KEVIN CARMICHAEL
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Globe and Mail

OTTAWA — The Bank of Canada dropped its key lending rate by half a percentage point, and indicated that further cuts will be needed to insulate Canada from the effects of a U.S. economy that teeters on the brink of recession.

“The deterioration in economic and financial conditions in the United States can be expected to have significant spillover effects on the global economy,” the central bank said in its statement Tuesday.

“Further monetary stimulus is likely to be required in the near term to keep aggregate supply and demand in balance and to achieve the 2 per cent inflation target over the medium term”, the bank said.

Mark Carney’s first policy decision as governor left the Bank of Canada’s benchmark interest rate at 3.5 per cent. The central bank last reduced borrowing costs by a half point in November 2001 and has adjusted interest rates by that magnitude only four times since moving to a fixed announcement schedule in March 2000.

Mr. Carney and his five deputies on the Governing Council next fix interest rates on April 22.

The decision by the central bank to get more aggressive after quarter-point reductions in December and January shows policy makers doubt Canada’s strong domestic economy will hold up next to weaker demand from the country’s largest trading partner.

Canada’s gross domestic product grew 0.8 per cent in the fourth quarter, the slowest in 4 ½ years and half as much as the Bank of Canada was expecting. The U.S. economy, which consumes some 80 per cent of Canada’s exports, was even weaker in the fourth quarter, advancing at a 0.6 per cent annual rate.

“There are clear signs the U.S. economy is likely to experience a deeper and more prolonged slowdown than had been projected in January,” the central bank said in the statement, citing the housing market, which is suffering the biggest collapse in generation. “These developments suggest that important downside risks to Canada’s economic outlook that were identified in (January) are materializing and, in some respects, intensifying.” The Bank of Canada sets interest rates to keep inflation advancing at about 2 per cent a year, and uses a measure that strips out volatile prices such as energy to predict where costs are heading.

Canada’s core rate of inflation was 1.4 per cent, leaving plenty of room for today’s half-point cut, economists said before the announcement.

While conceding that Canada’s domestic demand remains “buoyant” and that companies were producing above capacity, policy makers determined the bigger worry is economy won’t generate enough activity to keep inflation at its 2 per cent target.

“The bank now judges that the balance of risks around its January projection for inflation has clearly shifted to the downside,” the Bank of Canada said.

 

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Kathy Chu
USA Today

Seven years in the credit-counseling business didn’t prepare Ann Estes for the alarming trend she began noticing last fall: As her clients’ mortgage bills became unaffordable, a growing number of them began paying their credit card bills before — and sometimes instead of — their mortgages.

“We’ve never seen anything like this,” says Estes, who counsels clients by phone from her office in Richmond, Va. “Their homes are at risk, and they know it. But people say, ‘I don’t want to let my credit cards go because that’s my cash flow.’ “

Across the nation, credit counselors are reporting the same trend. Credit bureau analyses of consumer payment data show that financially squeezed borrowers have begun paying their credit card and car bills before their mortgages. That’s a striking reversal from the norm, one that reflects rising desperation. It suggests that some people essentially have given up trying to stay current with their mortgages and instead are focused on using credit cards to squeak by.

If the trend persists, many economists say, it could accelerate mortgage losses and further drag down the economy.

Rising living costs, along with cheap and plentiful credit, have led consumers to rely more on plastic to pay for necessities they can’t live without — and luxuries they don’t want to do without. But as the economy weakens, consumers are starting to spend less on discretionary items, such as furniture and electronics, and more on such necessities as groceries and gas, according to government data. Such items increasingly are showing up on credit card bills.

“Everything’s going up — dairy, gas, home taxes,” says Christie Carlson, 34, a single mother of five children, ages 5 to 14, in Tomah, Wis., who enrolled in a debt-management program after racking up $20,000 in card debt. “I’m trying to pay more for everything in cash, but it’s just impossible. It’s not feasible right now to stop spending on the credit card.”

During the past year, credit card debt has ballooned most rapidly in parts of the nation where the economy is particularly weak, including California, Florida, Arizona and Nevada, says Mark Zandi, chief economist for Moody’s Economy.com.

“That suggests that people are turning to their cards in times of financial need,” Zandi says. “They’re losing jobs and overtime hours and other income and trying to supplement their lower incomes with more spending on credit cards.”

Magnifying the problem has been the shrinking availability of a major alternative to credit cards: home equity loans. As home values have sunk, homeowners have found it tougher to qualify for such loans. So they’ve turned elsewhere, especially to credit cards, to cover daily expenses.

Even as mortgage growth slowed from April 2006 through December 2007, card debt accelerated, according to an analysis by the Center for American Progress, a liberal think tank in Washington, D.C.

“As people get squeezed, they still have the credit demand,” says Christian Weller, a senior fellow at the center. “For a few years, mortgages and home equity lines replaced credit card debt. Now, we’re swinging back to the credit cards.”

Like ‘broke college students’

Allen Lisowe and his wife, Jennifer, both 33, say they’re living like “broke college students,” relying on their credit cards to buy the “stuff we need every day,” such as groceries and gas.

The Lisowes, of New Holstein, Wis., racked up about $20,000 in credit card debt in recent years, most of it from daily expenses such as gas and food. Two years ago, the couple used a home equity loan to pay credit card and auto loan bills. They say they’d consider borrowing from their home equity again, but there’s little equity left to tap.

The growing reliance on plastic may explain why revolving debt — most of which is on credit cards — rose at a seasonally adjusted annual rate of 7.8%, to a record $943.5 billion, in 2007 compared with a 6.1% adjusted rate the year before, according to the Federal Reserve.

Eventually, a worsening economy could limit the rise in card debt. If the current slowdown turns into a full-fledged recession, many analysts say, lenders could clamp down further on credit. And consumers would cut back so much on discretionary purchases that, despite their increasing use of credit cards for daily necessities, the rise in overall card debt would likely slow.

There’s some sign this may be occurring already: After two months of rapid increases, the growth of revolving debt slowed in December, preliminary data from the Federal Reserve indicate. Credit card figures, though, normally are volatile from month to month. It’ll be three to six months before it’s clear whether consumers are indeed cutting back on plastic.

The danger is that “The economy has relied on the consumer to keep it afloat for the last seven years, and there’s no more gas in the tank of the consumer,” says Howard Dvorkin of Consolidated Credit Counseling Services in Fort Lauderdale. “They’ve got nothing to give.”

James Chessen, chief economist at the American Bankers Association, a trade group, predicts that “credit card debt is going to slow, but not as much” as in previous economic downturns.

During the housing boom, too many people took out mortgages they couldn’t afford. Many now owe more on their houses than they’re worth. Some are defaulting on their mortgages — figuring they’ll lose their homes anyway — even as they keep paying credit card and auto bills, credit counselors say.

“A lot of people are exhibiting a kind of fatalistic behavior to their mortgages,” says Douglas Hammond, outreach programs director at Alliance Credit Counseling. “They can’t make their mortgage payment, so why (try to) make it at all? ‘Let’s keep my car, make my payment on my credit card, so I have some way of feeding my family.’ “

When consumers are “pushed to the wall” and forced to choose between paying the mortgage or credit card bill, Chessen says, those who are likely to lose their homes may choose their credit cards, because “They still need to heat their homes, put food on their tables and fill their cars with gas.”

Allowing your house to be foreclosed on is “not a smart strategy,” Hammond says, “because foreclosure does horrible things to your credit score, and you’ll pay high interest rates” on future loans.

Because it takes months to foreclose on a home, some consumers likely are hoping to stave off foreclosure if their finances improve, says Linda Haran, senior director of Experian Decision Analytics.

A study by Experian found that consumers with weak credit scores — but not necessarily those with strong ones — are paying their credit card bills before their mortgage payments.

The study didn’t examine car loans. But an Equifax analysis shows that 38% of delinquent mortgage borrowers had kept all their credit card bills current, and 62% had kept all their auto loans current in the two-year period ending in July 2007. In the past, most people would pay late on their credit cards and auto loans before doing so on their mortgages.

This reversal in payment priorities helps explain why the rise in credit card and auto loan defaults — which occur when lenders give up trying to recover a debt — hasn’t matched the pace of mortgage defaults. Credit card defaults, while rising fast, are still in line with historic averages.

As the economy has worsened, card issuers have become more selective about offering credit to new customers, and in a growing number of cases, are shrinking card holders’ credit limits. Yet they’re still sending more solicitations to existing credit card customers. In 2007, issuers increased their solicitations to existing customers by 15.6%, advertising rewards and other perks to promote spending, according to Mintel, a firm that tracks such mailings.

Subprime customers — among the most profitable for banks because of the high rates and fees on their cards — saw a 41% jump in direct-mail credit card offers in the first half of 2007, the latest period for which figures were available, compared with the same period the year before, Mintel found.

It’s a matter of time, some analysts say, before financially squeezed consumers max out their credit cards and start defaulting in larger numbers.

“My guess is that you’ll see increasing numbers of people walking away from credit card debt the same way that they’re walking away from the mortgages,” says Ken McEldowney, an executive director at Consumer Action, a consumer advocacy group.

When Phyllis Coleman’s mortgage payment jumped 26% last year, she began withdrawing cash from her credit cards to pay the mortgage. That worked for a few months, until Coleman, 50, of Fairfield, Calif., maxed out on the cards’ credit limit. She defaulted on her mortgage and now faces foreclosure on her home.

Eventually, she also had to stop paying her credit cards, which she’d been relying on to cover daily expenses. “It became too much,” Coleman says, “when gas started going up. I just got deeper and deeper” in debt.

Using credit cards for gas

Consumers with the least financial resources are pressured the most by a deteriorating economy and rising living costs. For this group, credit cards are simply a way to delay the financial pain.

In recent years, banks have ramped up card rewards, enticing more people to charge their purchases. As gas costs rise to levels many people can’t afford — the national average for regular gas this week was $3.16 a gallon, up 32% from the same time last year — the number of consumers buying gas with credit cards instead of cash is accelerating, says Sonja Hubbard, CEO of E-Z Mart Stores, which has 307 locations in five states.

“People have less cash in their pocket, and if you have a $10 bill, that doesn’t get you a lot of gas anymore,” says Hubbard, who notes that most of her customers now charge gas to credit cards.

The move toward using credit cards for daily needs is occurring among blue-collar and white-collar professionals, credit counselors say.

“I put three doctors on debt-management plans and thought, ‘Wow, it’s getting tough,’ ” says Anissa Lipscomb, a credit counselor in Gaston, N.C. The doctors had sought counseling, Lipscomb says, because of surging insurance rates, high credit card debt and patients who had defaulted on medical bills.

For years, rising health care costs have cut into families’ discretionary income. But if the economy worsens, employers are likely to pass along higher health care costs to workers. That, in turn, could force more people of all income levels to boost their use of credit cards.

“Your typical American household is very vulnerable, and they’ve been vulnerable for a long time,” says Tamara Draut of Demos, a think tank in New York. “Now that energy costs are going up, health care (costs) are going up, people are turning to credit cards.”

Annie Edwards, a credit counselor in Rapid City, S.D., says a growing number of clients are charging health care expenses. Financial firms are encouraging them to do so with the rollout of cards and lines of credit designed specifically for health care, she notes.

In October, Republic Bank  and Humana introduced the HumanaAdvance health care credit card, which can be used at hospitals and doctors’ and dentists’ offices.

The card, says Steve Trager, CEO of Republic Bank, assures users that they “will have a means to pay for unexpected health care expenses.” Citigroup, Capital One and General Electric’s CareCredit division also offer loans for medical costs.

Diane Drew, a credit counselor in Menasha, Wis., says people “want to make sure they can get the health care they need for them and their families,” even if it means going into debt.

Maria Fernandez, a real estate agent in Rodeo, Calif., says the weak housing market has cut deeply into her commissions and made it harder to pay her own mortgage. Worse, the payment on her adjustable-rate mortgage jumped 17% in October. Fernandez, 40, asked her lender to modify the loan to reduce her monthly payment. She was rejected. So she’s resigned to losing her house in foreclosure this year.

Meanwhile, she says she’s committed to paying her credit card debts — which she’s consolidated with a debt-management agency — while she has the money. “It’s really stressful. I can only afford to pay my credit cards.”

 

Rising inflation among risks to further growth

Province

WASHINGTON — U.S. Federal Reserve chairman Ben Bernanke yesterday signaled a readiness to cut interest rates again to prevent further damage to the weak U.S. economy, even as he took note of rising inflation risks.

Delivering the Fed’s semiannual report on the economy to Congress, Bernanke made clear the central bank was worried a deepening housing slump, softening jobs market and tighter credit could dim an already bleak economic outlook.

“It is important to recognize that downside risks to growth remain,” Bernanke told the House of Representatives’ Financial Services Committee.

“The [Fed] will be carefully evaluating incoming information bearing on the economic outlook and will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks,” he said.

The central bank has lowered overnight interest rates to three per cent from 5.25 per cent in five steps since mid-September.

Financial markets saw Bernanke’s testimony as validating bets on another half-percentage point cut at the Fed’s next meeting on March 18.

“They’re willing to inject more juice into the system, and that’s what they need to do,” said Firas Askari, head of currency trading at BMO Capital Markets in Toronto.

A majority of dealers expect rates to be cut to 2.5 per cent at the Fed’s next meeting. Meanwhile, the median forecast was for rates to fall as low as two per cent during this cycle.

The U.S. dollar hit a record low against the euro on Bernanke’s remarks, while bond prices bounced around in reaction to zig-zagging stocks.

Stocks traded in and out of negative territory, rallying at one point when a U.S. regulator gave the green light to home finance companies Fannie Mae and Freddie Mac to invest more in the mortgage market, but ending the day little changed.

© The Vancouver Province 2008

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Banks face massive loan losses because of defaults on debts and housing-price slide

Duncan Mavin
Sun

TORONTO — The U.S. banking sector is headed for a credit downturn that will be “the worst in generations,” featuring widespread defaults on a range of debts and a national housing price slide not seen since the Great Depression, one of the most influential analysts on Wall Street says.

The banks face massive loan losses — “far more dramatic” than most bank executives and ratings agencies have forecast — as the next chapter in financial-sector turmoil unfolds, said Meredith Whitney, an analyst with Oppenheimer &Co. Inc.

“We believe loss rates will exceed the highest levels since 1990 by a significant margin,” she said in a note Monday.

“Bank losses will be the highest in the past 20-plus years as a result of greater numbers of individual defaulting on mortgages and/or other loans and from [loan balances that] are far higher than they were in the last housing cycle.”

Whitney — who is also a panellist for Fox News and the No. 2-ranked analyst on a Forbes list of top stock pickers for 2007 — shot to global infamy last year after her gloomy, but accurate, predictions about the scale of subprime problems facing Citigroup Inc. led to a worldwide sell-off of banking stocks.

In Monday’s note, the Oppenheimer analyst slashed her already-depressed forecasts of what large U.S. banks will earn in 2008 by 29 per cent and by 13 per cent for 2009, citing concerns about mortgages, credit-card balances and other loans.

In contrast to Whitney’s view, there was some good news Monday for big U.S. banks reeling from $92 billion US in collective writedowns tied to investments in the sub-prime-mortgage market.

The U.S. financial sector was buoyed by an announcement from rating agency Standard & Poor’s that it is unlikely to downgrade bond insurer MBIA Inc. any time soon. S&P and other rating agencies have been reviewing MBIA and its peers after U.S. monolines posted record losses on collateralized debt obligations (CDOs) they guaranteed. Banks stood to lose as much as $70 billion US if the CDOs they owned no longer carried an automatic AAA rating because of the insurance.

Canadian banks have been praised for avoiding the worst lending excesses of their U.S. counterparts. But their first-quarter profit reports — released over the next two weeks, starting with Canadian Imperial Bank of Commerce, Toronto-Dominion Bank and National Bank, all due out on Thursday — will be scrutinized for signs of a serious spillover from deteriorating U.S. markets.

The Canadian banks have tens of billions of dollars in indirect exposure to a wide-variety of U.S. loans through various complex investments, such as CDOs and structured investment vehicles. Also, Toronto-Dominion Bank, Royal Bank of Canada and Bank of Montreal all have extensive retail-banking operations in the United States.

According to Whitney, consumer loans are now the main area of concern for the U.S banking sector.

“As far as consumer credit is concerned, we are in unchartered territory,” the outspoken analyst said. “Housing prices, now down six per cent across the United States, have begun to decline on a national level, a phenomenon not seen since the Great Depression. We are of the belief that over the next 24 months, national home prices will decline by a factor of three times such levels.”

The “sand” really hits the fan because liquidity is drying up as banks stay away from the sort of securitized structured investments that have burned them in recent months, Whitney noted. Highly leveraged loan commitments are another source of earnings pressure in early 2008, she said.

Whitney said the stock prices of big U.S. bank could fall by another 40 per cent.

In a separate note, she also predicted more woes for Citigroup. The world’s largest bank must sell $100 billion US of assets to shore up its balance sheet, but in doing so risks losing profitable operations.

“Under duress, Citigroup will likely be forced to sell what it can and not what it should,” she said. The Oppenheimer analyst slashed her forecast for Citigroup’s earnings from $2.70 US to 75 cents — the revised estimate “could still prove optimistic,” she said — and predicted the bank’s stock price could fall as low as $16 US, compared with a 52-week high of $55.55 US.

© The Vancouver Sun 2008

 

Jeannine Aversa
USA Today

WASHINGTON — Federal Reserve Chairman Ben Bernanke warned Congress Wednesday of a period of sluggish business growth, sending a fresh signal of another cut in interest rates.

“The economic situation has become distinctly less favorable” since the summer, Bernanke testified. Since his previous such assessment last summer, the housing slump has worsened, credit problems have intensified and the job market has deteriorated. Bernanke said the confluence of these factors has turned people and businesses alike toward a more cautious attitude toward spending and investment. This, he said, has further weakened the economy.

Incoming barometers continue to “suggest sluggish economic activity in the near term,” Bernanke said in an appearance before the House Financial Services Committee. At the same time, he added, the Fed must keep a close eye on inflation given the recent run-up in energy and other prices paid by consumers and businesses.

Before he spoke, the Commerce Department released its January report on durable goods orders, which showed a 5.3% drop. At the start of his testimony, the Commerce Department reported that new-home sales fell nearly 3% last month to a seasonally adjusted annual rate of 588,000 units, the slowest pace since February 1991.

For now though, the No. 1 battle is shoring up the economy.

The Fed “will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks,” Bernanke said, hewing closely to assurances he offered earlier this month.

The central bank, which started lowering a key interest rate in September, has recently turned much more aggressive. Over the span of just eight days in January, it slashed rates by 1.25 percentage points — the biggest one-month reduction in a quarter century. Economists and Wall Street investors predict the Fed will cut rates again at its next meeting on March 18.

There are dangers that the economy will weaken even further. “The risks include the possibilities that the housing market or labor market may deteriorate more than is currently anticipated and that credit conditions may tighten substantially further,” Bernanke cautioned.

The Fed chief was hopeful that previous rate reductions along with a $168 billion stimulus package of tax rebates for people and tax breaks for business will energize the economy in the second half of this year.

Even as the Fed tries to shore up the economy, it must remain mindful of inflation pressures, Bernanke said.

Record high oil prices — topping $100 a barrel — are pushing consumer prices upward. That’s shrinking paychecks, and with people feeling less well off because the values of their homes have dropped, consumer spending “slowed significantly” toward the end of the year, the Fed chief said.

The Fed forecasts that inflation will moderate this year compared with last year. But the Fed’s recently revised inflation projection of an increase of 2.1% to 2.4% is higher than its old forecast from the fall.

Bernanke said there are “slightly greater upside risks” that inflation could turn out to be higher than the Fed currently anticipates, given the recent run-up in energy and food prices.

“Should high rates of overall inflation persist, the possibility also exists that inflation expectations could become less well anchored,” Bernanke warned. If people, companies and investors think inflation will move higher, they will act in ways that could turn inflation even worse, a sort of self-fulfilling prophecy. And Bernanke said that could complicate the Fed’s job of trying to nurture economic growth while also keeping inflation under control.

With the economy slowing and prices rising, fears are growing that the country could be headed for a bout of stagflation, a dangerous economic brew not seen since the 1970s.

The Fed for now is focused on bolstering the economy through interest rate reductions. To combat inflation, the Fed would raise rates.

At some point over the course of this year, the Fed will need to “assess whether the stance of monetary policy is properly calibrated” to foster the Fed’s objectives of price stability “in an environment of downside risks to growth,” Bernanke said.

‘Sand’ really hits the fan because liquidity is drying up

Province

TORONTO — The U.S. banking sector is headed for a credit downturn that will be “the worst in generations,” featuring widespread defaults on a range of debts and a national housing-price slide not seen since the Great Depression, says one of Wall Street’s most influential analysts.

The banks face massive loan losses — “far more dramatic” than most bank executives and ratings agencies have forecast — as the next chapter in financial-sector turmoil unfolds, said Meredith Whitney, an analyst with Oppenheimer &Co. Inc.

“We believe loss rates will exceed the highest levels since 1990 by a significant margin,” she said. “Bank losses will be the highest in the past 20-plus years as a result of greater numbers of individual defaulting on mortgages and/or other loans and from [loan balances that] are far higher than they were in the last housing cycle.”

Whitney — who is also a panelist for Fox News and the No. 2-ranked analyst on a Forbes list of top stock pickers for 2007 — shot to global infamy last year after her gloomy, but accurate, predictions about the scale of subprime problems facing Citigroup Inc. led to a worldwide sell-off of banking stocks.

Now the Oppenheimer analyst has slashed her already-depressed forecasts of what large U.S. banks will earn in 2008 by 29 per cent and by 13 per cent for 2009, citing concerns about mortgages, credit-card balances and other loans.

In contrast to Whitney’s view, there was some good news for big U.S. banks reeling from $92 billion US in collective writedowns tied to investments in the subprime-mortgage market. The U.S. financial sector was buoyed by an announcement from rating agency Standard & Poor’s that it is unlikely to downgrade bond insurer MBIA Inc. any time soon.

S&P and other rating agencies have been reviewing MBIA and its peers after U.S. monolines posted record losses on collateralized debt obligations (CDOs) they guaranteed.

Banks stood to lose as much as $70 billion US if the CDOs they owned no longer carried an automatic AAA rating because of the insurance.

Canadian banks have been praised for avoiding the worst lending excesses of their U.S. counterparts. But their first-quarter profit reports — released over the next two weeks, starting with Canadian Imperial Bank of Commerce, Toronto-Dominion Bank and National Bank, all due out tomorrow — will be scrutinized for signs of a serious spillover from deteriorating U.S. markets.

The big banks have tens of billions of dollars in indirect exposure to a wide variety of U.S. loans through various complex investments, such as CDOs and structured investment vehicles. Also, Toronto-Dominion, Royal Bank and Bank of Montreal all have extensive retail-banking operations in the U.S.

According to Whitney, consumer loans are now the main area of concern for the U.S banking sector. “As far as consumer credit is concerned, we are in uncharted territory,” said the outspoken analyst.

“Housing prices, now down six per cent across the United States, have begun to decline on a national level, a phenomenon not seen since the Great Depression. We are of the belief that over the next 24 months, national home prices will decline by a factor of three times such levels.”

The “sand” really hits the fan because liquidity is drying up as banks stay away from the sort of securitized structured investments that have burned them in recent months, Whitney noted. Highly leveraged loan commitments are another source of earnings pressure in early 2008, she said.

© The Vancouver Province 2008

 

Mongolia offered half the profits for the right

DALE CROFTS and ROB DELANEY
Sun

CHICAGO — Rio Tinto and Ivanhoe Mines have offered Mongolia more than half of the profits from the Oyu Tolgoi copper project in return for the right to develop the deposit, Rio Chief Executive Officer Tom Albanese said.

Under a 2007 draft agreement, the Asian nation would have the right to a 34 per cent equity stake in the project and related taxes equivalent to 55 per cent of the profits, Albanese said in a Feb. 22 interview in Chicago. The companies are in “ dialog ue and debate” with the government over the agreement, he said.

“ That’s a very fair transaction as measured by any mining jurisdiction in the world that would be one that attracts international c a p i t a l ,” Al b a n e s e s a i d . He declined to comment on whether the country was seeking a greater share of profit.

Companies planning mines in Mongolia are facing opposition f r o m p o p u l i s t l a w m a k e r s demanding that more of the country’s mineral wealth be used to benefit the public. Ivanhoe, based in Vancouver, has been trying for more than four years to reach an agreement with Mongolia for the Oyu Tolgoi project to gain from copper prices that have more than doubled in that period.

In most jurisdictions, the government “ typically” wouldn’t take an equity interest in the project, Albanese said.

The cabinet of Mongolian Prime Minister Sanjaa Bayar is reviewing a draft agreement Ivanhoe reached last year with former Prime Minister Miyeegombo Enkbold, said Nyamaa Tumenbayar, first secretary of trade and economic affairs at Mongolia’s U. S. embassy.

“ The Mining Law of Mongolia allows the government to hold up to 51 percent of stake of strategically important deposits,” Tumenbayar said in a Jan. 14 response to questions, without providing the terms the government was seeking. “ This might be now under the consideration.”

Ivanhoe said Sept. 11 that it may suspend development if it doesn’t win “ timely” approval. Rio, based in London, said in October that it would consider other options if the agreement wasn’t approved by the end of 2007. The two companies already have invested “ hundreds of millions of dollars” i n d e v e l o p i n g t h e p r o j e c t , Albanese said.

Bayar told Mongolia’s parliament in an inaugural address Dec. 13 that his government wants to complete the accord as soon as possible. He also proposed in the address that an independent, international organization be hired to assist the government in reaching a final agreement.

Rio called Oyu Tolgoi “ the world’s largest undeveloped coppergold resource” when it agreed to buy 10 per cent of Ivanhoe in October 2006. The site, about 80 kilometres north of Mongolia’s border with China, contains about 32 million metric tonnes of copper and 31.3 million ounces of gold.

EXPORTS: Domestic problems driving up cost of doing business

Province

SHANGHAI — As China’s factory floors feel the pressure from spiralling costs, there is growing nervousness in the rest of the world that the Asian giant’s next big export could be inflation.

Shoppers worldwide have become accustomed to the vast array of ultra-cheap Chinese goods on offer as China’s trade surplus last year reached $262.2 billion US, a more than 10-fold rise from 2003.

But now a confluence of factors, led by soaring domestic inflation that hit an 11-year high of 7.1 per cent in January, is ramping up the costs of doing business in China, with potential effects for the rest of the world.

As China’s currency has strengthened sharply against the U.S. dollar, the government has scrapped export-tax rebates, while more stringent labour laws and even the ice and snow storms in southern and central China have further driven up costs.

“China’s inflation is having a domino effect on worldwide inflation, especially in the United States,” Li Huiyong, an analyst from Shanghai-based SYWG Research and Consulting, said.

“In the past, [outside] inflation pressures in the U.S. mainly came from oil prices because the U.S. economy is highly dependent on crude oil. Cheap products from China and other developing countries helped to alleviate that pressure. Now Chinese goods are no longer as cheap it adds to the inflation pressure in the U.S.”

Nevertheless, while it is clear that doing business in China is getting more expensive, there is no consensus among economists about how much that will translate into higher price tags for Chinese-made products overseas.

Wang Qing, chief China economist at Morgan Stanley, stressed that Chinese competitiveness was not about to disappear and goods from Asia’s most populous nation would remain cheap for years.