Finance news. My opinion.

China may resume interest-rate cuts from mid-year as consumer and producer prices fall and hopes fade for a rapid rebound in the world’s third-biggest economy, Capital Economics Ltd. said.

Deflation means “real rates have risen sharply,” London- based economist Mark Williams said in a note e-mailed late yesterday. “If the recovery disappoints, further interest-rate cuts could resume from the middle of the year.”

Credit Suisse Group AG said this week that China’s recovery began to stall in the second half of last month and the World Bank cautioned against “premature” enthusiasm. Those views contrast with a 44 percent rally in the Shanghai Composite Index, driven by optimism that government-led investment will revive growth after trade collapsed.

The key one-year lending rate is 5.31 percent after five cuts in the final four months of last year. The first was as Lehman Brothers Holdings Inc. filed for bankruptcy and the central bank followed up with the biggest single reduction since the 1997-98 Asian financial crisis.

Williams predicts 81 basis points of cuts in both lending and deposit rates by year’s end after consumer prices fell for three straight months and producer prices declined by a record in April.

“Huge growth” in new project announcements because of the government’s 4 trillion yuan ($586 billion) stimulus package may not yet have generated spending gains of the same size, Williams said business card design. “While growth appears to have stabilized, there is no sign of a rapid rebound.”

Stocks May Fall

China’s economic recovery is slowing further this month, raising concern that the rebound won’t be as “strong as many recently have hoped” and adding to the likelihood of a decline in stocks, according to Credit Suisse.

Retail industries including electronics and department stores have weakened, adding to a slump in power consumption, Dong Tao, a Hong Kong-based economist, said in a report.

“The pace has slowed, even reversed in some sectors,” Tao said. “The trend has become more visible in May.”

Manufacturing may falter in coming months after expanding in March and April, Tao said. The Purchasing Manager’s Index, or PMI, rose to 53.5 in April from 52.4 in March. A reading above 50 indicates an expansion.

“The PMI runs a risk of slipping below 50 over the next few months,” Tao wrote.

China’s economy expanded 6.1 percent in the first quarter, the slowest pace in almost a decade. Overseas shipments declined 22.6 percent in April from a year earlier, the customs bureau said last week.

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Enthusiasm about an economic recovery in China may be “premature” as private investment lags behind government spending, the World Bank said.

“Until we see a recovery in private investment, it’s hard to get too excited about the future,” David Dollar, country director for China, said at a forum in Beijing today.

The Shanghai Composite Index has climbed 47 percent this year on optimism that a 4 trillion yuan ($586 billion) stimulus package will revive growth after exports collapsed. The world’s third-biggest economy is “struggling” and may fall short of the government’s target of an 8 percent expansion this year, Oppenheimer & Co. said this week.

Private investment, the main driver of growth, was “way down” in the first quarter, Dollar said, without citing a figure. Manufacturers have excess capacity and “a lot of the real-estate sector is over-built,” he said.

Shanghai’s stock index fell 0.3 percent as of 1:13 p.m. local time.

While China is the only one of the world’s five biggest economies still expanding, growth slowed to 6.1 percent in the first quarter, the weakest pace since at least 1999.

Private investment is “the main source of job creation,” Dollar said. “It’s very important for private investment to come back if China’s going to be able to continue to grow at a high rate that is sustainable.”

Economy ‘Stabilizes’

Stimulus spending has “stabilized” the Chinese economy, he said, adding that it can’t be the source of long-term sustainable growth and more should be done to increase consumption paydayloan.

The government’s efforts to spur domestic demand include subsidies for replacing older vehicles with newer models, a program that the State Council said yesterday would be widened to include home appliances.

Other steps should include raising the ceiling on interest rates for deposits, encouraging spending by improving returns for savers, according to Dollar.

A 30.5 percent gain in urban fixed-asset investment in the first four months from a year earlier, sparked by the stimulus plan, stoked investors’ optimism that a recovery is building.

Mark Williams, an economist with Capital Economics Ltd. in London, said May 15 that the official numbers don’t tally with other indicators, such as steel prices and excavator sales, suggesting that investment remains weak.

A recovery “lacks momentum” and hopes for a rapid rebound are receding, Williams said.

The central bank cautioned in a quarterly monetary policy report released May 6 that surging lending has been overly concentrated on government projects at the expense of small businesses. The recovery’s foundations aren’t solid, it said.

The World Bank, a lender formed after World War II to help nations reduce poverty, forecast in March that China’s economy will grow 6.5 percent this year.

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Japan’s local and foreign-currency debt ratings were brought to the same level, Aa2, by Moody’s Investors Service to reflect that the repayment risk for each is equal.

Moody’s cut the foreign-currency debt rating from Aaa and raised the local-currency assessment from Aa3, saying it can no longer assume that Japan would be more likely to repay debt borrowed in currencies other than the yen. The outlook remains stable, Moody’s said in a statement today.

Moody’s said Japan’s “considerable strengths” in terms of foreign reserves and household savings need to be balanced against its burgeoning debt. Prime Minister Taro Aso has pledged to spend 25 trillion yen ($263 billion) to counter Japan’s worst postwar recession, adding to debt that the Organisation for Economic Cooperation and Development says will swell to almost twice the size of the economy next year.

“The upgrade of the local-currency debt rating is psychologically positive” for local bond investors, said Akitsugu Bandou, senior economist in Tokyo at Okasan Securities Co. Investors shrugged off the downgrade to the foreign- currency rating because Japan has “almost no exposure” to debt denominated in other currencies, Bandou said.

The yield on Japan’s benchmark 10-year bond fell two basis points to 1.405 percent at the close in Tokyo. The yen was initially little changed before weakening to 95.79 per dollar at 10:05 a.m. in London from 95.01 before the announcement.

Hong Kong, Italy

The rating is the third-highest investment grade, equivalent to Standard & Poor’s AA and one notch higher than Fitch Ratings’ AA-. It puts Japan on a par with Hong Kong and Italy. Within the Group of Seven industrialized nations, only Italy and Japan have assessments below Aaa.

Moody’s said Japan is cushioned by its large household savings and foreign reserves as well as a “strong home bias” of investors in government bonds. Japan had $1 trillion in foreign reserves as of April 30, the most after China, and households have financial assets totaling 1,400 trillion yen.

Meanwhile the debt, the world’s largest, “leaves the country’s fiscal position vulnerable to shocks or imbalances that would cause a sharp rise in interest rates,” it said.

New bond sales will climb to an unprecedented 44.1 trillion yen for the year ending March. Total bond sales will surge to 130.2 trillion yen, also the highest ever.

Absorbing Bond Sales

Moody’s said domestic investors “will absorb the record level of bond issuance this year to fund the government’s economic stimulus program low fee pay day loans.”

So far there’s no indication that investors will become hesitant about buying the debt, though “perhaps that could happen if the government doesn’t resume its course of fiscal consolidation, and that would have negative rating implications,” Thomas Byrne, senior vice president at Moody’s, said at a press conference in Tokyo.

The OECD said in March that Japan’s public debt, already the world’s largest, will balloon to 197 percent of gross domestic product in 2010.

“The Ministry of Finance has to be satisfied with this, given the additional borrowing that’s planned — plus the economy is hardly booming,” said David Cohen, head of Asian economic forecasting at Action Economics in Singapore. “The bottom line is that they’re still way ahead of where they were a couple years ago.”

Moody’s assigned Japan the top Aaa rating in 1993, and since 1998 made four cuts as the nation’s borrowings swelled. It began raising the assessment in 2007. In Asia-Pacific, only Australia, New Zealand and Singapore retain the top rating.

Fiscal Discipline

Finance Minister Kaoru Yosano said last month that while fiscal spending is necessary to prop up the economy and employment during the current crisis, the government needs to keep a grip on its finances over the longer term.

Analysts expect a Cabinet Office report on May 20 to show the world’s second-largest economy contracted the most since World War II last quarter as exports collapsed. GDP shrank an annualized 16.1 percent in the three months ended March 31, according to the median estimate of economists surveyed.

Still, recent reports suggest that represented the low point for Japan. Overseas demand is beginning to stabilize and Aso’s stimulus plans are providing at least temporary relief to consumers facing job losses and wage cuts.

Household confidence climbed to a 10-month high in April, the Cabinet Office said today. Industrial production rose in March for the first time in six months as manufacturers replenished inventories. Exports had their first month-on-month gain since May 2008.

The government will raise its assessment of the economy for the first time in more than three years later this month, the Asahi newspaper reported last week.

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Industrial production contracted the least since October last month and New York’s manufacturing slump eased further in May, signaling the recession’s grip is loosening.

Output at U.S. factories, mines and utilities decreased 0.5 percent last month, less than forecast, after dropping 1.7 percent in March, Federal Reserve figures showed today in Washington. The New York Fed’s Empire state manufacturing index rose to minus 4.6, also beating economists’ estimates.

Today’s figures signal that manufacturing is bottoming out after companies slashed their stockpiles of unsold goods the most on record in the first three months of the year. Continued weakness in consumer spending means demand is too low for firms to raise prices: government figures today showed the consumer price index was unchanged in April after a March drop.

“This is another signal that suggests the biggest pocket of weakness in the overall economy was the fourth quarter and the first quarter,” said John Herrmann, chief economist at Herrmann Forecasting in Summit, New Jersey, referring to the manufacturing reports. “Weakness is dissipating and the economy is poised to grow in the second half.”

Stocks Fall

Stocks closed down, reversing gains following the reports, after Federal Deposit Insurance Corp. Chairman Sheila Bair’s prediction that the heads of some banks may lose their jobs sent financial shares lower. The Standard & Poor’s 500 Stock Index fell 1.1 percent to end at 882.88. Yields on benchmark 10-year notes climbed to 3.13 percent at 4:29 p.m. from 3.09 percent late yesterday.

The Treasury said separately today that international demand for U.S. financial assets gained in March, when American stocks and government bonds rallied as the Federal Reserve stepped up its campaign to end the credit crisis. Foreign net purchases of long-term equities, notes and bonds rose to $55.8 billion, the highest level since September.

Consumer sentiment improved for a third straight month in May, a private survey showed. The Reuters/University of Michigan preliminary index of consumer sentiment rose to 67.9 from 65.1 in April. The index reached a three-decade low of 55.3 in November.

Companies from Gap Inc. to Toyota Motor Corp. are keeping a lid on prices to draw buyers amid the deepest recession in five decades. 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.

Retail Discounts

Gap’s Banana Republic chain advertised 50 percent off accessories, while American Eagle Outfitters Inc. promoted shorts for less than $25.

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, the Labor Department said today in Washington.

From a year ago, consumer prices fell 0 fast payday loans.7 percent, the biggest decline since 1955. Excluding food and energy, prices climbed 1.9 percent from April 2008.

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

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.

Goods, Services

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.

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

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.

Fed officials project that inflation will remain contained because of the large amount of unused capacity in the economy, in both the labor market and manufacturing. Today’s industrial- production report showed that the capacity utilization rate fell to a record low of 69.1 percent in April.

Better Than Forecast

Economists forecast industrial production would fall 0.6 percent, according to the median of 66 projections in a Bloomberg survey, after an initially reported 1.5 percent drop in March.

Motor vehicle and parts production climbed 1.4 percent in April after increasing 0.3 percent the prior month, today’s report showed. Those increases are unlikely to be sustained in coming months as sales fall and Chrysler LLC and General Motors Corp. shut plants to reduce inventories.

Chrysler, whose U.S. sales tumbled 48 percent in April from the same month last year as bankruptcy neared, said last week it will offer rebates of as much as $6,000 to boost demand. The Auburn Hills, Michigan-based company on May 1 idled its 22 U.S. plants, which had about 26,800 hourly workers, and auto parts suppliers also are likely to cut jobs as they shut factories.

General Motors Corp., facing a U.S.-imposed June 1 deadline to restructure or file for bankruptcy, said last week it plans to idle, partially or completely, as many as 23 stamping, engine and transmission plants through July. The temporary closings are in conjunction with GM’s plan, announced last month, to idle 13 assembly plants for as long as nine weeks in the same period.

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Manufacturing in the New York region this month contracted the least since August and the six-month outlook improved for a third straight month, indicating the decline in factory production may be slowing.

The Federal Reserve Bank of New York’s general economic index rose to minus 4.6, better than forecast, from minus 14.7 the prior month, the bank said today. Readings below zero for the Empire State index signal manufacturing activity is shrinking.

A global recession is slowing demand for American-made goods, making it harder for U.S. companies to boost exports to counter the domestic downturn. Still, businesses may not make deep cuts to inventory this quarter after paring stockpiles at the fastest pace on record from January through March.

“Although the demand for manufactured goods is still falling, it is doing so at a much slower pace, suggesting a bottom in manufacturing may be near,” Steven Wood, president of Insight Economics LLC in Danville, California, said before the report.

Economists projected the Empire State index would climb to minus 12, according to the median of 43 estimates in a Bloomberg News survey. Forecasts ranged from minus 5 to minus 23.2.

Factory executives in the New York Fed’s district, which encompasses New York state, northern New Jersey and one county in Connecticut, turned more optimistic about the future. The gauge measuring the six-month manufacturing outlook jumped to 43.8, the highest since October 2007, from 33.1.

Economic Outlook

A Bloomberg survey of users on six continents showed confidence in the global economy rose to the highest level in 19 months. The Bloomberg Professional Global Confidence Index climbed to 38.72 in May from 21.2 in April, the biggest increase since the survey began in November 2007 poor credit personal loans. A reading below 50 means pessimists outnumber optimists.

The New York Fed’s measure of new orders decreased to minus 9 and a gauge of shipments rose to 1.3 from minus 1.8. The index of inventories increased to minus 21.6 from minus 36.

The index of prices paid improved to minus 11.4, and the gauge of prices received decreased to minus 27.3 from minus 18. A measure of employment rose to minus 23.9 from minus 28.1.

Today’s report is one of the earliest measurements of regional manufacturing this month. The Philadelphia Fed report, due out next week, may show manufacturing in that region contracted at a slower pace in May, according to the Bloomberg survey median.

Job Cuts

Weak global demand and falling commodity prices are hurting U.S. companies, forcing factory owners to cut jobs. U.S. manufacturers reduced payrolls by 149,000 workers last month, following the 167,000 jobs cut in March, according to data from the Labor Department.

Economists surveyed by Bloomberg News March 30 to April 8 projected the U.S. jobless rate will exceed 8 percent through 2011.

Intel Corp., the world’s largest chipmaker, is getting orders that are “a little better than expected” in the second quarter, Chief Executive Officer Paul Otellini said May 12. “A lot depends on June,” Otellini said at a meeting at the company’s Santa Clara, California, headquarters.

Last month, the company said first-quarter profit fell 55 percent because of slowing computer demand and signaled sales won’t recover in the current period.

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Spain’s economy, shattered by a housing-market collapse and the global financial crisis, contracted the most in four decades in the first quarter as manufacturing sank and unemployment soared toward 20 percent.

Gross domestic product shrank 1.8 percent in the three months after a 1 percent contraction in the fourth quarter, the Madrid-based National Statistics Institute said in an e-mailed statement today. From a year earlier, the economy contracted 2.9 percent. Both numbers were the sharpest declines since at least 1970, according to the institute’s data.

Spain, whose construction boom made it a motor of job creation in Europe, now has 4 million people out of work, accounting for almost 70 percent of the annual increase in euro- area unemployment over the last year. The European Commission expects Spain to contract further next year even after other economies in the region start to recover. First-quarter data tomorrow may show the euro-region economy shrank 2 percent, a fourth consecutive contraction, according to a Bloomberg News survey.

“While at the moment you’re seeing less negative growth rates in Spain than in the euro zone, that will probably reverse in the next quarter and beyond,” said Ben May, an economist at Capital Economics in London, who forecasts a 5 percent contraction for Spain this year. The economy will return to growth “probably another two or three quarters after the euro zone turns positive,” he said.

Lagging Recovery

Spain’s unemployment rate rose to 17.4 percent in the first quarter, double the EU average, government data show. Iberia Lineas Aereas de Espana SA forecasts its headcount may be 10 percent lower in a year, Chairman Fernando Conte said on May 12. Mecalux SA, Spain’s largest maker of warehouse equipment, said this week it plans to reduce the working hours of almost 1,000 workers because of weak demand.

Joblessness will reach 20.5 percent in 2010 after the economy contracts 3.2 percent this year, the commission forecast this month. More than a million Spanish households lack a family member with a job, and a million unemployed people no longer receive government benefits.

Bad loans have more than tripled, according to the central bank, and the collapse of the debt-fueled building boom and the squeeze on credit pushed 475 construction and real estate companies into bankruptcy proceedings in the first quarter cheap car insurance.

Political Toll

“It’s too early to speculate about green shoots,” said Martin van Vliet, senior economist at ING Bank in Amsterdam. “It’ll be a long downturn and the recovery is certainly not in sight but at least the worst quarter is definitely behind us.”

The crisis is taking a political toll on Prime Minister Jose Luis Rodriguez Zapatero, who was re-elected last year after pledges of full employment.

A poll of 2,500 people by the state-run Sociological Research Center in April showed the prime minister’s Socialist Party would have won 40.8 percent of the vote if elections were held then, against 40 percent for the opposition People’s Party. In last year’s election, the Socialists won 43.9 percent of the vote, against the People’s Party’s 39.9 percent.

Consumer prices in Spain, which rose faster than the euro- region average for most of the past decade, fell 0.2 percent from a year earlier in April, the second straight negative inflation rate, data yesterday showed. In the euro zone, prices increased 0.6 percent in April from a year earlier.

Swelling Deficit

Spain has implemented stimulus measures valued at 2.3 percent of GDP this year, more than any other country in Europe, according to the government. Prime Minister Jose Luis Rodriguez Zapatero announced additional measures this week in a bid to encourage Spaniards to buy homes and cars, while promising to trim spending by 1 billion euros.

The budget deficit will grow to 9.8 percent of output next year, more than three times the EU limit, according to the commission. Spain had a budget surplus for the three years ending 2007.

As Spain’s deficit swells, the extra interest that investors demand to hold its bonds instead of German equivalents rose to the most since the euro was created in February. The difference, 65 basis points today, is more than double what it was a year ago.

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The Federal Reserve considers the recent jump in Treasury yields more as a reflection of a better economic outlook than a signal it needs to step up purchases of U.S. government debt, according to central bank officials who declined to be identified.

It’s too early to judge the effectiveness of the Fed’s $300 billion plan to buy Treasuries even after 10-year yields climbed 0.65 percentage point since the initiative began in March, the officials said. They added that the goal is to stimulate private lending, rather than to target government- bond rates.

The Fed officials’ stance contradicts the view of firms including BlackRock Inc. that have predicted the rise in yields will prompt the central bank to announce an increase in the size of the program as soon as next month.

“It would be very different if the economy still appeared to be in freefall and yields were backing up, but it’s not,” said John Ryding, founder of RDQ Economics LLC in New York and a former Fed researcher. Increasing Treasury purchases would “fight against what is in my opinion a recovery signal, or a signal that the recession is drawing to a close.”

Chairman Ben S. Bernanke said May 11 that the danger of deflation, or prolonged declines in consumer prices, is “receding” and earlier this month cited evidence the economy’s contraction is easing. The Treasuries market, along with stocks and some commodities, have reflected those shifts.

Inflation Expectations

Ten-year note yields closed at 3.18 percent late yesterday, up from as low as 2.46 percent after the March 18 announcement of the plan to buy long-term government debt. The gap in yields between the notes and 10-year Treasury Inflation Protected Securities, a gauge of the inflation rate expected by investors, hit a seven-month high of 1.64 percentage points last week.

The Standard & Poor’s 500 Stock Index closed at 908.35 yesterday in New York, up 21 percent from two months before. Crude-oil futures reached $60.08 yesterday, the highest level since November.

Fed policy makers committed to buy as much as $300 billion of Treasuries over a six-month period in their March 18 Open Market Committee statement. The aim was “to help improve conditions in private credit markets,” the FOMC said.

“The statement is pretty clear,” Richmond Fed President Jeffrey Lacker, who was the first FOMC member to vote for buying Treasuries this year, told reporters May 8. “It doesn’t say anything about a U.S. Treasury yield” as a target, he said after a Washington speech. “I would urge people to take it at face value.”

Fed’s Campaign

The Fed has bought $101.7 billion under the initiative so far, part of its campaign to cut borrowing costs by purchasing assets with the benchmark interest rate near zero. Policy makers in March also decided to boost purchases of mortgage securities this year to $1.25 trillion from $500 billion and buy $200 billion, double the previous amount, of federal agency debt faxless payday loan guaranteed.

Stuart Spodek, BlackRock’s co-head of U.S. bonds in New York, said in an interview last week the Fed “needs to consider increasing its purchases of Treasuries” to “stabilize” long-term yields. He told Bloomberg Television May 11 officials may announce an increase as soon as the June 23-24 meeting. Spokeswoman Melissa Garville declined to comment further.

Another fund manager, James Platz of Mountain View, California-based American Century Investments, expects the Fed to announce further purchases “at some point.”

Mortgage Impact

Should the rise in yields cause mortgage rates to surge, that may prove to be a trigger for a stronger Fed response, said Richard Clarida, a strategic adviser at Pacific Investment Management Co., the world’s biggest bond-fund manager. “That’s going to really, really, really hurt the economy,” Clarida said in a Bloomberg Television interview this week.

Last week, fixed mortgage rates rose for the first time in four weeks, with the average cost of a 30-year home loan climbing to 4.84 percent from 4.78 percent, which was the lowest level in Freddie Mac data going back to 1970.

The increase in Treasury yields, coupled with a drop in consumer prices, is increasing real interest rates for companies. Real investment-grade corporate borrowing costs climbed to 8.34 percent in March, the highest level since 1985, according to data compiled by Bloomberg and Merrill Lynch & Co.

Rising real yields may deter companies from borrowing to invest in new products or factories, delaying an economic recovery, said John Lonski, chief economist at Moody’s Capital Markets Group in New York.

No Specific Target

Bernanke and other Fed officials have said they’re trying to lower mortgage rates and other private borrowing costs without aiming for any specific levels.

“We’re not trying to target a particular interest rate,” Bernanke said in May 5 congressional testimony. “Our objective is to provide more liquidity to the system and to help private credit markets, and I think that it has had some benefit.”

Janet Yellen, president of the San Francisco Fed, said May 5 that higher yields are related to the “bit of optimistic news, good signs in the last several weeks that are reflected in the stock market.”

The situation poses a “dilemma” for the Fed, because if the rise in yields reflects “erroneous market views” about the economy, it will hold back growth, said former Fed Governor Lyle Gramley.

“The Fed is probably scratching its head at the moment and will wait and not react until the smoke clears,” said Gramley, who is now a senior economic adviser with New York- based Soleil Securities Corp.

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Malaysia’s central bank said it will lower the country’s 2009 economic forecast amid a worse-than- expected slump in exports, predicting the nation will recover in the second half of the year.

“The export contraction was much greater than was earlier envisaged,” Governor Zeti Akhtar Aziz said in a Bloomberg Television interview in Singapore on May 9. “This more significant contraction of the export sector will require a revision of the numbers. The important part is the domestic sector continues to grow.”

Southeast Asia’s third-largest economy is facing its first contraction in more than a decade, with the central bank currently forecasting it may shrink 1 percent this year or expand that much. The 1.5 percentage points of interest-rate cuts since late November and the government’s 67 billion ringgit ($19 billion) of stimulus measures are enough for now, Zeti said.

“Right now the assessment is that there will be an improvement in the second half of the year, especially in the fourth quarter,” she said. “Unless that assessment changes, then the current rate is the appropriate rate.”

Asian governments have pledged to pump more than $950 billion into their economies through increased expenditure, tax cuts and cash handouts to kick-start local consumer and business spending. Growth in Asia including Japan, Australia and New Zealand will probably slow to 1.3 percent this year, from 5.1 percent in 2008, the International Monetary Fund said May 6.

Measures ‘Sufficient’

Malaysia’s stimulus plans are “sufficient” and if implemented aggressively and efficiently, will help the economy resume growth in the second half of this year after a “marked contraction” in the first six months, Zeti said. The government has the capacity to do more if needed, she added.

Bank Negara Malaysia kept its overnight policy rate unchanged at 2 percent in April following three consecutive reductions from Nov. 24 to Feb. 24.

The worst global economic slump since World War II has battered Asian exports, including Malaysian-produced Intel Corp. computer chips and IOI Corp. palm oil. The country’s industrial production fell for a seventh month in March, dropping 14.4 percent from a year earlier, a report showed today. Exports slumped 15.6 percent.

Once the world economy improves, Asia “holds the greatest promise for a stronger recovery,” Zeti said. “Our financial system continues to function, and therefore when conditions in the global environment stabilize, I believe that Asia will see a rapid recovery fast cash advance.”

Asian Currencies Rise

Malaysia’s GDP growth may revive to a 4 percent-to-5 percent pace once the global economy recovers, she said, without specifying a time frame.

The ringgit rose to a four-month high of 3.4965 against the dollar today as all of Southeast Asia’s five most-used currencies advanced on optimism the global recession is easing.

“The market expects to see improvements going forward,” said Suresh Kumar Ramanathan, a rates and currency strategist at CIMB Investment Bank Bhd. in Kuala Lumpur. “The dollar is selling off as risk appetite is coming back.”

Zeti didn’t say by how much the 2009 economic forecast would be changed. She said the central bank will unveil the new estimates when it releases first-quarter economic data, due later this month.

“The domestic economy is still holding its ground,” Zeti said. “If we didn’t have a domestic sector, the contraction would have been so much more severe.”

Low Interest Rates

Global central banks including the U.S. Federal Reserve have slashed interest rates to help spur economic growth and sustain consumer spending. Indonesia’s central bank on May 5 lowered its benchmark interest rate for a sixth straight month.

“Interest rates are likely to remain low for an extended period of time and this can have negative implications,” Zeti said. “For us, we also have to consider the return on savings. We are a high-savings economy,” where deposits account for about 180 percent of GDP, she said.

Malaysia scrapped its fixed-exchange rate of 3.8 ringgit against the dollar in July 2005 in favor of a managed float against the currencies of its major trading partners.

The ringgit “has seen greater volatility” against the dollar, Zeti said. Still, “our currency has been relatively stable against most of the currencies in this region. Malaysia does not have a target level, we don’t even have a band against which we operate.”

Malaysia’s ringgit fell 1.4 percent this year against the dollar, the worst performance among the 10 most-traded currencies in Asia outside Japan.

“The currency should reflect the underlying fundamentals,” she said. “If the underlying fundamentals hold the promise to improve, and going into next year especially, then the currency should also reflect that performance.”

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The Obama administration is likely to support giving the Federal Reserve the power to oversee financial companies that could pose a danger to the banking system, said participants in a White House meeting yesterday.

Treasury Secretary Timothy Geithner, a former Federal Reserve Bank of New York president, told representatives of the trade groups representing securities firms, hedge funds and banks that a single supervisor needs the authority over the biggest financial firms.

While the Fed was first favored to take the job, since a proposal by former Treasury Secretary Henry Paulson last year, lawmakers and some regulators have shifted away from that view. Federal Deposit Insurance Corp. Chairman Sheila Bair and Securities and Exchange Commission Chairman Mary Schapiro this week recommended that a council of regulators assume the role.

The divergence of views suggests that it will take months before any agreement on how to overhaul U.S. financial regulation in the aftermath of the worst credit crisis since the 1930s.

“There are going to be a number of regulators with oars in the water” over various parts of the banking system, Alan Blinder, a professor of economics at Princeton University and former Fed vice chairman, said in an interview with Bloomberg Television. Still, “we would have to tie ourselves in knots” to make the systemic-risk regulator any agency but the Fed, because it’s the “lender of last resort,” he said.

The SEC is best placed to oversee hedge funds, Blinder said.

Industry Groups

Representatives of the Securities Industry and Financial Markets Association, International Swaps and Derivatives Association and Chamber of Commerce were among those who attended yesterday’s meeting. Geithner dropped by the hour-long gathering in the Roosevelt Room, the people said on condition of anonymity.

The gathering was run by Diana Farrell of the National Economic Council and Pat Parkinson, a Fed staffer on detail to the Treasury, participants said. After Geithner left the meeting, Parkison told the attendees that the Fed would likely be the agency to supervise firms that are found to be too big to fail, they said cash advance in one hour.

“Geithner believes that we need a single independent regulator with responsibility for systemically important firms and critical payment and settlement systems,” Treasury spokesman Andrew Williams wrote in an e-mailed response to questions. “He does see a role, however, for a council to coordinate among the various regulators.”

‘Council’ of Agencies

Bair, in a May 7 speech at a Chicago conference, proposed a “Systemic Risk Council” that has “a mandate to monitor developments throughout the financial system, and the authority to take action to mitigate systemic risk.”

Schapiro said yesterday at an Investment Company Institute conference in Washington that she’s “inclined” to support Bair’s proposal.

“I have long been concerned about excessive concentration of power, which really means excessive concentration of a point of view in a single regulator,” Schapiro said.

Senate Banking Committee Chairman Christopher Dodd said in a May 6 hearing that “It is my preference that authority not lie in any one body; we cannot afford to replace Citi-sized financial institutions with Citi-sized regulators,” referring to Citigroup Inc., one of the largest U.S. financial firms.

In March, Geithner proposed creating a systemic risk regulator though he didn’t identify which agency should have those duties. President Barack Obama has said he wants to sign legislation overhauling financial rules by the end of the year.

Popular anger over the taxpayer-financed rescues of American International Group Inc., Bear Stearns Cos. and other firms has spurred Congress and the White House to push for regulatory changes that may become the most sweeping since the 1930s.

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Federal regulators today unveil what Treasury Secretary Timothy Geithner said will be a “reassuring” picture of a U.S. banking system able to withstand whatever stresses the recession may inflict on it once a handful of institutions add to their capital base.

Federal Reserve stress tests on the 19 biggest lenders show Bank of America Corp., Wells Fargo & Co. and Citigroup Inc. together require about $54 billion, said people familiar with the conclusions. At the same time, Goldman Sachs Group Inc., JPMorgan Chase & Co. and Bank of New York Mellon Corp. have enough capital to help prop up flows of credit to businesses and consumers grappling with the worst recession in five decades.

“There is very significant cushions in these institutions today, and all Americans should be confident that these institutions are going to be viable institutions going forward,” Geithner said yesterday in an interview with PBS television’s Charlie Rose program. “The results will be, on balance, reassuring.”

Bank stocks surged yesterday in anticipation that firms won’t need as much capital as once projected; the Standard & Poor’s 500 Financials Index rallied 8 percent. Officials favor filling the shortfall by converting preferred shares into common stock, enabling the Obama administration to keep aside most of the $110 billion left in the Troubled Asset Relief Program.

Geithner Bernanke

Geithner, Fed Chairman Ben S. Bernanke, Federal Deposit Insurance Corp. Chairman Sheila Bair and Comptroller of the Currency John Dugan are scheduled to brief reporters in Washington before the 5 p.m. release of the results.

The results are the culmination of weeks of investigations into the banks’ lending practices, funding strategies and securities and loan portfolios. Regulators said yesterday that banks that have to bolster their capital will have until June 8 to develop a plan and until Nov. 9 to implement it.

Officials put an emphasis in their reviews on tangible common equity, requiring the companies to have the equivalent of 4 percent of their assets after adjusting for risk. The financial yardstick strips out intangible assets, goodwill –the premium above net assets paid for acquisitions — and preferred stock, including shares issued to the Treasury.

The reviews were designed to ensure the firms could sustain lending even if house prices, gross domestic product and the job market deteriorate more than most economists anticipate.

“Some might argue that this testing was overly punitive, while others might claim it could understate the potential need for additional capital,” Geithner wrote in the New York Times today. “The test designed by the Federal Reserve and the supervisors sought to strike the right balance.”

Stock Rally

The S&P 500 Financials Index yesterday reached its highest level in four months. The broader S&P 500 Stock Index added 1.7 percent at 919.53. Citigroup jumped 17 percent to $3.86, Wells Fargo advanced 15 percent to $26.84 and MetLife Inc. gained 17 percent to $32.35.

Before news of most of the banks’ results emerged, “there was some portion of the market that was buying into the doomsday stuff, that the banks are insolvent,” said David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller in New York. “There couldn’t be a wilder swing in sentiment between my client conversations in early March versus” yesterday, he said.

Bank of America has the biggest shortfall, at $34 billion, according to people familiar with the matter. Citigroup’s requirement is about $5 billion, after incorporating the bank’s previously announced plan to convert some of its preferred shares into common stock, people with knowledge of its results said.

Wells Fargo needs about $15 billion, while GMAC LLC’s gap is $11.5 billion, one person said.

No Needs

MetLife, American Express, BB&T Corp. and Capital One Financial Corp. were deemed not to need additional funds, according to the results.

Morgan Stanley may need between $1 billion and $2 billion, according to people familiar with the matter free credit score online. Any capital requirement would result from Morgan Stanley’s plans to pay $2.7 billion to take control of Citigroup’s Smith Barney brokerage venture, one of the people said.

Spokespeople for all of the 12 banks declined to comment.

For firms judged to have additional capital needs, regulators have detailed options including conversions of preferred shares, asset sales and raising new funds from private investors.

Should the banks needing bigger capital buffers opt to convert the Treasury’s preferred shares, the government will have a bigger ownership stake. Officials may set limits on those companies’ dividends and political lobbying.

Management Changes

White House spokesman Robert Gibbs yesterday suggested that the Obama administration may seek management changes at some banks. Officials will want to “ensure that going forward they felt that the management was in place to remedy the situation and ensure long-term viability without continued government assistance,” he said.

Bank of America Chief Executive Officer Kenneth D. Lewis, 62, was ousted as chairman on April 29 after shareholders rebelled against management’s handling of the Merrill Lynch & Co. takeover.

Banks that want to return money injected by the Treasury since October must show they can borrow from private investors without a Federal Deposit Insurance Corp. guarantee, according to people familiar with the matter.

JPMorgan, Goldman Sachs and Bank of New York Mellon have each sold debt without FDIC guarantees in the past month. Bank of New York Mellon said proceeds from its May 5 sale will be used to help repay the $3 billion capital injection it got from the $700 billion TARP last year.

‘Next Stage’

“Going forward, we just need banks to be able to issue debt without the FDIC backing — that’s the next stage for these bank names in terms of evaluating their health,” said Mark Bronzo, a money manager at Security Global Investors, which oversees $21 billion in Irvington, New York.

Institutions that need to raise their capital levels “need to look to nongovernment sources first, the FDIC’s Bair told lawmakers at a hearing yesterday in Washington. ‘‘The Treasury can be there as a backstop.’’

The Treasury estimates about $110 billion remains to be distributed from the TARP. Geithner has said about $25 billion of the program’s funds are likely to be repaid in coming months. Lawmakers have warned that a political outcry against bailouts for Wall Street makes it impossible to count on authorizing an increase of TARP.

Tarp Exit

For many banks, the government’s stamp of approval may point to an exit from the TARP. The fund was initially aimed at boosting public confidence in banks by making the government a shareholder. Bernanke said May 5 it ‘‘helped us dodge what would have been a truly cataclysmic collapse of the global banking system.”

Congress later used the program to increase scrutiny of Wall Street, and passed legislation imposing executive pay limits. In February, lawmakers called eight bank chief executive officers to Washington to face criticism for outsized compensation and perks at a time when firms racked up losses.

JPMorgan Chief Executive Officer Jamie Dimon said April 16 that he could repay the New York-based firm’s $25 billion in taxpayer funds “tomorrow” and referred to the money as “a scarlet letter.” Repayment would free the company from compensation restrictions and other oversight.

MetLife, the largest U.S. life insurer, parted ways with its biggest rivals by not seeking funds from the TARP.

American Express Co., the biggest U.S. credit-card company by purchases, beat analysts’ profit estimates and said April 23 that it intends to repay the government’s rescue-fund investment.

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