March 28, 2024

High & Low Finance: Steering a Better Course Past the Fiction of Libor

Libor, if you have not been paying attention, is the London interbank offered rate — or rates, since there are dozens of them. For decades, it has been the dominant determinant of floating interest rates, with trillions of dollars in loans and derivatives priced off those rates.

Now it is ridiculous. It purports to be the rate at which banks can borrow, without collateral, from each other. Every day banks submit the rates at which they could borrow money, on an unsecured basis, in various currencies and varying maturities. Those rates are averaged, after the highest and lowest ones are eliminated, and that becomes that day’s Libor rate.

These days there is a problem: banks almost never borrow from each other, particularly at longer maturities. So the rates are fictitious — or at least not based on any information that could be verified.

Before, during and after the credit crisis, the rates were being manipulated by bankers, often with the approval of top management. Sometimes the motive was to make the bank look better — what does it say about a bank if its peers evidently will not lend money to it at the same rate they will lend to others? — but other times the motive was just to rig markets so traders could make money. It was sort of like betting on a soccer match: profits are much more likely if you fix the match before you place your bet.

Three major banks — Barclays, UBS and the Royal Bank of Scotland — were fined a total of $2.5 billion by authorities in Britain and the United States. It appeared to be a case of international regulatory cooperation at its best.

But now that cooperation is breaking down. In the United States, Gary Gensler, the chairman of the Commodity Futures Trading Commission and the man whose determination to do something helped to expose criminal behavior that evidently did not seem all that outrageous to some others, is pushing to get rid of Libor entirely. He argues that it no longer really exists, assuming it ever did, and wants to find a new benchmark for floating interest rate contracts.

But Britain and the European Commission appear to be determined to save Libor, whether or not it really means what it is supposed to mean. This week new governance rules took effect in Britain, and the European Commission is moving in the same direction. The new rules call for better governance, with efforts made to assure there is no cheating by traders.

Some banks, understandably, would just as soon get out of a business that has sullied reputations and cost billions. Some have tried to resign from the panels that determine Libor and its cousin, Euribor, a similar but less widely used system of base rates. But both European and British regulators view the existence of the benchmarks as critical and have warned banks not to leave.

“Interbank interest rate benchmarks are of systemic importance,” said Michel Barnier, the European commissioner in charge of markets. He said European legislation would force banks to submit rates.

To Mr. Gensler, the American regulator, the Europeans are moving in the wrong direction. “We have seen a significant amount of publicly available market data that raises questions about the integrity of Libor today,” he said in a speech last month. He said that there was very little unsecured interbank trading going on, and that even when other interest rates fluctuated widely — rates that include credit-default swaps on the very same banks — each bank tended to submit the same rates day after day.

He noted that a task force of the International Organization of Securities Commissions recommended earlier this year that “a benchmark should as a matter of priority be anchored by observable transactions entered into at arm’s length between buyers and sellers in order for it to function as a credible indicator of prices, rates or index values,” adding, “I agree with this.”

To put it mildly, there is no reason to think the interbank lending market fits that bill now, and there are reasons to think it will be even less true in the future. Mr. Gensler said some banks believed the new Basel capital rules regarding liquidity would make it prohibitively expensive for one bank to lend to another for more than 30 days at a time. If so, there will be no such lending.

Mr. Gensler would like to develop an alternative and points to two options. One would essentially be dependent on the Federal Reserve’s setting of the federal funds rate — the rate at which it will lend to banks. The other would be based on rates charged on secured loans. In each case these are real markets, at least in dollar-based transactions. He would like to phase in one of them as a replacement for Libor.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

Article source: http://www.nytimes.com/2013/04/05/business/steering-a-better-course-past-the-fiction-of-libor.html?partner=rss&emc=rss

DealBook: As Unit Pleads Guilty, UBS Pays $1.5 Billion Over Rate Rigging

UBS, the Swiss banking giant, announced a record settlement with global authorities on Wednesday, agreeing to a combined $1.5 billion in fines for its role in a multiyear scheme to manipulate interest rates.

In a sign that officials are increasingly taking a hard line against financial wrongdoing, the Justice Department also secured a guilty plea from the bank’s Japanese subsidiary, sending a warning shot to other big banks suspected of rate rigging. The UBS subsidiary, which agreed to plead to a single count of wire fraud, is the first unit of a big bank to agree to criminal charges in more than a decade.

The cash penalties represented the largest fines to date related to the rate-rigging inquiry. The fine is also one of the biggest sanctions that American and British authorities have ever levied against a financial institution, falling just short of the $1.9 billion payout that HSBC made last week over money laundering accusations.

The severity of the UBS penalties, authorities said, reflected the extent of the problems. The government complaints laid bare a scheme that spanned from 2005 to 2010, describing how the bank reported false rates to squeeze out extra profits and deflect concerns about its health during the financial crisis.

“The findings we have set out in our notice today do not make for pretty reading,” Tracey McDermott, the enforcement director for the Financial Services Authority of Britain, said in a statement. “The integrity of benchmarks,” she said, “are of fundamental importance to both U.K. and international financial markets. UBS traders and managers ignored this.”

The UBS case reflects a pattern of abuse that authorities have uncovered as part of a multi-year investigation into rate-rigging. The inquiry, which has ensnared more than a dozen big banks, is focused on key benchmarks like the London interbank offered rate, or Libor. Such rates are used to help determine the borrowing rates for trillions of dollars of financial products like corporate loans, mortgages and credit cards.

In the UBS matter, the wrongdoing occurred largely within the Japanese unit, where traders colluded with other banks and brokerage firms to tinker with Yen denominated Libor and bolster their returns. During the 2008 financial crisis, UBS managers also “inappropriately gave guidance to those employees charged with submitting interest rates, the purpose being to positively influence the perception of UBS’s creditworthiness,” according to authorities.

In a series of colorful e-mails and phone calls, traders tried to influence the rate-setting process. “I need you to keep it as low as possible,” one UBS trader said to an employee at another brokerage firm in September 2008, according to the complaint filed by the Financial Services Authority. “If you do that,” the trader promised to pay “whatever you want. I’m a man of my word.”

As the employees carried out the alleged manipulation, they also celebrated the efforts, with one trader referring to a partner in the scheme as “superman.” “Be a hero today,” he urged, according the complaint by regulators.

The British and Swiss authorities released their complaints on Wednesday before the bank’s shares began trading in Switzerland. American authorities are expected to release their own complaints later Wednesday in Washington.

In a statement, UBS highlighted its cooperation with the investigation. The firm previously stated that it made provisions of 897 million Swiss francs ($975 million) to cover potential legal and regulatory fines.

“We discovered behavior of certain employees that is unacceptable,” the chief executive of UBS, Sergio P. Ermotti, said in the statement. “We deeply regret this inappropriate and unethical behavior. No amount of profit is more important than the reputation of this firm, and we are committed to doing business with integrity.”

The UBS case provides a lens to view broader problems in the rate-setting process, which affects how consumers and companies borrow money around the world. In June, authorities scored their first Libor settlement, securing a
$450 million payout from Barclays, the big British bank.

The UBS case — the product of cross-border collaboration among regulators and federal prosecutors – is more than triple the earlier fine.

The Commodity Futures Trading Commission and the Justice Department leveled about $1.2 billion in combined fines. The Financial Services Authority of Britain fined the bank $260 million. The Swiss Financial Market Supervisory Authority, which does not have the power to fine, recovered $65 million in the bank’s supposed ill-gotten gains.

The Justice Department’s criminal division, which arranged the guilty plea with the Japanese subsidiary, also struck a non-prosecution agreement with the parent company. The exact total of the penalties was unclear, because the department has not yet released its settlement documents.

The Justice Department’s case is also expected to take aim at some of the bank’s traders, including 33-year-old Thomas Hayes. The Justice Department plans to announce charges against Mr. Hayes, the former UBS and Citigroup trader, who featured prominently in the investigation, according to people with knowledge of the matter. He was arrested in London last week and later released on bail. Other UBS employees have been suspended or fired following an internal investigation.

The fallout from the UBS case is expected to ratchet up the pressure on some of the world’s largest financial institutions and spur settlement talks across the banking industry.

The Royal Bank of Scotland has said it expects to pay fines before its next earnings statement in February, while Deutsche Bank has set aside an undisclosed amount to cover potential penalties. Some American institutions, including Citigroup and JPMorgan Chase, also remain in regulators’ crosshairs.

Article source: http://dealbook.nytimes.com/2012/12/19/as-unit-pleads-guilty-ubs-pays-1-5-billion-in-fines-over-rate-rigging/?partner=rss&emc=rss

DealBook: 3 Men Arrested in Rate-Rigging Inquiry

Offices of the Swiss bank UBS in London.Carl Court/Agence France-Presse — Getty ImagesOffices of the Swiss bank UBS in London.

10:24 a.m. | Updated LONDON – British authorities made the first arrests in the global investigation into interest-rate manipulation, an inquiry that has ensnared the world’s biggest banks.

The Serious Fraud Office of Britain said on Tuesday that it had arrested three people in connection with rate rigging. The three men, who are aged between 33 and 47 and are British citizens, were taken into custody by police in early morning raids at their houses on the outskirts of London.

One of the people is Thomas Hayes, a 33-year-old former trader at Citigroup and UBS, according to people with knowledge of the matter. At least one of the other two men worked for R P Martin, a British brokerage firm that previously surfaced in the Canadian investigation into rate manipulation, another person briefed on the matter said.

British criminal authorities typically make arrests at the early stages of an inquiry, and the actions do not necessarily mean the individuals will be charged with any wrongdoing. A Citigroup spokeswoman declined to comment. A UBS spokesman declined to comment. A lawyer for Mr. Hayes could not immediately be identified.

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The arrests mark a new phase of the sprawling rate-rigging inquiry.

Regulators around the world are investigating more than a dozen big banks that help set benchmarks like the London interbank offered rate, or Libor. Such benchmark rates are used to determine the borrowing costs for trillions of dollars of financial products, including credit cards, student loans and mortgages.

In June, the British bank Barclays agreed to pay $450 million to settle charges that some of its traders attempted to manipulate Libor to bolster profits. Authorities also accused Barclays of submitting low rates to deflect concerns about its health during the financial crisis. The scandal prompted the resignations of top bank officials, including the chief executive, Robert E. Diamond Jr.

Libor Explained

Regulators are now pursuing a number of criminal and civil cases.

The Royal Bank of Scotland is talks with authorities. The bank said it would likely disclose fines before its next earnings report in February.

The Swiss bank UBS is close to finalizing a settlement deal with American and British authorities. The bank is expected to pay more than $450 million to settle claims that some employees reported false rates to increase its profit. When American authorities announce their case against UBS in the coming days, Mr. Hayes is expected to figure prominently, one of the officials said.

Mr. Hayes built his reputation as a trader at UBS. He worked at the Swiss bank from about 2006 to 2009, before departing for Citigroup.

But his career at Citi was short-lived. In 2010, the bank suspended him after he approached a London trading desk about improperly influencing the Yen-denominated Libor rates, a person briefed on the matter said. He was fired in September 2010, and the bank reported his suspected actions to authorities.

UBS also implicated Mr. Hayes to authorities, according to another person briefed on the matter. The Swiss bank discovered that Mr. Hayes worked with traders at other banks to influence rates, according to officials and court documents.

Mr. Hayes emerged in court documents this year filed by Canadian authorities. The documents — collected by Canada’s Competition Bureau, the country’s anti-trust authority – highlight an alleged scheme in which Mr. Hayes and other traders colluded to push Yen Libor rates up and down. The Canadian investigation, which spans conduct from 2007 to 2010, also referenced traders at JPMorgan Chase HSBC, Deutsche Bank and the Royal Bank of Scotland.

The traders, the documents said, at times corresponded via instant messages on Bloomberg machines. While the flurry of activity took place outside Canada, the trading affected financial contracts in the country that were pegged to Yen Libor.

“Traders at participants banks communicated with each other their desire to see a higher or lower Yen Libor to aid their trading positions,” the Canadian documents said.

The traders also relied on middlemen at brokerage firms “to use their influence” on other banks that set Libor, according to the documents. The brokers included employees at R P Martin, a person briefed on the matter said.

Under British law, Mr. Hayes and the other men can be held for 24 hours. The authorities can then apply for an extension if they need more time for questioning.

The Serious Fraud Office started a criminal investigation into Libor manipulation in July, in response to the furor over the rate-rigging scandal at Barclays. The criminal investigations by the British authorities and their counterparts at the Justice Department parallel similar civil inquiries by international authorities, including the Commodity Futures Trading Commission and the Financial Services Authority, the British regulator.

The arrests come as the agency tries to repair it reputation. In April, the new director of the Serious Fraud Office, David Green, pledged overhaul the office after a series of mistakes by the organization.

Legal professionals say the appointment is a step toward rejuvenating the agency, which has lacked significant firepower to police London’s financial services section. The Serious Fraud Office has been given extra resources by the British government to pursue a criminal investigation related to Libor.

“The S.F.O. works incredibly slowly,” said a defense lawyer representing individuals implicated in the Libor inquiry, who spoke on the condition of anonymity because of the ongoing investigation. “It’s not surprising that people have been arrested. But how long it will take to lead to criminal charges is another matter.”

Azam Ahmed contributed reporting.

Article source: http://dealbook.nytimes.com/2012/12/11/three-arrested-in-connection-to-rate-rigging-scandal/?partner=rss&emc=rss

Trade Imbalance Worries Mervyn King, Departing British Central Banker

Mervyn A. King, the outgoing governor of the Bank of England, expressed confidence in his successor and discussed economic challenges facing Britain and the United States in their approaches to monetary policy and financial regulation in a speech Monday at the Economic Club of New York.

Mr. King punted, however, on a question about how America’s severe fiscal budget tightening scheduled for the end of the year might affect Britain.

“I have great confidence that one way or another,” the United States will avoid going over the so-called fiscal-cliff, he said, if doing so means just barely hanging on by the country’s “fingertips.” That was a reference to early next year when trillions of dollars in tax increases and automatic spending cuts begin to go into effect.

He did express concern at one point about the need to rebalance trade around the globe, as consumer-driven economies like the United States and Britain continue to run large trade deficits while export-driven countries like China run large surpluses.

“We haven’t found a solution to this,” he said, calling the pressures on deficit countries “inexorable.”

He said he feared that “in 2013 what we will see is growth in actively managed exchange rates” as an alternative to letting the market decide how much currencies are worth. Letting the market decide exchange rates would eventually make goods from trade-surplus economies like China more expensive and those from trade-deficit countries like the United States cheaper, which would help to rebalance global trade.

The tension between short-term and long-term policy goals, Mr. King said, is one of the challenges for other postcrisis policies, like forcing banks to recapitalize or encouraging the government to whittle down its debt.

 “What seems to be the right thing to do in the short term is absolutely the opposite of what we need to do in the long term,” he said.

The Bank of England is Britain’s counterpart to the Federal Reserve and, as in the United States, the British central bank has been providing monetary stimulus to offset fiscal austerity measures pushed through the legislature.

Britain has had disappointing economic growth in the last two years, a fact that Mr. King also attributed to rising energy and commodity prices, which are holding back consumer spending, and the euro zone’s debt crisis.

“A black cloud of uncertainty has drifted across the channel,” he said, and it has diminished what might otherwise have been a stronger recovery in investment spending.

The Bank of England has engaged in three main policy initiatives to combat these drags on the economy: large-scale asset purchases, along the lines of what the Federal Reserve has pursued; a special program that rewards banks for lending by reducing their interest rates, called the “funding for lending scheme”; and designing new regulations intended to improve the health of the banking sector, like requiring greater capitalization.

Asked whether the Bank of England would consider providing more explicit guidance about when it might eventually raise interest rates — as the Fed has done — Mr. King said, “We don’t think we have a crystal ball” about such decisions and so had no plans to provide a time frame.

Last month, the British government announced that Mr. King’s successor would be Mark J. Carney, the head of the Canadian central bank. Mr. Carney, who takes over in July, will be the first non-Briton to hold the position.

“I think he’ll do a great job, and they won’t miss me at all,” Mr. King said.

A major challenge for policy makers, he said, was to “defend the market economy in the face of concerns among so many who suffered during the financial crisis,” particularly those who did not benefit from the boom before the crisis and are still extremely angry today.

“We need to support the legitimacy of the market economy,” he said.

Article source: http://www.nytimes.com/2012/12/11/business/britains-central-banker-confident-over-us-budget-talks.html?partner=rss&emc=rss

DealBook: Barclays’ Ex-Chief Robert Diamond Defends Testimony to Parliament

Robert E. Diamond Jr., Barclays' former chief, testified to lawmakers last week about the bank's interest-rate manipulation scandal.Pool photograph by Agence France-PresseRobert E. Diamond Jr., Barclays‘ former chief, testified to lawmakers last week about the bank’s interest-rate manipulation scandal.

LONDON — Robert E. Diamond Jr., the former chief of Barclays who resigned because of a scandal involving interest rate manipulation, defended his testimony to a British parliamentary committee as lawmakers called more senior officials to appear.

Late Tuesday, Mr. Diamond responded to criticism from British politicians that he had not been completely forthcoming last week at a hearing on the Barclays case.

“Any such suggestion would be totally unfair and unfounded,” Mr. Diamond wrote in a letter to Andrew Tyrie, the committee’s chairman. “The comments made at today’s hearing have had a terribly unfair impact upon my reputation.”

Mr. Diamond said that he would be willing to discuss the issue with lawmakers. A number of committee members have called for him to give more testimony.

However, there may not be time. The committee has one week before it recesses for the summer, and other officials have already been slated to give testimony on Monday.

That list includes top executives from the Financial Services Authority, including the regulator’s chairman, Adair Turner; Andrew Bailey, the head of the prudential business unit; and Tracey McDermott, the acting head of the enforcement and financial crime division. Jerry del Missier, a senior Barclays official who resigned last week, is also set to appear.

The committee is investigating the manipulation of the London interbank offered rate, or Libor. The rate underpins trillions of dollars of financial products, including mortgages, student loans and complex derivatives.

In late June, Barclays agreed to pay $450 million to British and American authorities to settle claims that it submitted bogus rates to deflect concerns about its health and improve profits.

Politicians in Washington and London are questioning whether officials did enough to avoid the scandal.

The New York Fed said on Tuesday that it had received “occasional anecdotal reports from Barclays of problems with Libor” as far back as late 2007. Barclays has said that it had informed American and British regulators about concerns with the rate, but officials did not address the problems.

On Tuesday, members of the parliamentary committee focused their anger on Marcus Agius, Barclays’ chairman, asking him about the actions of Mr. Diamond and the culture inside the bank.

Questions centered on two letters to Barclays from British regulators who raised questions about Mr. Diamond’s management style. Some concerns dated to his appointment to the bank’s top spot in late 2010.

During his testimony last week, Mr. Diamond said the bank had maintained a good relationship with the Financial Services Authority, adding that he did not recall that the regulator had questioned the bank’s activities or its internal culture.

On Tuesday, members of the committee asked Mr. Agius about Mr. Diamond’s testimony.

“Would you say that Mr. Diamond lied to this committee?” David Ruffley, a member of Parliament, asked Mr. Agius.

“I can’t comment on Mr. Diamond’s testimony,” Mr. Agius said.

Diamond Letter to Tyrie

Article source: http://dealbook.nytimes.com/2012/07/11/more-officials-called-to-testify-on-libor-scandal/?partner=rss&emc=rss

DealBook: Groupon Prices I.P.O. at $20 a Share

As Groupon headed out on the road show for its public offering, executives faced a tough sell. Fielding questions about the company’s management, accounting and model, Andrew Mason, the founder and chief executive, and others had to convince investors that the daily deals site was not this generation’s equivalent of Pets.com, the online retailer that imploded after the last dot-com boom.

In mid-October at the St. Regis in New York, the usually irreverent Mr. Mason spoke somberly in business school parlance about gross profits, return on investment and other measures of the company’s prospects. Exchanging his usual uniform of jeans and T-shirts for a pressed suit and neat haircut, the chief executive told a packed room of 300 investors that “with a market measured not in billions but trillions of dollars, we’re just getting started.”

His pitch worked.

On Thursday morning, whispers of zealous demand snaked through Wall Street. As investors clamored for shares, Groupon, at the end of the day, priced its initial public offering at $20, above the expected range of $16 to $18. The stock sale values the company at $12.65 billion.

The demand, in part, is driven by a lack of supply. The current owners are holding on to their stakes, and Groupon is initially selling just 35 million shares, roughly 5 percent of its total, according to two people with knowledge of the offering.

While it’s an exceptionally small pot, it’s not a novel template. Groupon is following the lead of several Internet companies this year, which have favored small offerings to help buttress their stock prices.

LinkedIn, which went public in May, initially sold less than 10 percent of its total stock, announcing plans on Thursday to sell additional shares. By comparison, technology companies in the United States have typically offered about a third of pool, according to Thomson Reuters.

Christopher Brainard, the head of Brainard Equities, was waiting to hear from bankers whether the family office got a piece of the I.P.O., which he is looking to buy for the long term. “The negative press has been overdone,” he said “We think there’s a lot of demand.”

The next test for Groupon comes on Friday, when the company is set to start trading on the Nasdaq market. If shares of the technology company experience a significant pop on the first day, it could set the stage for another strong wave of Internet-related I.P.O.’s like Zynga and Facebook, both of which are expected to go public in the next 12 months. Should they fizzle, it could dampen enthusiasm for the broad sector.

David Menlow, the president of the research firm IPOfinancial.com, said that the small size of the offering and high interest in the company was likely to provide a big bump in Groupon’s stock price on Friday.

“I think we’re going to see prices on this that, on a percentage basis, will be more than the market has seen in many years,” he said, adding that “the Internet bubble is being slightly reinflated.”

Michael J. de la Merced contributed reporting

Article source: http://feeds.nytimes.com/click.phdo?i=bbb597ebbc74971f9b3c52ed58ac1194

Economix Blog: Back to Where We Began. Finally.

CATHERINE RAMPELL

CATHERINE RAMPELL

Dollars to doughnuts.

The American economy has finally reached the size it was before the recession began four years ago, according to the latest gross domestic product report from the Bureau of Economic Analysis.

That may sound like good news, but it’s long overdue, and frankly not good enough. If the economy were functioning normally, it would be significantly greater today than it was before the recession began.

Here’s a look at the level of gross domestic product over the last decade:

DESCRIPTIONSource: Bureau of Economic Analysis, via Haver Analytics

It has taken 15 quarters for the economy to merely recover the ground lost to the recession. That is significantly longer than in every other recession/recovery period since World War II. In the previous 10 recessions, the average number of quarters it took to return to the prerecession peak was 5.2, with a high of 8 quarters after the recession in the 1970s.

Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities and Vice President Joe Biden’s former economic adviser, has written up some additional thoughts on the significance of these numbers. He observes:

[R]egaining the peak is just a proximate goal. What we’ve really lost here is the trillions in output between potential GDP (how the economy would have done absent the recession) and actual GDP. That’s the actual cost of the downturn—the output, jobs, incomes, opportunities, even careers, that were lost in the Great Recession.

Article source: http://feeds.nytimes.com/click.phdo?i=277508087d92cd4686a91bf0b7dadfbe

China’s Efforts to Cut Inflation Fall Short

The latest data underlined the challenges that China faces as it tries to tame inflation while at the same time issuing trillions of extra renminbi to prevent the currency from rising quickly against the dollar, which would erode the competitiveness of Chinese exports.

Consumer prices were 5.3 percent higher in April than a year earlier. That represented a slight improvement from March, when consumer prices were up 5.4 percent. But economists had expected inflation to edge down to 5.2 percent or below, and the government’s target for the full year is 4 percent, a level not reached in any month so far this year.

Many businesses across China say that they see healthy sales and have the profits or bank lines of credit to allow them to invest in further expansion.

“Our domestic market is doing very well and continues to expand,” said He Lei, the vice general manager of the Zhejiang Qingsen Textile Garments Company. “Our year-on-year growth in this sector has been 30 percent.”

The Shanghai Composite Index of shares fell 0.6 percent in the first half-hour of trading after the release of the economic data, as investors appeared to conclude that persistent inflation made it more likely that the government would raise interest rates again, after already doing so four times since October.

Other economic statistics also released by the Chinese government on Wednesday presented a picture of an economy still expanding briskly, signaling that recent government moves to tighten credit have not had much effect.

Banks issued 739.6 billion renminbi ($114 billion) in new loans last month, higher than economists’ expectations of 700 billion. The People’s Bank of China, the country’s central bank, has been trying to restrain lending by raising repeatedly the percentage of bank assets that must be kept on deposit with it, but this has been offset by the large-scale issuance of renminbi to pay for currency market intervention, holding down the currency’s value against the dollar.

Retail sales jumped 17.1 percent in April from a year ago. Fixed asset investment grew even faster, climbing 25.4 percent last month from a year earlier, although Chinese fixed asset investment figures tend to be inflated somewhat by rising land prices, a factor that Western statisticians try to exclude.

Western economists had expected inflation to slow more quickly because food prices in China are flat or falling this year, unlike in many countries. Food is the largest component of China’s consumer price index, making up a third of it.

After vegetable prices surged at the end of 2009, partly because of a harsh winter, the Chinese government urged farmers across the nation to plant more vegetable farms. This winter was milder, and vegetable production surged so sharply that prices have fallen, leading to widespread complaints from farmers but limiting the cost of groceries for urban families.

Many economists had expected falling food prices to offset more fully the effects of rising world prices for many commodities, like oil and cotton. Changes in wholesale food prices are quickly and entirely reflected in changes in the prices that consumers pay for food at supermarkets and corner stalls.

But Jun Ma, an economist at Deutsche Bank, estimated in a research note on Tuesday that when prices of other commodity prices rise or fall in China, the price of the eventual retail product only rises or falls by one-sixth as much in percentage terms. That is because other raw materials, like rubber or cotton, tend to play a small role in the overall price of products like tires or clothing.

Hilda Wang contributed reporting.

Article source: http://feeds.nytimes.com/click.phdo?i=1fe19c8c4e903234e899200cde99f53f