QE3: Get ready for influx of cash!

QE3 set to boost confidence but experts warn against simply loading up on equities.

A RIVER of cash is likely to wash over the global financial system soon, thanks to decisions by major central banks to unleash their monetary “bazookas” on the faltering global economy.

The money-printing ball started rolling last month when the European Central Bank (ECB) said it would make “unlimited” purchases of bonds from countries such as Italy and Spain.

The US Federal Reserve was next, announcing that a third round of asset purchases, known as quantitative easing (QE3), would start at the rate of US$40bil (RM122.5bil) a month until the job market recovers “significantly”.

It was soon followed by the Bank of Japan, which said it would extend its asset-purchasing scheme by 10 trillion yen.

A big chunk of that excess liquidity will likely flow into Asian financial markets as investors search for better returns, given the low interest rates in most countries.

It is tempting to think investors can simply load up on equities and ride a rally like previous rounds of quantitative easing but this is not so, say experts.

They believe that while QE3 will boost confidence and support markets, the euphoria will be checked by the reality that the real economy is in the doldrums.

The list of worries is long: China is decelerating fast, Europe remains mired in recession, and many US consumers are still looking for jobs.

With countervailing forces at work, wealth managers and analysts have plenty of ideas on what to buy and what to avoid.

Buy
> US, Asian equities 

Analysts believe the flood of money will do much to support markets, but not all will do equally well.

UBS Wealth Management regional chief investment officer Kelvin Tay believes defensive bourses such as Singapore and Malaysia will do less well than markets such as Taiwan, Hong Kong and China.

He added that what is also likely to boost shares in Asia, outside of Japan, is simply that some stock markets look cheap, based on a metric known as price-to-earnings ratio. Shares could rise 12% from current levels, he said.

DBS regional equity strategist Joanne Goh said the bank recently recommended an “overweight” for Chinese and Hong Kong stock markets, indicating that investors should buy into these markets. These markets are likely to do well because they are large, open and undervalued, she added.

Analysts’ views were slightly more mixed about US equities, with some believing they will get a boost from QE3, while others warned that the impact would be limited.

Matthew Rubin, Neuberger Berman’s director of investment strategy, said American shares do look relatively cheap compared with investment-grade bonds.

“The additional liquidity should further support a rise in prices,” said Rubin, who helps set strategy at the fund, which manages assets of US$194bil (RM593.9bil).

But Sean Quek, Bank of Singapore’s head of equity research, said past experience shows that US equities benefit less from quantitative easing.

“Also, current valuations are less attractive versus previous QE periods as well as global peers,” he said, adding that he has a neutral rating on American shares.

> Gold

Most analysts believe stocking up on gold and gold-related assets is a good move.

First, with the amount of cash expanding in the system, there could be the risk of higher inflation. And with the value of the currency likely to fall due to the huge amounts of cash flowing about, investors will want “real assets” to protect themselves.

Rubin noted: “Real assets such as precious metals will act as inflation hedges and are per­ceived as diversifiers to holding fiat currency.”

Chew Soon Gek, head of strategy and economic research for the Asia-Pacific at Credit Suisse Private Banking, believes precious metals will outperform other commodities.

“They are the most sensitive to monetary easing, inflation expectations and real interest rates,” she said.

She tips gold to hit US$1,850 (RM5,663.80) per ounce in a year, from the US$1,760 (RM5,388.40) now.

> High-yield securities

With interest rates likely to stay near zero for the next two years, analysts believe that the demand for high-yielding securities will remain strong.

In particular, companies that pay a good dividend and have strong balance sheets are likely to attract investors, say analysts.

“With the QE expected to suppress yields and the Fed’s commitment to keep interest rates low until mid-2015, dividends will remain an important driver of total returns,” said Quek.

He noted that firms giving investors good payouts have generally performed better in the past two years when rates have fallen.

Rubin also believes that high-yield corporate bonds as well as real estate investment trusts are good places to park money.

“The search for yield in a low interest rate environment will continue,” he said.

Avoid
> US dollar 

If there is one asset class that most analysts believe is to be avoided, it is the greenback.

The flood of US dollars into the system through QE3 will lead to what analysts term a “debasement” of the currency – essentially a depreciation. In fact, Rubin believes that cash, and not just the greenback, should be avoided.

“QE3 increases potential for inflation and depreciation of the dollar,” he said.

This may also affect Singapore investors who have taken positions in US equities, as the currency may erode gains or increase losses due to the exchange rate. Likewise, investors might want to avoid the euro.

The poor economic outlook and flood of cash into the market will likely send it down against Asian currencies such as the Singdollar.

Uncertain
> European equities

For investors who take a riskier approach to investing, European stock markets do offer an option. After all, some of the best bargains are made when everyone else is deserting them, said Henderson Global Investors.

The asset management firm said that even though the outlook is gloomy, many firms remain healthy, with global operations.

But Quek is cautious on the region, simply because many question marks over the overall health of the economy remain.

A recent run-up in share prices there, as a result of the ECB’s unlimited bond purchase decision, has also made European stocks more expensive and less attractive, he noted. “As such, we are maintaining a negative stance on Europe.”

> Property 

While previous rounds of quantitative easing may have been one of the causes of property price inflation, this may not be repeated with this latest round.

Singapore has introduced the additional buyer’s stamp duty of 10% that foreigners incur when buying homes. Tay thinks that while QE3 may keep property resilient, price rises will be capped.

But QE3 could still end up boosting the appeal of US property, says Dr Lee Boon Keng, head of the investment solutions group for Singapore at Bank Julius Baer, noting that the housing conditions were improving and rebounding from historical lows.

“The US economy continues a moderate recovery, aided by rising property prices which should have a multiplier effect on consumption and investment,” he said. — The Sunday Times/Asia News Network

By AARON LOW

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QE3 triggers fear of new currency wars! What it means?
New global currency wars warning!  QE3 triggers fear of new currency wars! What it means?

QE3 triggers fear of new currency wars! What it means?

A man watches the foreign currencies exchange rate in Rio de Janeiro, Brazil

Fear has crept into the foreign exchange markets: fear of central banks. Currency traders are rapidly shifting assets to countries seen as less likely to try to weaken their currencies, amid concern that the fresh round of US monetary easing could trigger another clash in the “currency wars”.

Fund managers are rethinking their portfolios in the belief that “QE3” – the Federal Reserve’s third round of quantitative easing – will weaken the dollar and trigger sharp gains in emerging market currencies. Such moves would cause a headache for central banks worried about the domestic impact of a strengthening local currency, leading to possible intervention.

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Some investors are allocating money towards countries with beaten-up currencies, such as India or Russia, or those with more benign central banks, such as Mexico, that do not have a history of frequent forex intervention.

Currencies whose central banks have either intervened or threatened to intervene since QE3 have been underperforming the US dollar as investors have steered clear.

The Czech koruna is the worst-performing major currency against the dollar since QE3 was launched this month, according to a Bloomberg list of expanded major currencies. The governor of the Czech central bank last week raised the prospect of forex intervention as a tool to stimulate the economy.

The Brazilian real is also weaker in the past two weeks after Guido Mantega, finance minister, made it clear that the government would defend the real from any fresh round of currency wars sparked by the Fed’s move.

Even the Japanese yen is weaker against the dollar overall since the Fed’s move, despite having clawed back all its losses after the Bank of Japan’s move to add to its bond-buying programme last week.

Currency desks at Baring Asset Management and Amundi are avoiding the Brazilian real, which the country’s central bank keeps managed at around R$2 against the US currency, and are instead buying the Mexican peso, where the central bank has signalled it is happy for the currency to appreciate further.

James Kwok, head of currency management at Amundi, said: “Mexico is an emerging market currency many managers like as they believe the central bank won’t intervene. The Singapore dollar and the Russian rouble are managed by a range, instead of one-way direction, and so are also good candidates for QE play.”

He is concerned that another “big scale” intervention from Tokyo is on the cards after the BoJ failed to weaken the yen substantially this month, and is avoiding the currency as a result.

“We definitely take the intervention risk into account when investing in a currency,” says Dagmar Dvorak, director of fixed income and currency at Barings. “In Asia, intervention risk is fairly high. We have still got positions in the Singapore dollar but remain cautious on the rest of the region.”

Other investors are opting for currencies that have weakened substantially this year. Clive Dennis, head of currencies at Schroders, says: “Russia and India have currencies with strong rate support and levels which remain well below their best levels of the last year, hence pose less intervention risk. I like owning those currencies in a US QE3 environment.”

Some currencies are strengthening on a combination of Fed easing and domestic factors. While the Indian central bank is not seen as likely to intervene to stem any appreciation in the rupee, the currency has also been popular this month due to a reform package from the Indian government aimed at stimulating the economy.

Commodity currencies including the Russian rouble are responsive to expectations of a rise in commodity prices fuelled by Fed easing, while investors view the Mexican peso, along with the Canadian dollar, as a play on any economic recovery in the US because of their strong trade links.

However, some investors believe the QE3 effect could be lower this time. They argue that central banks in emerging markets face a tough decision over whether to weaken their currencies to help struggling exporters and stimulate growth, or allow them to strengthen to offset the impact of rising food prices.

In fact, the US dollar has shown signs of resilience since QE3 as fears over the health of the eurozone continue.

While flows into EM debt and equity funds rose substantially last week, according to data from EPFR Global, Cameron Brandt, research director, says this week’s flows looked more muted: “There’s a certain amount of reaction fatigue setting in.

By Alice Ross, FT.com

What QE3 means for China and rest of Asia?

 China recently announced plans to boost spending on subways and other transportation infrastructure to boost its economy. But China may not be as aggressive with stimulus as the Federal Reserve and European Central Bank.

NEW YORK (CNNMoney) -- Peter Pham, a capital market specialist and entrepreneur with expertise in institutional sales and trading, is the author of AlphaVN.com, an investing blog focusing on Vietnam and other markets in Southeast Asia
 
Now that most of the developed world's major central banks have all committed to some form of open-ended quantitative easing, we can start to make some concrete predictions about the effects this will have in Asia.

In general, QE is being undertaken in the West to stabilize debt markets that are deflating. So this may do little to actually stimulate sustainable economic growth. But, the uncertainty as to whether the central banks would act aggressively kept a lid on many emerging growth markets for months. Here's what may happen next.

China has been lowering interest rates but it cannot afford to do print money to buy bonds like other central banks have done. China's central bank can still announce more fiscal stimulus due to its strong trade surplus. The recent plan to spend $156 billion on domestic infrastructure is significant, but compared to the amount of money the Federal Reserve and European Central Bank may wind up spending, it might was well be $156.

The political situation in China is proving to be more volatile than we may have originally thought as the response to Japan's buying the Senkaku islands seems completely out of proportion with the level of threat or even insult this is represents. It speaks to a party that needs to redirect anger at its own mishandling of the economy.

That this is coming just a few months after Japan and China signed the most sweeping currency and trade agreement of any that China has signed with another country seems very odd.

Japan's response to the QE announcement by the Fed was to extend their existing QE program another 10 trillion Yen (~$128 billion US). That may sound like a lot but it's even less than China's most recent stimulus program.

This suggests that the Bank of Japan is uninterested in printing to oblivion at the same rate as the Fed and ECB, and that Japan will manage the yen's rise while shifting its focus towards more regional trade. Japan and China are each other's largest trading partners, which makes this row over the Senkaku Islands seem manufactured to force the Japanese to choose a side in the growing cold war between the U.S. and China.

So far, Japan has been trying to work with both sides. It is helping to internationalize China's yuan currency and is giving China a clear alternative to U.S. Treasuries with its own bonds. At the same time, Japan has stepped up its purchase of Treasuries, buying more than $200 billion's worth in the past 12 months.

I expect the Bank of Japan to continue to try and position the yen as an alternative regional reserve currency as other Asian nations like Thailand, Malaysia and Indonesia try to lessen their reliance on the U.S. economy.

By keeping the yen strong versus the euro and the dollar, Japan can attract capital from overseas and use it to deploy it around Asia. There should be enough money sloshing around the region so that Asian nations can continue their trade with the West at current levels while also focusing more on regional growth.

The economies of Indonesia, Thailand and Malaysia are already growing above expectations this year despite volatility in their currencies because of the fear over Europe. With worries about Europe starting to wane, these countries, as well as the best companies in them, should have little trouble raising capital through bond sales.

The wildcards for Asia are Hong Kong and Singapore. We're already seeing signs of a property bubble in Hong Kong thanks to the Fed's four-year old policy of interest rates near zero. That's because Hong Kong's dollar is nominally pegged to the U.S. dollar.

Now that the Fed has implemented a program that will further debase the dollar -- and expand its already bloated balance sheet -- Hong Kong is being forced to reassess its currency peg. If they do not make changes, this could result in an even bigger property bubble. That would lead to loan problems for Hong Kong banks similar to those plaguing those in the U.S., Europe, China and, to a lesser extent, Singapore.

Since the Monetary Authority of Singapore (MAS) pegs its interest rates to that of the Fed, its economy is vulnerable to a property bubble like the one in Hong Kong. Inflation is currently above 4% and has recently been above 5%. While Singapore's banks are all very well capitalized and their foreign exchange reserves are higher than their annual GDP, the Fed's QE3 policy will put pressure on an economy already dealing with sluggish growth.

But all in all, the latest round of QE is mostly bullish for Asia as it creates some certainty after the past 12 months of extreme uncertainty. Even though the actions by central banks in the West appear to indicate that their economies are worse than the headlines make it seem, the mere fact that the Fed and ECB have acted should reassure investors throughout Asia.

By Peter Pham @CNNMoneyInvest
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New global currency wars warning!

Debt crisis in Europe will affect rest of the world

The economic crisis in Europe is deepening and may get worse, with worrisome effects on the rest of the world.

Eurozone crisis: high-stakes gamble as David Cameron warns Greek voters.

David Cameron and European Commission president José Manuel Barroso talk before a session at the Nato summit in Chicago. Photograph: Pablo Martinez Monsivais/AP

THE economic situation in Europe has worsened considerably in the past week, giving rise to a very worrisome situation.

The ramifications of a full-blown crisis are serious not only for Europe but also the rest of the world.

The recent Greek elections saw the citizens proclaiming their anger towards the austerity policies tied to the European-IMF bail-out package, by repudiating the two major parties and giving the small anti-austerity Syriza party second place.

The elections came in the midst of a greatly deteriorating condition. Greece has 22% unemployment, 50% youth unemployment, GNP is falling steeply, and public debt will remain high at 160% of GDP next year despite the recent bailout and debt-restructuring measures.

The leader of Syriza, Alexis Tsipras, who swept to the forefront of Greek politics on the wind of protest against the austerity measures imposed by creditors, wants to re-negotiate the terms of the bailout.

He thinks his insistence on this will eventually force the creditors to change the terms, with Greece remaining in the Eurozone.

But many analysts think that the response to this demand from the EU and IMF would be to stop further loans and force Greece to exit the Euro. In a second election in mid-June, Syriza is expected to do even better and a messy Greek loan default and Euro exit are now seen as more than just possible.

In a Eurozone exit, Greece would re-introduce a local currency, and after Greeks change from their Euros, a depreciation of the new currency is expected to happen.

News report indicate that some capital flight from Greece is already taking place, as Greeks fear that their present Euro-denominated assets would lose value after conversion to the local currency.

Meanwhile, Spain was last week desperately trying to avoid a run on banks after the government was forced to partly nationalise Bankia, the second largest bank, followed by rumours of such a run.

The value of bad loans held by the banking sector rose one third in the past year to 148 billion Euro and Moody’s downgraded the credit rating of many Spanish banks.

The Spanish finance minister Luis de Guindos said the battle for the Euro is going to be waged in Spain, implying his country is now in front in trying to prevent the Greek crisis from infecting other European countries and bringing down the Euro.

The spreading crisis throws into doubt the policies in most European countries that have in recent years focused on drastically cutting government spending to reduce the budget deficit in an attempt to pacify investors and enable a continued flow of loans.

This reversed the coordinated policy of fiscal reflation that the G20 leaders agreed on in 2009 to counter the global crisis. It contributed to the rapid recovery.

Since then economists and politicians alike have been debating the merits of Keynesian reflationary policies versus a resumption of IMF-type fiscal austerity.

The movement towards recession in Europe as a whole and deep falls in GNP in bail-out countries like Greece has boosted the arguments of the Keynesians.

But key leaders such as Angela Merkel of Germany and David Cameron of Britain are still convinced of the need to stick to austerity.

The victory of the new French President Francois Hollande and the stunning polls performance of the Syriza party in Greece indicate that the public wind has shifted radically against austerity, and that a change may be on the cards.

The stopping of loans to Greece would lead to an economic collapse, with government debt default, bank runs, re-denomination of local contracts to local currency and default on external contracts denominated in euro, in a scenario painted by Wolf.

A Greek exit could trigger bank runs and capital flight in Portugal, Ireland, Italy and Spain and beyond, causing collapse in asset prices and large GNP falls.



A decisive European response is needed, such as the European Central Bank providing unlimited loans to replace money taken out in bank runs, capping of interest rates on sovereign debt, Eurobonds and abandoning austerity-centred policies.

But if these policies are not taken, the Eurozone may disintegrate, with one study suggesting GNP falls on 7% to 13% in various countries, and if a full Eurozone break up takes place there could be a freeze in the financial system, a collapse in spending and trade, many lawsuits and Europe facing a situation of political limbo.

The impact on the world would be worse than the Lehman collapse. Though the implication is that this should not be allowed, a Greek exit would greatly increase the likelihood of these dangers.

If Greece leaves, the Eurozone will have to change fundamentally but if that is impossible, large crises will be repeated in a nightmare.

There would have to be a choice between a stronger union of European countries (which many do not like) or endless crises in future, or a break up now. No good choices exist, concludes Wolf.

The scenarios and predictions detailed above in the Wolf article are pessimistic, but may also be realistic not only because of the current economic situation, but also the apparent lack of conditions for a political solution.

Watching from the sidelines, with no ability to influence developments, many in the developing countries are disturbed by the turn of events. It will likely lead to a weakening of the global economy at best and a full blown crisis at worst, with the developing countries at the receiving end in terms of trade downturn, financial reverberations, and declining incomes and jobs.

It is apparent, once again, that a global forum should exist where all countries can discuss developments in the global economy and contribute their views on what needs to be done.

In the inter-connected world, policies and events in one part (especially in the core countries) affect all others.

 

 Global Trends By MARTIN KHOR

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The euro crisis just got a whole lot worse

With Europe plunging back into recession and unemployment soaring, Francois Hollande, the French president elect, is calling for growth objectives to be reprioritised over the chemotherapy of austerity. 

Riot policemen lead away a protester holding a placard reading 'Let's get out of the Euro' during May Day demonstrations in Neumuenster, Germany Photo: Reuters

Angela Merkel, the German Chancellor, has meanwhile continued to insist that on the contrary, Europe must persist with the hairshirt. What's needed is political courage and creativity, not more billions thrown away in fiscal stimulus. Stick with the programme, she urges, as the anti-austerity backlash reaches the point of outright political insurrection.

Hollande and Merkel are, of course, both wrong. What Europe really needs is a return to free-floating sovereign currencies. Only then will Europe's seemingly interminable debt crisis be lastingly resolved. All the rest is just so much prancing around the goalposts, or an attempt to make the fundamentally unworkable somehow work.

The latest eurozone data are truly shocking, much worse in its implications both for us and them than news last week of a double-dip recession in the UK.

Even in Germany, unemployment is now rising, with a lot more to come judging by the sharp deterioration in manufacturing confidence. For Spanish youth, unemployment has become a way of life, with more young people now out of a job (51.1pc) than in one. In contrast to the US, where the unemployment rate is falling, joblessness in the eurozone as a whole has now reached nearly 11pc. Against these eye-popping numbers, Britain might almost reasonably take pride in its still intolerable 8.3pc unemployment rate.

There is only one boom business in Spain these days – teaching English and German. No prizes for guessing where these students are heading.

Hollande's opportunism in calling for a growth strategy he must know cannot be delivered looks like being answered only by intensifying recession. Maybe Mario Draghi, president of the European Central Bank, will surprise us after Thursday's meeting with a rate cut and a eurozone-wide programme of quantitative easing. But even if he did, it wouldn't fix the underlying problem, which is one of lost competitiveness manifested in ever more intractable levels of external indebtedness.

To think these problems can be solved either by fiscal austerity or, as advocated by Hollande and others, by its polar opposite of fiscal expansionism is to descend into fantasy.

By reinforcing the cycle, and thereby exacerbating the slump, fiscal austerity is proving self-defeating. Far from easing the problem of excessive indebtedness, it is only making it worse.

But it is equally absurd to believe that countries in the midst of a fiscal crisis can borrow their way back to growth. Who is going to lend with the certainty of a haircut or eurozone break-up to come?

I've been looking at the comparative numbers on fiscal consolidation, and they reveal some striking differences. The hairshirt prescribed for others is most assuredly not being donned by austerity's cheerleader in chief, Germany.

In fact, German government consumption is continuing to rise quite strongly, even in real terms, and the fiscal squeeze pencilled in by Berlin for itself for the next three years is marginal compared with virtually everyone else. Germany is requiring others to adopt policies it has no intention of following itself. What's so odd about that, you might ask?

Right to spend

Germany has earned the right to spend through years of prior restraint. It's got no structural deficit to speak of and, in any case, isn't that the way things are meant to work, with those capable of some fiscal expansionism compensating for the squeeze imposed by others?

All these things are true, but there is something faintly hypocritical about a country prescribing policy for others that it wouldn't dream of imposing on itself. Germany's supposed love of self-flagellation is actually something of a myth.

By the way, despite the rhetoric, Britain is hardly an outrider on austerity either. Now admittedly, the Coalition's plans for fiscal consolidation have been somewhat derailed by economic stagnation. We were meant to be further along than we are. But in terms of what's left to do, the UK is no more than middle of the pack.

On current plans, by contrast, the fiscal squeeze in the US, land of supposed fiscal expansionism, ratchets up substantially to something quite a bit bigger than what the UK has pencilled in for the next two years. It remains to be seen what effect that's going to have on the American recovery. Will renewed growth melt away as surely as it did in early 2011, or is it self-sustaining this time?

Back in the eurozone, the stand-off between creditor and debtor nations shows few, if any, signs of meaningful resolution. During the recession of the early 1990s, there was a famous British Property Federation dinner at which the chairman introduced the then chief executive of Barclays Bank, Andrew Buxton, as "a man to whom we owe, er, more than we can ever repay". It was a good joke, but it also neatly encapsulated what happens in all debt crises.

When the debtor borrows more than he can afford, the creditor will in the end always take a hit. The only thing left to talk about is how the burden is to be shared. The idea that you can force the debtor to repay by depriving him of his means of income is a logical absurdity, yet this is effectively what's going on in the eurozone.

When such imbalances develop between countries, they are normally settled by devaluation, which provides a natural market mechanism both for restoring competitiveness in the debtor nation and establishing the correct level of burden sharing.

Least tortuous form of default

It's default in all but name, but it is the least tortuous form of it. Free-floating sovereign exchange rates also provide a natural check on the build-up of such imbalances in the first place.

The reason things got so out of hand in the eurozone is that investors assumed in lending to the periphery that they were effectively underwritten by the core, mistakenly as it turned out. Interest rates therefore converged on those of the most creditworthy, Germany, allowing an unrestrained credit boom to develop in the deficit nations.

None of this is going to be solved by austerity. For now, there is no majority in any eurozone country for leaving the single currency, but one thing is certain: nation states won't allow themselves to be locked into permanent recession. Eventually, national solutions will be sought.

The whole thing is held together only by the fear that leaving will induce something even worse than the current austerity. This is not a formula for lasting monetary union.

By Jeremy Warner - Telegraph  

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Eurozone unemployment hits record 10.9% as manufacturing slumps to recession!

Eurozone unemployment hit a record in March, with Spain's 24.1% rate setting the pace.

NEW YORK (CNNMoney) -- Unemployment in the eurozone rose to 10.9% in March, another sign of the broad economic weakness and possible recession across the continent.

The unemployment rate across the broader 27-nation European Union remained at 10.2% in March, according to a organization report Wednesday.

10 largest economies

But the 17-nation eurozone unemployment edged up from 10.8% in February. The EU and eurozone rates are the highest since the creation of the common euro currency in 1999.

There are now 13 nations in Europe struggling with double-digit percentage unemployment, led by a 24.1% rate in Spain, which was a record high, and 21.7% in Greece.

The rising jobless rates are primarily blamed on the ongoing European sovereign debt crisis, which has forced governments to take tough austerity measures to cut spending.

Europe's next recession risk: Germany

There are 12 countries in Europe that have had two or more consecutive quarters in which their gross domestic product has dropped -- a condition many economists say define a recession. Nine of the countries are in the eurozone, and three use their own currency.

The United Kingdom, which had an 8.2% unemployment rate in its most recent reading, is the largest economy now in recession.

The entire EU and and eurozone are widely believed to be in recession as well, a fact likely to be confirmed when their combined GDPs are reported on May 15.

Even some of the healthier countries in Europe are likely to meet that criteria, including Germany, the EU's largest economy and one in which unemployment is 5.6%, the fourth-lowest rate on the continent.

German GDP declined 0.2% in the fourth quarter and many economists are forecasting another drop in the first quarter, suggesting Germany could be in recession soon.



By contrast to Europe, the U.S. unemployment rate has been steadily falling, reaching 8.2% in March. The jobless rate here reached a 26-year high of 10.0% in October 2009, but it has declined in six of the last seven months, shaving almost a full percentage point off the 9.1% rate of last August.

Economists surveyed by CNNMoney forecast that the rate will stay unchanged in the April jobs report this Friday, while hiring is expected to pick up to a gain of 160,000 jobs

By Chris Isidore @CNNMoney, Newscribe : get free news in real time

Eurozone manufacturing heads towards recession

 

(BRUSSELS) - Gloom over eurozone manufacturing deepened in April, highlighting the impact of policies to control budgets and signalling recessionary pressures, a Markit survey showed on Wednesday.

A key index of activity based on a survey by Markit fell to almost the lowest level for three years.

Markit publishes closely watched leading indicators of economic activity and in its latest survey for its purchasing managers' index the firm said: "The eurozone manufacturing downturn took a further turn for the worse in April."

The adjusted manufacturing PMI figure, closely watched as an indicator of economic trends, fell to 45.9 from 47.7 in March.

A figure of below 50 points to contraction and Markit noted that "the headline PMI has signalled contraction in each of the past nine months."

The chief economist at Markit, Chris Williamson, said: "Manufacturing in the eurozone took a further lurch into a new recession in April, with the PMI suggesting that output fell at (a) worryingly steep quarterly rate of over 2.0 percent."

He said that "austerity in deficit-fighting countries is having an increasing impact on demand across the region" and that "even German manufacturing output showed a renewed decline."

Williamson commented that the latest forecast from the European Central Bank "of merely a slight contraction of GDP (gross domestic product) this year is therefore already looking optimistic."

He added: "However, with the survey also showing inflationary pressures to have waned, the door may be opening for further stimulus."

His remarks highlight controversy over policies in many countries to correct budget deficits and heavy debt to install confidence on debt markets where governments borrow.

There are increasing warnings that the eurozone must raise economic growth, but opinions differ on the best route, with some saying that budget austerity opens the way to structural reform and competitiveness and others saying that extra stimulus is essential.

Markit said that "the April PMIs also indicated that manufacturing weakness was no longer confined to the region's geographic periphery."

In Germany, which has the biggest economy in the eurozone and has shown broad resilience to downturn elsewhere, Markit also noted a setback.

"The German PMI fell to a 33-month low, conditions deteriorated sharply again in France and the Netherlands also contracted at a faster rate," it said.

Markit said: "There was no respite for the non-core nations either, with steep and accelerating downturns seen in Italy, Spain and Greece. Only the PMIs for Austria and Ireland held above the 50.0 no-change mark."

Markit said that manufacturers reported weak demand from clients inside and outside the zone and this had hit even German companies.

The worsening outlook for eurozone manufacturing was also affecting the job market, Markit said, just as eurozone data put the unemployment rate at a record high level.

In manufacturing "job losses were reported for the third straight month in April, with the rate of decline the sharpest in over two years," Markit said on the basis of its survey. - AFP.

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Europe: 'Dark clouds on the horizon'

Michael Klein, is the William L. Clayton Professor of International Economic Affairs at the Fletcher School, Tufts University, and a nonresident Senior Fellow in Economic Studies at the Brookings Institution. 

This weekend's meetings of the International Monetary Fund and the World Bank are overshadowed by "dark clouds on the horizon" that threaten the "light recovery blowing in a spring wind," according to Christine Lagarde, the managing director of the IMF.

The main source of the dark clouds is Europe, where recovery remains weak.

More than three years into the crisis, policy options in Europe are limited; fiscal stimulus is out of reach for many countries, and recent efforts by the European Central Bank provided only a temporary respite. In this environment, strong and sustained recovery depends upon rebalancing within Europe, whereby countries' trade imbalances are reduced.

But rebalancing is a two-sided affair. We have all heard the ongoing calls for some European countries to rebalance deficits through painful austerity measures.

Investors to ECB: 1 tillion euros not enough

 

These calls need to be balanced with demands that countries with surpluses also move to rebalance.

In particular, Germany must take advantage of its scope for fiscal expansion to bolster European recovery and to forestall its own slippage towards an economic slowdown.

There are those who argue that the German surplus reflects its productivity growth and labor market reform. These people argue that Germany could only rebalance by stifling its own economic dynamism.
There are three responses to this argument:

Shared rewards: Reforms have made labor markets more flexible in Germany. Innovative policies, such as the Kurzbeit, the short-time working policy, limited the unemployment effects of the crisis.

German unemployment briefly peaked at 8% in July 2009 while the U.S. unempoloyment rate spiked to 10% in October of that year. Despite the soft landing, workers have not fully shared in the benefits of the recovery, and trade unions have been demanding higher wages.

Higher wages for workers would raise their demand for consumer goods, including the products from other euro-area nations.

Shared consequences: German exporters, and German producers of import-competing goods, have benefited from the weak euro.

Since 2008, the German real exchange rate has depreciated by almost 9%, even while its economy recovered relatively strongly from the crisis and its economy was strongly in surplus.

In contrast, over this same period the Swiss franc appreciated 16% -- estimates suggest that had the German real exchange rate tracked the Swiss real exchange rates, German export growth would have been cut in half.

Another major surplus country, China, saw an appreciation of its real exchange rate by more than 10% over this period.

If Germany had a free-floating currency of its own, rather than one whose value is determined by the fate of the full set of euro members, it would have seen an appreciation that would have brought down its current surplus.

Shared experiences: Another surplus country offers a striking recent example of rebalancing: China. In 2007, China's surplus exceeded 10% of its GDP.

The IMF projects that the debt to GDP ratio will fall to 2.3% in 2012, well below the 6.3% forecast published in its World Economic Outlook last year. In contrast, the most recent IMF forecast of the 2012 German debt to GDP ratio, of 5.2%, exceeds last year's forecast of 4.6%.

As a member of the euro area, Germany will not see the natural forces of a currency revaluation bring about a reduction in its current surplus.

But the government has the tools available to rebalance, and foster growth both domestically and more widely in Europe, through a stimulative fiscal expansion.

Investing in Europe? Look north

 

There are other tools available as well, such as policies to promote female labor force participation (which is low relative to other industrial countries) and liberalizing retailing (which could help promote domestic demand), to raise growth and to widen its benefits among its citizens.

Rebalancing needs to occur for both deficit and surplus countries to support and sustain growth during these challenging times.


By Michael W. Klein @CNNMoneyMarketsApril 21, 2012: 10:50 AM ET

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G20, Apec without gusto; Asean for peace; US cold war against China!

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G-20, Apec summits – without gusto!

What Are We To Do By TAN SRI LIN SEE-YAN

WHEN President Sarkozy of France assumed the presidency of G-20 for 2011, I was delighted for alas, international monetary reform would take centre stage. That's what he promised. I felt it's high time leadership was put to bear on an issue of critical international concern, where the Americans had for years “ feared to tread,” for obvious reasons: to protect US national interest to preserve (as long as feasible) an archaic international monetary system with the US dollar as its centrepiece and which has outlasted its usefulness.

But this was not to be. Political turmoil in Greece had added fuel to the European financial chaos, with the G-20 meeting scrambling to arrange (and rearrange) emergency measures aimed at preventing the eurozone sovereign debt crisis from contaminating the rest of Europe and the global economy. As they gathered in Cannes on Nov 3-4, leaders from G-20 faced high expectations to confront the festering European turmoil. Instead, the two-day summit in this Mediterranean resort largely resulted in more pressure on Europe to respond more forcefully. The United States, China and others were worried that Europeans may fail to avert a collapse of the Greek economy, bringing with it sovereign default and corporate bankruptcies that would inevitably send shock waves through the global financial system. Priority was placed to quickly resolve the evolving European crisis. It was clear the weight of the crisis had overshadowed other policy goals of the summit.

G-20 and France

France's president had hoped to use the G-20 to burnish his reputation as a global statesman. I gathered Sarkozy had intended to focus the G-20 agenda on French ideas for reducing global imbalances. Instead, he found himself in the midst of a gathering euro-storm, now focused on Greece's sudden decision to call a referendum on its bailout.

Behind the scene, France was itself subject to growing economic stress. The market's verdict on France's finances had since grown increasingly harsh. The spread between the yields on German & French 10-year AAA government bonds widened to a euro-era record of 1.95%-age points. France is a triple-A rated nation in name only because its debt is in danger of spiralling out of control.

Forecast by Fitch Ratings at 86.8% of gross domestic product (GDP) in 2013, it is the highest among AAA-rated nations. Its recent sharp economic downturn has exposed an 8-billion-euro gap in France's efforts to reduce its budget deficit to 4.5% of GDP in 2012 from 7.1% in 2010 more than twice the permissible limit of 3%. At 45% of GDP, France is already among the most highly taxed in the Organisation for Economic Co-operation and Development or the OECD. The recent report by the Lisbon Council ranked France 13th out of 17 for its overall health, including growth potential, unemployment and consumption, and 15th for progress on economic adjustments, including reducing the budget deficit and unit labour cost.

G-20 and Italy

It's quite clear G-20's prime concern is Italy. The country is increasingly unable to raise debt at affordable cost, and its prime minister was struggling to push through austerity measures in the face of mounting labour unrest amid an unfriendly parliament. It was also clear the eurozone isn't equipped to deal with the collapse of Italy. At G-20, although they had indicated a willingness to co-operate, non-European leaders had made it clear they want the eurozone to first rely on its own resources to resolve the crisis. Nevertheless, Europeans did consider seeking outside help, in particular to boost their bailout fund, including asking the International Monetary Fund (IMF) for co-operative support. But no one bit. The very hint of boosting IMF's role underscored deepening worries about the adequacy of Europe's own response. In the end, G-20 leaders agreed only to explore options, including voluntary contributions and using its special drawing rights (SDR) in some fashion.

G-20 has little to show

As in the previous year, an all too familiar G-20 meeting ended with a long list of promises made, many of which reflected a rehash of old ones; with most promises made and then broken in the past; and still others, not known to be kept.

However, one key step did emerge: Italy, the focus of most worries in the European, and indeed the world, markets agreed to permit the IMF to monitor its progress with fiscal reforms. This is as drastic a step as can be expected, given the biggest fear among Europeans is that markets will cease financing Italy, causing a meltdown the eurozone would be quite powerless to stop.

European leaders had hoped G-20 would conclude with an endorsement of their plan announced a week before, that would boost confidence in the markets. It included new efforts to recapitalise European banks, an upgraded bailout scheme for Greece, and an increase in funding available to the eurozone's bailout fund, the European Financial Stability Facility (EFSF).

There was also the hope to enhance EFSF's capacity through parallel “investments” from non-European G-20 members. G-20 had noted the European Central Bank's (ECB) refusal to act as lender of last resort and to provide financing to help leverage the EFSF's 440 billion euro into something much larger, which had led the Europeans to pursue the non-Europeans with large surpluses, such as China.

As the eurozone crisis deepened, much of the wider G-20 agenda to encourage “strong, stable & balanced” global growth fell by the wayside at this time. As I understand it, it would appear the stronger economies, including China, Germany, Canada & Brazil, did agree to limit efforts at fiscal tightening and possibly do more to boost demand at home. This marked a reversal from last year's summit which centred on fiscal deficit reduction.

The G-20 pact 

The more important conclusions reached at the Summit included the following:

● Commitment to take decisions to reinvigorate economic growth, create jobs, ensure financial stability and promote social inclusion; and to coordinate their actions and policies.
● An action plan for growth and jobs to address short-term vulnerabilities and strengthen foundations for growth. Advanced economies committed to adopt policies to build confidence and support growth, and implement clear & credible measures at fiscal consolidation.
● Commitment by (i) countries whose public finances remain strong to take discretionary measures to support domestic demand; (ii) countries with large current surpluses commit to reforms to raise domestic demand; and (iii) all commit to further structural reforms to raise output in their countries.
● Commitment to strengthen the social dimension of globalisation.
● Set-up a taskforce to work with priority on youth unemployment.
● Agreement to (i) ensure the SDR basket composition continues to reflect the global role of currencies; (ii) review the composition of the SDR basket in 2015, or earlier; and (iii) make progress towards a more integrated, even-handed and effective IMF surveillance.
● Commitment to move rapidly toward more market-determined exchange rate systems, avoid persistent exchange rate misalignments, and refrain from competitive devaluation.

Despite the cheering about Europe's debt deal and G-20's role in pressuring Europe to act swiftly, worries continue to mount that the world can't succeed without stronger growth. Europe and the United States are virtually at a standstill. At the present pace of muted expansion, unemployment will stay high and incomes stall. Debt saddled nations will have an even tougher time generating enough revenue to pay bills & service debt. This would spark more default fears or even higher borrowing rates in Italy, Greece and others under pressure.

Latest projections point to the eurozone flirting with recession in 2012. Even in Asia, a critical engine of recovery, prospects are dimming. Yet, nations remain divided on enacting new measures to boost growth or continue focus on deficit reduction. Weak nations like Italy and Greece are under intense pressure to adopt very severe austerity schemes in the face of enormous suffering by its people who fall victim to weakened social safety nets and reduced cashflows.

Towards this end, the G-20 commitments fall far short. Markets worldwide have since responded; their verdict: continuing sell-off of bonds and shares, and continuing high cost of borrowing by Italy and Spain.

APEC Honolulu Declaration

Following the goings-on at G-20, the 21-member Asia-Pacific Economic Cooperation (Apec) economic leaders met in Honolulu on Nov 12-13 to bolster their economies and lower trade barriers as they seek to prop up global growth and shield themselves against fallout from Europe's debt crisis.

They adopted the Honolulu Declaration in which leaders agreed to take concrete steps towards building a “seamless regional economy” to generate growth and create jobs in “three priority areas”: (i) strengthening regional economic integration & expanding trade, (ii) promoting green growth, and (iii) advancing regulatory convergence and co-operation. Apec leaders gathered at a time when “growth and job creation have weakened and significant downside risks remain, including those arising from the financial challenges in Europe and a succession of natural disasters in the region.”

Against this uncertain backdrop, the forum had something more concrete to focus on than the usual bromides about extending free trade. This reflected in part frustration with the long-running (entering its 11th year with no end in sight) world trade talks, and in part, a desire to snap out of the poor global economic outlook. There is also a broader influence from concern about how best to grow and create jobs.

The Trans-Pacific Partnership (TPP), a proposed free trade pact covering nine Apec members (the United States, Australia, New Zealand, Vietnam, Singapore, Malaysia, Brunei, Chile & Peru) account for 35% of the world economy, is unique, making it the blueprint for future global trade agreements since it had taken on new issues including green technologies & the digital economy. An agreement was reached on the broad outline of a deal with a final agreement in sight for 2012.

Since then, three more Apec members (Japan, Canada and Mexico) have expressed interest to join. Together, this would create a market of 800 million, the largest trade deal for the United States. The aim is to eventually cover all 21 members of Apec which accounts for more than one-half of the world's economic output. Apec says: “We recognise that further trade liberalisation is essential to achieving a sustainable global recovery in the aftermath of the global recession of 2008-09.” An expanded TPP would provide the much needed boost.

But no trade agreement in the Pacific is complete without China. Looks like a power play between the United States and China is in the works. As such, optimism about its potential benefits needs to be tempered.

At the conclusion of Apec meeting, leaders agreed to: (i) address two key next generation trade and investment issues, viz. commitment to help the small and medium-sized enterprises grow and plug into global production chains; and to promote effective market-driven innovative policies; (ii) develop by 2012 a list of environmental goods (including solar panels, wind turbines and energy efficient light bulbs) that contribute to green growth on which members resolved to reduce tariffs to 5% or less by end 2015, and to also eliminate non-tariff barriers; and (iii) take steps by 2013 to implement good regulatory practices. In the end, the question remains how far leaders will be able to turn promises into action.

The biggest problem on the Asia-Pacific horizon remains Europe, where fiscal turmoil centred on Italy and Greece will continue to surprise and send shock waves worldwide.

As feared, both summits ended with a whimper, eclipsed by the Italian and Greek sovereign debt drama.

● Former banker, Dr Lin is a Harvard educated economist and a British Chartered Scientist who now spends time writing, teaching and promoting the public interest. Feedback is most welcome; email: starbizweek@thestar.com.my.

Asean for Pacific peace

BEHIND THE HEADLINES By BUNN NAGARA

WHEN the US hosted this year’s Apec (Asia-Pacific Economic Cooperation) summit, Honolulu was the natural venue. Hawaii is the only US state in the Pacific, as distinct from merely being on the periphery.

But as regions go, the “Asia-Pacific” itself is a cumbersome construct alien to existing realities. Not only is the Pacific Ocean the largest expanse of water on the planet, making the Asia-Pacific a “region” is a geopolitical attempt to fuse several distinct regions lapped by Pacific waters into a single whole: East Asia, Oceania, North America and Latin America.

That has made an ambitious, 21-member Apec an unwieldy mass of anxieties in search of a higher purpose beyond generalities shared also by much of the rest of the world. With few common interests and fewer shared priorities and modalities, Apec proceedings have progressively suffered from inertia.

In contrast, more natural regions as clusters of nations or economies in and around the Pacific have evolved with greater vibrancy. The late Robert Scalapino, UC Berkeley’s specialist in East Asian affairs, called these “natural economic territories (Nets)”.

On one level, culture, history and trade (economics) have bonded these entities together as identifiable regions: thus the North American Free Trade Agreement (Nafta), Mercosur, the EU and Asean Plus Three (APT, with China, Japan and South Korea). They developed from geographical proximity and social affinity through economic logic and official policy.

Although today’s US-China economic relationship continues to grow, it is at least as competitive as it is complementary. Their non-economic relationship is even more troubled.

On a localised level, Nets are evident in “growth triangles” and various growth polygons in several cross-border regions. Without their non-political elements, however, “regions” become undernourished because they cannot live on strategic concerns alone.

Nets do not deny a unitary global economy with globalised supply chains and markets – or the contagion effect these produce when core economies decline. But Nets do help to explain the distinct economic impulses and motive forces for each region, such as why East Asia remains the world’s most economically dynamic region even when North American and European economies falter.

Politically, East Asia also has no ideological encumbrances when state policy determines economic priorities. Culturally, pragmatism is key, so that eclecticism is often rated above orthodoxy.

Differences between regions are also manifested in the way foreign relations are shaped. For Asean, it is better for countries to agree to disagree without being disagreeable, than for them to confront each other with self-righteous ire and distinct dogmas.

East Asia is also not as hypersensitive to the vagaries of a fickle electorate with sensibilities set to four-year election cycles. National policy therefore has more time to develop, mature and yield dividends.

In the build-up to Apec 2011, Ralph Cossa of Honolulu-based think tank Pacific Forum CSIS said: “China is becoming an 800-pound gorilla. The US is still the 1,600-pound gorilla, so which one would you rather have? ... we’re housebroken; we’re a lot more fun to invite into your living room ...”

China’s impressive rise still marks it as aspiring to only a fraction of what the US has already achieved, economically and more so militarily – if China is aiming for tactical parity at all, which is doubtful.

But Cossa is right only in part. The reality of a post-Cold War world, and one which all Asean countries hope will prevail, is not having to choose between superpowers.

The regional situation is not either-or, “with us or against us”. It is “both and”, so the question of “rather having” one or the other does not arise.

Besides, whether any superpower is, ever has, or can be “housebroken” remains very much in doubt. Nations that have borne the brunt of US military intervention are still hoping to recover.

But Cossa is right in that the US needs to be invited into this region’s “living room” – it is not an Asian country. China, however, has always been an Asian power, and an East Asian giant at that.

How the US today, still bristling with military technology and looking to confront global challenges, responds to a rising China forms the basis of the region’s concerns. Developments in recent days have not been reassuring.

On his way to the East Asia Summit (EAS) in Bali after Apec, President Barack Obama stopped over in Australia and announced plans for stationing US troops there.

Mean­while, the Pentagon has been working quietly on its AirSea Battle concept to counter China (see   next).

On Wednesday the US said it would provide the Philippines with an additional warship to boost Manila’s claims to islands in the South China Sea disputed by China. The next day a US Congressional committee voted to provide Taiwan with new F-16 jet fighters in addition to technical upgrades to its existing fleet, upping the ante in Taipei against Beijing.

On Friday Japan pledged US$25bil (RM79bil) in infrastructure projects for Asean countries, in efforts described as raising its regional profile in competing with China. Following China’s reservations about the US-Australia military arrangements, Canberra warned Beijing not to interfere.

East Asia has tried and tested ways of satisfactorily engaging various powers, regardless of size and strength.

What the region does not need, and can ill afford, is superpower presumptuousness that upsets diplomacy and destabilises geopolitics.

A pragmatic Asean has learnt that bluster, bravado and brinkmanship are not the way to proceed. Its steadier if slower methods are respected internationally, having made it the most successful regional organisation in Asia.

Where US military dominance of the Pacific has ensured safe passage of international shipments, the US is the main benefactor and a resource-importing, export-oriented China the main beneficiary.

If there is any change to the status quo, China would want to be the least involved.

Pentagon planning Cold War against China - AirSea Battle concept

Pentagon battle concept has Cold War posture on China ...

Washington Times: 12 November 2011

The Pentagon lifted the veil of secrecy Wednesday on a new battle concept aimed at countering Chinese military efforts to deny access to areas near its territory and in cyberspace.
 
The Air Sea Battle concept is the start of what defense officials say is the early stage of a new Cold War-style military posture toward China.
 
The plan calls for preparing the Air Force, Navy and Marine Corps to defeat China's "anti-access, area denial weapons," including anti-satellite weapons, cyberweapons, submarines, stealth aircraft and long-range missiles that can hit aircraft carriers at sea.
 
Military officials from the three services told reporters during a background briefing that the concept is not directed at a single country. But they did not answer when asked what country other than China has developed advanced anti-access arms.

 

** FILE ** A security officer walks on the roof of the Pentagon. (AP Photo/Charles Dharapak)

A senior Obama administration official was more blunt, saying the new concept is a significant milestone signaling a new Cold War-style approach to China.

"Air Sea Battle is to China what the maritime strategy was to the Soviet Union," the official said.
 
During the Cold War, US naval forces around the world used a strategy of global presence and shows of force to deter Moscow's advances.
 
"It is a very forward-deployed, assertive strategy that says we will not sit back and be punished," the senior official said. "We will initiate."
 
The concept, according to defense officials, grew out of concerns that China's new precision-strike weapons threaten freedom of navigation in strategic waterways and other global commons.
 
Defense officials familiar with the concept said among the ideas under consideration are:
 
• Building a new long-range bomber.
• Conducting joint submarine and stealth aircraft operations.
• New jointly operated, long-range unmanned strike aircraft with up to 1,000-mile ranges.
• Using Air Force forces to protect naval bases and deployed naval forces.
• Conducting joint Navy, Marine Corps and Air Force strikes inside China.
• Using Air Force aircraft to deploy sea mines.
• Joint Air Force and Navy attacks against Chinese anti-satellite missiles inside China.
• Increasing the mobility of satellites to make attacks more difficult.
• Launching joint Navy and Air Force cyber-attacks on Chinese anti-access forces.
 
Pentagon press secretary George Little said the new office "is a hard-won and significant operational milestone in meeting emerging threats to our global access."
 
"This office will help guide meaningful integration of our air and naval combat capabilities, strengthening our military deterrent power, and maintaining US advantage against the proliferation of advanced military technologies and capabilities," Mr. Little said.
 
He noted that it is a Pentagon priority to rebalance joint forces to better deter and defeat aggression in "anti-access environments."
 
Earlier this month, Defense Secretary Leon E. Panetta said during a visit to Asia that US forces would be reoriented toward Asia as the wars in Iraq and Afghanistan wind down. The new focus will include "enhanced military capabilities," he said without elaborating.
 
The military officials at the Pentagon on Wednesday did not discuss specifics of the new concept. One exception was an officer who said an example would be the use of Air Force A-10 ground attack jets to defend ships at sea from small-boat "swarm" attacks.
 
China in recent years has grown more assertive in waters near its shores, harassing Navy surveillance ships in the South China Sea and Yellow Sea.
 
China also has claimed large portions of the South China Sea as its territory. US officials said the Chinese have asserted that it is "our driveway."
 
The Pentagon also is concerned about China's new DF-21D anti-ship ballistic missile that can hit aircraft carriers at sea. Carriers are the key power-projection capability in Asia and would be used in defending Japan, South Korea and Taiwan.
 
"The Air Sea Battle concept will guide the services as they work together to maintain a continued US advantage against the global proliferation of advanced military technology and [anti-access/area denial] capabilities," the Pentagon said in announcing the creation of a program office for the concept.
 
Although the office was set up in August, the background briefing Wednesday was the first time the Pentagon officially rolled out the concept.
 
The Army is expected to join the concept office in the future.
 
One defense official said the Army is involved in cyberwarfare initiatives that would be useful for countering anti-access weapons.
 
"Simply put, we're talking about freedom of access in the global commons. Increasing ranges of precision fire threaten those global commons in new expanding ways," said a military official speaking on condition of anonymity. "That, in a nutshell, is what's different."
 
Defense officials said some administration officials opposed the new concept over concerns it would upset China. That resulted in a compromise that required military and defense officials to play down the fact that China is the central focus of the new battle plan.
 
A second military official said the new concept also is aimed at shifting the current US military emphasis on counterinsurgency to the anti-access threats.
 
The office was disclosed as President Obama sets off this week on trip to Asia designed to shore up alliances. He is set to meet Chinese President Hu Jintao in Hawaii on Saturday.
 
The concept grew out of the 2010 Quadrennial Defense Review that, in its early stages, had excluded any mention of China's growing military might.
 
China was added to the review after intervention by Andrew Marshall, director of the Pentagon's Office of Net Assessment, and Marine Corps Gen. James N. Mattis, at the time head of the Joint Forces Command.
 
China military specialist Richard Fisher said the new Air Sea Battle office is necessary but may be "late in the game."
 
"A Pentagon office focused on China's military challenges in Asia or beyond will be insufficient," said Mr. Fisher, of the International Assessment and Strategy Center. "This challenge will require Cold War levels of strategic, political and economic policy integration well beyond the Pentagon's writ."
 
Said former State Department China specialist John Tkacik: "This new Air Sea Battle concept is evidence that Washington is finally facing up to the real threat that China has become an adversarial military, naval and nuclear power in Asia, and that the only way to balance China is to lend the weight of US air and naval forces to our Asia-Pacific allies' ground forces."
 
Source: Washington Times