Finance Blog number 1

St. Louis Brewery, maker of Schlafly craft beer, is for sale. But company founders Tom Schlafly and Dan Kopman say they are in no rush to sell their stakes, and they would strongly prefer a local ownership group that includes current brewery workers.

The main reason for the "for sale" sign outside St. Louis’ largest craft brewer is succession planning, they said. Schlafly, 61, who owns nearly 80 percent of the company, has no family interested in running the business. Kopman, 48, who holds about 20 percent, also does not see his school-age children becoming involved with the brewery.

"At some point, the brewery is going to move to additional ownership," Schlafly said Monday.

And they wanted to begin thinking about that now. So earlier this month they asked the brewery’s senior staff to look for ways they could buy the company.

"We’re exploring this on the basis that we want our employees to have a long-term stake in the company," Kopman said.

St. Louis Brewery joins a generation of craft brewers now confronting questions about what future ownership will look like. Anchor Brewing Co. in San Francisco, which is considered the brand that launched the microbrew movement, was sold earlier this year to Bay-area entrepreneurs. Rogue Ales in Portland, Ore., is being handed down from the founder-father to son.

St. Louis Brewing, founded in 1991, sells its beer under the Schlafly name and operates two brew pubs, in downtown St. Louis and Maplewood. It posted nearly $12 million in sales last year and ranked No. 41 among the nation’s largest craft brewers, according to the Brewers Association.

James Ottolini, head of brewing operations, is one of the longtime workers whom Schlafly and Kopman hope will lead the buyout effort. Ottolini, who holds a freshly minted Washington University MBA, said he was excited by the opportunity.

"Our efforts will be to put together an investment group" that includes outside investors and workers, Ottolini said.

Schlafly, an attorney not involved in the day-to-day operations, said he hoped to retain a small, unspecified stake in the company. Kopman said he might not sell any of his share. In any case, he planned to stay on as chief operating officer "for the foreseeable future."

They sounded reluctant to sell to venture capital firms seeking outsized returns or to take the company public, with heavy compliance costs and focus on making quarterly numbers.

The most likely scenario, Kopman said, is local investors and some form of employee-stock ownership plan buying a majority stake.

"We don’t want to see what we’ve helped build diminished," Kopman said.

Schlafly said he was motivated to seek a buyer, in part, because the growing company faces a looming decision on building a new brewery, "and I don’t have the appetite for the debt that it would involve."

The brewery could roughly fetch $5 million to $18 million, based on revenue and estimated margins, said Tom Lee, senior vice president with Mercer Capital in Memphis, Tenn.

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The U.S. Department of Commerce’s Economic Development Administration has awarded Jacksonville $1.32 million in federal funding to repair Lake Fretwell.

The investment will fund repairs and expansion of Lake Fretwell, an existing storm water retention facility located at the former Cecil Field Naval Air Station. The storm water retention lake was damaged by flooding from Tropical Storm Fay in 2008.

The improvements to the lake will allow a major expansion of Cecil Commercial Park to create future jobs and attract private investment. The project will also protect residential neighborhoods downstream, prevent roadway and property flooding damage such as occurred in 2008, and stop further erosion of the lake’s levy.

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Stock Building Supply on Monday closed on its acquisition of National Home Centers Inc., an Arkansas-based supplier of construction materials that had been operating under Chapter 11 bankruptcy protection.

Raleigh-based Stock had issued a stalking-horse bid in late February to purchase National Home Centers Inc. A bankruptcy court judge approved the sale April 2.

Ken Greene, a Stock veteran, will serve as market manager for the company’s Arkansas operations.

The expansion adds to Stock’s 19-market footprint.

Financial terms of the deal were not released. It was not immediately known how many employees and stores the acquisition would bring to Stock.

A Stock spokeswoman did not immediate return a phone call seeking comment.

Stock’s expansion comes after a tumultuous two-year period for the company. In response to a stalled housing market, the building material supplier slashed more than 5,000 jobs and closed more than 100 stores as part of its own bankruptcy reorganization last year. As part of that process, British giant Wolseley PLC sold a majority stake in stock to The Gores Group, a Los Angeles-based private equity firm that provided the financing to bring Stock out of Chapter 11 protection.

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LPK (Libby Perszyk Kathman) said Monday that it has opened a second Asian office, this one in Singapore.

The office will led by Geffrey Chan, director of brand design, according to a news release. The company also has an office in Guangzhou, China, which it opened in 2006.

LPK said the office will serve international clients like Procter & Gamble, Kraft Foods and Cadbury, while looking for new business from companies in the region.

“Having an on-the-ground presence in Singapore allows us to provide a centralized hub of operations for emerging Asia Pacific markers beyond mainland China, which remains the primary responsibility of our Guangzhou office,” said John Recker, president of LPK International, in the release payday loans.

Cincinnati-based LPK is a design and branding agency with operations worldwide. The company has more than 350 employees and also has offices in London; Geneva; and Frankfurt, Germany.

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In the next couple of weeks, lawmakers are expected to unveil an unprecedented climate change proposal that may open up more areas for offshore drilling and cut emissions through a cap on greenhouse gases and a tax on gasoline.

Details on the proposal, put forth by Sens. John Kerry, D-Mass., Joe Lieberman, I-Conn., and Lindsey Graham, R-S.C., are scant - the actual bill isn’t expected until at least the end of the month.

But since this may be the last time this year climate change law is discussed, timing is critical. And with health care, financial reform and looming elections on Washington’s collective plate, it faces an uphill battle.

Still, there’s an outside chance the novel idea could gain traction.

"If they put out something people really like, they’ve got a real shot," said Christine Tezak, an energy and environmental policy analyst at asset management firm Robert W. Baird & Co.

Cutting emissions

The oil, utility and manufacturing industries will all be affected by the new law — the challenge is to craft something they’ll all feel comfortable with.

Tax gasoline: Many oil companies have opposed a cap-and-trade system — where the government issues annual permits to pollute and then ratchets down that number each year.

Like many economists, oil companies maintain that it is an inefficient system, with too many middle men to handle the complex trading of permits.

Their opposition to cap-and-trade intensified when they weren’t granted liberal exemptions under the greenhouse gas bill that passed the House last summer — the bill that this Senate version is meant to complement.

So to win their support the Senate proposal is thought to include a straight-up carbon tax on products derived from oil, such as gasoline, which would likely be passed along to consumers at the pump.

The tax isn’t expected to be huge — starting at something under 10 cents a gallon for gasoline and moving up to maybe 20 cents a gallon after 10 years, said Kevin Book, Managing Director of research at ClearView Energy Partners, a Washington D.C.-based research firm.

And the tax isn’t expected to discourage people from driving, said Book, as it’s too gradual and small to have much of an impact. But revenue from it would likely be spent on other, cleaner transportation projects like mass transit or subsidies for hybrid cars.

So although the oil industry may be more receptive to this gas tax idea, their ultimate support for the law is uncertain.

"We’d like to see more of the proposal," said Lou Hayden, senior director of federal relations at the American Petroleum Institute, echoing the sentiment of most interest groups involved.

In the end, at least one analyst doesn’t think the oil industry will play ball.

"It is unlikely that the oil industry will eventually support whatever shape it takes in the bill," Divya Reddy, an energy policy analyst at the political consultancy Eurasia Group, wrote in a recent research note. "Moreover, carbon fees will translate into higher prices at the pump, an outcome with which few politicians will want to be associated."

Cap emissions for utilities: Power producers may give the proposal a warmer reception, although here again their eventual support lies in the details guaranteed high risk personal loans.

The utility industry as a whole was generally supportive of a cap-and-trade plan that applied to the whole economy, even if they dickered with lawmakers over how fast emission cuts should happen.

For utilities, a cap-and-trade law allows them to upgrade their equipment and pass the cost along to consumers. And under the House cap-and-trade bill, the pass-through to consumers is offset by plans that allow reductions to come from things like planting trees and rebates for low income ratepayers. The Congressional Budget Office said the House bill would cost the average household an additional $175 a year.

As for participating in a cap-and-trade plan without other manufacturers, the industry didn’t rule it out.

"We’re keeping an open mind on everything," said Jim Owen, spokesman for the utility association’s Edison Electric Institute.

A temporary reprieve for manufacturers - Several Midwest Senators opposed a greenhouse gas bill on the grounds that it would make U.S. firms less competitive with foreign factories that don’t have to comply with tighter pollution rules, and hence cost American jobs.

To get around this, the Senate plan calls for some delay in holding factories accountable to the new rules — maybe five to 10 years.

It’s unclear whether this will be enough to get industry and their key Midwest lawmakers on board.

More energy

In return for approving all the reductions, lawmakers that focus on energy production want some bones.

Drilling - Key among them is greater access to U.S. oil and gas reserves — and the great prize in that is Alaska’s Arctic National Wildlife Refuge (ANWR).

"You want to have me sit down at the table and talk about what a strong domestic production piece is, [then] you have to be willing to talk to me about ANWR," Sen. Lisa Murkowski, R-Alaska, was quoted as saying in remarks about what it would take to get her to support a climate bill.

Lieberman said that is not an option, and most analysts say opening ANWR isn’t in the cards.

But expanding production in the eastern Gulf of Mexico is, as well as encouraging some states to open up their waters to oil and gas drilling, said Baird’s Tezak. It’s thought that Virginia, among other states, might jump at federal laws that permanently opened more offshore areas.

Nukes - More support for nuclear power may also be in order, although it’s unclear how much more the Senate plan might allocate beyond President Obama’s recent pledge of over $50 billion in loan guarantees for the industry.

Most analysts think this is probably the last chance the Senate has this year to pass a climate bill, one of Obama’s key policy goals.

With everything going on in Washington, Obama isn’t expected to give this his undivided attention.

"He is most likely to pay lip service to the bill but not put himself on the line for it the way he has done for health care," wrote Eurasia Group’s Reddy.

But few expect this issue to go away. If a bill doesn’t materialize this year, many expect this last ditch effort will form the starting point for negotiations in 2011. 

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Japanese Financial Services Minister Shizuka Kamei said the central bank should contemplate directly purchasing government debt, increasing political pressure for the policy board to overcome deflation.

“The central bank should consider underwriting debt to help the government create funds for fiscal stimulus,” Kamei said at a parliamentary hearing in Tokyo today. By law, the Bank of Japan is prohibited from buying debt directly.

Kamei’s remarks underscore the growing tension between the central bank and Prime Minister Yukio Hatoyama’s administration over how policy makers can fight price declines. Burdened by the largest public debt in the industrialized world, the government has little room to bolster spending and is urging the bank to take charge in beating the deflation that threatens the nation’s recovery from its longest postwar recession.

“The Bank of Japan is under siege with increasing government pressure and severe deflation,” said Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group AG in Tokyo, who used to work for the central bank. “The market knows that bond purchases won’t be a panacea for deflation and they would hurt the BOJ’s independence.”

Having the central bank underwrite debt would give the government more access to funds, though it could also heighten investor concern about the nation’s fiscal discipline and drive bond yields higher. The yield on benchmark 10-year government debt rose to 1.31 percent at 1:13 p.m. today.

Fiscal Policy Needed

Kamei said the central bank alone won’t be able to eradicate price declines and that fiscal policy is also needed. Finance Minister Naoto Kan replied by saying fiscal discipline must always be exercised even though spending can help prop up the economy.

“It’s necessary to provide funds for bold fiscal spending” with direct purchases of debt from the central bank, said Kamei, who heads a junior coalition party. “Without fiscal stimulus funds, Minister Kan can’t resolve the economy’s output gap payday loans. He’s not a magician.”

The bank currently buys 1.8 trillion yen ($20 billion) of government debt from lenders each month. Bank of Japan Governor Masaaki Shirakawa has said the purchases are to provide liquidity and aren’t aimed at paying for government projects.

Kamei, head of the People’s New Party, has championed that increased government spending is key to spurring growth. Last year, he forced the government to delay unveiling a stimulus package he said was too small.

‘Show Its Commitment’

“Japan can’t overcome this economic crisis unless the Bank of Japan shows its commitment by going as far as” underwriting debt to pay for government spending, Kamei said.

Kan, a member of the ruling Democratic Party of Japan, has put heat on the central bank to do more to halt price declines and last month indicated he wanted Shirakawa to implement an inflation target. The finance chief said he wants to stamp out deflation as soon as this year and reiterated that he wants the bank to target inflation of 1 percent or higher.

“Given that various efforts to overcome deflation have failed, I won’t say we can immediately overcome this in a few months,” Kan said. “If I were allowed to be ambitious, I’d say I want prices to rise within the year” adding that “that is just my hope.”

Consumer prices excluding fresh food, the central bank’s key gauge of inflation, slid 1.3 percent in January from a year earlier, an 11th straight decline, the government said last week.

Shirakawa, also speaking to lawmakers, said he is committed to keeping policy very accommodative and that having the benchmark overnight lending rate at 0.1 percent has helped lower borrowing costs for companies.

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Singapore’s consumer prices fell the least in eight months in November as food and transport costs climbed amid an economic recovery.

The consumer price index slid 0.2 percent from a year earlier, after falling 0.8 percent in October, the Department of Statistics said in a statement in Singapore today. The median forecast of six economists surveyed by Bloomberg News was for a 0.4 percent drop. Prices rose 0.4 percent from October, without adjusting for seasonal factors.

Rising commodity and food prices, coupled with an improving global economy, have sparked concerns that inflation will accelerate and derail Asia’s recovery. That’s prompted policy makers in Australia, Vietnam and India to start raising interest rates or signal they may remove monetary stimulus soon.

“As the economy is expected to continue its recovery, the outlook is for a moderate positive trend in inflation into next year,” said David Cohen, an economist with Action Economics in Singapore.

Singapore’s gross domestic product climbed an annualized 14.2 percent last quarter from the previous three months, the second consecutive expansion as the island exited the deepest recession since independence in 1965.

The central bank, which uses its currency rather than interest rates to manage price gains, forecasts inflation will be about zero this year. It said in October it will maintain a no-appreciation stance in its exchange rate policy, refraining from further monetary easing after opting for a de-facto devaluation of the Singapore dollar in April to counter collapsing exports.

Policy Changes

The Singapore dollar has gained about 3.2 percent in the past six months against the U.S. currency. It fell 0.5 percent to S$1.4119 against the U.S. dollar as at 12:55 p.m. local time.

Australia and Vietnam raised interest rates this quarter to contain inflation. In India, where wholesale food prices are rising at the fastest pace in 11 years, central bank Governor Duvvuri Subbarao said this month that monetary policy, while an “ineffective instrument” to rein in food costs, may be needed to damp inflation expectations.

Bank of Korea Governor Lee Seong Tae said this month the central bank shouldn’t wait too long before gradually raising interest rates, held at a record-low 2 percent since February.

Food prices, which make up 23 percent of Singapore’s consumer price index, rose 0.7 percent in November from a year earlier, after climbing 0.8 percent the previous month. Transport and communications costs climbed 2.4 percent, while housing prices slid 4.6 percent.

Consumer prices will probably rise 0.3 percent in 2009 and 2.8 percent next year, according to the median forecast in a quarterly survey of economists by the Monetary Authority of Singapore released Dec. 9. The central bank forecasts inflation will average 2.5 percent to 3.5 percent in 2010.

“We expect inflation to return modestly by year end and for it to continue climbing in the first quarter next year,” said Matt Hildebrandt, an economist at JPMorgan Chase & Co. in Singapore.

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Australian retail sales rose in October as households spent more at department stores and restaurants.

Sales climbed 0.3 percent from September, when they fell 0.2 percent, the Bureau of Statistics said in Sydney today. The result matched the median forecast of 19 economists surveyed by Bloomberg News.

Household spending is helping stoke an economic expansion forecast by the central bank to accelerate in 2010, extending 18 straight years of annual growth. Governor Glenn Stevens raised the benchmark interest rate this week by a quarter percentage point for an unprecedented third month amid a rebound in consumer confidence.

“I think we’ll have record Christmas” sales, Gerry Harvey, chairman of Australia’s biggest electronics retailer, Harvey Norman Holdings Ltd., said in an interview with Bloomberg television. “We’ve had very good sales figures in October and November and I can’t think of any reason why that won’t follow into December.”

Australia’s dollar maintained gains versus the U.S. dollar. The currency traded at 92.86 U.S. cents as of 11:49 a.m. in Sydney from 92.90 cents before the retail sales report and 92.48 cents yesterday in New York.

Spending at department stores rose 1.9 percent and restaurant sales gained 1.1 percent, today’s report showed. Consumers spent 0.2 percent less on clothing.

Consumer Confidence

Hardware store group Mitre 10 said yesterday that earnings before interest and tax of A$2.67 million ($2.47 million) in October boosted profit for the four months through Oct. 31 to A$6.44 million, compared with a loss of A$239,000 for the same period a year earlier.

Consumer confidence is close to its highest level in more than two years, boosted by an increase in employment in October and higher wages.

Central bank policy makers increased the overnight cash rate target to 3.75 percent from 3.5 percent on Dec. 1, citing evidence that the economy, which skirted the global recession, “is in a gradual recovery.”

Gross domestic product rose 1 percent in the first half of the year and is forecast by the Reserve Bank to climb 3.25 percent next year and in 2011. Third-quarter GDP figures will be published on Dec. 16.

Investors are betting there is a 46 percent chance Stevens will boost the benchmark rate by a quarter point to 4 percent at the central bank’s next meeting on Feb. 2, according to interbank futures on the Sydney Futures Exchange at 6:24 a.m.

Rate Threat

Still, some retailers say the central bank’s interest-rate increases in October, November and this month will prompt consumers to reduce spending in coming months.

This year’s interest-rate increases add about A$150 to monthly repayments on an average A$300,000 home loan, and may prompt consumers to trim spending that surged in the first half of the year after Prime Minister Kevin Rudd distributed more than A$20 billion in cash handouts to households.

The cost to some home borrowers will be even higher after Westpac Banking Corp., Australia’s second-largest lender, increased its standard variable home-loan rate by 45 basis points after this week’s central-bank decision. A basis point is 0.01 percentage point.

Christmas trading is expected to be “subdued” in New South Wales, Australia’s largest state, according to a quarterly survey published today.

“The last quarter has been disappointing for many small businesses in New South Wales, with most of the gains made during the previous quarter negated,” said Christena Singh, author of today’s Sensis Business index report.

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Lehman Brothers Holdings Inc has filed a lawsuit against Barclays Capital Inc alleging the British bank took control of excess assets in collusion with Lehman executives when it bought its U.S. brokerage business a year ago, court documents show.

Lehman filed for bankruptcy on September 15, 2008, in the largest U.S. bankruptcy in history. Its flagship U.S. brokerage business was sold to Barclays less than a week later in a hurriedly assembled deal.

Lehman said in September this year that Barclays Capital got an $8.2 billion “windfall profit” due to the fire sale of its business for an undisclosed $5 billion discount off the book value of securities transferred to Barclays.

“The windfall to Barclays was not disclosed to the Court, the Lehman Boards or Lehman’s lawyers so as to allow the transfer to Barclays of billions of dollars in excess assets, without consideration, in a manner designed to avoid judicial, corporate and creditor oversight,” Lehman said in a Monday court filing.

The charges come after Lehman received approval in June to probe whether Barclays got “too good of a deal” when it bought Lehman’s brokerage business, as the British bank was able to quickly book a $4 direct lender payday loans.2 billion gain on its $1.75 billion purchase.

Barclays said at the time that it did not expect the probe to result in any additional claims.

In the lawsuit, Lehman requested the court to order Barclays to “disgorge to Lehman any ill-gotten gains it obtained” and pay punitive damages.

A Barclays Asia spokesman said in an email that all queries on the lawsuit should be directed to its New York office. Barclays’ New York officials were not immediately available for comment, outside of normal U.S. hours.

The case is In re: Lehman Brothers Holdings Inc, U.S. Bankruptcy Court, Southern District of New York, No. 08-13555. (Reporting by Supantha Mukherjee and Ajay Kamalakaran in Bangalore; Editing by Muralikumar Anantharaman)

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China’s stimulus-induced lending binge probably propelled growth in the third quarter to its fastest pace in a year. Now, policy makers have to figure out how to wean the economy off state support.

The country’s rebound has been powered by 4 trillion yuan ($586 billion) of spending on railways, roads, power plants and public housing. The program ends next year, forcing Premier Wen Jiabao to find new ways to sustain the expansion with increased consumer spending and the financing of small businesses.

“This has been growth on steroids,” said Michael Pettis, a Peking University finance professor and former head of emerging markets at Bear Stearns Cos. “The question now is how to stop pumping so much money into the system without a sharp reduction in growth.”

State-directed support will make up more than four-fifths of growth this year, says the World Bank, spurring record iron- ore production at Rio Tinto Group and car sales in China at Volkswagen AG. An exit from the stimulus won’t be easy without unnerving investors: A plunge in July loan growth sent the Shanghai Composite Index down more than 20 percent in August.

Extending the stimulus for too long risks the diversion of funds into stocks and real estate, an erosion of bank asset quality and inflationary pressures, the Asian Development Bank said in a report last month.

‘Severe’ Reaction

“Such a scenario might trigger a round of severe monetary tightening in the medium term that would pull growth down again,” the lender said.

China’s cabinet late today said that it will continue with monetary and fiscal stimulus measures even after the economy exceeded officials’ expectations for the first nine months of the year. At the same time, the State Council signaled that inflation concern will be an increasing focus of policymaking as the rebound strengthens.

The recovery remains at a “critical stage” and China will “maintain the continuity and stability of macro-economic policies,” the State Council said in a statement on a government Web site. “The policy focus of the next few months is to balance the need to maintain stable and relatively fast growth, the need to adjust the economic structure and the need to better manage inflationary expectations,” it also said.

Policy Shift

“They are cautious about the speed at which inflation will return,” said Ben Simpfendorfer, an economist with Royal Bank of Scotland Group Plc in Hong Kong. “It’s not a change of policy tone yet, but I think we will get that change in the first quarter of next year.”      The state-driven credit boom, which led to a record $1.27 trillion in new loans in the first nine months, the stimulus plan and resulting growth in car and property sales will help the economy expand 11.2 percent in the fourth quarter, according to Frankfurt-based Deutsche Bank AG. That follows a 7.9 percent expansion in the second quarter of this year, the first acceleration in growth since the last three months of 2006.

The benchmark Shanghai Composite Index of stocks reached a two-month high today before tomorrow’s economic data releases, including gross domestic product. The gauge rose as high as 3,105.51 before trading at 3,087.84 as of 2:03 p.m. local time.

Industrial output probably grew 13.2 percent in September and investment in properties and factories surged 33.1 percent in the first nine months, pushing GDP growth to 9 percent in the third quarter. It was the fastest pace since the third quarter of last year, according to the median estimate of 34 economists surveyed by Bloomberg News. The data will be released tomorrow.

Inflation Gauge

Figures this week will probably show no signs of inflation, allowing the People’s Bank of China to keep in place what it calls its “moderately loose” monetary policy. China will stick to that policy, guide reasonable loan growth to boost domestic demand and further cement the nation’s economic recovery, the central bank said Sept. 29.

Consumer prices dropped an estimated 0.8 percent in September, according to the survey.

Retail sales rose 15.5 percent last month, the fastest pace since January, according to the data survey. Car sales surged 84 percent to more than 1 million units for the first time, putting China on course to overtake the U.S. this year as the biggest market for sales of new cars.

The stimulus, record lending, tax cuts and subsidies may help push China’s imports 30 percent higher to $313 billion this quarter, according to Zurich-based Credit Suisse Group AG payday loans with low fees. Iron ore imports jumped to a record 64.6 million metric tons last month while copper imports rose 23 percent.

Global ‘Locomotive’

China’s demand for goods from overseas can play “a critical role in some locomotive way for the world,” Jim O’Neill, chief economist at Goldman Sachs Group Inc. in London, said in a Sept. 2 research note.

The lending boom, equivalent to about 50 percent of China’s GDP in the first half, drove public and private investment in factories and properties 33 percent higher in the first eight months, helping restore investor confidence in stocks and property after the start of the financial crisis.

The Shanghai index has soared 70 percent this year as government-influenced spending helped growth rebound from 6.1 percent in the first quarter, the slowest pace of expansion in almost a decade.

Volkswagen Sales

Wolfsburg, Germany-based Volkswagen, the biggest overseas carmaker in China, sold 150,000 cars last month, a monthly record, as sales for the first nine months surged 37 percent. Car sales were buoyed after the government halved sales taxes and announced 5 billion yuan in subsidies to help rural residents to buy vehicles. Volkswagen is investing 4 billion euros ($5.9 billion) to expand capacity in China through 2011.

“China is the steam engine of the world economy,” Volkswagen sales chief Detlef Wittig said in a Sept. 25 interview in Frankfurt. “The lust for mobility there seems almost bottomless. We’re very well positioned there and will keep investing to secure our share of the market.”

Iron-ore production at London-based Rio Tinto, the world’s third-largest mining company, rose 12 percent in the third quarter to a record 47.5 million tons on demand from steelmakers in China, the company said in an Oct. 14 statement.

China Mobile Ltd., the world’s biggest phone company by market value, reported that subscriber numbers rose to 508.4 million at the end of September, more than the populations of the U.S. and Japan combined.

World Bank’s Remedies

The effect of stimulus spending will taper off starting in mid-2010; the overall impact will be less than half what it was this year, said Wang Tao, a UBS AG economist in Beijing.

On the World Bank’s list for measures to reduce dependence on investment-led growth are: boosting spending on health, education and social welfare to aid low-income earners and reduce their reluctance to consume; providing greater funding for small- and medium-size enterprises; and allowing more flexibility for the yuan to appreciate, making imports cheaper.

“Keeping the Chinese economy growing is very important for employment generation and to avoid social instability,” said Yolanda Fernandez Lommen, chief China economist at the ADB in Beijing. “The easy part has been done. The real challenge is ahead.”

By developing service industries and ensuring easier access to consumer products and credit, China can boost domestic consumption by $2.2 trillion, or more than France’s annual output, by 2025, the McKinsey Global Institute said in an Aug. 21 report.

Driving Investment

Some areas of the economy may emerge as new drivers of growth even as stimulus and new lending slow. Net exports may contribute 0.5 percentage point to next year’s expansion after slashing more than 3 percentage points from this year’s GDP rise, said UBS’s Wang.

A rebound in property construction, which contributes about a quarter of urban fixed-asset investment, will also pick up some of the slack in 2010, said Wang. Property sales jumped 73.4 percent in the first nine months of 2009 from a year earlier to 2.75 trillion yuan.

China may still have to get used to a lower average annual growth rate as reduced demand from Western nations slows exports. The World Bank estimates 2 percentage points may be shaved off the average 10 percent yearly growth recorded over the past decade, the ADB envisions a trajectory of 8 percent to 9 percent and Pettis says the economy may have to adjust to a trend growth rate of 5 percent to 7 percent.

“The government has been postponing the difficult and painful reforms,” said Fernandez Lommen. “It’s a huge task ahead.”

–Kevin Hamlin, with assistance from Andreas Cremer in Berlin. Editors: Anne Swardson, Chris Anstey.

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