China's Shuttlecock Slump Shows Why Pimco Loves Yuan (Update2)

May 27 (Bloomberg) -- Investors from London to California are increasing bets that China will let its currency appreciate at a faster pace even as makers of toys, textiles and sporting goods say a stronger yuan has made their exports uncompetitive.

Aberdeen Asset Management Plc doubled its stake in the yuan forwards market after contracts giving the right to buy the yuan in 12 months slumped as much as 5 percent this quarter. Pacific Investment Management Co., manager of the world's biggest bond fund, and Pictet Asset Management also said they placed wagers on the currency to gain.

While Deutsche Bank AG and Citigroup Inc. say pressure is growing on the government to slow the yuan's advance to help exporters, fund managers counter that doing so will only cause inflation to accelerate from February's 11-year high of 8.7 percent. Wuhu Dayi Sports Goods Co., which had forecast a boom in shuttlecock shipments before Beijing's Olympic Games open on Aug. 8, said sales have instead fallen 30 percent this year.

``I have used the weakness to double up my position,'' said Edwin Gutierrez, a money manager who invests $5.5 billion in emerging market debt in London for Aberdeen, Scotland's largest independent money manager. ``The exporters who are finding it difficult to compete are ones which the Chinese authorities don't mind seeing go bust. This isn't the future for China.''

Yuan Stalls

The yuan has gained 0.8 percent against the U.S. currency this quarter to 6.9559 per dollar, as of 5:30 p.m. in Shanghai, following a 4.2 percent climb in the first three months of the year.

As the currency's advance stalled, the 12-month yuan non- deliverable forward contract slumped to 6.5297 from as high as 6.2755 on April 7. The contract rose 2 percent last week. Forwards are agreements to buy and sell assets at current prices for delivery at a specified time and date. Non-deliverable contracts are used for currencies that can't be freely converted and are settled in dollars.

Pictet, part of Switzerland's largest privately held bank for the wealthy, forecasts the yuan will rise an additional 5 percent to 6.6 per dollar this year, higher than the median forecast of 6.65 by 27 analysts surveyed by Bloomberg.

Since China scrapped a decade-long link of about 8.3 to the dollar almost three years ago, the currency has risen 19 percent as increased exports drive the nation's trade surplus to a record and overseas investors buy Chinese stocks and property.

Foreign-exchange reserves surged 40 percent to $1.68 trillion in March from a year earlier, flooding the economy with cash and fueling inflation.

Weakness `Overdone'

The U.S. Treasury said in a semiannual report on May 15 China needs to maintain the pace of yuan gains to curb inflation and ``rebalance its economy'' by spurring domestic demand. Treasury Secretary Henry Paulson will host a Chinese delegation in Washington next month for talks on exchange-rate policy.

``Inflation will be the main concern for Chinese authorities,'' said Wee Ming Ting, a bond fund manager and head of Asian fixed income in Singapore for Pictet, which oversees the equivalent of $136 billion. ``Weakness in the forward market is overdone. We took the opportunity to add to our position.''

The dilemma facing Chinese officials is that exports are slowing because of the currency's strength. Overseas sales grew 22 percent in April from a year earlier, down from 31 percent growth in March. A third of the manufacturers in Guangdong province -- which produces 30 percent of China's exports -- will be closed in three years, according to an April 29 report by Tao Dong, chief Asia economist at Credit Suisse Group in Hong Kong.

Another `Disappointment'

Wuhu Dayi, which supplies shuttlecocks for badminton tournaments across Asia, expects 10 to 20 manufacturers in its industry will go bankrupt this year because of the yuan's gains and a doubling in labor costs in three years, said Zhang Huizi, a sales manager at the Wuhu, Anhui province, company.

``Three months away from the Olympics and we are under huge pressure just to survive,'' Zhang said. ``Everyone said it's a big year for us, but it turned out to be another year of disappointment.''

China may slow appreciation before the Olympics to avoid ``bankruptcies and unemployment, which could lead to social unrest,'' said Shen Minggao, an economist in Beijing for Citigroup, the fourth-biggest currency trader.

Citigroup and Deutsche Bank, the largest trader, forecast the yuan will end the year at 6.7 per dollar, weaker than the median forecast.

Consumers to Rescue

Consumer spending, bolstered by the Olympics, may help offset a slowdown in exports, according to Chia Liang Lian, who oversees $10 billion of Asian bonds and currencies for Pimco. China's retail sales rose 22 percent last month from a year earlier, the most since at least 1999, led by television sales, according to the state statistics bureau.

``The long-term trend for the yuan to appreciate remains intact,'' said Lian, who is based in Singapore. ``Policy makers have both the will and wallet to pump-prime if necessary.''

Chinese companies are satisfying local demand for ``high- end'' products such as computers and cars that the nation has traditionally imported, bolstering the trade surplus, Lian said.

Geely Automobile Holdings Ltd., the Chinese maker of $5,000 compact cars, has exported 14,000 vehicles to the Middle East, Africa, Russia and Ukraine so far in 2008, compared with 20,000 for the whole of last year, said Dai Yang, vice president of international business at the Hong Kong-listed company.

``The yuan's appreciation doesn't have much impact on our exports,'' he said. ``The government wants to change China from the world's factory to a country with its own intellectual properties and international brands.''

Corn Costs Signal Biggest Beef Surge Since 2003 as Herds Shrink

May 27 (Bloomberg) -- Enjoy your next steak, because prices from Shanghai to San Francisco are only going up.

The highest corn prices since at least the Civil War, based on Chicago Board of Trade data, mean U.S. feedlots are losing money on every animal they sell, discouraging production as rising global incomes increase meat consumption and a declining dollar spurs exports. Cattle may rise 13 percent by the end of the year on the Chicago Mercantile Exchange and Brazil's Bolsa de Mercadorias e Futuros, futures contracts show.

Not since 1996, when corn reached what was then a record $5 a bushel, have cattle been this cheap relative to their primary source of feed. Cattle are the seventh-worst performer of the 26-member UBS Bloomberg Constant Maturity Commodity Index in the past year, a time when soybeans, oil and copper jumped to records. After adjusting for inflation, cattle are down 27 percent from their 1988 peak.

``It's pretty certain that we'll see a decline in domestic supply in the U.S.,'' Joesley Batista, chief executive officer of JBS SA, the world's biggest beef producer, told reporters in Sao Paulo on May 15. ``As a result, we'll have price hikes and improved margins.''

Production also is dropping or failing to keep pace with demand in China, Brazil and the European Union, mostly for grain-fed beef, analysts and government data show.

``We expect meat prices, especially beef prices, to rise this year,'' said Peter Weeks, chief economist at Meat & Livestock Australia, a trade group in Sydney. ``We've already seen big increases in beef prices in China, Russia, India and throughout Southeast Asia.''

Food Inflation

The beef rally risks accelerating global food inflation, which has sparked riots from Haiti to Egypt. In the U.S., food prices will jump 5.5 percent this year, the fastest pace since 1989, according to the U.S. Department of Agriculture.

``Our demand far exceeds supplies, and our production is stagnating,'' Liu Qiangde, deputy general secretary, China National Cattle Association, said in Beijing.

Wholesale choice-grade beef in the U.S., the world's biggest producer and consumer, will rise 16 percent to a record average of $1.86 a pound next year, the biggest gain since 2003 and the second-largest since 1979, said Len Steiner, a principal at Manchester, New Hampshire-based Steiner Consulting Group, which provides research to the food industry.

Steakhouse Partners Inc., operators of 21 steakhouses in California and the Midwest, filed for bankruptcy May 16, citing rising costs for corn-fed beef.

Feedlot Losses

Cattle prices haven't kept pace with the grain used to feed the animals. Corn surged to a record $6.39 a bushel on May 9 from $3.6625 a year earlier.

Feedlots lost money on animals sold for slaughter the past 11 months, including $139.56 a head in April, compared with a profit of $46.79 a year earlier, said Erica Rosa, an economist at the Livestock Marketing Information Center in Lakewood, Colorado. Losses were a record $169.80 per animal in March, and feedlots may not be profitable until after October, she said.

``Higher prices are necessary for survival of the industry,'' said Douglas Carper, 58, the principal of Omaha, Nebraska-based DEC Capital Inc., which manages or consults for $300 million in commodity investments. ``The job of the market now is to create a price high enough that provides the industry with profitability.''

Corn more than doubled in the past two years as demand for meat boosted feed consumption and U.S. government mandates and subsidies promoted the use of grain-based ethanol. Cattle futures gained just 31 percent over the period, and cash prices rose 16 percent.

Rising Prices

Richard Bond, the chief executive officer of Tyson Foods Inc., the world's largest meat processor, said that the ethanol boom has boosted feed costs so much that consumers should expect higher meat prices.

A 1,250-pound (567-kilogram) steer in the U.S. is worth about 4.2 times the cost of the corn he consumes over five months to reach slaughter weight, down from almost 12 times in December 2005 and the lowest since June 1996.

Cattle may not remain cheap for long. Prices jumped 6.5 percent last month, the most since August 2006, and there are signs of reduced supply from U.S. producers.

As of May 1, feedlots held 11.1 million head, down 1.4 percent from a year earlier, the government said. Ranchers last year cut the number of young females they held by 3.5 percent to 5.67 million on Jan. 1, the second straight annual decline.

Export Demand

As the incentive for producers dwindles, demand for U.S. beef exports will jump 14 percent next year, the USDA said. Sales will increase because of a declining dollar, rising global incomes and a relaxation of bans imposed after a case of mad-cow disease in 2003, the USDA said.

U.S. beef exports in the first quarter rose 29 percent from a year earlier, data from the USDA show. Increasing beef shipments to Russia, South Korea and other emerging economies will help push up prices in the U.S., JBS's Batista said.

Global demand for beef, pork and chicken may grow as much as 50 percent by 2020 as the population increases and incomes improve, a study by Rural Industries Research and Development Corp. said in December.

``We are witnessing the globalization of meat as incomes rise,'' said David Kruse, president of CommStock Investments Inc., an agricultural broker and researcher in Royal, Iowa. ``The first thing these consumers buy as their incomes rise is more and better food, not a flat-screen television or a computer.''

Rice Futures Drop to Two-Month Low on Increased Global Supplies

May 28 (Bloomberg) -- Rice futures plunged for a third day to a two-month low as producers resumed exports, boosting global supplies, and a report showed improved crop conditions in the U.S., the world's fourth-biggest supplier.

The July contract on the Chicago Board of Trade dropped as much as 5.5 percent to $18.52 per 100 pounds, the lowest since March 24, after declining by the daily limit for the past two days. Cambodia lifted an export ban this week, and Vietnam said May 21 it will remove a ban on new overseas shipments in July.

The staple for half the world has lost as much as 26 percent since reaching a record last month, when it was buoyed by export curbs from China, Vietnam and India. Record prices for food, including wheat, corn and palm oil, have stoked concern about shortages and caused unrest from Haiti to Egypt.

``We will see more supplies in the coming months as producers in Southeast Asia harvest their crops,'' Kazuhiko Saito, strategist at Interes Capital Management Co. in Tokyo, said today by phone. ``Producers may try to sell as much as possible following record price levels.''

The July contract fell 90 cents, or 4.6 percent, to $18.70 per 100 pounds at 12:01 p.m. Singapore time, after declining by the daily limit of 75 cents yesterday. The price is still 77 percent higher than a year ago.

In the U.S., about 72 percent of the rice crop was in good or excellent condition, up from 65 percent a week earlier and 67 percent a year earlier, the Department of Agriculture said yesterday in a report. About 94 percent of the U.S. crop was seeded as of May 25, compared with 84 percent a week earlier and 97 percent at the same time in 2007, it said.

`Improving Crop'

``The improving crop condition in the U.S. was another negative impact on the rice market,'' Saito said. Tumbling wheat prices, which have fallen to the lowest in nine months, were also pressuring rice futures, Saito said.

Wheat for July delivery fell as low as $7.40 a bushel on May 23, the lowest for the most-active contract since Aug. 29 and down 45 percent from a Feb. 27 record of $13.495. The contract dropped 0.7 percent to $7.545 at 12:05 p.m. Singapore time.

Farmers across Asia have boosted rice production to try and take advantage of the higher prices. Global output of milled rice in 2008 will be 445.3 million tons, up 2.3 percent from last year's record 435.2 million tons, the Food and Agriculture Organization of the United Nations said on May 22.

Farmers in Vietnam's Mekong Delta, the nation's main rice- growing region, have chopped down sugar cane plots, cleared shrimp ponds and removed orange trees in favor of rice, the Vietnam News reported today.

China Sets Limit on ICBC Offer for Wing Lung Bank (Update3)

May 28 (Bloomberg) -- The Chinese government capped what China Merchants Bank Ltd. and Industrial & Commercial Bank of China Ltd. will be allowed to pay for Hong Kong's Wing Lung Bank Ltd., said two people familiar with the matter.

The two state-owned banks, vying for a controlling stake in family-run Wing Lung, were asked not to pay more than 2.85 times book value, the people said, declining to be identified as talks are ongoing. Wing Lung's owners had sought at least three times book value.

China is increasing scrutiny of acquisitions after money- losing investments in Blackstone Group LP, Barclays Plc and Morgan Stanley in the past year. Regulators are concerned the winner will overpay for Wing Lung, valued at $4.5 billion at yesterday's close, after the bank posted a first-quarter loss on writedowns of credit market investments, one of the people said.

``This is a bit funny and unheard of, but in China these kinds of things can happen,'' said Ivan Li, a Hong Kong-based analyst at Kim Eng Securities. ``This will set a bad example and may send a quite negative message to the market.''

Wing Lung fell 6.2 percent to HK$140.50 at the 12:30 p.m. lunchtime break in Hong Kong trading, the biggest fall in four months. Maria Fung, the bank's company secretary, declined to comment.

The government is ICBC's largest shareholder and owns a combined 70.6 percent after the bank's $22 billion initial public offering in 2006, the world's largest. China Merchants Group, a state investment arm, is the biggest shareholder in Merchants Bank with a 12.1 percent stake.

Ministry of Finance

Xie Taifeng, a Beijing-based spokesman at ICBC, declined to comment, as did Guo Xiaoli, a Shenzhen-based spokeswoman at China Merchants Bank.

The price guidance was first imposed by the Ministry of Finance on Beijing-based ICBC, the people said. Merchants Bank was then urged by China's banking regulator to follow, one of the people said.

It is unclear whether Wing Lung's book value as of March 31 this year or Dec. 31, 2007 will be used for calculating offer prices, the people said. ICBC and Merchants Bank have used the end of 2007 book value as a reference for bids as it provides more room for higher offers, they said.

Wing Lung's equity fell 6.5 percent in the first quarter, to HK$11.67 billion ($1.5 billion).

Based on March 31 figures, the maximum valuation imposed would imply HK$143 per Wing Lung share, valuing the company at $4.25 billion. Using the bank's Dec. 31 book value would yield a price of HK$153 per share, or $4.55 billion. Wing Lung closed at HK$149.70 yesterday in Hong Kong. The stock had surged 57 percent this year before today, the best performer on the 201-company Hang Seng Composite Index.

CCB Drops Out

Wing Lung, founded in 1933 with initial capital of $5,700, has 35 branches in Hong Kong and $12 billion of assets. On April 30, the bank reported a first-quarter loss after writing off $61 million of investments in structured investment vehicles and collateralized debt obligations.

The family of Chairman Michael Wu, seeking to sell a 53 percent stake, had sought at least three times book value, people with direct knowledge of the matter said earlier. Hong Kong's 18 publicly traded banks are valued at an average 2.45 times book value, according to data compiled by Bloomberg.

Merchants Bank was picked as the preferred bidder for Wing Lung Bank last week after offering the highest price, people familiar with the matter said at the time. ICBC said in a May 23 statement that it offered a ``reasonable price'' for Wing Lung after conducting due diligence. It didn't say whether the bid was accepted or rejected.

Australia & New Zealand Banking Group Ltd. was one of the three banks selected in April to make final bids for Wing Lung, people familiar with the matter said last month. China Construction Bank Corp., the country's second-biggest, dropped out of bidding in April, saying the price was too high.

Past Lessons

China's decision to cap bidding prices suggests growing unease that the nation's banks, flush with cash from stock sales and rising profits, will squander money as they expand overseas.

``The government is concerned about Chinese banks overpaying for acquisitions,'' said Samuel Chen, a Hong Kong-based analyst at JPMorgan Chase & Co. ``Obviously, you have some lessons in the past.''

ICBC, the world's largest bank by market value, agreed in August last year to buy almost 80 percent of Macau's Seng Heng Bank for 4.68 billion patacas ($582 million), equivalent to 3.2 times the target's book value as of June 2007.

China blocked state-owned China Development Bank's attempt to bid for a stake in Citigroup Inc. in January on concern about the U.S. bank's losses related to the subprime mortgage meltdown, a person familiar with the matter said.

Asian Stocks Fall; BHP Billiton, Inpex Decline After Oil Drops

May 28 (Bloomberg) -- Asian stocks declined, led by raw- materials companies, after crude oil fell the most in a month yesterday on concern slowing global growth will sap demand.

BHP Billiton Ltd., the world's biggest mining company, slumped the most in a week and Cnooc Ltd., China's largest offshore oil explorer, retreated. Yamaha Motor Co., the world's No. 2 motorcycle maker, dropped in Tokyo after Goldman Sachs Group Inc. cut its rating on the stock because of lower demand in the U.S., where consumer confidence plunged to a 16-year low.

``Given the outlook for global growth, it's untenable that prices will keep going up,'' said Michael Foo, Singapore-based head of Asian portfolio management at Clariden Leu AG, which manages the equivalent of $123 billion in assets globally.

The MSCI Asia Pacific Index lost 0.7 percent to 147.58 as of 1:20 p.m. in Tokyo, with more than twice as many stocks declining as advancing. The benchmark index earlier rose 0.2 percent. A measure of raw-materials shares decreased 1.1 percent, the biggest drop among the regional gauge's 10 industry groups.

Most Asian benchmark indexes retreated. Japan's Nikkei 225 Stock Average fell 0.8 percent to 13,769.39, led by an index of mining and energy companies.

Oki Electric Industry Co. surged after the Nikkei newspaper said the company may sell its chip-making business to larger rival Rohm Co. this year. Technology shares also advanced after JPMorgan Chase & Co. raised its share-price estimate for Taiwan Semiconductor Manufacturing Co.

U.S. stocks gained yesterday, rebounding from the biggest weekly tumble since February.

Oil `Still Too High'

BHP, also Australia's largest oil company, fell 2.1 percent to A$45.73, on course for its largest decline since May 21. Inpex Holdings Inc., Japan's No. 1 oil explorer, dropped 3.1 percent to 1.27 million yen.

Cnooc slumped 5 percent to HK$14.22, the steepest drop in Hong Kong's Hang Seng Index. The shares were valued last week at the most expensive relative to the index since at least 2001, when Cnooc went public. The stock was priced at 19.5 times earnings on May 22, versus 14.5 for the Hang Seng.

Crude oil for July delivery fell 2.5 percent to $128.33 yesterday, the biggest one-day decrease since April 29, on signs that U.S. fuel consumption is dropping because of a slowing economy and record energy prices. Futures rose to $135.09 on May 22, the highest since trading began in 1983.

``Oil prices are still too high compared with other commodities such as gold or grains, although growth in emerging economies such as China continues to increase demand,'' said Yuji Ogino, an executive director at Meiji Dresdner Asset Management Co., which manages the equivalent of $28 billion in Tokyo.

Newcrest, Yamaha

Gold fell 1.9 percent yesterday, the biggest loss in four weeks, as a drop in energy costs reduced demand for a hedge against inflation. Prices of silver and copper also retreated.

Newcrest Mining Ltd., Australia's No. 1 gold producer, slumped 4.8 percent to A$32.22. Rio Tinto Group, the world's third-largest mining company, lost 2.7 percent to A$143.10. Zijin Mining Group Co., China's largest producer of gold, fell 2.1 percent to 9 yuan in Shanghai.

Yamaha dropped 3 percent to 1,940 yen after Goldman Sachs analyst Kota Yuzawa said the company's operating profit this year will be 12 percent below the vehicle maker's projection. The stock's rating was lowered to ``sell'' from ``neutral.''

The cost of gasoline in the U.S. has risen 29 percent so far this year. Rising fuel costs and a continued slump in housing sent the Conference Board's confidence index for May to its lowest since 1992, the New York-based research group said yesterday. The measure was less than economists had forecast in a Bloomberg News survey.

Airlines Rebound

The slide in energy prices helped spur a rally in airlines. Air China Ltd., the nation's largest international carrier, added 3.1 percent to HK$5.62 in Hong Kong, leading a rebound in the Bloomberg Asia Pacific Airlines Index. The measure of 17 stocks had slumped 5 percent last week as crude oil prices climbed to records.

Korean Air Lines Co., the nation's biggest, jumped 5.4 percent to 50,800 won, while Asiana Airlines Inc., the second- largest, advanced 2.7 percent to 5,750 won. The airlines said separately that they applied for government approval to raise fuel surcharges to help offset record jet kerosene prices.

Shares of Oki had the biggest advance in Japan's Nikkei 225 index, jumping 7.1 percent to 225 yen. The computer-equipment maker plans to sell its chip-making business to Rohm by the end of this year for about 100 billion yen ($959 million), the Nikkei newspaper said. The companies may announce a deal as early as today, the paper said.

Taiwan Semiconductor Manufacturing Co., the world's largest customized chipmaker, gained 2 percent to NT$67.10. JPMorgan Chase & Co. raised its share-price estimate to NT$76 from NT$73, saying the company's third quarter ``looks strong.''

``We're starting to like technology where valuations are looking attractive,'' said Clariden Leu's Foo. ``We're going for companies that still exhibit quite good growth potential.''