Finance Blog number 1

Former Federal Reserve Chairman Alan Greenspan signaled that the financial crisis has yet to end even as borrowing costs tumble, warning that U.S. banks must raise “large” amounts of money.

“There is still a very large unfunded capital requirement in the commercial banking system in the United States and that’s got to be funded,” Greenspan said in an interview yesterday in Washington. He also said that “until the price of homes flattens out we still have a very serious potential mortgage crisis.”

Greenspan’s comments suggest he sees a bigger capital shortfall in the banking system than reflected in regulators’ stress tests on the 19 biggest U.S. lenders. Treasury Secretary Timothy Geithner told lawmakers yesterday that banks have issued more than $56 billion in new stock or debt since the tests found 10 firms needed to raise about $75 billion.

A lack of capital at banks may inhibit lending to consumers and businesses, tempering any economic recovery. The former Fed chief, who left the central bank in 2006, said that the continued slump in home prices is putting at risk millions of borrowers.

“We’re on the edge and if this thing doesn’t get resolved quickly I’m worried,” he said before a meeting with House of Representatives members on financial regulation that was organized by the Washington-based Bipartisan Policy Center.

Home prices will only start to stabilize once the “liquidation” rate of single-family homes has peaked, he said. “I don’t think we’re there yet.”

‘Remarkable’ Improvement

More broadly, “things have unquestionably improved” across the economy and financial markets, he said. “They’ve improved everywhere in the world. It’s remarkable.”

The London interbank offered rate, or Libor, for three- month dollar loans fell 3 basis points yesterday to 0.75 percent, the British Bankers’ Association said, the 35th straight drop. The Libor-OIS spread, a gauge of banks’ reluctance to lend, narrowed to 55 basis points, the least since February 2008. It was as high as 364 basis points in October.

That’s an “extraordinary improvement,” said Greenspan, who last year said that the credit crisis would be at an end once the Libor-OIS spread narrowed past 25 basis points business cards. “Virtually all of the various credit spreads not only in the U.S. but globally have come down.”

Alan Blinder, a former Fed vice chairman, also said on Capitol Hill that “if there are no more reversals, history will judge that by May 2009 we will have passed the worst of the crisis.”

GDP Call

“My current guess would be in terms of GDP the second quarter will be a bottom and by the third quarter we’re eking out a positive,” Blinder said.

Greenspan agreed, estimating that U.S. gross domestic product will decline at an annual rate of 1 percent in the second quarter.

Members of the Fed’s Open Market Committee who met in Washington April 28-29 saw “some signs pointing toward economic stabilization,” and some officials detected prospects for “a trough” in the housing market’s downturn, according to minutes of the meeting released yesterday in Washington.

Fed governors and district-bank presidents project that the economy will shrink 1.3 percent to 2 percent this year and grow 2 percent to 3 percent in 2010, according to median estimates released yesterday.

Greenspan separately said he opposed the creation of a “systemic risk regulator,” a concept that has been backed by the Obama administration and Fed Chairman Ben S. Bernanke. The agency would be given an impossible task of trying to foresee crises, he said.

“If you put the power into the hands of people, very smart people, but if you ask them to do more than is possible I think they will create problems for the system,” said Greenspan, who said in congressional testimony in October that “a flaw” in his free-market ideology contributed to the “once-in-a- century” credit crisis.

The former Fed chairman also reiterated his view that the central bank’s emergency lending should be done instead through the Treasury.

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The Obama administration may call for stripping the Securities and Exchange Commission of some of its powers under a regulatory reorganization that could be unveiled as soon as next week, people familiar with the matter said.

The proposal, still being drafted, is likely to give the Federal Reserve more authority to supervise financial firms deemed too big to fail. The Fed may inherit some SEC functions, with others going to other agencies, the people said. On the table: giving oversight of mutual funds to a bank regulator or a new agency to police consumer-finance products, two people said.

The 75-year-old SEC, chartered to oversee Wall Street and safeguard investors, has seen its reputation tarnished as some lawmakers blamed it for missing the incipient financial crisis and failing to detect Bernard Madoff’s $65 billion Ponzi scheme. Any move to rein in the agency is likely to provoke a battle in Congress, which would need to approve the changes, and draw the ire of union pension funds and other advocates for shareholders.

“It would be a terrible mistake,” said Stanley Sporkin, a former federal judge and enforcement chief at the SEC. “Whatever the SEC has done or didn’t do, it is still the premier investor protection agency around.”

SEC Chairman Mary Schapiro’s agency has been mostly absent from negotiations within the administration on the regulatory overhaul, and she has expressed frustration about not being consulted, according to people who have spoken with her. She has pledged to fight any attempt to diminish the SEC, they said.

Geithner, Summers

Treasury Secretary Timothy Geithner and National Economic Council Director Lawrence Summers are leading the administration’s effort to redraw the lines of authority for policing the financial system.

“We’re going to have to bring about a lot of changes to the basic framework of oversight, so there’s better enforcement,” Geithner, said May 18 at the National Press Club in Washington. “That’s going to require simplifying, consolidating this enormously complicated, segmented structure.”

Geithner may be asked about his plans for a regulatory revamp at a Senate Banking Committee hearing on financial-rescue efforts in Washington today.

Treasury spokeswoman Stephanie Cutter didn’t respond to requests for comment. The SEC also didn’t immediately respond.

Dinner Meeting

Geithner was set to discuss the proposals at a dinner last night with Summers, former Fed Chairman Paul Volcker, ex-SEC Chairman Arthur Levitt and Elizabeth Warren, the Harvard University law professor who heads the congressional watchdog group for the $700 billion Troubled Asset Relief Program.

President Barack Obama has said he wants to sign legislation on regulatory changes by year-end. House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, is planning hearings with the aim of drafting a bill by the end of June paydayloan.

The SEC’s job is to regulate stock markets, police securities sales and make sure public companies make adequate disclosures to investors about their finances. The commission has five members, with the chairman and two commissioners typically from the president’s political party and the other two from the party not in the White House.

Schapiro was appointed by Obama to replace Christopher Cox, who was named by President George W. Bush.

Cox Record

Under Cox, the SEC ceded some of its authority to the Fed after the central bank responded to Bear Stearns Cos.’ near collapse last year by inserting its own examiners into Wall Street securities firms.

Former Treasury Secretary Henry Paulson, Geithner’s predecessor, urged Congress in a March 2008 “blueprint” for overhauling financial rules to give the Fed broader powers to oversee risk in the system.

Opponents of giving the Fed more authority, such as former SEC chief Levitt, have said the central bank’s focus on keeping the financial system solvent may trump efforts to punish companies for violating securities laws. Levitt is a board member of Bloomberg LP, the parent company of Bloomberg News.

The SEC’s reputation took a hit last week when U.S. Senator Charles Grassley, an Iowa Republican, released a report saying two of its enforcement attorneys face an insider-trading investigation by the Federal Bureau of Investigation.

Trades Questioned

The report, written by the SEC inspector general’s office, faulted the SEC for inadequately monitoring trades by the employees and said one of them sold shares in companies after co-workers opened probes into the firms. Both employees, who are enforcement attorneys in the SEC division that investigates securities fraud, denied any wrongdoing.

While the agency has been battered recently, it still has powerful supporters, including a number of Democrats on the Senate Banking Committee who aren’t likely to support having an agency they oversee cut back.

In addition, public pension funds that hold $872 billion of assets urged lawmakers this month to protect the SEC’s turf in any legislation overhauling financial regulation.

The California Public Employees’ Retirement System, the New York retirement fund and 12 other pension funds wrote letters to Frank and Senate Banking Committee Chairman Christopher Dodd, arguing that the SEC “must maintain robust regulatory and enforcement authority” over securities trading, brokers, money managers, corporate disclosures and accounting rules.

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Confidence among U.S. homebuilders in May increased to the highest level since September, providing further evidence that the housing slump that started in 2006 may be closer to a floor.

The National Association of Home Builders/Wells Fargo index of builder confidence rose to 16 from 14 the prior month, the Washington-based NAHB said today, capping the first back-to-back gain since February 2008. A reading below 50 means most respondents view conditions as poor.

The biggest drop in residential construction on record has helped builders trim the glut of properties on the market while low borrowing costs and falling prices are attracting new buyers. Still, unemployment is at a 25-year high, foreclosures persist and credit conditions are tight for builders, indicating a housing recovery will be slow.

“Record high affordability, record low mortgage rates, and the government’s efforts to jump start economic growth, are giving potential buyers optimism,” Jennifer Lee, an economist at BMO Capital Markets in Toronto, said in a note to clients. Still, she said, “the supply of foreclosures that started to hit the marketplace over the last couple of weeks will be tough competition for these new homes.”

The builder confidence index was expected to rise to 16 this month, according to the median estimate of 45 economists surveyed by Bloomberg News. Projections ranged from 13 to 20. The index reached a record low of 8 in January.

The gauge, first published in January 1985, averaged 16 last year.

Report Details

The confidence survey asks builders to characterize current sales as “good,” “fair” or “poor” and to gauge prospective buyers’ traffic. It also asks participants to forecast the outlook for the next six months.

The builders group’s index of current single-family home sales rose to 14 in May from 12 last month. The gauge of buyer traffic was unchanged at 13. A measure of sales expectations for single-family homes over the next six months rose to 27 from 24.

Confidence rose in three of four regions of the U.S., led by a four-point gain in the West to 12 and a three-point gain in the Northeast to 18. Sentiment in the Midwest held at 14.

“Builders are responding to what they perceive to be some of the best home buying conditions of a lifetime,” NAHB Chairman Joe Robson, a builder from Tulsa, Oklahoma, said today in a statement. He cited borrowing costs, low prices and the federal government’s $8,000 tax credit for first-time buyers cash advances pay day loan.

Starting to ‘Stabilize’

Federal Reserve Chairman Ben S. Bernanke this month told the congressional Joint Economic Committee that housing “is beginning to stabilize,” citing that as a reason why the economy will “bottom out,” then return to growth “later this year.”

Recent reports indicate Americans are more amenable to purchasing homes as affordability increases.

The Reuters/University of Michigan index of home-buying conditions, part of a consumer sentiment report released on May 15, rose to 161 this month from 146 in April. That level is “about equal to the average from 2002 to 2004,” Abiel Reinhart, an economist at JPMorgan Chase & Co., said in a note to clients.

The average on a 30-year fixed-rate home loan declined to 4.76 percent in the week ended May 8 from 4.79 percent the prior week, according to the Mortgage Bankers Association. The rate fell to 4.61 percent in late March, the lowest level since the group began records in 1990.

Housing Starts

The Commerce Department may report tomorrow that builders broke ground on more houses in April, adding to signs the recession is abating. Housing starts rose 2 percent last month to an annual rate of 520,000, according to a Bloomberg survey. Building permits rose to a 530,000 pace, the survey said.

Still, some U.S. builders are struggling.

Pulte Homes Inc. and Centex Corp., the companies that plan to combine this year, reported quarterly losses that exceeded analysts’ estimates as the housing recession forced them to record $762 million in land writedowns and property expenses.

Pulte, based in Bloomfield Hills, Michigan, reported a first-quarter net loss of $514.8 million, or $2.02 a share. The median estimate in a Bloomberg survey was 55 cents. Centex reported a net loss of $402.8 million, or $3.24 a share, greater than the median estimate of $1.11 a share.

“The operating environment for housing remained very difficult during the first quarter of 2009,” Richard Dugas, Pulte’s chief executive officer, said in a May 5 statement. “Although we are not ready to call a bottom in housing, we are nevertheless encouraged by our sales, traffic and cancellation trends seen in the first quarter that have continued into April.”

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Confidence among U.S. consumers rose this month to its highest level since before the collapse of credit markets late last year threw the economy deeper into a recession.

The Reuters/University of Michigan preliminary index of consumer sentiment rose to 67.9 in May from 65.1 in April. The index reached a three-decade low of 55.3 in November.

Surging stocks and signs that the deepest recession in at least five decades is moderating may prompt Americans to increase their spending. Still, the recovery may be drawn out as automakers close factories and showrooms, throwing more people out of work.

“Financial-market improvement and the fiscal stimulus is leading to stabilization in spending and improvement in confidence,” said Dean Maki, co-head of U.S. economic research at Barclays Capital Inc. in New York. “Economic data, while choppy, has improved somewhat, and consumer spending has stabilized.”

Economists projected the sentiment index would rise to 67, according to the median of 53 estimates in a Bloomberg News survey. Forecasts ranged from 63 to 70.5.

Expectations Gauge

The expectations gauge — which more closely predicts the direction of consumer spending — rose to 69 from 63.1 in April. A measure of current conditions, which reflects Americans’ perceptions of their financial situation and whether it’s a good time to buy expensive items such as cars, decreased to 66.2 from 68.3.

Consumers in today’s report projected an inflation rate of 2.6 percent over the next 12 months, compared with 2.8 percent in the April survey.

Over the next five years, Americans expected a 2 payday loans.8 percent rate of inflation, unchanged from the April forecast. These figures are tracked by Federal Reserve policy makers.

Consumer spending rose at a 2.2 percent pace in the first quarter following its longest slump in almost three decades, the government said last month. Still, spending will stagnate in the current three-month period and then not exceed the first quarter’s gain in the second half of the year, economists said in a monthly Bloomberg survey released on May 12. Such spending accounts for 70 percent of the economy.

Consumers have been buoyed by a 32 percent surge in the Standard & Poor’s 500 Index from March 9 lows. Gasoline costs, down nearly 50 percent from July highs, and mortgage rates at historic lows are also boosting sentiment.

Conserving Cash

Still, consumers continue to face unemployment at a quarter-century high of 8.9 percent, home prices down by nearly a third from their peaks and difficulty obtaining credit, so they are focused on conserving cash and spending mainly on essentials.

Kohl’s Corp., the fourth-largest U.S. department-store company, this week posted first-quarter profit that declined less than analysts estimated after April sales exceeded its forecast. Still, net income fell for a seventh straight quarter.

“We expect the consumer to continue to be reluctant to spend and demand to continue to be weak” this year, Chief Executive Officer Kevin Mansell said on a conference call.

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The cost of living in the U.S. was unchanged in April as decreases in food and energy costs offset increases in medical care, autos and a second straight jump in tobacco prices.

The consumer price index was flat after decreasing 0.1 percent in March, the Labor Department said today in Washington. Excluding food and fuel, costs climbed a greater-than-forecast 0.3 percent, almost half of which reflected an increase in excise taxes on cigarettes, according to Labor.

Companies from Gap Inc. to Toyota Motor Corp. are keeping a lid on prices to draw buyers amid the deepest recession in five decades. Still, recent increases in commodity costs and Federal Reserve efforts to thaw credit markets by pumping cash into the economy will help lower the odds that broad-based price declines, or deflation, will take root, analysts said.

“Demand simply remains too weak for most businesses to find any success in pushing through price hikes at this point, Russell Price, a senior economist at Ameriprise Advisor Services in Detroit, said before the report. “Widespread price cuts however, are also unlikely especially given the recent evidence that the economy may be stabilizing.”

Annual Rate

From a year ago, consumer prices fell 0.7 percent, the biggest decline since 1955. Excluding food and energy, prices climbed 1.9 percent from April 2008.

A separate report today showed that manufacturing in the New York region shrank less than forecast in May. The Federal Reserve Bank of New York’s so-called Empire index rose to minus 4.6, the highest level since August, from minus 14.7 the previous month.

Stock-index futures, which had fallen earlier in the day, remained lower after the figures. Contracts on the Standard & Poor’s 500 Stock Index lost 0.4 percent to 886 at 8:43 a.m. in New York. Yields on benchmark 10-year Treasuries were little changed at 3.10 percent.

Consumer prices were forecast to be unchanged on a monthly basis, according to the median of 71 estimates in a Bloomberg News survey. Projections ranged from a 0.1 percent drop to a 0.3 percent gain. Costs excluding food and energy were expected to rise 0.1 percent. Last month’s increase was the biggest since July.

Food, Energy

Energy costs fell 2.4 percent in April, led by decreases in gasoline and natural gas. Food prices dropped 0.2 percent as costs for dairy products and non-alcoholic beverages fell.

The CPI is the broadest of three monthly price gauges from Labor because it includes goods and services. Almost 60 percent of the CPI covers prices consumers pay for services ranging from medical visits to airline fares and movie tickets personal loan for poor credit.

New vehicle prices and medical care costs both climbed 0.4 percent, while tobacco jumped 9.3 percent.

A category designed to track rental prices increased 0.1 percent after increasing 0.2 percent in March.

Wages increased 0.1 percent after adjusting for inflation, and were up 2.6 percent over the last 12 months, matching the year-over-year increase in March.

Increases in vehicle prices may not last much longer. Automakers are among companies cutting prices or enhancing incentives in a bid to revive plunging demand.

Toyota Versus Honda

Toyota, the world’s largest automaker, last month cut the base price of its Prius hybrid by $1,000 to help beat back competition from Honda Motor Co.’s gasoline-electric Insight.

Honda started selling the new Insight on March 24 with a sticker price starting at $19,800, less than the $22,000 for the current base-model Prius. Toyota will offer a 2010 Prius for $21,000 later this year, after higher-priced versions debut in late May, according to a Toyota statement last month.

Several retailers offered promotions during April. Aeropostale was offering two tank-tops for the price of one and half-price swimwear. Gap Inc.’s Banana Republic chain advertised 50 percent off accessories, while American Eagle Outfitters Inc. promoted shorts for less than $25.

Still, smaller declines in manufacturing and an easing in the housing slump indicate the worst recession in at least 50 years may be starting to abate.

Recession Abating

The economy will probably shrink at a 1.9 percent annual pace this quarter after contracting at an average 6.2 percent rate in the prior six months, according to economists surveyed this month.

Federal Reserve Chairman Ben S. Bernanke said May 11 that the danger of deflation, or prolonged declines in consumer prices, was “receding.”

“We are currently of course being very aggressive because we are trying to avoid another form of price instability, which is deflation,” Bernanke said in response to a question at a conference in Jekyll Island, Georgia. “We are also committed to removing accommodation in a timely way to ensure that, as we come out of this episode and we move to a sustainable recovery, that we will have price stability, low and stable inflation, going forward.”

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China’s 4 trillion yuan ($585 billion) stimulus plan and record bank lending may drive the nation’s economic recovery even as exports plunge.

Spending on factories and properties surged 30.5 percent in the first four months from a year earlier, data released this week showed. Money supply grew by a record and new loans have exceeded a 5 trillion yuan government target for the whole year.

China aims to be the first nation to recover from the global slump that has choked off demand for exports, sending the nation’s shipments tumbling. A revival in the world’s third- biggest economy would help countries across Asia by increasing demand for their products and add to signs that the worst of the global recession is over.

“The recovery from the major shock of the second half of 2008 was never going to be smooth,” said Glenn Maguire, chief Asia-Pacific economist at Societe Generale SA in Hong Kong. “But China can pump-prime its economy for 18 months to two years to wait for a recovery from Western consumers.”

The Shanghai Composite Index of stocks has climbed 46 percent this year on expectations that China’s economic growth will accelerate.

Nobel Prize-winning economist Joseph Stiglitz said yesterday that China may emerge “a winner” from the global crisis because the nation is buffered by a high savings rate and the government “has taken very rapid action.”

Solid Foundations

This week’s data highlighted the effects of the stimulus plan announced in November. It also supported the central bank’s assessment in a quarterly monetary policy report that the recovery is not yet on solid foundations.

Growth in industrial production weakened in April and a decline in power output accelerated, the statistics bureau said. Exports plunged a more-than-estimated 22.6 percent from a year earlier as trade with the U.S. and the European Union fell car insurance quotes.

“I’m shrugging off the decline in industrial output growth,” said David Cohen, an economist with Action Economics in Singapore. “We are still heading in the right direction.”

China has scrapped quotas that limited lending by banks, unveiled plans to support 10 industries from autos to textiles, and pledged extra health and welfare spending to spur growth.

Positive data this week included a 14.8 percent gain in retail sales in April from a year earlier and a 35 percent jump in home sales in the first four months. Consumer prices fell 1.5 percent last month from a year earlier, which may encourage spending.

‘Aggressive’ Stimulus

“China is doing massive, aggressive monetary, fiscal and credit stimulus and that’s going to lead to a recovery of growth,” said Nouriel Roubini, the New York University economics professor who predicted the financial crisis. “But I worry about the quality of that growth,” he said, adding that private domestic demand is not growing fast enough.

Ma Jun, chief China economist at Deutsche Bank AG in Hong Kong, had a similar concern. Ma said this week’s data showed an economy driven by government-led investment while the recovery in the private sector remains weak.

China’s economy grew 6.1 percent in the first quarter, the weakest pace since at least 1999. While the government says its 8 percent goal for this year is within reach, a bigger challenge may be maintaining growth in the longer term.

“Without exports, China can produce growth for a period of time by getting the banks to lend like crazy, but that’s not sustainable growth,” said Paul Cavey, an economist with Macquarie Securities Ltd. in Hong Kong.

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Japan’s current-account surplus narrowed at the slowest pace in six months in March as a decline in exports eased.

The surplus shrank 48.8 percent to 1.486 trillion yen ($15.5 billion) from a year earlier, the Ministry of Finance said in Tokyo today. Exports fell 46.5 percent after declining a record 50.4 percent in February.

Economists don’t expect shipments abroad to resume rising soon given that they have plunged at an unprecedented pace since last year. The International Monetary Fund says the global recession will be deeper and the recovery slower than earlier predicted as financial markets take longer to stabilize.

“Overseas demand is bottoming out, but the strength of its recovery is weak,” said Mitsumaru Kumagai, a senior economist at Daiwa Institute of Research Ltd. in Tokyo. “Both Japan and the world economy are unlikely to achieve a full- blown recovery until the second half of next fiscal year.”

The yen traded at 96.09 per dollar at 11:31 a.m. in Tokyo from 96.17 before the report was published.

The median estimate of economists surveyed was for the current-account surplus to narrow to 1.21 trillion yen. The gap fell every month in the year ended March, except for January, when Japan had a deficit for the first time in 13 years.

The Washington-based IMF said in April that the world economy will shrink 1.3 percent this year, compared with its January projection of 0.5 percent growth. It predicted expansion of 1.9 percent next year, slower than an earlier 3 percent estimate.

Imports Fall

Imports slid 37.8 percent, compared with an unprecedented 44.9 percent drop the previous month.

Shipments to China sank 31.6 percent in March, less than the 39.7 percent decline in the previous month, according to a separate trade report released last month faxless payday loan. Exports to the U.S. fell 51.4 percent, moderating from 58.4 percent in February. Today’s figures don’t include regional breakdowns.

“China’s economy has started rebounding, but the emerging economies on the whole aren’t strong enough to lead the world economy,” said Junko Nishioka, an economist at RBS Securities Japan Ltd. “Capital probably won’t flow back into the emerging nations unless the industrialized countries return to growth.”

Japan’s government last month cut its economic forecast, saying the world’s second-largest economy will shrink a record 3.3 percent this fiscal year as exports and corporate spending tumble at an unprecedented pace.

Income Surplus

The income surplus, the difference between money earned abroad and payments made to foreign investors in Japan, narrowed 13 percent to 1.7 trillion yen in March from a year earlier, today’s report showed.

On a seasonally adjusted basis, the current-account surplus widened 31.7 percent from February, today’s report showed. Exports rose 5.3 percent and imports gained 4.9 percent.

The surplus narrowed 50.2 percent to 12.2 trillion yen in the year ended March 31, today’s report showed, the most since comparable data were made available in 1985. Exports tumbled a record 16.3 percent and imports fell 3.9 percent.

The current account tracks the flow of goods, services and investment income between Japan and its trading partners. It includes trade not shown in the customs-cleared balance.

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China’s new lending cooled in April, easing concern that banks are taking on too much risk in a credit boom after the government dropped restrictions on loans in November.

Lending was “approximately” 600 billion yuan ($88 billion), central bank Governor Zhou Xiaochuan said in Basel, Switzerland, today. The number is about a third of the record 1.89 trillion yuan in March. The official figure is due to be released this week.

Consumer prices fell 1.5 percent in April from a year earlier, the statistics bureau said today, making it easier for the government to maintain the “moderately loose” monetary policy that saw restrictions on banks’ loan volumes scrapped in November. China is yet to establish a stable economic recovery, with lending concentrated on government projects while small businesses lack cash, the central bank said last week.

“There were concerns about rising non-performing loans; those concerns will have eased,” said Ben Simpfendorfer, an economist at Royal Bank of Scotland in Hong Kong. “If bank-loan growth continues to drop from here that would be a worry, but I don’t expect that.”

The Shanghai Composite Index rose for an eighth day, climbing 0.1 percent as of 2:33 p.m. local time, its longest winning streak in two years. The yuan was little changed at 6.8220 against the dollar.

Investment, Exports

New loans of 600 billion yuan would be about 30 percent more than a year earlier. In comparison, lending surged six times in March.

Other data this week may show investment growth accelerated and a decline in exports moderated, strengthening a fledgling recovery in the world’s third-biggest economy. China is battling a global recession that dragged economic growth to 6.1 percent in the first quarter, the slowest pace in almost a decade, according to official data.

Urban fixed-asset investment grew 29.1 percent in the four months through April from a year earlier, according to the median estimate of 16 economists surveyed by Bloomberg News. That compares with a 28.6 percent gain in the first three months.

Exports may have dropped 15.3 percent last month, the smallest decline in four months. The government will release trade and investment figures tomorrow.

Gaining Speed

“The economy has gained speed heading into the current quarter,” said Wang Qian, an economist with JPMorgan Chase & Co instant cash advance. in Hong Kong. “We expect it to strengthen further as policy stimulus kicks in more powerfully and the external environment gradually improves.”

That view contrasts with interest-rate swaps showing traders paring expectations for the speed of the recovery.

China’s consumer prices fell for a third month on lower costs for food and commodities. Producer prices plunged 6.6 percent, the most since Bloomberg data began in 1999. While lower prices may encourage consumer spending, the central bank is also on guard against entrenched deflation, where people delay purchases in the hope of better deals in the future.

“Downward pressure on consumer prices still exists,” Su Ning, a deputy governor of the People’s Bank of China, said in Shanghai today.

The stimulus package announced in November is taking effect and the economy is recovering, Su said.

Manufacturing Expands

Chinese manufacturing expanded in April for the first time in nine months, according to the CLSA China Purchasing Managers’ Index. A government-backed index also showed an expansion.

General Motors Corp., the biggest overseas automaker in China, said its sales in the country rose 50 percent last month to a record. Overall vehicle sales climbed 25 percent to a record 1.15 million units.

Industrial & Commercial Bank of China Ltd., the world’s largest lender by market value, increased its lending by 636.4 billion yuan in the first quarter, an amount greater than Vietnam’s annual gross domestic product.

Lenders face “severe” challenges in managing their risks, the banking regulator said last month.

“The size of lending in the first quarter was quite astonishing,” said Wang Tao, an economist at UBS AG in Beijing. “It takes time to digest that much money.”

Besides the risk of bad loans, the credit boom may inflate asset prices and increase the likelihood of inflation making a comeback. The Shanghai Composite Index has climbed 45 percent this year.

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Jean-Claude Trichet has dragged the European Central Bank into a new era by pursuing direct asset purchases over the objections of Germany’s Bundesbank.

President Trichet yesterday announced the ECB will buy 60 billion euros ($80 billion) of covered bonds, taking markets by surprise after Bundesbank chief Axel Weber had campaigned against such a policy. For a central bank that’s been slow to follow counterparts around the world, the move marks a change in mentality toward battling the financial crisis.

“This is in fact a seminal day for the ECB,” said Marco Annunziata, chief economist at UniCredit Group in London. “The decision to launch direct asset purchases shows that output and inflation developments have dealt a very heavy blow to the credibility of the hard-core hawks” like Weber.

Trichet’s policy shift, pushed by smaller nations such as Cyprus, Greece, Austria and the Netherlands, is a setback for the conservative Bundesbank, which provided the blueprint for the ECB at its inception in 1998. While Weber downplayed the significance of the asset-purchase program, it will see the ECB taking more risk onto its books against his wishes.

“It’s a blow to his personal credibility,” said David Tinsley, an economist at National Australia Bank in London. “The Rubicon that’s been crossed is that the ECB will be accepting private credit risk on its balance sheet.”

‘A Few Bonds’

Weber said on April 15 that “direct interventions, such as the purchase of corporate debt, shouldn’t take priority.” He pushed instead for the ECB to lengthen the maximum maturities on its loans to banks to 12 months from six months, a measure the central bank also announced yesterday.

“We’re extending the maturities of refinancing operations with banks, that’s the important measure,” Weber said yesterday in an interview with German broadcaster ARD. “In addition we’re buying a few bonds, that’s true.”

Weber had also campaigned for the ECB to set a 1 percent floor for its benchmark interest rate. While the bank yesterday cut the rate by a quarter point to 1 percent and called that “appropriate,” Trichet said it’s not necessarily at its floor.

“We have not decided that the lowest level of rates has been reached,” ECB council member Erkki Liikanen said in Oslo today.

Council Split

ECB policy makers have been split over the best policy response to Europe’s deepest recession since World War II cash advance now. The economy of the 16 euro nations will shrink 4.2 percent this year, according to the International Monetary Fund, more than the projected 2.8 percent contraction in the U.S.

Athanasios Orphanides, the former Federal Reserve economist who now heads the Cypriot central bank, led the push for the ECB to engage in asset purchases and keep open the option of deeper rate cuts. The idea gained momentum when ECB Vice President Lucas Papademos floated the idea of buying corporate debt on March 26.

Still, Weber’s resistance to asset purchases, shared by Executive Board members Juergen Stark and Lorenzo Bini Smaghi, left the 22-member Governing Council divided at its April policy meeting. Trichet was forced to delay a decision on new measures until May. He said yesterday’s decisions were all “unanimous.”

Some economists said the purchase of covered bonds doesn’t represent a heavy defeat for Weber, as Germany has 57 percent of the market.

‘Nice’ Defeat

Known as Pfandbriefe in Germany, the bonds are issued by banks and backed by mortgages or public-sector loans. There were about 1.5 trillion euros of the securities outstanding in the euro region at the end of 2007, 900 billion euros of which were German, according to BNP Paribas SA.

Weber “may have lost this initial battle but he obtained the covered bond, which is very good news for German banks,” said Aurelio Maccario, chief euro-area economist at UniCredit MIB in Milan. “If this is a loss, it’s a nice one.”

The ECB’s bond plan is also dwarfed by programs in other parts of the world. It is equivalent to about 0.5 percent of euro-region GDP, according to Lloyds TSB Group Plc. That compares with debt-purchase programs in the U.K. and the U.S. amounting to 8 percent and 2 percent of GDP respectively.

The Bank of England said yesterday it will increase bond purchases by 50 billion pounds ($75 billion) to 125 billion pounds after keeping its key interest rate at a record low of 0.5 percent.

“The ECB continues to lag behind,” said Jennifer McKeown, an economist at Capital Economics in London. “We suspect that the ECB will eventually be forced into bolder asset purchases as spare capacity mounts and the risk of deflation increases.”

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The European Central Bank cut its key interest rate to a new record low of 1 percent today, and may offer banks longer-term loans to stem the region’s worst recession since World War II.

ECB officials meeting in Frankfurt lowered the benchmark rate by a quarter point, as predicted by all 53 economists in a Bloomberg News survey. Separately, the Bank of England left its key rate at 0.5 percent and increased its asset-purchase program. ECB President Jean-Claude Trichet, who has promised to unveil new policy measures to tackle the crisis, holds a press conference at 2:30 p.m.

“That’s it with rates,” said Stephane Deo, chief European economist at UBS AG in London. “They are now moving into unconventional territory. Trichet will announce an extension of the bank loan maturities and will have to flag that the ECB will keep all other options open.”

The difficulty for Trichet is that his 22-member Governing Council is split over how best to proceed. Germany’s Axel Weber wants the ECB to signal that 1 percent is the floor for the key rate and has argued against buying government or corporate debt to boost the economy. Others such as Athanasios Orphanides of Cyprus say asset purchases and deeper rate cuts may be needed.

‘Woefully Inadequate’

“The continuing divisions and bickering risk delaying the appropriate policy response,” said James Nixon, an economist at Societe Generale SA in London. “What they announce today will be woefully inadequate given the challenges facing the economy.”

The ECB narrowed the corridor around its benchmark rate. It lowered the marginal rate, at which banks can borrow overnight funds, by half a point to 1.75 percent, and left the deposit rate, at which banks can park funds overnight, at 0.25 percent.

The euro rose more than half a cent to $1.3377 after the rate decision.

Having cut their key rates to close to zero, the Bank of England, U.S. Federal Reserve and Bank of Japan are now buying bonds, effectively printing money to reflate their economies in a policy known as quantitative easing.

With recent economic reports in Europe suggesting the worst of the recession is over, Trichet may find common ground around the less aggressive approach put forward by Weber. The pace of decline in Europe’s service and manufacturing industries is easing and factory orders in Germany, the region’s largest economy, unexpectedly rose in March.

War ‘Not Won Yet’

“The recent stronger data have increased the risk that the bank will settle for a more prudent approach,” said Marco Annunziata, chief economist at UniCredit Group in London free credit score online. “This would be a mistake. The war against the financial and economic crisis is not won yet.”

Arguing that asset purchases are not required, Weber is pushing for the ECB to extend the maturities on its loans to banks to ease tensions in money markets.

The measure may force colleagues to sign up to his second request — a signal from the ECB that interest rates won’t drop any further. That’s because banks would be reluctant to take up long-term loans if they thought credit could get cheaper.

Council member Yves Mersch and Executive Board members Juergen Stark and Lorenzo Bini Smaghi have signaled support for Weber’s view. They’re squaring off against Orphanides, Nout Wellink and George Provopoulos, who want to preserve the option of further action. That has opened perhaps the biggest split among ECB policy makers in the bank’s 10-year history.

Deflation Threat

The 16-nation economy will shrink 4.2 percent this year, according to the International Monetary Fund, more than the projected 2.8 percent contraction in the U.S. and 4.1 percent slump in the U.K.

While some economic reports are pointing to stabilization, lending to companies and consumers dropped for a second straight month in March and a European Commission survey shows households expect prices to fall over the next 12 months.

Inflation was 0.6 percent in April. The ECB, which aims to keep the rate just below 2 percent, says it may dip below zero this summer.

“If inflation threatens to remain significantly below 2 percent for a considerable period of time, then additional policy easing could be warranted” after May, Orphanides, a former Fed adviser, said in an April 14 interview.

Even though almost three quarters of company financing in the euro area comes from banks, buying corporate debt may be helpful because “all asset markets are interconnected,” Orphanides said.

“The euro area is clearly experiencing a deep recession,” said David Mackie, an economist at JPMorgan in London. “It is hard to see how the region can avoid something that looks a lot like deflation. The ECB should be putting in place the most accommodative policy stance possible, and leaving it in place for an extended period of time.”

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