Finance & Business World

First Banks narrowed its loss in the fourth quarter as it reduced costs associated with bad loans.

First Banks, the privately-held holding company for Clayton-based First Bank, posted a loss of $51.4 million in the quarter compared to a $153.8-million loss a year ago.

First Banks reduced its provision for loan losses to $52 million in the fourth quarter, compared to $63 million in the same quarter a year ago.

First Banks’ nonperforming assets, including nonaccrual loans, and other real estate and repossessed assets, decreased 16.1 percent in the fourth quarter, to $103.2 million, compared to a year ago.

“We strengthened our balance sheet significantly during the fourth quarter as a result of the significant decline in both nonperforming assets and construction loans, as well as the payoff of our remaining term secured borrowings,” said First Banks’ president and Chief Executive Terrance McCarthy in a statement. “While these actions contributed to our net loss for the fourth quarter, we believe they better position us for earnings improvement in 2011.”

For all of 2010, First Banks reported a loss of $191.7 million, compared to a loss of $427.6 million in 2009.   

Additionally, holders of First Banks’ trust preferred securities agreed to changes in its securities agreement in an effort to boost capital for the holding company. First Bank initiated a consent solicitation for holders of preferred securities in October and extended a November deadline for the consent until Jan. 21  

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Fitch Rating on Friday revised down its outlook for Egypt, dropping it to “negative” as mass protests in the country turned violent, engulfing the capital and other cities in the most serious challenge to President Hosni Mubarak’s regime in years.

Fitch said it was holding steady Egypt’s other ratings, including its long-term foreign currency issuer default rating, which was held at the investment grade BB+.

“The Outlook revision reflects the recent upsurge in political protests and the uncertainty this adds to the political and economic outlook ahead of September’s elections,” said Richard Fox, head of Fitch’s Middle East and Africa Sovereign Ratings. Egypt is slated to hold presidential elections in the fall.

The revision came after the Egyptian stock exchange’s benchmark EGX30 plummeted about 17 percent in two days, a drop fueled by investor panic over Tunisia-inspired protests that erupted Tuesday in the Arab world’s most populous nation. The demonstrations have focused on the economic disparity in the country, spiraling food prices and the grinding poverty that afflicts nearly 40 percent of Egypt’s 80 million people.

Analysts have downplayed the likelihood that President Hosni Mubarak’s regime would be ousted as a result of the protests. But the mass rallies in which tens of thousands have clashed with riot police have pushed to the surface latent concerns about Egypt and raised questions about the economic impact on the country cheap pay day loans.

While Egypt has enjoyed respectable economic growth figures, even during the global financial meltdown, the rallies have centered on the inequality in income distribution, allegations of corruption, and the grinding unemployment some analysts have put as high as 25 percent. Egypt’s GDP growth is projected at about 6 percent in 2011.

It remains unclear whether Mubarak, who has ruled Egypt for nearly 30 years, will run for a sixth term in the September presidential election. But the protests have spotlighted the popular distaste for his possible candidacy, or the increasingly discussed possibility that his younger son, Gamal, would take over.

Fitch said that while it doesn’t expect Egypt’s macroeconomic outlook to be seriously affected as a result of the protests, it noted that serious challenges remain, such as high youth unemployment and food inflation running at about 17 percent per year.

“The severity of the macroeconomic impact will depend on political developments in the days and months ahead,” Fitch said in a statement.

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China needs to extend interest rate increases and allow the yuan to gain by about 5 percent annually to combat inflation and avoid fuelling asset bubbles, said Li Daokui, a central bank monetary policy committee member.

The People’s Bank of China has raised benchmark lending rates twice by a quarter point since October to 5.81 percent. Consumer prices rose 3.3 percent in 2010, breaching a government target of 3 percent.

“Rate increases are necessary,” Li said in an interview at the World Economic Forum in Davos today. “We should gradually increase rates in the first and second quarter.”

Asian countries are attempting to battle accelerating inflation pressures as food and commodity costs climb and foreign capital inflows spur asset-price increases. India is forecast by economists to join Thailand and South Korea in increasing benchmark rates this month.

Li said rising real-estate prices are the “biggest danger” to China’s economy, “a thousand times worse than inflation.”

China may allow more gains in the yuan to contain consumer prices and ease trade tensions, a topic on the agenda of President Hu Jintao’s meetings in the U.S. last week. The Chinese currency traded at 6.5830 per dollar, after President Barack Obama said it remains undervalued.

“There has been movement, but it has not been fast enough,” Obama said last week.

While an annual gain of 5 percent to 6 percent in the yuan is acceptable, any “excessive” appreciation would hurt Chinese exporters, said Li.

Inflation Pressure

“It will also increase inflation pressure for these countries because there’s no alternative to cheap Chinese goods in the short term,” he said.

China won’t suffer a “hard landing,” Li said. Its economy will grow about 9.5 percent this year and the average inflation rate will be between 3.8 percent and 4.0 percent, he forecast.

China’s economy expanded 10.3 percent in 2010, the fastest pace in three years, according to the nation’s statistics bureau. That compared with growth of 9.2 percent in 2009. The nation’s standing as the No. 2 economy may be confirmed on Feb. 14 when Japan reports fourth-quarter gross domestic product.

In nominal terms, China’s gross domestic product is more than 100 times bigger than in 1978, when Communist Party leader Deng Xiaoping began introducing free-market policies. While China outstripped Germany in 2007 and the U.K. and France in 2005, the economy remains less than half the size of the U.S.

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The Bank of Japan raised its growth forecasts for the year through March and predicted faster inflation as strength in overseas demand bolsters exports and pushes up commodity prices.

“The economy will probably emerge from its slump soon and return to a moderate recovery path,” Governor Masaaki Shirakawa said at a press conference after his board raised its growth forecast to 3.3 percent from 2.1 percent. “What’s important is that we can foresee a path leading toward deflation’s end, in which price declines will moderate and start rising, and we’re approaching that point.”

Japanese government bond prices dropped on expectations that global growth will bolster the nation’s expansion. The country’s reliance on foreign demand leaves the economic rebound vulnerable to any strengthening in the yen that undercuts export competitiveness and worsens deflation.

“Even if price declines ease because of higher commodity costs, that doesn’t mean Japan’s economy is overcoming deflation,” said Yoshiki Shinke, a senior economist at Dai-Ichi Life Research Institute in Tokyo. “I don’t think today’s numbers will alter investor expectations that the BOJ will maintain its zero-rate policy” for years to come, he said.

Officials voted unanimously to keep the key interest rate between zero and 0.1 percent and a program to buy securities at 5 trillion yen ($60 billion).

Prices Rising

The policy board forecast that consumer prices will increase 0.3 percent in the year starting April, higher than its October prediction of 0.1 percent. The bank said that while inflation may unexpectedly accelerate if demand from emerging economies pushes up commodity costs, a government review of the consumer price index later this year will likely lead to a downward revision in the index.

Shirakawa said the so-called rebasing “won’t alter spending behavior of companies and households.”

The yield on the benchmark 10-year bond rose to 1.250 percent as of 4:58 p.m. in Tokyo. It touched 1.26 percent on Jan. 19, the highest level in a month. Japan’s currency traded at 82.41 per dollar. The yen has fallen 3 percent since touching a 15-year high of 80.22 per dollar on Nov. 1.

“The magnitude of the increases in Japan’s bond yields have been relatively small compared with other nations,” in part because the BOJ’s pledge to maintain its zero-rate policy until it beats deflation, he said. He said he will “carefully watch” bond yields and their effect on the economy.

Policy Pledge

The bank has pledged to keep the current policy until it can see signs of stable price moves, which officials define as increases of around 1 percent.

World food prices climbed 25 percent last year to a record in December on higher sugar, grain and oilseed costs, according to the United Nations. The level surpassed that reached in 2008, when costlier wheat prompted Japan’s largest flour miller Nisshin Seifun Group Inc. and Yamazaki Baking Co. to raise bread and noodle prices.

China’s growth accelerated to 9.8 percent in the fourth quarter, while data due Jan. 28 are expected to show the U.S. economy expanded at a 3.5 percent annual rate in the fourth quarter from 2.6 percent. The U.S. and China together account for more than a third of Japan’s overseas sales.

Accelerating Growth

In Japan, the expansion will probably speed up in each quarter of 2011 after contracting at an estimated 0.75 percent annual pace in the final three months of 2010, according to a Bloomberg News survey. Industrial output increased for the first time in six months in November.

The BOJ upgraded its assessment of the economic outlook, saying that “Japan’s economy is expected to gradually overcome the deceleration in the pace of improvement and return to a moderate recovery path.”

“Japan is set on a path of moderate acceleration following the contraction,” said Akio Makabe, a professor of economics of Shinshu University in Matsumoto city in central Japan. “Still, some uncertainties remain over the outlook and deflationary pressure persists in the economy.”

Core consumer prices, which exclude fresh food, dropped for a 21st straight month in November. The government will reset the index this year, and that’s expected to result in a further decline, reflecting falling prices of electronic products such as flat-screen televisions.

Price Slump

Core prices may decline by 0.6 percent in fiscal 2011, pulled down by the effects of the index revision, according to the median projection of 15 economists surveyed by Bloomberg News.

Japan’s central bank will raise interest rates in 2013 at the earliest, ten of 15 economists surveyed by Bloomberg News last week predicted, while three said a rate increase will occur in 2012. One forecast the BOJ will wait until 2014 and one declined to make a forecast.

There’s a “very low chance” of the BOJ increasing borrowing costs in 2012, because the central bank is predicting inflation below 1 percent through the year ending March 2013, said Takuji Okubo, chief Japan economist at Societe Generale.

“I think there is still about a 30 percent chance for another policy easing around March if the yen strengthens and political pressure remains,” Seiji Shiraishi, chief economist at HSBC Securities in Tokyo, said before the decision.

Loosening Policy

Julian Jessop, chief international economist at Capital Economics Ltd. in London, said in a report he expects “a further substantial loosening in monetary policy by the end of the year, especially as the room for fiscal stimulus is now largely exhausted.”

Japan’s parliament started a regular session yesterday to discuss Prime Minister Naoto Kan’s record 92.4 trillion yen annual budget to shore up the economy, which is saddled with debt the Organization for Economic Cooperation and Development estimates will exceed twice the size of the economy this year.

The BOJ’s 5 trillion yen fund, unveiled in October, has purchased assets worth 1.5 trillion yen as of Jan. 20, including government debt, exchange-traded-funds and real estate investment trusts, a central bank report showed yesterday. BOJ policy makers have said the bank will expand the fund if more stimulus becomes necessary.

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Goldman Sachs Group Inc.’s offering of 30-year bonds, its first in more than three years, signals waning concern among investors that inflation is accelerating.

The fifth-biggest U.S. bank by assets received $9 billion in orders for its $2.5 billion of debentures sold on Jan. 21, according to Mizuho Securities USA. The 6.25 percent senior bonds yield 170 basis points more than similar-maturity Treasuries, at the low end of a 5-basis-point range marketed by the New York-based firm, data compiled by Bloomberg show.

Economists are lowering forecasts for consumer price rises next year, with the median estimate declining to 1.9 percent this month from 2 percent in December, according to a Bloomberg survey of 55 economists. The record $13 billion auction of 10- year Treasury Inflation-Protected Securities on Jan. 20 attracted lower-than-average demand and the difference between yields on 10-year notes and TIPS narrowed the most since May.

“People aren’t too worried about inflation,” said Anthony Valeri, market strategist with LPL Financial Corp. in San Diego, which oversees $293 billion. “Goldman was noticing there’s some demand here and they could get that deal done.”

Thirty-year Treasuries yield 3.07 percentage points more than the consumer price index, above the average of 2.38 percentage points since the start of 2000. Goldman Sachs economists predict a 0.6 percent increase in personal consumption expenditures this year, compared with the median 1.05 percent of 59 economists surveyed by Bloomberg.

‘Satiate’ Demand

The bank’s last benchmark-sized offering of 30-year dollar- denominated bonds was in September 2007, Bloomberg data show. In that sale, Goldman Sachs issued $2.5 billion of 6.75 percent debt at a 190 basis-point spread, Bloomberg data show. Benchmark sales are typically at least $500 million.

“With Goldman Sachs doing a 30-year, it allows them to satiate some of the demand in the 30-year part of the curve and gets them close to all the buyers that are knocking on their door for bonds with duration,” said Timothy Cox, an executive director of debt capital markets at Mizuho in New York.

Elsewhere in credit markets, spreads on global company bonds narrowed for a third week, shrinking to the lowest since May. Securities issued by Petroleo Brasileiro SA in Brazil’s largest corporate debt offering rose on their first day of trading as issuance worldwide fell. Leveraged loan prices increased, reaching the highest level in more than three years during the period.

Yields on company debt from the U.S. to Europe and Asia narrowed 4 basis points relative to government bonds to 162 basis points, or 1.62 percentage points, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. Spreads, which have tightened 7 basis points this month, are down from 177 on Nov. 30 and at the lowest since reaching 158 on May 5.

Petrobras Bond Sale

Yields jumped to an average 3.98 percent from 3.93 percent on Jan. 14. The Barclays Capital Global Aggregate Corporate Index of bonds has gained 0.08 percent this month.

In emerging markets, relative yields widened 4 basis points to 239 basis points, according to JPMorgan Chase & Co. index data. During the past three months the index has ranged from a high of 279 on Nov. 30 to as low as 217 on Jan. 5.

Petrobras, Brazil’s state-controlled energy producer, sold $6 billion of bonds as worldwide issuance declined to $73.3 billion for the week, from $111 billion in the prior period, according to data compiled by Bloomberg.

The Rio de Janeiro-based company’s $2.5 billion of 5.375 percent notes due in 2021 rose on the first day of trading, climbing 1.52 cent from the issue price on Jan. 20 to 101.32 cents on the dollar, according to Trace, the bond price- reporting system of the Financial Industry Regulatory Authority.

Loans Climb

The cost of protecting corporate securities from default in the U.S. was little changed. Credit-default swaps on the Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, rose 0.3 basis point to 83.6 basis points, according to Markit Group Ltd. In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings fell for a second week, declining 4.6 to 100.

Credit-default swaps typically rise as investor confidence deteriorates and fall as it improves. Contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a swap protecting $10 million of debt.

The Standard & Poor’s/LSTA US Leveraged Loan 100 Index increased 0.3 cent for the week to 95.54 cents on the dollar after reaching 95.59 on Jan. 19, the highest since November 2007. The index, which tracks the 100 largest dollar-denominated first-lien leveraged loans, has gained 1.98 percent this month. Speculative-grade debt is rated less than Baa3 by Moody’s Investors Service and BBB- by S&P.

‘Bumping Along’

Goldman Sachs may have offered the long-maturity debt to get ahead of an increase in borrowing costs, said LPL’s Valeri. Yields on 30-year Treasuries climbed last week to 4.61 percent, the highest since April.

“They’re probably saying, ‘Look, this 30-year’s still not performing well, it’s bumping along in terms of price, let’s get this debt done now before interest rates get higher,’” Valeri said. “As an investor you’re being compensated more to stand out on the yield curve. You’re getting more yield for extending the maturity.”

Michael DuVally, a spokesman for Goldman Sachs, said the firm doesn’t comment on its own deals.

Including Goldman Sachs’s offering, companies have issued $5.32 billion of 30-year debt in dollars this month, up from $1.5 billion of sales in December, Bloomberg data show. That compares with an $8.86 billion average in the first 11 months of 2010.

‘Buckets’ to Fill

“A lot of investors have buckets they need to fill up within their portfolios, and there’s a need for 30-year paper,” said Rajeev Sharma, a money manager at First Investors Management in New York, who helps oversee $1.5 billion of investment-grade credit. “It’s very hard to get 30-years out there.”

The U.S. auction of 10-year TIPS on Jan. 20 drew a yield of 1.17 percent, compared with an average forecast of 1.108 percent in a Bloomberg survey of nine of the Federal Reserve’s 18 primary dealers, who are obligated to bid in U.S. debt auctions. The yield at the last auction of the maturity on Nov. 4 was the lowest ever, 0.409 percent.

The sale was the largest 10-year TIPS offering since the government began selling inflation-indexed debt in 1997.

The bid-to-cover ratio, which gauges demand by comparing the amount offered with the amount sold, was 2.37, the lowest since April 2009. It was 2.91 at the last sale in November and averaged 2.73 at the past 10 offerings.

Negative Return

“Inflation expectations implied by TIPS are down this week,” Valeri said. “That’s probably motivating investors to feel more comfortable with long-term debt.”

Yields on 10-year TIPS show bondholders expect the consumer price index to increase 2.19 percentage points a year on average over the life of the debt. The CPI rate rose 1.5 percent in 2010 and is forecast to climb 1.7 percent this year, based on a Bloomberg survey of more than 60 economists.

The so-called breakeven rate on TIPS reached 2.41 on Jan. 5 and is up from 1.51 percent in August amid concern that the $600 billion of cash the Federal Reserve will print to buy Treasuries would cause faster inflation.

U.S. corporate bonds due in 15 years or more are poised for a fifth consecutive month of declines, losing 1.23 percent in January, the worst-performing class in the Bank of America Merrill Lynch indexes.

JPMorgan Sale

The last benchmark offering of 30-year debt by a U.S. bank was in October, when New York-based JPMorgan sold $1.25 billion of bonds, Bloomberg data show. The 5.5 percent securities paid a spread of 165 basis points. Goldman Sachs sold $1.3 billion of 50-year debt on Oct. 26, Bloomberg data show. The bonds were offered in $25 denominations and can’t be called, or redeemed, for five years, the bank said in a regulatory filing.

Goldman Sachs “is saying, ‘Hey, listen, the market wants this, let’s give it to them because if we do this a year from now, there’s a good chance rates could be up 100 basis points,’” Mizuho’s Cox said. “If you believe we’re in the beginning of a recovery, then you would certainly anticipate the 30-year to move up in yield.”

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The number of people who bought previously owned homes last year fell to the lowest level in 13 years, and economists say it will be years before the housing market fully recovers.

High unemployment and a record number of foreclosures are deterring potential buyers who fear home prices haven’t reached the bottom. Job growth is expected to pick up this year, but not enough to raise home sales to healthier levels.

“We built too many houses during the boom, and now after the crash, it will take us a long time to get back to normal,” said David Wyss, chief economist at Standard & Poor’s in New York.

The National Association of Realtors reported Thursday that sales dropped 4.8 percent to 4.91 million units in 2010. That was slightly fewer than in 2008, which had been the weakest year since 1997.

The poor year for sales did end on a stronger note. Buyers snapped up homes at a seasonally adjusted annual rate of 5.28 million units in December, the best sales pace since May and the 12.8 percent rise from November was the biggest one-month surge in 11 years.

Gains in mortgage rates may have spurred some fence-sitters to buy homes in December before rates moved higher, analysts noted.

The increase was an encouraging sign after a dismal year for home sales, said Mark Zandi, chief economist at Moody’s Analytics. But he cautioned against raising expectations for a rapid recovery in housing.

“The job market is still very weak, and unemployment is very high. Until we get more jobs, people will be reticent about buying homes,” he said.

Zandi said home prices would fall another 5 percent this year. Sales of previously occupied homes would likely exceed 5 million. That’s a slight improvement from last year, he said, but it will probably take until 2013 or 2014 for sales to reach a healthy level of 6 million units a year.

Home sales will benefit from an improved hiring market. Many economists predict employers will double the number of jobs added this year compared with 2010. A reason for more optimism is a decline in the number of people applying for unemployment benefits over the past four months.

Last week, applications fell to a seasonally adjusted 404,000, the Labor Department said cash advance. That followed a spike in applications in the previous week, which is typical after the holidays end and employers let temporary workers go. Even with the holiday bump and this past week’s decline, the latest figures were only slightly higher than the 391,000 level reached last month _ the lowest in more than two years.

Fewer than 425,000 people applying for benefits is considered a signal of modest job growth. Economists say applications must fall consistently to 375,000 or fewer to substantially reduce the unemployment rate.

Still, the unemployment rate is not expected to fall much below 9 percent this year. And the housing market cannot fully recover until the glut of foreclosed homes is cleared.

Last year, a record 1 million homes were lost to foreclosures, and foreclosure tracker RealtyTrac Inc. predicts 1.2 million more will be lost this year.

Foreclosures or distressed sales such as short sales _ when lenders let homeowners sell for less than they owe on their mortgages _ are forcing home prices down in many markets. That has made it difficult for some potential buyers looking to upgrade, because they would have to accept less money to sell their current home.

Even historically low mortgage rates have done little to boost the sales.

The average rate on a 30-year fixed mortgage rose to 4.74 percent this week, Freddie Mac said Thursday. That’s up from a 40-year low of 4.17 percent in November. The average rate on the 15-year loan, a popular refinance option, slipped to 4.05 percent last week. That’s nearly half a point higher than the 3.57 percent rate in November _ a 20-year low.

For December, sales rose in all parts of the country, with the strongest gain a 16.7 percent increase in the West. Sales rose 13 percent in the Northeast, 10.1 percent in the South and 11 percent in the Midwest.

The median price for a home sold in December was $168,800, down 1 percent from a year ago.

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Chinese President Hu Jintao’s bargaining power has strengthened since he last visited Washington in 2006. He can credit China’s explosive growth, coupled with economic misfortunes in the United States.

No wonder an emboldened Hu has shown little inclination to bow to the U.S. on issues from China’s currency to its support of North Korea.

Since his last visit, China has become the world’s second-largest economy. Its auto market is now the biggest. Its ranks of Internet users exceed the entire U.S. population.

Over the same time, the U.S. has shed 5 million jobs, suffered a grave financial crisis and seen its unemployment rate double.

It’s been a tale of two divergent economies.

“China punches harder than it did in economic and political terms,” says Charles Freeman, a China specialist at the Center for Strategic and International Studies in Washington. “There’s no mood in China to be particularly concessionary to the United States.”

That’s a sharp contrast to China’s approach during Hu’s last visit in 2006. Back then, it was willing to concede “that the United States was without a doubt the big dog,” Freeman says. Now, within China, “there’s a very active debate about what China’s international role should be and whether they should seize the day.”

China’s rising influence is evident even in the dining arrangements for Hu’s visit: President Barack Obama gave Hu the lavish state dinner that President George W. Bush denied him in 2006.

“The U.S. needs China to help deal with all the challenges it faces,” says Yuan Peng, director of the Institute of American Studies at the government’s China Institutes of Contemporary International Relations.

The financial crisis and the Great Recession helped shift the economic balance between the two nations. When Hu visited in April 2006, the U.S. economy was enjoying its 19th straight quarter of growth. The housing market had caught fire. Any notion that the U.S. financial system risked collapse seemed far-fetched.

Yet it was China that managed to rebound from the global recession with scarcely a dent. By contrast, the United States has struggled to invigorate an economy marred by slow job creation and high unemployment.

The U.S. economy is still more than twice the size of China’s. But the gap is narrowing. The U.S. economy rose about 16 percent from 2005 to 2010. China’s more than doubled, according to the International Monetary Fund.

On Thursday, China reported that its economy grew a sizzling 10.3 percent in 2010. By comparison, the U.S. economy is believed to have grown less than 3 percent last year.

Surging growth has transformed Chinese living standards, especially in major cities. Citizens there enjoy better homes, schools and high technology.

And the collective appetite of 1.3 billion Chinese has turned the nation into a ravenous growth market. The value of imports nearly doubled between 2005 and last year to $1.4 trillion.

That purchasing power has helped give China sway over foreign companies in fields ranging from processed food to high-speed rail. China has pressured those companies to turn over their technology as the price of admission to Chinese markets.

China deposed the United States in 2009 as the world’s biggest auto market (ranked by the number of vehicles sold) no fax payday loans. It requires foreign automakers to forge joint ventures with Chinese partners if they want to reach Chinese buyers. Those partnerships are helping Chinese auto companies expand abroad.

“Companies realize that the future of their global business depends on being able to operate and capture domestic Chinese market share,” said Michael Klibaner, head of research for Jones Lang LaSalle Shanghai.

China has been using its wealth to expand its influence around the globe. Beijing lent $110 billion to poor countries in 2009 and 2010 _ outstripping the World Bank’s $100 billion, according to data gathered by the Financial Times.

China has also acquired a bigger voice at the World Bank and International Monetary Fund. As a result, it’s gained a leading role in efforts to restructure the global financial system.

Emboldened by its success, Beijing is pushing back at Washington on a range of contentious issues. In climate talks, for instance, it’s pledged to rein in China’s greenhouse gas emissions but has rejected binding limits or a system to monitor its output.

China, one of five permanent U.N. Security Council members with veto power, has put aside its traditional reluctance to become involved in global affairs. It’s joined Russia, for example, in resisting Western pressure to sanction Iran over its nuclear program.

Beijing also has frustrated Washington by refusing to leverage its role as a supplier of food and fuel to North Korea to force Pyongyang to stop provocative behavior. North Korea has rattled its neighbors and Western nations by pursuing a nuclear weapons program, sinking a South Korean warship and shelling a South Korean island.

Since Hu’s last visit, the Chinese have more than doubled their holdings of U.S. Treasury debt to nearly $896 billion. When Hu visited Washington five years ago, Japan was the No. 1 buyer of U.S. Treasury debt.

China’s role as the leading financier of U.S. budget deficits has played to its interests. Beijing is unlikely, for instance, to move as fast as Washington would like to let the value of the Chinese currency, the yuan, rise freely.

The U.S. complains that China keeps its currency artificially low to give Chinese exporters an unfair edge. A weak yuan makes Chinese products cheaper in the United States and U.S. products costlier in China.

U.S. lawmakers are threatening to impose penalties on China if it continues to keep its currency low. But China could retaliate against trade sanctions merely by buying less Treasury debt.

“If they simply reduce this year’s purchase of Treasury bonds and buy a few more euro bonds, that’s going to force interest rates up in the United States,” says Richard Drobnick, director of the University of Southern California’s Center for International Business Education and Research.

“And if they do it abruptly, because they’re mad at us, we could go into recession again,” Drobnick says. “You shouldn’t argue with your banker.”

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McDonald reported from Beijing. Associated Press Writers Christopher Bodeen in Beijing and Elaine Kurtenbach in Shanghai contributed to this report.

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Investors are finally inching back into the stock market. But are they too late?

While millions sought refuge in traditionally stable bonds over the past two years, they missed a more than 90 percent rally in stocks. Suddenly bonds don’t look so safe, and some of the $11 trillion that Americans have parked in mutual funds is shifting back to stocks.

After putting more than $570 billion into bonds over the past two years, mutual fund investors reversed course last fall, worried that the prospect of rising interest rates and the growing deficits of state and local governments were bringing bond prices down.

In the last two months of 2010, investors withdrew a net $23 billion from bond funds, according to industry consultant Strategic Insight.

At the same time, corporate bottom lines are improving. So investors are finally starting to take another look at stocks after being burned in the 2008 financial crisis and scared by the market’s “flash crash” single-day plunge in May.

“Most investors have been in a capital-preservation mentality, because they saw so much of their net worth destroyed in the bear market,” says Chris Jones, chief investment officer with J.P. Morgan Asset Management.

Few have fully recovered since the stock market began sliding from its historic peak in October 2007. The Standard & Poor’s 500 index is 17 percent shy of that level, despite recent gains.

The momentum has shifted, and now, with a couple of years of solid market performance, many risk-averse investors may be ready to get back in. But there are cautionary voices.

The economic recovery is still fragile in the eyes of Tom Roseen, an analyst with fund-tracker Lipper Inc.

“I wouldn’t be surprised if we have a little bit of a pullback over the next couple months, as people re-evaluate their portfolios and take a look at how much the market has gained,” he says.

Until recently, investors got a decent return from their play-it-safe strategy. Diversified bond funds gained an average of 10.8 percent last year, beating their average annual gain of 6.2 percent over the past five years, according to Morningstar.

Still, nearly all types of bonds lost money in the fourth quarter, with government bonds taking the biggest hit.

This downturn helped fuel a shift into stocks _ most notably abroad. Mutual funds buying overseas stocks took in a net $72 billion last year, while investors pulled a net $49 billion out of funds buying American stocks.

There are signs that U.S. stocks are becoming more attractive to mutual fund investors. For one week last month, domestic stock funds took in more money than investors pulled out. The last time that had happened was in April. And the pace of withdrawals is slowing.

Market optimism is also improving. For 19 consecutive weeks, surveys by the American Association of Individual Investors have shown a greater-than-average belief that stock prices will rise. The last time the surveys had such a long streak of bullish sentiment was in late 2004.

Yet the movement of money because of troubles with municipal bonds offers a reminder of how important it is for investors to remain even-keeled.

“You simply have got to put aside the emotion and believe in what you are taught, to buy low and sell high,” says Carol Clemens, a 64-year-old retiree from Edmond, Okla.

She scored big when she snapped up shares of Ford for around $2 when it appeared U.S. automakers might go under a couple of years ago. The stock now trades above $18, thanks to smart moves by Ford’s management and a strengthening economy.

Clemens’ portfolio is about two-thirds stocks and one-third bonds, and she’s recently been trimming her stake in bonds.

“If you put money into bonds, there is a nice cushion when the stock market goes down,” Clemens says. “But I’m retired, and we’re looking for an income stream. We’re not getting it from bonds,” she says, calling current yields “abysmal.”

Belief that the economic recovery is on track has recently driven up long-term interest rates from record lows. This has led investors to pull out of low-yielding Treasurys. Rising rates also are making it costlier for state and local governments to borrow. Fear of further rate increases also is causing prices for many previously issued bonds to drop. That’s because investors will be able to buy newly issued bonds paying higher interest.

So as bond prices decline, investors like Clemens will be looking for income from stocks that pay solid dividends. And as other investors step back into stocks, they may be questioning whether they’re making the classic mistake of buying in at the market’s peak.

The S&P 500 is up 23 percent since Sept. 1, and at its highest point since August 2008. It finished 2010 with a return of 15 percent including dividends, more than twice the gain for a comparable bond index.

J.P. Morgan’s Jones expects further stock gains in 2011, with a breakout year for growth stocks of companies whose earnings rapidly appreciate _ think Amazon.com, whose stock price has tripled since March 2009. But Jones doesn’t think many investors are willing to get back into those richly priced stocks.

“Investors are incredibly shell-shocked,” Jones says, “and they’re not willing to pay for growth until they see it.”

Yet many market pros are predicting another year of double-digit gains. They point to an abundance of positive economic indicators: factories cranking up production, hiring activity picking up, growing corporate investment in technology. Consumers also are more confident, thanks in part to the recent extension of the Bush-era tax cuts and a new cut in the Social Security payroll tax.

Sooner or later, investors will put their money where it’s gaining the most, predicts Bob Doll, chief stock strategist at BlackRock, the world’s biggest money management company. Investors tend to chase rather than anticipate returns. He expects investors will embrace stock funds over bonds, ending what he calls an era of fear.

Stocks may post their third year of double-digit percentage gains in a row, Doll says. That hasn’t happened since the late 1990s.

And if the market behaves like it has coming out of previous recessions, the S&P 500 could rise nearly 12 percent this year. That’s the average gain the index made in the one year immediately following this point in the economic cycle, a year and a half after the end of a recession. The analysis by Birinyi Associates examined market gains coming out of seven prior recessions.

Another positive: Corporate earnings are rising. Around mid-year, Doll expects profits of S&P 500 companies will top the record high they reached in June 2007, noting that more companies have recently been boosting their earnings projections than scaling them back.

Yet many believe investor conservatism still runs deep, in part because of demographics. Baby boomers are beginning to retire in droves, and they’re drawn to the steady income and returns that bonds typically generate.

Indeed, not everyone is declaring that investors have given up on bonds. Strategic Insight expects demand for bond funds will rebound in the first half of this year.

A key reason is that bond yields still look pretty good compared with the current near-zero returns from cash investments such as money-market funds.

“The numbers suggest a slow rebound for investor confidence in stocks,” says Strategic Insight’s Avi Nachmany. “But they’ll continue to buy bonds for the same reasons they bought them before: There’s an insatiable interest in income, and people are still scared.”

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In late 2009, President Barack Obama and his Chinese counterpart Hu Jintao announced an ambitious array of joint clean energy research projects touted as a mark of a maturing relationship and an alliance to fight climate change.

A year after Obama’s visit to China, the envisioned partnership has largely evaporated. The U.S. has filed a complaint at the World Trade Organization against China’s policies favoring its producers of wind and solar equipment. Cooperation in climate change talks has been rare.

On the eve of Hu’s U.S. visit, the conflict is emblematic of a range of areas, from climate to technology to reducing strains in the the global economy, where Beijing sees its interests as very different from Washington even as they pledge cooperation.

“On the main issues, there is open hypocrisy on both sides,” said Derek Scissors, an economist at the Heritage Foundation, a Washington think tank.

The stakes are significant. The United States and China are the two biggest economies and greenhouse gas emitters and are linked by $250 billion a year in trade. Whether they can cooperate is likely to be key to restoring the world economy to health and creating an effective program to forestall climate change.

The two governments have worked over the past decade to forge ties with regular Cabinet-level meetings and U.S. officials advise Beijing in fields from health to environmental enforcement. But across many economic issues they are moving toward conflict.

Beijing, citing its need to reduce poverty and avoid financial shocks, has rejected binding greenhouse gas limits and U.S. pressure to ease currency controls that critics say keep its yuan weak and swell China’s trade surplus.

On the U.S. side, a listless economy and high unemployment make it politically harder for Washington to argue for cooperation and add to pressure on Obama to press China over trade complaints.

In climate, the two governments trade accusations that they are blocking progress.

Similar conflict marks efforts to reinvigorate the world economy and ease global economic imbalances by reducing America’s huge trade and budget deficits and narrowing China’s multibillion-dollar trade surplus.

Beijing committed to boost its domestic consumption to cut reliance on exports and fuel demand for imports. But it has restrained the rise of its yuan against the dollar, which would increase the spending power of Chinese families. Analysts expect a Chinese trade surplus this year of about $200 billion _ the same as 2010.

Washington promised to narrow its trade and budget deficits but spending outpaced revenue by $1.3 trillion last year. The U.S. Federal Reserve’s latest effort to stimulate the economy with $600 billion in bond purchases triggered alarm in Beijing, which warned it could fuel global inflation and erode the value of the dollar and China’s mountain of U.S. Treasury debt and other assets.

The current strains are at odds with Obama’s first year in office in 2009, when he talked up the importance of a partnership with Beijing on energy, the economy and other issues.

“Obama’s in a tough place because in the first two years of his administration, he made repeated cooperative gestures to China and got nothing in return,” said Jim McGregor, a senior counselor for consulting firm APCO Worldwide and a former chairman of the American Chamber of Commerce in China.

The American leader was received coolly on his November 2009 visit to Beijing. The next month in Copenhagen, U.S. envoys were dismayed when China led opposition to block agreement on a framework to limit growth of greenhouse gas output.

China pledged to reduce its use of fossil fuels per unit of economic output but rejected a monitoring system to verify its emissions online cash advance. Washington was criticized by environmentalists for refusing to commit to bigger cuts of its own, which U.S. manufacturers say would put them at a disadvantage against fast-rising Chinese competitors.

The setback in Copenhagen hardened the Obama team’s views on cooperation while China felt less pressure to compromise due to its quick rebound from the global crisis and rapid economic growth.

During the 2009 visit, the two sides announced energy ventures including a U.S.-China Clean Energy Research Center to work on electric cars, more efficient buildings and cleaner coal technology. They promised to promote cooperation in private sector research.

Those plans are moving ahead but officials are still reviewing possible projects and research work has yet to start.

Meanwhile, Beijing faced growing complaints that it was squeezing European and U.S. makers of wind turbines out of its fast-growing market while subsidizing exports of solar and wind gear in violation of its free-trade commitments.

Such subsidies are “particularly harmful,” U.S. Trade Representative Ron Kirk said when the WTO case was filed in December. If the WTO ultimately rules in Washington’s favor, the Obama administration would be authorized to impose penalty tariffs on Chinese products equal to the lost sales that U.S. energy companies are experiencing.

Beijing reacted angrily, criticizing the WTO case as a politically motivated attack on efforts to develop clean energy technology. An official of the Chinese Cabinet’s National Energy Administration accused Washington of providing its own improper subsidies to U.S. companies.

“At every high-level meeting, they promise more cooperation on clean energy. But they are really moving toward more conflict on energy,” Scissors said. “In the U.S., you hear constant political complaints about how China is stealing clean energy jobs.”

Boosting sales of computer, telecoms and clean power technology is a core element of Obama’s pledge to double U.S. exports and create 2 million jobs with in five years. But that conflicts with Beijing’s “indigenous innovation” strategy, which aims to build up China’s technology suppliers by favoring them in government procurement.

Beijing has promised to let foreign companies apply to have China-based operations treated as domestic suppliers. But even if they are, production in China would create far fewer U.S. jobs than exporting the same goods from American factories.

In a speech last week, U.S. Treasury Secretary Timothy Geithner suggested Beijing might be given greater access to U.S. technology if it does more to address American complaints about its currency controls and intellectual property theft.

Again, that clashes with China’s strategy of pressing companies to hand over know-how as a condition of buying wind power, high-speed rail and other goods. Some complain Chinese partners use that to create competing products and in some cases might be selling shared technology abroad in violation of licensing agreements.

“There are more and more policies of protectionism that aren’t in the headlines but are in the details of the local and national regulatory systems,” said McGregor. “It appears there is a debate behind closed doors on how much further to take `reform and opening’ versus building state capitalism and `national champion’ state-owned enterprises.”

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The difference between 2- and 30- year Treasury yields widened to a record as investors demanded higher compensation when buying longer-term securities on concern a strengthening U.S. economy will spur inflation.

The so-called yield curve steepened to 3.96 percentage points yesterday, compared with an average of 2.07 percentage points the past 10 years. Treasuries fell yesterday as reports showed retail sales and industrial production both rose in December. The Federal Reserve will buy up to $21.5 billion in Treasuries next week, including inflation-indexed securities.

“Rates are headed generally higher from here as we see a slow recovery, trending higher,” said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee.

The yield on the 30-year bond rose five basis points, or 0.05 percentage point, to 4.53 percent, from 4.485 percent on Jan. 7, according to BGCantor Market Data. The price of the 4.25 percent security due in November 2040 dropped 1/2, or $5 per $1,000 face amount, to 95 19/32.

Two-year note yields fell three basis points to 0.57 percent. The gap between the two securities is the highest since Bloomberg records on the data began in 1977.

Prospects for faster economic growth caused Treasuries to lose 2.67 percent last quarter, including reinvested interest, trimming the annual gain to 5.88 percent for 2010, Bank of America Merrill Lynch’s U.S. Treasury Master index shows.

Improved Outlook

Fed Chairman Ben S. Bernanke said the increase in market interest rates in recent months reflects an improved outlook for the U.S. economy. He spoke Jan. 13 at a forum in Alexandria, Virginia.

The U.S. consumer-price index rose 0.5 percent in December from the previous month, more than the 0.4 percent median forecast in a Bloomberg News survey, data from the Labor Department showed yesterday. The so-called core rate, which excludes volatile food and fuel costs, rose 0.1 percent, in line with the median projection.

The U.S. producer price index rose 1.1 percent in December, the most in 11 months, according to a Labor Department report on Jan. 13.

Traders’ expectations for price increases rose almost to an eight-month high on speculation the Fed’s plan to add $600 billion to the economy will facilitate faster growth, Treasury Inflation Protected Securities showed.

Break-Even Rate

The difference between yields on U.S. 10-year notes and comparable TIPS, a gauge of traders’ outlook for consumer prices over the life of the securities, touched 2.41 percent on Jan. 12. The figure, known as the break-even rate, reached 2.42 percentage points on Jan. 5, the most since April 30. It was 1.47 percent in August.

U.S. retail sales increased in December less than forecast, to 0.6 percent, Commerce Department figures showed yesterday in Washington, while the Thomson Reuters/University of Michigan preliminary January index of consumer sentiment unexpectedly decreased.

The Fed will purchase Treasuries every business day next week, from Jan. 18 through Jan. 21, as part of its bond-buying plan. It bought $86.5 billion in Treasuries this week, according to a statement on its website.

Treasuries rose Jan. 13 after the central bank acquired $8.4 billion of them due from July 2016 to December 2017. The purchase accounted for 40.1 percent of the $21 billion offered by holders that day, compared with an average accepted-to- submitted ratio of 30.6 percent at the previous 10 purchases.

Treasury Auctions

The U.S. sold $66 billion in 3-, 10- and 30-year securities on three consecutive days, ending Jan. 13 with the auction of long bonds.

Indirect bidders, a class of investors that includes foreign central banks, bought 37.8 percent of the 30-year bonds, compared with 49.5 percent in December, which was the most since July 2009. The average for the past 10 sales is 36.9 percent.

At the $21 billion offering of 10-year notes on Jan. 12, the bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.30, the highest since April. Indirect bidders bought 53.6 percent of the notes, compared with 44.4 percent at the sale in December.

A $32 billion auction of three-year debt on Jan. 11 drew a yield of 1.027 percent, the highest since July.

The Treasury said it will auction $13 billion of 10-year TIPS on Jan. 20, $3 billion more than at the last sale of the maturity on Nov. 4.

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