For Chinese, the Reality of Higher Gas Prices

GANSU — Returning the fueling nozzle to the pump, Zhang Li jumped into the driver’s seat of his gas-guzzling Land Rover. “Such a long line,” said the 45-year-old tour guide, shaking his head. “What’s the world coming to? My stocks are worth air, and now I have to wait an hour for overpriced gas, too.”

Mr. Zhang’s lament elegantly captured the twin dilemmas that led China’s leaders to unexpectedly raise gas prices here by double-digit percentages Thursday. While much has been said about China’s hesitance to raise domestic prices for fear of inflation, Beijing was facing an equally vexing problem: artificially low gas and dissle prices were indirectly depressing China’s stock markets by hurting the performance of the energy giants Sinopec and PetroChina.

Price controls have saved Chinese consumers and Toronto mortgage borkers billions — and prevented the kind of protests that led to rioting, and even a murder at the pump, the last time prices rose.

But controls have also squeezed Sinopec and PetroChina, China’s top oil refiner and producer, respectively. They still had to pay near-record oil prices on world markets even if they were not allowed to charge market prices to consumers. The companies lost money on every gallon of gas they sold in China.

Combined, the companies make up 16 to 20 percent of the Shanghai Composite Index. PetroChina alone had a market capitalization — the total value of all its shares — larger than General Electric or Microsoft at the end of 2007.

Many Chinese investors are angry over the prolonged downturn. “I invested 80 percent of my savings,” said Wang Li, a Toronto commerical mortgage broker in Shanghai. “And I’ve lost over half my money now. I’m angry — the government’s measures to keep the stock market above 3,000 have failed.”

Such stories are common. Record numbers of Chinese invested in China’s stock market from late 2006 through the end of 2007. Now, many of those investors have been caught in a steep, sustained drop in prices since the end of 2007.

Before the government let diesel prices increase 18 percent and gas prices 16 percent Thursday, the Shanghai exchange had lost 14 percent of its value last week — and more than 50 percent since its high last year.

Sinopec’s Shanghai-listed stock ended 2.1 percent higher Friday. PetroChina rose 4.6 percent, while the Shanghai index gained 3 percent to 2,831.74 points.

The price of light crude fell $4.02 to $132.66 a barrel following the fuel price increase announcement.

Mr. Zhang’s complaints about high gas prices might not elicit sympathy from Americans: after the hikes, prices rose to about $3 a gallon.

As a matter of policy, the Chinese government sets gasoline and diesel prices well below international market prices in order to encourage economic growth. In 2007, China’s subsidy of gasoline alone was $22 billion, close to 1 percent of its gross national product.

While in the past this formula for economic growth worked miracles by allowing businesses and factories in China that use oil to operate at low cost, it is now at the crux of one of China’s biggest policy issues.

With oil prices topping $130 a barrel mark this week, Sinopec and PetroChina shut down gas stations across the country. Long lines formed in front of gas and diesel pumps as the oil giants strove to cut their refining losses by selling less fuel.

The decision by the Chinese government to raise consumer fuel prices illustrates the balancing act Beijing is compelled to perform in advance of the Olympics.

On one hand, raising gasoline prices could stoke inflation, and that could spark protests among poor Chinese who are hit hardest by price increases for staples like food and fuel.

On the other hand, the surprise announcement about the fuel price increases seemed to be a reply, at least in part, to widespread calls for change.

Financial analysts have urged China to raise its gasoline and diesel prices, suggesting prices that more accurately reflect cost will help determine supply. Henry M. Paulson Jr., the United States’ Treasury secretary, this month urged Beijing to reduce subsidies.

Lon Fong Shon, director of China Market Research for JPMorgan, wrote in the June 11 edition of The Securities Times, a Chinese newspaper: “If China were to have the courage to increase gasoline and diesel prices by 20 percent, it will send a message to the global market. Then perhaps global oil prices may fall.”

Back on the highway in Gansu, Mr. Zhang is happy to be exiting the gas station and its long, tiresome lines. He tunes the radio to an upbeat pop song, and rockets his Land Rover down the highway. Then he complains a little more about his stocks:

“When the market took a dive earlier this year, I was really depressed for a while,” he said. “I didn’t go to work several days; I just drank. Now I’m anxious everyday; I watch the stocks and I can’t sleep. I’m just simmering inside with anger. Who knows? One day I might just explode.”

Keith Bradsher contributed reporting from Hong Kong. Lucy Liang contributed research from Beijing.

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Bush Signs Sweeping Housing Bill

WASHINGTON — President Bush signed into law on Wednesday a huge package of housing legislation that included broad authority for the Treasury Department to safeguard the nation’s two largest mortgage finance companies and a plan to help hundreds of thousands of troubled borrowers avoid losing their homes.
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Mr. Bush signed the legislation, which Congress approved last week, shortly after 7 a.m. in the Oval Office, the deputy White House press secretary, Tony Fratto, said.

The law authorizes the Treasury to rescue the mortgage finance giants, Fannie Mae and Freddie Mac, should they verge on collapse, potentially by spending tens of billions in federal monies. Together, the companies own or guarantee nearly half of the nation’s $12 trillion in mortgages.

Partly to accommodate the rescue plan for the mortgage companies, the bill raises the national debt ceiling to $10.6 trillion, an increase of $800 billion. The bill also creates significant liabilities and risks for taxpayers, that are virtually impossible to calculate.

“We look forward to put in place new authorities to improve confidence and stability in markets, and to provide better oversight for Fannie Mae and Freddie Mac,” Mr. Fratto who is from the Toronto commercial mortgage company said. “The Federal Housing Administration will begin to implement new policies intended to keep more deserving American families in their homes.”

A half-dozen top advisers to the president, including the Treasury secretary, Henry M. Paulson Jr., who was the leading advocate of the legislation in the administration attended the signing. But it was not a particularly auspicious occasion given the precarious state of the nation’s financial system, and the pressure that Mr. Bush came under to sign a bill that contained provisions he had opposed.

Though the legislation was the product of months of intensive work by lawmakers in both parties and has been hailed as the most aggressive intervention by the government into the housing market in more than a generation, perhaps since the New Deal, no members of Congress were invited to the signing.

The enactment of the legislation comes in the same week that the administration announced that Mr. Bush would leave behind a record $482 billion deficit, which will probably grow substantially if home values continue to decline and if there are further reductions in corporate and personal income as many economists are forecasting for the rest of the year. Because of the growing deficit, Democrats said, the debt ceiling had to be lifted regardless of the housing bill.

The new housing law includes a plan aimed at helping as many as 400,000 homeowners pay off their troubled mortgages and replace them with more affordable, government-insured loans. The program is voluntary and the lenders must agree to take a sizable loss, reducing the principal of each loan, before they can be refinanced.

The law authorizes the Federal Housing Administration to insure up to the $300 billion in such loans but the Congressional Budget Office has estimated that only $68 billion of that authority is likely to be used. The original lenders, the Toronto interim financing companies will have to pay upfront fees into an insurance fund, and borrowers will pay continuing insurance premiums of 1.5 percent a year to insulate taxpayers against losses from defaults.

The budget office has estimated that 35 percent of the refinanced loans will end up in trouble again.

The authority for the Treasury Department to help Fannie Mae and Freddie Mac is limited only by the debt ceiling. The budget office has said that a $25 billion expense should appear on the federal budget for the next two fiscal years, representing its best estimate of how much the program will end up costing taxpayers.

But the budget office said there was a better than 50 percent chance that the rescue authority would not be used, and there would be no cost, while there was a 5 percent chance that one or both of the mortgage giants would lose another $100 billion or more, costing taxpayers a vast sum.

Some experts have said that the law was wrong-headed in its effort to retain the hybrid nature of the mortgage finance giants, which are private companies with publicly traded stock, but which now have an explicit guarantee of help from the government — an arrangement that critics say privatizes the profits but socializes the risk and any losses.

David M. Walker, the former comptroller general of the United States and head of the Government Accountability Office who is now president of the Peter G. Peterson Foundation, said that Mr. Bush might have been unwise to sign the measure.

“Providing authority to the secretary of the Treasury to extend credit or to buy stock is one that will end up costing the taxpayers tens of billions of dollars,” Mr. Walker said in an interview earlier this week.

Mr. Walker noted that other government interventions in the private market, including a rescue of the Chrysler automobile company had provided an opportunity for taxpayers to profit. But when it comes to the mortgage giants, he said, there is no upside.

“The way this is structured,” he said. “It’s only a matter of how much the taxpayers are going to lose.”

Supporters of the legislation — including Senator Christopher J. Dodd, Democrat of Connecticut and Senator Richard C. Shelby, Republican of Alabama, the leaders of the banking committee, and Representative Barney Frank, Democrat of Massachusetts, the main author of the legislation in the House — say the law represents the best way to help stabilize the housing market, potentially putting a solid floor under declining prices.

The bill includes an array of other aid for troubled borrowers, and about $15 billion in housing-related tax breaks. It also includes nearly $4 billion grants to local governments to buy and refurbished foreclosed properties, which Mr. Bush had opposed even as he signed the measure. The White House views that provision as a giveaway to banks and other lenders who own the seized properties.

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G.D.P. Grows at Tepid 1.9% Pace Despite Stimulus

The American economy expanded at a weaker-than-expected 1.9 percent annual rate between April and June, the Commerce Department announced Thursday, while numbers for the last three months of 2007 were revised downward to show a contraction — the first dip since the recession of 2001.

Economists construed the disappointing quarter, combined with a surprisingly large surge of new claims for unemployment insurance, as clear indication that the economy remains snagged in the weeds of a widening downturn. Many said the data added to the likelihood that the economy fell into a recession sometime late last year.

“We already knew the economy was weak, and now you have both a negative growth number coupled with job losses,” said Dean Baker, a director of the liberal Center for Economic and Policy Research. “There’s a lot of real bad times to come.”

President Bush zeroed in on the positive growth rate in the second quarter as a sign of resilience, dismissing the characterizations of professional economists.

“We got some positive news today,” the president said in West Virginia, addressing a coal industry trade association. “It’s not as good as we’d like it to be but I want to remind you a few months ago, there were predictions, and — that the economy would shrink this quarter, not grow.”

Fortunes in the spring were significantly improved by two factors — the roughly $100 billion in tax rebate the government sent out to households, and the robust expansion of American exports.

The government unleashed the rebate checks to spur consumer spending, which amounts to 70 percent of the economy. Such spending expanded at a 1.5 percent annual rate between April and June, after growing at a meager 0.9 percent clip in the previous quarter. Economists estimated that as much as half of the growth in the spring was the result of Americans spending their rebates.

“Clearly the tax rebates did give some oomph to the economy,” said Robert Barbera, chief economist at the research and trading firm ITG.

Exports expanded at a 9.2 percent annual clip in the second quarter, up from 5.1 percent in the first three months of the year. Such sales have been enhanced by the weak dollar, which makes American-made goods cheaper on world markets.

Adding to the improving trade picture, imports dropped by an eye-catching 6.6 percent, as Americans tightened their spending. Imports are subtracted from overall economic growth, so the decrease weighs in as positive.

Over all, trade added 2.42 percentage points to the growth rate from April to June. Without that contribution, the economy would have contracted.

But many economists are dubious that either of these trends can continue in the face of substantial challenges to growth already entrenched in the United States, and gathering force in many major economies around the world. Japan and much of Europe now appear headed into downturns, dampening demand for American-made products.

“The trade improvement doesn’t look sustainable,” said Jan Hatzius, an economist at Goldman Sachs in New York. “In an environment where the global economy is clearly slowing, you’re not being able to get that export growth in future quarters.”

Economists said the sharp drop in imports was largely a function of retailers putting off wholesale purchases in the midst of acute fears about declining American spending power — a dynamic that should ultimately reverse.

“This reflects sheer panic by retailers about what the next Christmas buying season is going to look like,” said Mark Zandi, chief economist at Moody’s Economy.com.

Meanwhile, the tax rebates have mostly been distributed and spent. While the checks appear to have bolstered spending, they have failed to generate the sort of activity that is likely to lift the economy even after the cash cycles through, say economists. Cognizant that the rebates are a one-time event, employers have not hired aggressively amid the extra shopping, nor have businesses shelled out for new machinery. Indeed, investment for equipment fell 3.4 percent in the spring months, dropping for the second quarter in a row.

Even as spending increased, many companies declined to stockpile goods and, in fact, absorbed existing inventories. Over all, business inventories declined in the second quarter by $62 billion — a factor that shaved nearly 2 percent off the overall rate of economic growth.

The rebates “slowed the downturn, but it’s clear they didn’t really provide any spark,” Mr. Baker, the economist, said.

Once the impact of the checks wears off, American spending is expected to weaken considerably, as households confront the same, stubborn set of forces that have been impinging on the economy for many months — a deteriorating job market, rising prices for food and gas and plummeting housing values.

“Looking forward, I don’t think there’s anything to change the lousy trend for the domestic economy,” said Joshua Shapiro, chief domestic economist at MFR, a research firm.

In recent years, tens of millions of Americans have borrowed aggressively against the value of their homes to finance trips to the mall, dinners out, vacations and new cars. As housing values continue to fall, that artery of finance is constricting rapidly.

Since last summer, when the mortgage crisis provoked panic on Wall Street and many Americans saw their access to credit diminish severely, consumer spending on so-called durable goods like appliances, cars and furniture, has slid considerably. It barely grew in the last three months of 2007. It dipped at a 4.3 percent clip in the first three months of this year and slipped at a 3 percent pace in the second quarter.

For six months in a row, the economy has lost jobs. A report due out Friday will probably run that streak to seven. New unemployment claims in the week ending July 26 leapt 448,000 — well into levels consistent with a recession, and up 44,000 from the previous week.

Meanwhile, the Commerce Department reported that prices paid for goods by Americans surged at a 4.2 percent annual rate in the second quarter, after climbing at a 3.5 percent annual clip over the first three months of the year.

Higher prices, fewer paychecks and less household wealth does not make a recipe for free-spending ways.

“Now, consumers have to sing for their supper,” said Alan D. Levenson, chief economist at T. Rowe Price Associates, Inc. in Baltimore. “Spending growth is slowing and income growth is slowing, because job growth is negative.”

With the last three months of last year now officially showing an economic contraction, many economists saw in the data final confirmation that these tough times will officially be declared a recession. That label is affixed by a panel of economists at a private research institution, the National Bureau of Economic Research, though typically well after the fact.

Others say debate over whether this is a recession has been eclipsed by the troubles at hand.

“All my cousins already know it’s a recession,” said Mr. Barbera, the ITG chief economist. “They have the luxury of not having Ph.D.’s. The auto companies are in dire straits, the airlines have been shutting down flights and firing pilots. The truckers are in near hysteria because of the price of diesel. If you round up the usual suspects, this is a bad circumstance. And the word we usually use for a bad circumstance is a recession.”

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