China Fears Much Ado About Nothing

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

Markets in Hong Kong, Vietnam, Taiwan and Korea are closed next week as people across Asia celebrate Moon Festival, one of the culture’s most beloved holidays along with Chinese New Year. Moon Festival’s origins center around a husband (Houyi) and wife (Chang’e), who were sentenced to live eternally separated on the sun and the moon.

Chang’e, representing “Yin,” lives on the moon and Houyi, representing “Yang,” lives on the sun. Once a year, on the night of the Mid-Autumn Festival, Houyi visits his wife and that is the reason why the full moon burns brightly on this night. To read the complete version of Chang’e and Houyi’s tragic tale, click here for a version Sherman Guo from CICC shared with us earlier today.

For many, the yin and the yang illustrate the importance of having balance in life. Investors must find the right risk/reward balance. Businesses must find the right capital spending/revenues balance. And, we all must strive to find the right work/life balance.

 

China’s Economy Finds Balance

 

Balance is also a crucial goal for China’s economy—the economy must not grow too quickly or risk a sharp correction. Just this year, China has weathered an epic battle with inflation, drought and floods, poor global macroeconomic conditions, massive accounting/corruption scandals and a tragic accident on one of its marquee achievements—the country’s high speed rail system.

We’ve discussed the tremendous build-out of China’s high speed rail system before (Read: Railway Revolution Builds China’s Consumer Culture). Last week, members of our investment team and board of directors were in China doing research and you can see from the photo that we were lucky enough to see what traveling at the speed of China feels like firsthand. Our train averaged 185 miles per hour during the 923-mile trip from Shanghai to Beijing. I’ve traveled to all corners of the world and have seen many things during my travels, but viewing China’s explosive growth as it flies by you is something I will never forget.

China remains the beacon of hope for the global economy, the largest and, many times, the “sole engine of the world economy,” BCA Research says. China’s real GDP is forecasted to grow 8.9 percent in 2011 and 7.8 percent in 2012, according to ISI Group. This is a slower rate of growth compared to recent years but “doesn’t look like an economy struggling under tighter credit conditions,” GaveKal research says.

The key to China’s economic growth isn’t “how fast?” or “how much?” The most critical question is “what’s driving it?”

Many of China’s critics, such as Jim Chanos and Hugh Hendry, claim China’s current economic status is a mirage created by government stimulus and relies on exports. However, examination of China’s economic growth over time (see chart) reveals that consumption and gross capital formation are the two pillars lifting China to the top.

Ending the country’s dependence on exports is the “professed pursuit of quality over quantity,” says GaveKal and became an immediate necessity for China to maintain economic stability after exports collapsed by 40 percent from September 2008 to January 2009, triggering a sharp slowdown in growth, BCA says. Recent data shows China has kicked the habit as exports have contributed little to the country’s growth in 2011. Net exports accounted for 18 percent of China’s total 14.2 percent GDP growth in 2007, according to CLSA’s Andy Rothman. During the first half of 2011, exports have a negative contribution of -0.7 percent of China’s 9.6 percent GDP growth and accounted for only 12 percent of total industrial sales revenues. We’ll debunk more tall tales of China’s export economy in a moment.

Strong income growth has triggered a rise in domestic consumption. CLSA says inflation-adjusted wages in urban areas rose 7.8 percent in 2010 and have risen another 7.6 percent during the first half of 2011. As a result, urban retail sales and household expenditures increased 17.4 percent and 12 percent during the second quarter of 2011, respectively. In addition, rising migrant wages and higher farm-gate prices have led to a 13.7 percent increase in real rural incomes and 16.8 percent increase in rural retail sales during the first half of 2011, CLSA says.

ISI Group reports that retail sales increased 17 percent on a year-over-year basis in August and the firm sees “no reason at present to anticipate any lasting weakness in China’s healthy consumer sector.” As one example, China recently surpassed the U.S. to become the world’s largest personal-computer market, The Wall Street Journal reports. An analyst from research firm International Data Corporation (IDC) told the WSJ that they estimate China’s PC shipments to reach 85.1 million in 2012.

ISI is especially bullish on luxury goods citing the “work, earn, consume” lifestyle much of the Chinese population has adopted in recent years. We’ve discussed the potential of the luxury goods market in China several times but the sector has been held back by high luxury taxes that can reach up to 50 percent on some products. Sales are growing quickly but luxury sales only make up around 1 percent of the current market, GaveKal says.

A primary driver of China’s economic growth has been fixed asset investment (FAI), which slowed to 23 percent in August but is maintaining the 23-25 percent pace the country has seen in recent years, CLSA says. Strong FAI is bullish for commodities demand as increased industrial activity and construction gobbles up more cement, iron ore, crude oil and copper.

Manufacturing activity has increased 32 percent so far in 2011, outpacing that of a year ago and driving the profits of industrial firms to rise 28 percent on a year-over-year basis, data from CLSA says. Since 2004, total FAI for manufacturing has jumped a staggering 261 percent in RMB terms, nearly double the increase for real estate, 167 percent over the same time period, says data from ISI.

In addition, FAI by private companies has outpaced that of state-owned enterprises for 17 consecutive months. Rothman says this is indicative that private firms are financially healthy and anticipate strong demand. This isn’t because the Chinese government doesn’t have the money. Revenue increased more than 21 percent in 2010 and has already jumped more than 31 percent in 2011, CLSA data shows. According to BCA, “China has one of the smallest fiscal deficits and fastest nominal GDP growth rates among major world economies.” Government expenditures for this “socialist” country only account for 23 percent of GDP, well behind other countries such as Brazil and the U.S. (both roughly 40 percent), the United Kingdom (about 43 percent) and Ireland (around 70 percent).

The low level of government expenditure as a percentage of growth is not by chance, but a specific model the Chinese government has adopted. Guan Jianzhong, the head of state-owned Chinese rating agency Dagong, recently told German news outlet Spiegel that “China relies on its real economy to create value and money. If we can draw some lessons from the Western experience, we should insist on letting real economy create value and money while discouraging the Chinese from borrowing too much money.”

 

Transitioning Workforce and the Importance of Housing in China

 

While China’s “ghost cities” have stolen headlines, China’s real estate market sits on a much stronger foundation than China bears would have you believe. In reality, the property market is actually in a much healthier position than it was at the start of the year. CLSA says the government’s focus on keeping housing price growth under control and limiting the availability of mortgages has resulted in “none of the 70 cities monitored by NBS [reporting] price increases of more than 1 percent” on a month-over-month basis in July.

This is in stark contrast to July 2010 when CLSA’s composite of 40 cities across the country jumped 17 percent on a year-over-year basis. For the year, new-home sales were up 12 percent on a year-over-year basis through July and year-over-year residential starts increased 27 percent. In addition, construction on most of the social housing projects planned for 2011 has already begun, GaveKal says.

Despite this relatively tame market, GaveKal cites Nouriel Roubini as saying these “ghost towns” are evidence that China’s excessive investment in capital stock has crossed a critical threshold—a bubble.

With respect to Dr. Doom, that’s not the case. For starters, as GaveKal cleverly points out, the Shanghai province of Pudong was once “the biggest ghost town of them all.” Today, millions of Chinese citizens and China’s largest state-owned and private banks call Pudong home, making it one of the financial centers of the Eastern Hemisphere. Roubini isn’t the first one to get it wrong either. GaveKal says upon visiting Pudong in 1998, legendary economist Milton Friedman lambasted the province as “a statist monument for a dead pharaoh on the level of the pyramids.”

GaveKal says “Hundreds of once-empty districts across the country, from Shangdi in northwest Beijing to Donghu in southeast Wuhan, have turned into flourishing neighborhoods.” According to GaveKal’s research, China’s cities absorb 20 million new people each year, creating a current shortfall of 75 million housing units. They estimate 40-50 million new urban households will need to be constructed by 2020 in order to meet demand. The chart on the left illustrates that a large portion of China’s urban growth will take place in suburbs as cities with 1 million people or less experiencing the most growth.

Although China has seen a decade of economic transformation, detractors have also compared China’s growth to the Japanese bubble economy during the late 1980s and South Korea just prior to the Asian financial crisis in the late 1990s. GaveKal argues that China is more similar to 1960s Japan and 1970s South Korea, with “rapid catch-up growth still ahead.”

Around the globe, no “rich countries” have more than 10 percent of their workforce in agriculture and no “fairly well-off” countries have more than 20 percent. The chart on the right compares GDP per capita of China, South Korea and Taiwan as their workforces transitioned away from agriculture. When China’s workforce hit the 50 percent level, the country’s GDP per capita was $2,000—roughly the same as Taiwan. Today, China’s GDP per capita stands at $7,500 but the country is still carrying a larger percentage of farmers and ranchers than South Korea and Taiwan were at the same level.

GaveKal’s research estimates that between 33 and 40 percent of China’s workforce is currently employed in the agriculture sector. As more of China’s workforce shifts to more modern jobs, their productivity and incomes increase. GaveKal says this means the country is “far from exhausting the economic gains of shifting its workforce to more productive activities.”

 

China Bears Doth Protest Too Much

 

Perhaps some of China’s negative press stems from American’s fear that China is taking our place atop the global hierarchy. There are a couple of reasons that’s just not true. One, many American companies are riding the wave of China’s growth all the way to the bank.

Of the companies held in the S&P Composite 1500 Index, 707 have revenue growth above 10 percent. Many are America’s largest and oldest companies, who long ago recognized China’s transformation and shifted capital overseas to continue growing their revenues.

Caterpillar already has 16 manufacturing facilities, 3 research and development centers, and 3 logistics and parts centers located in China. In a recent announcement, the world’s leading manufacturer of construction and mining equipment says it is expanding operations again. Up and running by the fall of 2012, Caterpillar plans on building a state-of-the-art proving ground and a large wheel loader manufacturing facility, a company press release indicates. Executives of Caterpillar say this new facility will support a growing customer base in China and across Asia.

Likewise, Coca-Cola announced that the company was investing $4 billion over the next three years in China, bringing the total investment to more than $7 billion beginning in 2012. Muhtar Kent, chairman and CEO of The Coca-Cola Company, stated, “China is one our most important growth markets in the world as we work to achieve our 2020 Vision goal of doubling system revenues and servings this decade.”

Illinois-based Kraft Foods entered the China market way back in 1984. Today, it has eight manufacturing facilities, offices in 250 cities and 4,000 employees, and the company is still growing and introducing new production lines. This summer, the company opened an $8 million production line, with the president of Kraft Foods China indicating that the country is “one of the top 10 markets in terms of development priority for Kraft Foods.”

These are only a few examples of how American business is keeping its entrepreneurial spirit and sustaining jobs by reinventing itself in the developing world. Some will say that they are sending American jobs overseas but the U.S. economy is actually much more domestic-oriented than you’d think.

For example, U.S. imports only accounted for 16 percent of U.S. GDP in 2010 with imports from China totaling 2.5 percent of GDP. U.S. consumer spending on goods from China was only 2.7 percent of total spending in 2010, according to a new report from the Federal Reserve Bank of San Francisco. Consumer spending on items manufactured in America was nearly 90 percent of the total.

A greater myth many believe is that most of the $100 you spent shopping at Wal-Mart last weekend heads back to China. However, the San Francisco Fed reports shows that for every dollar spent on an China-made item in the U.S., 55 cents lands in the pocket of U.S. businesses for services such as marketing and sales.

There’s also a trickle-down effect of Chinese goods. Laura Baughman, president of the Trade Partnership told USA Today that “because we import from China, prices are cheaper, consumers have more money in their pocket, and they go out and spend more” which creates a greater number of jobs than are lost.

Andy Rothman argues that the increase in China’s share of personal consumption expenditure for the U.S.—which has doubled over the past decade—has come at the expense of other countries looking to export goods to the U.S. because “the overall import content of U.S. consumer goods has remained relatively constant while the Chinese share has doubled.”

America also sends goods in the other direction. China is America’s third-largest export market with the total U.S. exports of electronics, agricultural and other products to China rising an astounding 468 percent from 2000 to 2010, according to USA Today.

 

Conclusion

 

There are many questions surrounding the global market but the Chinese economy remains headed toward the moon. The country, of course, remains vulnerable to external forces but we believe the economy’s strong momentum will be enough to carry the country through, should volatile times persist.

 

Index Summary

• The major market indices declined this week. The Dow Jones Industrial Average lost 2.21 percent. The S&P 500 Index declined 1.68 percent, while the Nasdaq Composite fell 0.50 percent.
• Barra Growth outperformed Barra Value as Barra Value finished 1.98 percent lower while Barra Growth declined 1.42 percent. The Russell 2000 Index closed the week with a loss of 1.38 percent.
• The Hang Seng Composite Index finished lower by 2.27 percent, Taiwan declined 1.89 percent, and the KOSPI lost 2.94 percent.
• The 10-year Treasury bond yield closed 7 basis points lower at 1.92 percent.

 

Domestic Equity Market

 

The domestic stock market was lower this week with the S&P 500 Index down 1.68 percent. The figure below shows the performance of each sector in the index for the week. All sectors decreased. The best-performing sector for the week was technology which decreased 0.50 percent. Other top-three sectors were consumer staples and healthcare. The financials sector was the worst performer, down 2.56 percent. Other bottom-three performers were materials and industrials.

Within the technology sector the best-performing stock was SanDisk, up 10.82 percent. Other top-five performers were Juniper Networks, Tellabs, Western Digital, and Cisco Systems.

 

Strengths

• The retail drug group gained 2 percent, led by member CVS Caremark. Industry member Walgreen Co. reported August same-store sales increased 5.6 percent year-over-year, above the 5.3 percent consensus estimate.
• The oil & gas refining & marketing group outperformed, rising 2 percent. Refiners continue to experience a profitable spread between the price of refined product and the cost of crude oil.
• The computer & electronics group rose 2 percent, led by member GameStop. August physical video game sales data released this week were weak, but a major brokerage firm reiterated its “Outperform” rating and $30 price target on GameStop. It cited strong industry growth that should resume in September, GameStop’s unique initiatives, including its growing loyalty program, and its digital and used offerings.

Weaknesses

• The household appliances group was the worst-performing group, down 10 percent, led by its single member, Whirlpool. A major brokerage firm lowered its rating on the stock to “Neutral” from “Buy,” citing expected further market share losses, deteriorating North American margins, risks to volume growth, and retail consolidation in Brazil.
• The diversified metals & mining group underperformed, losing 6 percent, led by its largest member, Freeport McMoRan Copper & Gold. The stock’s weakness is likely related to investor concern over an economic slowdown which could reduce demand for copper.
• The consumer electronics group declined 5 percent on weakness in its single member, Harman International Industries. A major brokerage firm reduced its earnings estimates for Harman, based on the broker’s lowered, below-consensus estimates for North American auto production.

Opportunities

• There may be an opportunity for gain in merger & acquisition (M&A) transactions in 2011. Corporate liquidity is high, thereby providing the means to pursue acquisitions.

Threats

• A mid-cycle slowdown in the domestic economy would be negative for stocks.
• An escalation in concerns over sovereign debt obligations in Europe would be negative for stocks.

 

The Economy and Bond Market

 

This week the yield on the 10-year U.S. Treasury declined by 7 basis points to end the week at 1.92 percent.

As shown in the graph below, the number of people in the U.S. continuing to receive jobless benefits, although trending down since the peak in 2009, remains elevated relative to the levels existing in the years 2004 thru 2007. As of August 27, continuing claims fell by 30,000 to 3.72 million.

The continuing claims figure does not include the number of people receiving extended benefits under federal programs. In the week ended August 20, 3.6 million people were collecting emergency and extended payments.

 

Strengths

• The non-manufacturing ISM index increased to 53.3 in August from 52.7 in July, beating the consensus estimate of 51.0. A reading above 50 indicates that the service sector of the economy is expanding.
• The U.S. trade deficit shrank by 13.2 percent to $44.8 billion in July from a revised $51.6 billion in June. Expectations were for a $51.0 billion deficit.
• Economic activity expanded in all 12 Federal Reserve districts according to anecdotal reports in the Fed’s Beige Book report released this week. The modest recovery slowed or was very subdued in 7 of the districts.

Weaknesses

• Initial jobless claims rose by 2,000 to 414,000 in the week ended Sept 2. The consensus expectation was for a decline to 405,000.
• The Bloomberg Consumer Comfort Index was minus 49.3 in the week ended Sept 4 compared with minus 49.3 the previous week. The index has been below minus 40, the level associated with recessions or their aftermath, since the end of February.
• Mortgage applications decreased 4.9 percent in the week ended Sept.2, the third consecutive weekly decline. The refinancing index declined 6.3 percent, and the purchase index rose 0.2 percent, a second straight gain after reaching the lowest level since December 1996.

Opportunities

• With the economy weak and concerns brewing about an additional financial crisis, the Fed will remain accommodative for some time and bonds appear well supported in the current environment.

Threats

• There is a crisis of confidence in world leaders at the moment and the potential for another financial crisis is rising.

 

Gold Market

 

For the week, spot gold closed at $1,855.70, down $27.18 per ounce, or 1.44 percent, however the gold stocks tacked on gains. The U.S. Trade-Weighted Dollar Index jumped 3.29 percent for the week.

 

Strengths

• The gold mining equities, as measured by the NYSE Arca Gold Miners Index, ended the week with a gain of 1.42 percent, despite the weakness in gold prices.
• This rise is significant in that for most of the trailing year gold bullion has been beating the performance of the gold stocks.
• As we have recently highlighted, precious metal investors appear to now recognize that the mining company’s valuations have lagged the price performance of bullion and are rotating money out of bullion into shares of gold and silver producers.

Weaknesses

• Overall the economic data being reported as of late paints a somber picture.
• Not only was gold bullion down this week, but silver, platinum, palladium, and copper all decreased.
• The immediate beneficiary of the market turmoil was the U.S. dollar which rallied significantly despite the recent downgrade of our credit rating.

Opportunities

• The Swiss government policy change to peg their currency value to the euro is a game changer which should benefit gold and precious metals investors.
• No longer will the Swiss franc be a haven for a worried investor as the franc’s future has been anchored to the mask of a sinking ship.
• Another spike in COMEX futures margin requirements may prompt an abrupt sell off in bullion. Precious metal stocks seem to be the clear beneficiary for investors who want a continued exposure to gold.

Threats

• A recent study by the Federal Reserve Bank of San Francisco titled “Boomer Retirement: Headwinds for the U.S. Equity Markets?” outlines a less positive view on equity returns in the broader market.
• Essentially, the study notes historical data which suggest a strong link between age distribution and stock market performance. A key demographic trend is the aging baby boom generation that will likely shift from buying equities to selling equities to fund their retirement.
• The Fed noted that their statistical models on this relationship suggest this shift in asset allocation could hold down equity valuations of the general market for the next two decades.

 

Energy and Natural Resources Market

 

Strengths

• Despite market volatility, the Global Resources Fund traded roughly in-line with our benchmark this week. Relative outperformance came mainly from the fund’s weighting in precious metals and agricultural securities.
• The FAO Food Price Index (FFPI) is up 26 percent from a year ago with prices set to remain high amid mounting concern over corn stock levels.
• Brazilian mining giant Vale is not seeing any slowdown in the global iron ore market despite a growing crisis in Europe and a weak U.S. economy.

Weaknesses

• The Basic Materials and Energy sectors fell by an average of 5 percent this week, driven mainly by concerns over slowing global economic growth.
• The U.S. Dollar Index broke above 77 on Friday, as traders sold the Euro and other commodity currencies in the face of further macro risks out of the Europe.
• Commodities gave back some of last week’s gains as global markets continue to focus on Europe’s sovereign debt risks and the health of related bank equities. Copper fell 3 percent this week, and crossed briefly below the key $4.00 per pound level, while gold and silver declined by 1.2 percent and 3.8 percent, respectively.
• Global oil demand is expected to grow less than previously projected next year as the economy slows. World consumption will rise by 1.39 million barrels per day (bpd) or around 1.6 percent next year, the Energy Information Administration said, around 250,000 bpd less than forecasted a month ago.

Opportunities

• The U.S. could create more than 1 million jobs by 2030 by expanding offshore drilling, limiting federal regulation of shale gas development and quickly approving a Canadian oil sands pipeline, according to a study commissioned by an oil industry group.
• Steel output in China, the world’s top steel producer, is likely to hit a new record in excess of 700 million tons this year based on first-half production, according to the China Iron & Steel Association.

Threats

• President Obama may struggle to get his proposed $450 billion jobs stimulus passed by Congress given reluctance to increase deficits, as well as a strong pre-election year partisanship.
• Protesters battled riot police with rocks and homemade bombs on Thursday in a protest against Colombia’s fourth-largest oil producer, Petrominerales Ltd., forcing the Canadian firm to suspend output.
• Freeport McMoRan Copper & Gold’s Indonesia mine workers have announced plans to strike indefinitely from September 15 unless the company meets their pay raise demands.

 

Emerging Markets

 

Strengths

• China’s consumer price index (CPI) in August dropped to 6.2 percent from 6.5 percent in July. The market expected the People’s Bank of China (PBOC) to stop raising interest rates, and it may lower the required reserve ratio from the current 21.5 percent for major banks.
• The Bank of Korea, the central bank, left its benchmark rate unchanged at 3.25 percent for a third month, conforming with the market expectation.
• Indonesia’s central bank held its reference rate at 6.75 percent, remaining unchanged for the seventh straight month. The Philippine central bank also maintained its benchmark rate at 4.5 percent for the third straight meeting. The Bank of Malaysia kept policy rate on hold at 3 percent. This indicates economic growth has been moved to the frontline on the policy list while inflation control has been the priority since last year.
• China’s Ministry of Construction said 86 percent of the social housing projects have begun construction in the first eight months of this year, i.e., start-up units are 8.68 million out of total target of 10 million. This will create demand for construction materials and equipment.
  
  At 6.9 percent year-over-year, July industrial production in Turkey was considerably stronger than the consensus, which estimated a 4.0 percent year-over-year increase. This reading puts industrial production growth in the first seven months of the year at 10.2 percent compared with the same period of 2010. The chart below illustrates this year’s industrial production growth compared to 2010 with total industrial production growth reset to 100 in January 2005.

Weaknesses

• In China, food prices increased 13.4 percent, and pork prices rose 45.5 percent on a year-over-year basis in August. Controlling prices remain a hefty task and, because of that, China’s monetary policy may not change its tightening stance.
• Thailand’s consumer confidence fell to 73.8 in August, despite the efforts made by the new government to raise the minimum wage.
• Malaysia saw its July exports increase 7.1 percent, down from June’s 9.6 percent; imports rose 2 percent.
• China’s Purchase Manager Service Index fell to a record low in August to 50.6 percent from 53.5 percent.
• Although credit expansion is still robust, BCA Research points to signs of stress among corporate borrowers in Brazil. Consumer loan delinquency rates are also rising, weighing on banks’ bottom lines despite policy easing.

Opportunities

• In a recent global mobility study, Jefferies’ TMT analysts predicted that multiple trends centered around mobility—including higher wireless bandwidth, the immediacy of social networking and advances in devices—are transforming the full technology, media and telecommunications food chain: handset, tablet and other hardware manufacturers; telecommunications service providers, network infrastructure and semiconductor vendors, and developers of end-user software, content, and payment systems. The chart below shows how fast the explosive wireless data traffic growth is and how it increases its shares in revenue contributions for the three telecom operators in China.

Tremendous Growth in Wireless Data Traffic
Results in Revenue Growth for Telecom Companies

Data Revenue as a Percent of Service Revenue

 

 

First Half 2010

First Half 2010

Year-Over-Year

China Mobile

29.5%

32.2%

2.6%

China Telecom

38.1%

42.2%

4.1%

China Unicom

27.7%

35.3%

7.6%

Wireless Data Traffic Growth (Billions of Megabytes)

 

 

First Half 2010

First Half 2011

Year-Over-Year

China Mobile

2G + 3G

53.5

137.1

156.2%

China Telecom

3G

5 .2

9.4

78.3%

China Unicom

2G

2 .1

7.3

256.2%

 

3G

4 .2

29.8

602.2%

• Amid a string of recent catastrophic accidents, mounting unease over Russia’s ageing transport is increasing pressure on President Medvedev to overhaul infrastructure sooner rather than later. The Russian government budgeted billion of dollars for infrastructure spending in 2015 through 2020, but it may no longer be able to postpone it until then.

Threats

• The emerging markets in Asia are now concerned with economic growth as well as inflation pressure. On one hand, inflation is still at high level; on the other hand, exports and industrial activities are slowing down. The declining economic environment may eventually hinder consumer spending, an area that has been a preferred investment focus since inflation flared up in early 2010. Although the Asian governments are now holding off further benchmark rate increases, they have no optimal policy to cure both economic symptoms at the same. The equity market, with forward pricing mechanism, is actually in the pricing process toward recession.
• Real rates in Brazil—the highest in the world—broke below 6 percent last week. BCA Research calls the breakdown “historic.” They believe rates (both in nominal and real terms) will move much lower in the months ahead due to disappointing growth.

• The Hungarian government may force the nation’s lenders to swallow losses on foreign-currency mortgage loans by fixing the Swiss franc as much as 20 percent below prevailing rates. The vote on this proposal is expected this weekend.

 

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