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By AARON BACK

BEIJING—A gauge of nationwide manufacturing activity was slightly higher in February but remained in contractionary territory, signaling Chinese businesses continued to face challenges.

The preliminary HSBC China Manufacturing Purchasing Managers Index was 49.7 in February, compared with a final reading of 48.8 for January, HSBC Holdings PLC said Wednesday.

A reading below 50 indicates contraction from the previous month, while a reading above 50 indicates growth. February is the fourth straight month of contraction, and HSBC’s chief China economist Qu Hongbin warned in a note that despite the “marginal improvement” from January—due, he said, to a rebound in production following the Lunar New Year holiday—China’s economy “remains on track for a slowdown” and in need of stimulus.

The People’s Bank of China “should step up policy easing as inflation pressures continue to ease,” he said. The PBOC cut banks’ required reserve ratio in November and February.

The preliminary China PMI figure, also called the HSBC Flash China PMI, is based on 85% to 90% of total responses to HSBC’s PMI survey each month, and is issued about one week before the final PMI reading. The final PMI reading for February is due March 1.

Within the PMI’s subindexes there were further warning signs. New export orders were at an eight-month low in February, down sharply to 47.4 from 50.4 in January. Domestic demand was also disappointing, with new orders flat at 49.1 in February.

“Weaker-than-expected credit growth in early February suggests that liquidity conditions remain tight and corporate demand cool,” Mr. Qu said.

The identity of the source of Mr. Qu’s information on credit growth wasn’t clear, but earlier on Wednesday the Shanghai Securities News, citing unnamed sources, reported that China’s “Big Four” state-run banks issued a total of around 70 billion yuan (US$11.1 billion) in new loans between Feb. 1 and Feb. 19. That would indicate a tepid pace of credit expansion.

Financial institutions in China extended 738.1 billion yuan of new yuan loans in January, well below market expectations for one trillion yuan.

The PBOC’s reduction in the reserve ratio over the weekend was partly in response to tight liquidity conditions in the banking system, analysts have said.

Write to Aaron Back at aaron.back@dowjones.com

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BY CONOR DOUGHERTY

The nation’s rural regions saw much slower population growth over the past decade, reflecting a drop in the number of jobs in these often-isolated areas.

Rural America—which includes about three-quarters of the nation’s landmass—gained 2.2 million people between 2000 and 2010, about half the increase seen in the previous decade, according to an analysis of Census data released Tuesday by Kenneth Johnson, senior demographer at the University of New Hampshire’s Carsey Institute. Driving the change is fewer jobs. During the booming 1990s, far more people moved to rural areas to take manufacturing …

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By RIVA FROYMOVICH And LAURENCE NORMAN

BRUSSELS—The European Commission proposed Wednesday to suspend €495 million ($655 million) in European Union budget funds for Hungary in 2013 unless it acts quickly to cut its deficit.

The proposed suspension, unprecedented for any member state, would represent 0.5% of Hungary’s gross domestic product, and comes as the country battles with the EU’s executive over new controversial laws that officials say threaten the independence of the central bank and judicial system. Hungary is also in the process of negotiating a credit line from the EU and International Monetary Fund to restore investor confidence.

The commission said Wednesday that Hungary has failed to adopt measures to bring its deficit below 3% of GDP in a sustainable way, despite repeated warnings. Instead, the country’s government has transferred private pension funds to the budget and introduced special taxes as one-off measures to achieve a 2011 deficit of 3.5% of GDP.

Hungary has been in an excessive deficit procedure ever since its accession to the EU in 2004.

Agence France-Presse/Getty Images

EU Commissioner for Economic and Monetary Affairs Olli Rehn gives a press conference at the EU headquarters in Brussels.

“If the country takes effective action in time it will not face this consequence,” said EU Economic Affairs Commissioner Olli Rehn Wednesday.

The commission said the suspension would be lifted once effective action was taken by Hungary’s government, adding that there’s plenty of time to take these steps before a suspension is launched. However, if the matter is not properly addressed by the end of 2015, Hungary would lose the EU cohesion funds for good.

EU member states must still approve the commission’s proposal.

Hungarian Prime Minister Viktor Orban Wednesday issued new directives to achieve the country’s 2012 and 2013 deficit targets. They involve the reduction of medicine subsidies, cutting funding to public transportation, the introduction of an electronic motorway toll system and the immediate suspension of procuring office equipment and vehicles, according to the official state gazette reveals.

Raiffeisen Bank said the newly announced measures involve a budget correction of 100 billion forints, or around $463 million.

Mr. Rehn said that the latest letters the commission has received from the Hungarian government about its new reform plans aren’t adequate. In addition, given the downward growth forecasts for the country, it is likely additional measures will be needed.

The commissioner stressed Wednesday that the proposal to suspend EU funds to Hungary “is a separate process” from the legal questions over the country’s central bank and judiciary. Hungary has said it will alter these laws.

He didn’t comment on the potential impact of such a move on Hungary’s attempt to secure a temporary credit line with the EU and IMF to calm financial markets. These talks have been on hold amid such ongoing questions.

Prime Minister Viktor Orban told Dow Jones Newswires in an interview that without an agreement with international lenders, Hungary would only be able to continue raising money from capital markets for the next year or two. After that, borrowing at current yields of around 9% would be unsustainable.

—Laurence Norman and Gergo Racz contributed to this article.

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By ALEX BRITTAIN and ILONA BILLINGTON

LONDON—Business activity in the euro zone contracted unexpectedly in February, reviving fears that the region is heading for recession.

Instead of pushing ahead, the euro zone’s composite PMI, or purchasing managers index, fell back sharply, raising fears that the region’s economy is contracting. Dow Jones’ Martin Essex gives us a run through of the data and assesses what it means for the euro-zone. Photo: Reuters

Markit Economics said Wednesday its preliminary composite purchasing managers’ index for the 17-nation currency bloc fell to 49.7 in February after a rebound to 50.4 in January, and way below forecasts in a Dow Jones Newswires poll of economists for 50.8. A reading below 50 signals a contraction in the index, which measures activity in the currency bloc’s manufacturing and services sectors.

“The euro zone is far from out of the economic woods and faces a hard slog to get back to sustained growth,” said Howard Archer, economist at IHS Global Insight, a forecasting group.

“Indeed, the surveys reinforce our belief that it is more likely than not that the euro zone will suffer a further contraction in the first quarter of 2012 which will put it back into recession,” he said.

The euro-zone economy shrank by 0.3% in the last three months of 2011. A recession is defined as two straight quarters of falling output.

Concerns over the currency bloc’s prospects are centered on the sovereign debt crisis that has forced Greece, Portugal and Ireland to take billions of euros in bailout funds after their borrowing costs soared out of control. Euro-zone finance ministers agreed on a new €130 billion ($172.1 billion) bailout for Greece this week in an attempt to end the crisis. But the austerity measures that these and other governments are pursuing to cut their debts are likely to suppress growth for some years to come.

The contractionary PMI reading was balanced somewhat by a rise in new business taken on by euro-zone factories in December, suggesting manufacturing output could strengthen in the coming six months. Eurostat, the European Union’s statistics agency, said factory orders in December grew at the fastest pace since May last year, boosted by strong growth in Germany, Ireland and Italy. Orders were up 1.9% on the month, following a 1.1% fall in November.

There have been other signs of late that the economy is stabilizing. Euro-zone consumer confidence improved for the second straight month in February, and German economic expectations also turned positive in February for the first time in nine months.

James Ashley, economist at RBC Capital Markets, said that on balance, a recession is likely in the euro zone but it will be “shallow and short lived.” In any event, Mr. Ashley said, “growth prospects for the euro area remain lackluster.”

The Markit survey showed the fall in activity was broadly based, with contractions in both the services and manufacturing industries. Markit noted a stark divergence between countries in the euro zone, with the biggest economies still expanding, while the weaker countries on the periphery showed a “steep decline” in activity.

Germany, the euro zone’s biggest economy, showed continued private sector growth in February, with a reading of 52.9 down from 53.9. But its dominant manufacturing sector—the motor of euro-zone growth—slowed to near-stagnation at 50.1. In France, the second-largest euro zone country, business activity slowed to a tepid growth rate of 50.6 from 51.2.

France was the only big economy to post growth in the euro zone in the fourth quarter of 2011, its gross domestic product rising a quarterly 0.2%.

Write to Alex Brittain at alex.brittain@dowjones.com and Ilona Billington at ilona.billington@dowjones.com

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By ART PATNAUDE And NEELABH CHATURVEDI

LONDON—Fitch Ratings has downgraded Greece’s credit rating to C from triple-C Wednesday after confirmation of the second bailout package that includes a debt exchange which will force bondholders to take a loss on their holdings of Greek debt.

The well-flagged downgrade came amid the restructuring process that will see private investors, who own around €200 billion ($264.7 billion) of Greek bonds, take steep losses on their holdings as part of the debt deal agreed to on Tuesday.

Such drastic measures are needed in order for cash-strapped Greece to avert a default next month when €14.4 billion of its bonds are due.

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European Pressphoto Agency

Greek Finance Minister Evangelos Venizelos speaks during a press conference in Athens on Tuesday.

The debt exchange is likely to begin soon, with the aim of wrapping it up in early March.

The new “C” rating is now “indicating that default is highly likely in the near term,” Fitch said.

The rating company said its decision was in line with a June 6, 2011, statement “which outlined its rating approach to a sovereign debt exchange.”

Fitch said it will lower its rating on Greece’s sovereign bonds to “restricted default” upon the completion of the debt exchange aimed at reducing the country’s debt burden.

“Shortly after completion of the exchange with the issue of new securities, Greece’s sovereign rating will be moved out of the ‘RD’ category and re-rated at a level consistent with the agency’s assessment of its post-default structure and credit profile,” Fitch said.

There was little market reaction to the Fitch headlines as Greek bonds are already rated below investment grade by all the three main rating companies. Standard Poor’s has also in the past said it will put Greece in selective default when the debt exchange takes place and will change the rating shortly after.

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Prior to Greece’s accession, the Convention on Mutual Administrative Assistance In Tax Matters had 33 members, including most developed and large developing economies.

“This signing is a step towards Greece’s efforts to restore the longer-term sustainability of its public finances,” said Angel Gurria, the OECD’s secretary general. “The Convention will help Greece improve its internal tax collection system and pursue the tax revenues lost to tax avoidance and evasion.”

The Convention was established in 1988, but has attracted many more members since the financial crisis hit in 2008, leading to pressures on public finances. Until November 2011, the Convention had 21 developed-country signatories, but at a signing ceremony in Cannes, France all members of the Group of 20 largest economies that hadn’t previously been signatories adopted the Convention.

—Paul Hannon, Matina Stevis and Alkman Granitsas contributed to this article.

Article source: http://online.wsj.com/article/SB10001424052970203960804577238852588700524.html?mod=rss_economy

BY AARON BACK

BEIJING—Capital flowed back into China in January after three consecutive months of outflows, according to data released by its central bank Monday, in a sign of improving investor sentiment concerning the world’s No. 2 economy.

China’s central bank and financial institutions bought a net 140.9 billion yuan ($22.4 billion) of foreign exchange in January compared with net sales of 100.3 billion yuan in December, according to Wall Street Journal calculations based on central bank data issued Monday.

January marks the …

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By ANANT VIJAY KALA

NEW DELHI — India’s consumer prices in January rose 7.65% from a year earlier, data showed Tuesday, raising concerns that a much-awaited central bank rate cut might not come quite as soon as industry would like.

This is the first time that an on-year price change is available under a new price series, which was launched early last year and is gradually expected to displace wholesale price data as the primary indicator of inflationary trends.

The data measures price increases in five groups such as food, fuel, housing and clothing as well as some services such as medical, education, transport among others.

The Reserve Bank of India says consumer prices are the most appropriate benchmark for measuring inflation, as wholesale prices could understate price-rise trends in the economy.

Inflation in Asia’s third-largest economy has remained significantly above the central bank’s comfort zone of about 5%-6% for a few years, forcing the RBI to tighten monetary policy aggressively even at the cost of sacrificing economic growth.

“The CPI reading supports the Reserve Bank Of India’s argument that demand side pressures still exist,” said N.R. Bhanumurthy, an economist at think-tank National Institute of Public Finance and Policy. “But it is the first [inflation] number we are getting, so the trend is still not clear in CPI.”

But inflation lately has been easing, helped by a seasonal decline in vegetable prices, raising demands that the RBI begin lowering interest rates to support economic growth.

The RBI, however, has been reluctant to cut the policy rate, keeping it steady in the previous two reviews–after raising it 13 times since March 2010–as prices of manufactured products still remain high.

Besides, the decline in food inflation could be temporary while high crude oil prices pose risks of a revival in price pressures, RBI Deputy Governor Subir Gokarn said at a conference Tuesday.

“We should not really be too complacent about the inflation number having come down so sharply,” Mr. Gokarn said.

Data last week showed that January inflation based on the wholesale price index slowed to 6.55% from a year earlier, its weakest level in 26 months.

Economists widely predict that the RBI would leave the policy rate unchanged yet again at its forthcoming review on March 15 as it awaits a sustained slowdown in manufacturing inflation.

Tuesday’s data show prices of eggs, fish and meat in January rose 10% from a year earlier while those of milk and milk products climbed 17%.

Vegetable prices declined by 25%.

Write to Anant Vijay Kala at anant.kala@dowjones.com

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BY MUKESH JAGOTA

NEW DELHI — India is better placed than other economies to withstand more global financial shocks, Finance Minister Pranab Mukherjee said Tuesday, adding that the current …

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By PAUL HANNON

LONDON—Consumers in the 17 countries that use the euro became a little more upbeat about their prospects in February, the second straight month in which confidence strengthened.

The European Commission Tuesday said a preliminary estimate indicates its monthly measure of consumer confidence rose to -20.2 from -20.7 in January, having also risen in that month. The February figure was in line with economists’ expectations.

The pickup in consumer confidence adds to some recent signs that the euro-zone economy may have stabilized in the early part of 2012, having contracted in the final three month of last year by 0.3%.

However, economists said the small rise in the overall measure likely reflects a pickup in Germany, which has seen a steady decline in the unemployment rate, and may not be widespread.

“This is likely to mask conflicting trends between countries with consumer confidence notably firming in Germany recently but remaining under serious pressure in several other countries, most notably where unemployment is rising markedly, tighter fiscal policy is biting and euro-zone sovereign debt problems are particularly elevated,” said Howard Archer, an economist at IHS Global Insight.

Belgium was Monday the first euro-zone member to release a measure of consumer confidence for February, and it showed a further decline in February to reach its lowest level since April 2009.

“The drop in the indicator is mainly the consequence of greatly increased pessimism on the part of consumers with regard to the unemployment outlook,” the Belgian National Bank said. “Besides, they expect the general economic climate to decline further.”

However, consumers in the Netherlands became slightly less pessimistic, with the Central Bureau of Statistics Tuesday reporting that its measure rose to -36 from -37 in January.

“Their mood about the economic situation in general was less negative than in January,” the CBS said.

The European Central Bank’s decision to provide large amounts of three-year funds to banks in December has eased concerns about the possibility of a credit crunch in the euro zone, while governments have been edging towards a resolution to Greece’s fiscal crisis, taking a significant step forward earlier Tuesday with agreement on a second, €130 billion bailout for the country.

However, consumer confidence remains weak by historic standards, and below the long-term average of -12.7.

Write to Paul Hannon at paul.hannon@dowjones.com

Article source: http://online.wsj.com/article/SB10001424052970204909104577237100114210634.html?mod=rss_economy

By STEPHEN FIDLER

Greece has a bailout deal but political and economic hurdles remain, Matina Stevis reports on Markets Hub. (Photo: Reuters/Yves Herman)

WSJ’s Matthew Dalton has details of the bailout package for Greece approved by Eurozone leaders that is expected to help Greece avoid a catastrophic default. AP Photo.

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No triumphalism accompanied Greece’s bailout and debt-restructuring deal hammered out early Tuesday; the euro zone’s two-year debt crisis has seen too many false dawns.

Financial markets were somewhat cheered that months of negotiations aimed at cutting Greece’s heavy debt had reached a resolution, largely putting to rest fears of a chaotic debt default next month. It also removed—at least for the immediate future—the gnawing anxiety that some policy makers in Germany and elsewhere are trying to oust Greece from the euro.

But the overriding reaction was of unease that this tough deal, which has already generated huge opposition among Greeks, is bound to fail. Many observers ask not if the program will fall apart, but when.

Euro-zone finance ministers on Tuesday forged a €130 billion ($171.9 billion) rescue deal that will see Greece’s private creditors cut the face value of their bonds by 53.5% in a swap that will reduce the country’s outstanding debt by €107 billion.

The deal will still leave Greece, in the best case, with a huge debt burden and enormous challenges to implement. “We’ve seen Greece derailing several times in the last two years,” Dutch Finance Minister Jan Kees de Jager said Tuesday. “Implementation risks are very high in the case of Greece.”

Tuesday’s agreement isn’t quite the end of Greece’s near-term debt concerns. Private investors will be asked to tender their old bonds for new, which will force some to crystallize losses of perhaps three-quarters of their investments.

If enough bondholders don’t agree—the agreement assumes 95% participation—holdouts will be forced into the bond swap, a process that in past sovereign restructurings has generated multiple lawsuits. In Athens, a new law was unveiled Tuesday that could be invoked to strong-arm holdouts.

The money to finance the plan—and the €30 billion in high-quality bonds being offered to entice investors into the swap—will also need to be voted through euro-zone member parliaments, so the swap can be completed before a €14.5 billion bond repayment comes due on March 20.

Dow Jones Newswires reporter Matina Stevis visits Mean Street to discuss the future of Greece and the Eurozone after a bailout package was approved for the troubled country on Tuesday. Photo: Reuters.

But it wasn’t this short-term uncertainty but the downbeat debt assessment from the International Monetary Fund accompanying the agreement that tempered enthusiasm for the accord.

The balance of risks in this “accident-prone” economic program is “mostly tilted to the downside,” the IMF said, adding even a small shock could see the country’s debt growing “on an ever-increasing trajectory.”

On Tuesday morning, private and official lenders to Greece made extra concessions that should bring down Greece’s debts from the levels cited in the report. But that didn’t soften criticism that even a glum IMF assessment lacked credibility. Sony Kapoor, managing director of Re-Define, a financial think tank, said the IMF had engaged in “arithmetical gymnastics” to produce the assumptions to get Greece’s debt target down to the targeted 120.5% of gross domestic product by 2020—a level many analysts still consider too high. Greek government debt now stands at more than 164%.

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Agence France-Presse/Getty Images

Finance Minister Evangelos Venizelos, second from left, speaks at a news conference in Athens on Tuesday.

On growth, the IMF’s base case assumes Greece, now entering its fifth year of recession, won’t grow this year—and for the next seven years grows at an average 2.6%, an estimate many economists say stretches credulity. But a worse growth case—still optimistic compared with many private forecasts—pushes the numbers way off course: leaving debt at 159% of GDP by 2020, way above levels normally considered manageable.

The program wasn’t vulnerable only to slower growth, the IMF said: Smaller privatization receipts, higher interest rates than assumed, or a worse budget performance would all make the target unreachable.

The trouble, the IMF admits, is that Greece is being asked to cut its debt burden compared with the size of its economy at the same time it is pursuing an internal devaluation—reductions of wages and other costs to make its economy more competitive—that will inevitably shrink the economy further. Meanwhile, improving competitiveness and boosting exports will be a slow process, given Greece’s small export-oriented industrial base.

Then, there are questions about the will of a new Greek government, under its likely leader Antonis Samaras after elections in April, and the patience of its official lenders. Greece, closed out of the financial markets probably for the rest of the decade, will still depend on life-support from its fellows in the euro zone until the decade is up and possibly beyond.

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Reuters

Belgian Finance Minister Steven Vanackere and French Finance Minister François Baroin met with Greece’s Prime Minister Lucas Papademos and Finance Minister Evangelos Venizelos on Monday in Brussels.

That suggests concerns about a Greek departure from the currency union could re-emerge, even this year.

Some analysts worry that the euro zone’s political masters have been made complacent by how the European Central Bank has taken pressure off the region’s financial markets by flooding the region’s banks since December with cheap three-year money. Since that offer to banks in December—to be followed by another next week—interest rates on the bonds of Italy and Spain have fallen sharply.

Some economists, meanwhile, say Greece is an extreme case, but not alone, and the main worries for the euro zone’s future may be as much economic and political as financial. “While Greece is in a worse shape than any other euro-area country, the austerity-driven deep recession, collapse of business and consumer confidence, testing of the social fabric and dysfunctional politics seen there could all rear their ugly heads elsewhere,” said Mr. Kapoor of Re-Define.

—Geoffrey T. Smith, Ainsley Thomson and Costas Paris contributed to this article.

Write to Stephen Fidler at stephen.fidler@wsj.com

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