 40,000 years before Voyager 1 drifts past a neighboring star. For any aliens they might meet, both Voyagers bear a gift: a disc storing images and sounds from Earth. This gold-plated copper record contains images and sounds such as:
- Scenes of Earth showing people, places, animals, technology.
- Sounds of Earth re-creating noises such as a rocket lift-off, surf, rain, and music - from Pygmy initiation-rite songs to Chuck Berry's rock-and-roll.
- Greetings in 55 languages.
The technology however, falls short of Star Trek standards. Each disc is designed to be played on a turntable, and a phonograph needle is thoughtfully included.

Weekend's Featured: Bulgaria and Bosnia After 10 Years with Currency Board Systems

In 1997, Bulgaria and Bosnia and Herzegovina, which is commonly known as Bosnia, introduced currency board systems on July 1 and August 11 respectively. With a currency board system, a monetary authority issues a domestic currency that is convertible into an anchor currency at a fixed rate. Confidence in the domestic currency is established because the monetary authority must hold foreign reserves to fully cover the domestic currency that is issued.

Prior to the introduction of their currency board systems, both Bulgaria and Bosnia were in bad shape. Bulgaria had defaulted on its international debt, narrowly escaped a revolution in late 1996, and was battling hyperinflation (a rate of inflation per month that exceeded 50%) that had virtually wiped out its banking system and sent the real economy into a free fall. It is worth noting that hyperinflations are rather rare. There have only been 30 in history, with Bulgaria's 1997 hyperinflation being the last one in the twentieth century and Zimbabwe's current hyperinflation being the first in this century.

The newly independent Bosnia and Herzegovina had just come out of a bloddy civil war, one the had disrupted and displaced most of the population, destroyed 18% and damaged 60% of the housing stock, and covered much of the territory with land mines. Its economy was in shambles, declining to about 20% of the 1990 level. With the exception of the deustchemark, the other three currencies in circulation - the Bosnia and Herzegovina dinar, the Croatian kuna, and the Yugoslav dinar - were either unstable or very unstable.

In both Bulgaria and Bosnia, Steve Hanke, a Professor of Applied Economics, had an opportunity to play a role in designing and implementing their currency reforms. In 1991, he co-authored with Kurt Schuler a monograph Teeth for the Bulgarian Lev: A Currency Board Solution. After its publication, he began to visit Sofia to introduce the currency board idea to government officials and the public.

In particular, he can recall his meetings over the years with Todor Vulchev who served as Governor of the Bulgarian National Bank from January 1991 to January 1996. Todor had studied his proposal carefully and understood it. Indeed, during their meetings, he required no staff prompting. From their first meeting until the last, Vulchev's position remained the same: "We at the BNB are in full control and can't envision a scenario in which that wouldn't be the case. In consequence, we have no need for currency board rules."

The conclusions were echoed in official circles until late 1996. Faced with a hyperinflation and an economic collapse, the official resistance to the currency board idea began to crumble. What forced it to completely collapse was a turn in public opinion as well as a revolt carried out in the streets of Sofia.

The public had lost all confidence in the government and the BNB. Instead, it embraced the currency board idea. In March 1997, President Petar Stoyanov appointed Steve as his economic advisor. His immediate task was to draft a currency board law and assist in implementing it. On July 1, 1997, Bulgaria introduced a currency board law to govern the BNB.

Among other things, this episode is further evidence to confirm a conclusion made by Milton Friedman in his memoirs: "I have long believed that we do not influence the course of events by persuading people that we are right when we make what they regard as radical proposals. Rather, we exert influence by keeping options available when something has to be done at a time of crisis."

In Bosnia, the currency board system was mandated in the Dayton/Paris Treaty (December 1995) ending the civil war. At the time of their installation, critics claimed that neither currency board would succeed because Bulgaria and Bosnia didn't meet preconditions required for a successful currency reform. Those who peddle this precondition notion claim that a currency board is unlikely to be successful without the solid fundamentals of adequate reserves, fiscal discipline and a strong and well-managed financial system, in addition to the rule of law.

The preconditions argument falls into what is termed as the "95% Rule" by Steve: 95% of what is written about economics is either wrong or irrelevant. In the last decade, Bulgaria and Bosnia have experienced sustained economic growth, stable prices and a rapid increase in the demand as reflected in the growth in foreign reserves for the currencies produced by their currency board systems.