A 90-minute flight away, in San Francisco, China’s biggest
property developer has formed a joint venture to develop two
high-rise condominium towers that are likely to draw wealthy
Chinese buyers. It is China Vanke Co Ltd’s first
foray into the U.S. market, and probably not its last.

Combined, the two deals are worth about $1 billion, which
could rise to at least $3 billion as Genting builds out its
resort, which is due to open in 2016. That’s just a fraction of
the $102 billion in outbound investment from Asia-Pacific
companies in 2012, according to Thomson Reuters data.

But it signals a strategic shift.

Instead of hunting for natural resources, the driving force
behind many of Asia’s biggest foreign acquisitions over the past
year, these companies are investing in the United States to
cater to Chinese consumers abroad.

Beijing bars individuals from moving more than about $50,000
a year out of the country. Yet vast sums leak out illegally.
Estimates vary widely on just how much, but research group
Global Financial Integrity said it could have been as much as
$472 billion in 2011 alone.

The money goes to places such as Hong Kong, Singapore,
Sydney, London and San Francisco, where a heavy flow of Chinese
buyers has driven up property prices. But until the Genting and
Vanke deals, there was little evidence that large Asian
companies were chasing the cash to the United States.

“You have Chinese money sitting in U.S. houses and Chinese
money sitting in U.S. banks. If you’re smart, you start setting
up places for Chinese people to stay and things for them to
buy,” said Derek Scissors, an economist at the Heritage
Foundation think-tank in Washington, who tracks Chinese foreign
investment.

RISK TO RIVALS

Scissors said the Genting and Vanke deals represent another
step in the progression of Chinese investment in the United
States since the global financial crisis.

First, individual Chinese investors started pouring money
into U.S. property in late-2009. Then, a couple of years later,
Chinese property developers began scouring for deals, largely
unsuccessfully. The Genting and Vanke transactions are early
signs that Asian companies see ways to tap Chinese demand beyond
China, something few U.S. firms seem to have recognized.

The property that Genting bought had been abandoned since
2008, and the deal is the biggest new investment on the Las
Vegas Strip since then. In that time, China’s
gambling capital of Macau has opened four new casinos – two of
them built by U.S. gaming company Las Vegas Sands Corp.

Genting has casinos in cities such as Singapore, which is
popular with Chinese visitors, but not in Macau, the world’s
biggest gambling hub. The firm is not guaranteed success in
Vegas, a market with thinner margins and tougher competition
than in its power base in Singapore where it operates one of
only two casinos.

Its arrival could spell trouble for casino rivals, too.

Ratings agency Fitch warned that Genting’s arrival was a
“risk” for U.S. operators because its project will add 3,500
hotel rooms in a city where occupancy was flat last year and the
average daily rate up a tepid 2.8 percent.

“We believe the property will target high-end Asian
customers, which has been the principal catalyst for gaming
revenue growth on the Strip since 2010,” Fitch said, adding that
high-end properties run by Wynn Resorts, Sands and
others were “especially vulnerable to the increased competition
from Genting.”

PERFECT HARMONY

For Vanke, venturing into the United States makes sense now
because Beijing is clamping down on property speculation at
home. New restrictions announced on Friday may speed the flow of
Chinese property investment abroad.

Vanke “will go anywhere mainland Chinese want to go,” said
Jinsong Du, a property analyst at Credit Suisse in Hong Kong.
“Their target customer is not overseas Chinese. Their target
customer is mainland Chinese who want to migrate to overseas, or
have a home outside the country.”

Vanke President Yu Liang, however, said the company had no
intention of building a Chinese community overseas. “What we are
looking for is overseas resources and market, not Chinese
immigrants. We place emphasis on the concept of harmony,” he
said.

Other Asian companies might learn from the example set by
Vanke and Genting.

Jonathan Galaviz, managing director at Galaviz and Co, a
California-based research and strategic advisory firm, said real
estate and hotel companies such as Singapore’s CapitaLand Ltd
and Hong Kong’s Sun Hung Kai Properties Ltd
run the risk of losing global relevance as they lack a U.S.
presence.

In an emailed statement Sun Hung Kai said it aims for a
balance between steady cash flow and fast asset turnover.
“Geographically, Hong Kong remains our focus. The Group is also
positive about the long-term outlook for the mainland and will
continue to expand its business there.” A spokeswoman for
CapitaLand declined to comment.

“Companies like these, and others in Asia, need to also
recognize they are investing in potentially overheated markets
in mainland China – and elsewhere in Asia – and diversifying
some asset holdings in America would be something smart to do,”
Galaviz said.

Countries such as Argentina, Indonesia and South Korea, which were required to make deep budget cuts in exchange for tens of billions of dollars in International Monetary Fund aid, said the lending institution was finally learning from mistakes made during financial crises in Asia and Latin America.

“People learn from what happened in the past,” said Indonesia’s Trade Minister Gita Wirjawan. “Certainly what we went through in 1998 was painful. I lived through that, and hopefully the… difficulties we went through served as lessons.”

Indonesia signed a $10 billion IMF loan deal in 1997 as the Asian financial crisis raged, and started an economic program that called for spending cuts, tax increases, bank closures and tight monetary policy which the IMF predicted would limit the downturn.

Indonesia’s economy ended up contracting by 13 percent in 1998, nowhere near the IMF’s forecast for 3 percent growth.

Former IMF Managing Director Dominique Strauss-Kahn admitted in 2010 that the lending institution had made “mistakes” in Asia.

Last week, the Fund released research showing that the economic damage from aggressive austerity measures may be as much as three times larger than previously assumed.

“Advice is sometimes difficult – both giving and receiving,” current IMF head Christine Lagarde said in a speech at the start of the group’s meetings in Tokyo on Friday.

In line with the research, the IMF has softened its earlier advice on austerity in the euro zone crisis, arguing now that forcing Greece and other debt-burdened countries at the center of the debt storm to reduce their deficits too quickly would be counterproductive.

CUSHIONING THE BLOW

The IMF’s research shows a marked difference in how austerity affected advanced countries before and after 2009, when most of the world’s major central banks had cut interest rates to near zero to fight the global financial crisis.

Normally, when fiscal policy tightens, central banks can cushion the blow by lowering interest rates. But because rates are now about as low as they can go, monetary policy can do little to offset the budget tightening.

“We are in a period in which many countries are in the liquidity trap,” said Olivier Blanchard, the IMF’s chief economist. “As we know it doesn’t mean they cannot use monetary policy, but monetary policy is much more constrained than in normal times. In this case, you just get the effect of fiscal consolidation without the offset from monetary policy.”

In Indonesia back in 1997, the IMF recommended both budget cuts and tight monetary policy, which critics have long argued exacerbated the downturn.

The IMF acknowledged in 1999 that it could have allowed for quicker policy easing when it became apparent that the economy was faring far worse than predicted. But it also blamed the government for not properly implementing the program.

The IMF’s reputation in Asia remains tarnished to this day, and countries in the region have amassed some $6 trillion in foreign exchange reserves in part to ensure they will never again have to seek a bailout.

STRATEGIES “BOUND TO FAIL”

Hernán Lorenzino, Argentina’s minister of economy and public finance, said the IMF’s admission was a “first step” that should lead it to change tack in Europe, where it has lent to Greece, Ireland and Portugal.

“Once again… the IMF is endorsing policy conditionalities and reform strategies that are bound to fail, worsening recession and unemployment levels in program countries and leading to unsustainable debt paths and social failure,” Lorenzino wrote in his official statement to the IMF.

Argentina borrowed about $23 billion through a series of IMF loans over the past decade, which it has since repaid, and is now a vocal critic of the conditions that the institution places upon loan recipients.

Although Lorenzino cancelled his trip to the Tokyo meeting at the last minute, citing the need to resolve a labor dispute at home, he spoke out against the Fund, saying it “overestimates the impact of its recipes”, according to the local Ambito daily.

“It is amazing that their reports use ‘fiscal consolidation’ as a euphemism for the adjustments,” he was quoted as saying at a conference in Buenos Aires. “Continuing to support the financial system over the real economy simply makes workers suffer the consequences of the crisis.”

South Korea took out a $21 billion IMF credit line in 1997 and agreed to an economic program that envisioned its gross domestic product slowing to 3 percent in 1998 from 5.7 percent the year before. The economy actually contracted by nearly 6 percent in 1998.

Chung Duck-koo, who headed the South Korean delegation that negotiated the 1997 bailout, said the Fund misdiagnosed a currency crisis as a fiscal policy problem and prescribed the wrong reforms.

“It was like a fire fighter, having arrived far too late, who turned out to be short of sufficient water and short of the precise assessment of the nature of the fire,” he told Reuters. “Therefore, the fire resulted in getting bigger.”

At least one country said it has found success in diverging from the IMF’s economic recipes.

Bolivian Finance Minister Luis Arce said his government had decided to ignore IMF policies after observing the failure of the fund’s policies in other countries.

Arce said his government had reduced extreme poverty to just over 24 percent of the population in 2011 from more than 38 percent in 2005 by pursuing policies contrary to Fund recommendations. Per capita GDP doubled between 2005 and 2011.

“In Bolivia we have achieved better wealth distribution with higher state involvement. We have never had faith in the market and we abandoned a market-based economy in 2006,” Arce said, adding that the faith many IMF economists have shown in the “perfect market” was misguided, given the economic crises caused by their policies.

“The directors of the IMF have good intentions but certain departments are absolutely deaf to the changes that should be made within the Fund,” Arce continued. “The best thing Lagarde could do is make sure her good intentions make it through to the next level.”

(Additional reporting by Choonsik Yoo in SEOUL, James Grubel in CANBERRA and Anna Yukhananov in TOKYO’ Editing by Neil Fullick)

Global growth in advanced economies is too weak to bring down unemployment and what little momentum exists is coming primarily from central banks, the International Monetary Fund said in its World Economic Outlook, released ahead of its twice-yearly meeting, which will be held in Tokyo later this week.

“A key issue is whether the global economy is just hitting another bout of turbulence in what was always expected to be a slow and bumpy recovery or whether the current slowdown has a more lasting component,” it said.

“The answer depends on whether European and U.S. policymakers deal proactively with their major short-term economic challenges.”

Ahead of the Tokyo meeting, policymakers have flagged the U.S. “fiscal cliff” — government spending cuts and tax raises due to take affect early in 2013 — and resolving the euro area’s debt crisis as the top issues facing the global economy.

Europe’s debt crisis is “a clear and present danger”, Canadian Finance Minister Jim Flaherty said last week.

The IMF forecast in its latest health check on the world economy that global output in 2012 would grow just 3.3 percent, down from a July estimate of 3.5 percent.

That would make this the slowest year of growth since 2009 when the world was struggling to pull out of the global financial crisis. It predicted only a modest pickup next year to 3.6 percent, below its July estimate of 3.9 percent.

It projected U.S. growth would be a little more than 2 percent this year and next, but forecast a contraction in the euro area this year by 0.4 percent and modest growth in 2013 of 0.2 percent.

Emerging markets are still expected to grow four times as fast as advanced economies, but the IMF took a sharp knife to its estimates for India and Brazil, with the latter now seen growing slower than the United States this year.

It also cut its expectations for China in 2012 and 2013 but warned against being overly pessimistic about the prospects of these economies, which were major engines of growth in the global financial crisis.

“Let me be clear. We do not see these developments as signs of a hard landing in any of these countries,” IMF Chief Economist Olivier Blanchard said at a briefing, referring to China, India and Brazil.

MORE AT WORK

The IMF said “familiar” forces were dragging down advanced economy growth: fiscal consolidation and a still-weak financial system, the same problems that have plagued the world since the global financial crisis exploded in 2008.

“More seems to be at work, however, than these mechanical forces – namely, a general feeling of uncertainty,” Blanchard said in a commentary on the forecasts.

Measures of risk and uncertainty, such as the VIX volatility gauge in the United States, remain at low levels, Blanchard pointed out, which makes it difficult to assess the nature of the uncertainty.

“Worries about the ability of European policymakers to control the euro crisis and worries about the failure to date of U.S. policymakers to agree on a fiscal plan surely play an important role, but one that is hard to nail down,” Blanchard said.

Concerns about the health of the global economy and corporate earnings prospects have weighed on financial markets. World shares as measured by the MSCI world equity index fell 0.7 percent on Monday. The index was flat in Asia on Tuesday.

S&P 500 earnings for the third quarter are forecast to have fallen more than 2 percent from the year-earlier period, which would be the first decline in three years, Thomson Reuters data shows.

The IMF said financial conditions are likely to remain “very fragile” over the near term because repairing euro zone problems will take time and there are concerns about how the U.S. economy will cope with the expected spending cuts and tax increases.

The “urgent policy priorities” for the United States should include avoiding the fiscal cliff, which the IMF said at the extreme would amount to a fiscal withdrawal of more than 4 percent of GDP in 2013, and economic growth would stall.

“Both sides of the political isle (should) signal that they are willing to compromise and that they’re willing to get this done … that could help lower the level of uncertainty that is affecting U.S. investors and consumers,” IMF First Deputy Managing Director David Lipton told Reuters in an interview on Monday.

Resolving the euro area crisis would require progress in adopting and implementing the various measures discussed, including banking and fiscal union, the IMF report said.

“If the complex puzzle can be rapidly completed, one can reasonably hope that the worst might be behind us,” Blanchard said.

Euro zone finance ministers on Monday unveiled the European Stability Mechanism (ESM), a 500 billion euro rescue mechanism for lending to distressed economies in the 17-country bloc.

But perhaps the biggest contagion risk for the region is Spain, which a British finance ministry source suggested will be the top issue for finance ministers in Tokyo.

“We have always been very clear that the euro zone needs to take significant action,” the source said.

The euro zone has already set aside 100 billion euros for Spain to recapitalise its banks but financial markets believe a government bailout will follow in coming weeks or months.

(Additonal reporting by Anna Yukhananov in TOKYO and David Milliken in LONDON; Editing by Neil Fullick)

Global growth in advanced economies is too weak to bring
down unemployment and what little momentum exists is coming
primarily from central banks, the International Monetary Fund
said in its World Economic Outlook, released ahead of its
twice-yearly meeting, which will be held in Tokyo later this
week.

“A key issue is whether the global economy is just hitting
another bout of turbulence in what was always expected to be a
slow and bumpy recovery or whether the current slowdown has a
more lasting component,” it said.

“The answer depends on whether European and U.S.
policymakers deal proactively with their major short-term
economic challenges.”

Ahead of the Tokyo meeting, policymakers have flagged the
U.S. “fiscal cliff” — government spending cuts and tax raises
due to take affect early in 2013 — and resolving the euro
area’s debt crisis as the top issues facing the global economy.

Europe’s debt crisis is “a clear and present danger”,
Canadian Finance Minister Jim Flaherty said last week.

The IMF forecast in its latest health check on the world
economy that global output in 2012 would grow just 3.3 percent,
down from a July estimate of 3.5 percent.

That would make this the slowest year of growth since 2009
when the world was struggling to pull out of the global
financial crisis. It predicted only a modest pickup next year to
3.6 percent, below its July estimate of 3.9 percent.

It projected U.S. growth would be a little more than 2
percent this year and next, but forecast a contraction in the
euro area this year by 0.4 percent and modest growth in 2013 of
0.2 percent.

Emerging markets are still expected to grow four times as
fast as advanced economies, but the IMF took a sharp knife to
its estimates for India and Brazil, with the latter now seen
growing slower than the United States this year.

It also cut its expectations for China in 2012 and 2013 but
warned against being overly pessimistic about the prospects of
these economies, which were major engines of growth in the
global financial crisis.

“Let me be clear. We do not see these developments as signs
of a hard landing in any of these countries,” IMF Chief
Economist Olivier Blanchard said at a briefing, referring to
China, India and Brazil.

MORE AT WORK

The IMF said “familiar” forces were dragging down advanced
economy growth: fiscal consolidation and a still-weak financial
system, the same problems that have plagued the world since the
global financial crisis exploded in 2008.

“More seems to be at work, however, than these mechanical
forces – namely, a general feeling of uncertainty,” Blanchard
said in a commentary on the forecasts.

Measures of risk and uncertainty, such as the VIX volatility
gauge in the United States, remain at low levels, Blanchard
pointed out, which makes it difficult to assess the nature of
the uncertainty.

“Worries about the ability of European policymakers to
control the euro crisis and worries about the failure to date of
U.S. policymakers to agree on a fiscal plan surely play an
important role, but one that is hard to nail down,” Blanchard
said.

Concerns about the health of the global economy and
corporate earnings prospects have weighed on financial markets.
World shares as measured by the MSCI world equity index
fell 0.7 percent on Monday. The index was flat
in Asia on Tuesday.

S&P 500 earnings for the third quarter are forecast to have
fallen more than 2 percent from the year-earlier period, which
would be the first decline in three years, Thomson Reuters data
shows.

The IMF said financial conditions are likely to remain “very
fragile” over the near term because repairing euro zone problems
will take time and there are concerns about how the U.S. economy
will cope with the expected spending cuts and tax increases.

The “urgent policy priorities” for the United States should
include avoiding the fiscal cliff, which the IMF said at the
extreme would amount to a fiscal withdrawal of more than 4
percent of GDP in 2013, and economic growth would stall.

“Both sides of the political isle (should) signal that they
are willing to compromise and that they’re willing to get this
done … that could help lower the level of uncertainty that is
affecting U.S. investors and consumers,” IMF First Deputy
Managing Director David Lipton told Reuters in an interview on
Monday.

Resolving the euro area crisis would require progress in
adopting and implementing the various measures discussed,
including banking and fiscal union, the IMF report said.

“If the complex puzzle can be rapidly completed, one can
reasonably hope that the worst might be behind us,” Blanchard
said.

Euro zone finance ministers on Monday unveiled the European
Stability Mechanism (ESM), a 500 billion euro rescue mechanism
for lending to distressed economies in the 17-country bloc.

But perhaps the biggest contagion risk for the region is
Spain, which a British finance ministry source suggested will be
the top issue for finance ministers in Tokyo.

“We have always been very clear that the euro zone needs to
take significant action,” the source said.

The euro zone has already set aside 100 billion euros for
Spain to recapitalise its banks but financial markets believe a
government bailout will follow in coming weeks or months.

Global growth is too weak to bring down unemployment and what little momentum exists is coming primarily from central banks, the International Monetary Fund said in its World Economic Outlook, released ahead of its twice-yearly meeting, which will be held in Tokyo later this week.

“A key issue is whether the global economy is just hitting another bout of turbulence in what was always expected to be a slow and bumpy recovery or whether the current slowdown has a more lasting component,” it said.

“The answer depends on whether European and U.S. policymakers deal proactively with their major short-term economic challenges.”

For 2012, the IMF now expects global output to grow just 3.3 percent, down from its July estimate of 3.5 percent, making it the slowest year of growth since 2009. It predicted only a modest pickup next year to 3.6 percent, below its July estimate of 3.9 percent.

Emerging markets are still expected to grow four times as fast as advanced economies, but the IMF took a sharp knife to its estimates for India and Brazil, with the latter now seen growing slower than the United States this year.

The IMF said “familiar” forces were dragging down advanced economy growth: fiscal consolidation and a still-weak financial system, the same problems that have plagued the world since the global financial crisis exploded in 2008.

“More seems to be at work, however, than these mechanical forces – namely, a general feeling of uncertainty,” IMF Chief Economist Olivier Blanchard said.

Measures of risk and uncertainty, such as the VIX volatility gauge in the United States, remain at low levels, Blanchard pointed out, which makes it difficult to assess the nature of the uncertainty. Blanchard described it as “more Knightian in nature,” referring to a term for risk that is impossible to measure, named after economist Frank Knight.

“Worries about the ability of European policymakers to control the euro crisis and worries about the failure to date of U.S. policymakers to agree on a fiscal plan surely play an important role, but one that is hard to nail down,” Blanchard said.

The IMF said financial conditions are likely to remain “very fragile” over the near term because repairing euro zone problems will take time and there are concerns about how the U.S. economy will cope with the expected expiry of tax cuts early next year.

For the United States, the IMF said its “urgent policy priorities” should include avoiding a so-called “fiscal cliff” from the expected tax increases and spending cuts, raising the government borrowing limit, and agreeing on a credible plan to reduce the deficit.

It said the fiscal cliff at the extreme would amount to a fiscal withdrawal of more than 4 percent of GDP in 2013, and economic growth would stall.

In the euro area, it said resolving the crisis was the highest priority, and that would require progress toward banking and fiscal union.

“If uncertainty is indeed behind the current slowdown, and if the adoption and implementation of these measures decrease uncertainty, things may turn out better than our forecasts, not only in Europe, but also for the rest of the world,” Blanchard said. “I, for once, would be happy if our baseline forecasts turn out to be inaccurate – in this case, too pessimistic.”

(Editing by Tomasz Janowski)

Flash forward to 2012 and China has been a tougher market than expected. Overseas names from Britain’s Tesco Plc (TSCO.L: Quote, Profile, Research, Stock Buzz) to Germany’s Metro AG (MEOG.DE: Quote, Profile, Research, Stock Buzz) are slowing their Chinese expansion, while Hong Kong-listed Sun Art Retail Group Ltd (6808.HK: Quote, Profile, Research, Stock Buzz) has overtaken Wal-Mart as the country’s top hypermarket chain.

The move last month by U.S. home improvement chain Home Depot Inc (HD.N: Quote, Profile, Research, Stock Buzz) to close its big box stores in China served up the latest evidence of foreign retailers’ struggle with a crowded market, slowing economy and tough competition in a country that was once their best hope for growth.

“The rapid growth era for such types of hypermarket operations is over and it’s not as easy as before to generate profit by simply opening new stores,” said Steve Chow, an analyst at Kingsway Group Research in Hong Kong.

Wal-Mart, which now has 364 China stores, may no longer draw the monster crowds seen in the early days, but its initial success has attracted plenty of competition — perhaps too much.

China’s hypermarket segment, with retail sales estimated at 506.9 billion yuan ($80 billion) last year, includes the world’s three largest retailers in Wal-Mart, France’s Carrefour SA (CARR.PA: Quote, Profile, Research, Stock Buzz) and Tesco, and a crowded field of domestic players led by Sun Art.

Hong Kong-listed Sun Art said the marketplace was full and the next phase might be consolidation.

“We don’t see much room for newcomers unless their business model is very different from others,” Sun Art Chief Executive Bruno Mercier told Reuters in late August, after the company reported a 75 percent jump in first-half net profit.

Metro, which in 2010 said it saw potential for 100 of its Media Markt consumer electronics stores in China, is now more cautious on expansion. Its chief executive, Olaf Koch, said earlier this year the group would decide later on whether to open “100 or 50″ of the stores in what he termed a “very tough” market.

SLOWING ECONOMY

Home Depot’s struggle partly reflected the cultural challenge of winning over Chinese shoppers with a U.S.-style do-it-yourself model — why would consumers take on home improvement projects themselves when hiring contractors is cheap?

It was also a sign that retailers are feeling the pinch as the world’s second-biggest economy heads for its slowest year of growth since 1999.

“The reality is that the economy in China is slowing, and with it there will be some impact on our China growth,” a Wal-Mart spokesperson said in an emailed response to questions from Reuters. “Customers in China have become more conscious about their spending, and we believe that now, more than ever, our (low price) promise is resonating with Chinese customers.”

To be sure, overall retail sales growth remains high by international standards — year-on-year growth has held above 13 percent every month this year, and in fact has not posted an increase smaller than 10 percent since 2006 — but it has slowed from 17-18 percent growth late last year.

And big-box retailers haven’t come close to keeping up with that overall sales growth rate in a country where the vast majority shop at local markets. A t Carrefour, 2011 sales at its China stores open at least a year fell 0.8 percent. Even Sun Art has been singed: its same-store sales growth cooled to 4.3 percent in the first half of this year, from 11 percent a year earlier.

BIG IN CHINA

When Wal-Mart opened its first China store, the main competition was Carrefour, which launched its first Chinese store in 1995. Sun Art, a joint venture between Taiwan conglomerate Ruentex Group and privately held French retailer Groupe Auchan SA AUCH.UL, followed three years later and quickly caught up.

On a global scale, Sun Art can’t touch Wal-Mart or Carrefour, the world’s two biggest retailers with combined annual revenue of more than $550 billion.

But Sun Art’s success in China — its $10.8 billion in 2011 revenue was 40 percent larger than Carrefour’s China total — shows how the giants can be tamed.

Sun Art, which operates stores under the RT-Mart and Auchan banners, controls 12.8 percent of China’s hypermarket segment, topping Wal-Mart’s 11.2 percent and Carrefour’s 8.1 percent, according to research firm Euromonitor. Sun Art overtook Wal-Mart in 2010 and extended its lead in 2011, the data shows.

At a Sun Art-owned store in Shanghai’s working-class Yangpu district, 66-year-old Yao Jinghua spent 138 yuan ($21.87) buying meat, eggs and some honey and crackers that were on sale. A Wal-Mart store is about a five minute drive away and Yao said a free bus to the store stops in front of her house, but she doesn’t shop there.

“I don’t like Wal-Mart because it’s not convenient,” she said in a television interview with Reuters. “Their products are good, but it’s relatively expensive. Yeah, more expensive.”

CONSOLIDATION PLAY

Sun Art’s success has not gone unnoticed on the Hong Kong stock exchange. Its shares trade at 27 times its 12-month earnings estimates, according to Thomson Reuters StarMine data, well above Wal-Mart’s ratio of 14.3 and Carrefour’s 12.1.

The stock also leads its larger global rivals on analyst revision scores, a StarMine measure of analysts’ earnings and revenue estimates and rating changes. Sun Art scores a strong 85, above Wal-Mart’s 74 and Carrefour’s 46.

China has no shortage of smaller players that could be acquisition targets to help the big global players regain the top spot, but the food and staples retailing segment as a whole looks pricey compared with the rest of the world. Hong Kong- and mainland Chinese-listed companies in that sector trade at about 20 times the next 12 months’ earnings estimates, compared with a global average of 14.6.

If consolidation is coming, Sun Art does not seem keen to take the first bite.

“We don’t see many M&A opportunities because not many stores are up to our requirements in terms of scale, standard and quality,” said Peter Huang, Sun Art’s executive director.

“We came across these kinds of opportunities before but we gave up eventually as we didn’t want to eat four pieces of cake we didn’t want, in order to have two pieces of cake we were fond of,” he said. ($1 = 6.3093 Chinese yuan) (Additional reporting by Jane Lanhee Lee in Shanghai, James Davey in London, Victoria Bryan in Frankfurt, Dominique Vidalon in Paris, Patturaja Murugaboopathy in Bangalore and Jessica Wohl in Chicago; Editing by Chris Gallagher)

Chief executive Shamsul Azhar Abbas took to the stage and declared that the government’s policy of subsidizing fuel was plain wrong. A murmur ran through the crowd – his boss, Prime Minister Najib Razak, was sitting in the front row.

Moments later, Najib went to the podium himself to remind everybody that the subsidies – for which Petronas foots the bill – have “social-economic objectives.”

The subtext of that rejoinder: Malaysians pay among the lowest electricity rates and petrol-pump prices in Asia. While the government has vowed to “rationalize” that, it’s highly unlikely to happen before elections expected in a few months.

The polite but pointed disagreement was the latest sign of assertiveness from an oil company that prime ministers have treated as a piggy bank for pet projects since it was established in 1974.

Interviews with current and former officials and an examination of Petronas and government documents show that strains have been building behind the scenes over how much money the company hands over to the government in the form of fuel subsidies, dividends and taxes.

Financial data reviewed by Reuters show the government has increasingly relied on Petronas’s payments – a “dividend” to its sole shareholder – to plug fiscal deficits that have begun to alarm ratings agencies and analysts.

The data also show these payments grew over the past several years as oil prices soared, along with government spending. But Malaysia’s official accounts do not show how the money is being spent – and the government has steadfastly refused to disclose any details about that.

“WE NEED CASH”

Petronas is Malaysia’s largest single taxpayer and biggest source of revenue, covering as much as 45 percent of the government’s budget. Unlike other oil-rich nations such as Saudi Arabia, Norway or Brazil, Malaysia runs chronic, large budget deficits that have expanded even as oil revenues increased. Last year’s fiscal gap, at 5 percent of gross domestic product, trailed only India’s for the dubious distinction of biggest in emerging Asia, and it may widen this year.

Subsidies account for a big chunk of the deficit. They have other downsides as well, Shamsul noted in his speech to the gas conference. “Subsidies distort transparency, reduce competition and deter new investments,” he said, adding that Petronas paid between 18 billion and 20 billion ringgit ($5.75-6.35 billion) a year to subsidize gas consumption.

Malaysia isn’t facing a fiscal crisis. Foreign investors eagerly buy Malaysian government bonds, confident the country’s reserves of oil, gas and foreign currency are deep enough to ensure the debt will be repaid.

That faith will be tested over the next few months.

Falling oil and gas prices will likely constrain Petronas’s 2012 profits, and a worsening euro-zone crisis may hurt the country’s exports. Smaller Petronas payouts and slowing economic growth would pinch government finances.

Shamsul argues now is an opportune time to pursue foreign acquisitions on the cheap as Malaysia’s domestic energy supplies deplete. On Thursday, the company announced it was acquiring its Canadian joint-venture partner, Progress Energy Resources Corp, for $4.7 billion. More may be in the offing.

“Mind you, for that to happen, we need cash,” Shamsul said in his speech.

The trouble is, the government needs the cash, too.

TOWERS OVER MALAYSIA

Petronas, Malaysia’s only global Fortune 500 company, towers over the Southeast Asian country – literally and figuratively. Its 88-storey twin towers, once the world’s tallest buildings, dominate the skyline of Kuala Lumpur.

Petronas’s oil and gas reserves rank 28th in the world, according to data from PetroStrategies in Plano, Texas, ahead of some better known players such as Norway’s Statoil and CNOOC, China National Offshore Oil Corp.

Unusual for a state-owned enterprise, Petronas’s debt is rated stronger than the sovereign state’s. The company had about $15.6 billion in total borrowing as of March 31 and counts U.S. insurer Aflac Inc among the debt holders.

Petronas’ CEO and board, however, serve at the pleasure of the prime minister. Over the years, prime ministers have tapped into Petronas funds to build their dream projects and bail out their mistakes. Political leaders were used to dealing with yes-men in the company, which on Malaysia’s organization chart is part of the prime minister’s office.

Now Petronas is trying to say no.

Like all state-owned oil companies, Petronas is expected to pass along a share of profit to the government, just as a private sector oil company pays dividends to shareholders.

Those dividends gobbled up almost 55 percent of its net profits in the fiscal year ended March 31, 2011, well above the average of 38 percent paid by national oil companies around the world, Petronas figures show.

Including taxes, export duties and the dividend, Petronas estimates its total payments to the Malaysian government added up to 65.7 billion Malaysian ringgit ($21.10 billion) in that fiscal year.

SWELLING DEFICIT

Petronas has been pushing for a new dividend policy that would set the annual payout to the government at 30 percent of profits instead of the flat 28 billion Malaysian ringgit ($8.75 billion) it will pay this year.

A lower payout would preserve money to reinvest in global oil and gas exploration in order to compensate for declining domestic supplies.

A Reuters analysis of Petronas and government financial data shows Petronas would have paid close to 17 billion ringgit in the March 2011 fiscal year if the 30 percent dividend formula was in place.

A smaller dividend payment would have deepened Malaysia’s fiscal deficit, swelling it to about 6.5 percent of gross domestic product. That’s nearly triple the average among the world’s emerging-market economies, according to International Monetary Fund data.

With less Petronas money under the new formula, Prime Minister Najib would have three unpopular options: cutting spending, increasing taxes or ramping up the deficit. Worsening public finances could unsettle foreign investors, who hold about 39 percent of the government’s local currency debt, the highest share in emerging Asia.

The Petronas CEO put a brave face on it when Reuters asked him if the new formula might be put in place this year, with elections now expected as soon as September.

“The government is fairly aware of Petronas’s need to have our own funding for growth,” Shamsul said after the company released financial results on May 31. “They respect that and they will agree to our request.”

Najib’s office declined to comment.

ELECTION STIMULUS?

Najib, who took over mid-term from his predecessor and has yet to receive an electoral mandate as prime minister, can ill-afford to accommodate Petronas right now on the dividend. He has raised civil-servant wages and approved cash payouts to low-income households – vote-winning measures paid for in part by Petronas.

Ratings agency Fitch warned in February that Malaysia’s budget was too reliant on petroleum receipts, and elections could drive up spending and deepen the budget deficit.

“If aggressive stimulus measures were implemented and this led to a sustained increase in public debt ratios, it would be negative for the ratings,” Fitch wrote.

That may already be happening. The government in June asked parliament to approve another 13.8 billion ringgit in supplementary spending – more than half of it for food and fuel subsidies – which would swell the fiscal deficit to 6 percent of GDP.

Petronas only began detailing its contributions to the government two years ago – around the time it began lobbying for a change in the dividend policy. Indeed, the word “dividend” does not even appear in its annual reports for 2001 through 2009.

Reuters has filled in some of the gaps from previous years, obtaining figures from former Prime Minister Mahathir Mohamad, now adviser to the oil company, dating back to 1976. Petronas declined to confirm their accuracy.

NO PUBLIC DISCLOSURE

Mahathir’s data show Petronas payments to the state more than doubled between 2005 and 2011 as oil prices soared. Malaysia’s spending swelled too, widening the budget deficit even though revenues rose. But Malaysia won’t disclose what the Petronas money is being spent on.

Reuters placed an official request for that data from Malaysia’s accountant general’s office, but the audit agency said it could provide budgetary figures for everything except Petronas’s contributions.

Without access to official figures, it is difficult to determine how the government spends Petronas money. Mahathir told Reuters he released additional Petronas data on his blog as an “appeal” for more clarity on where the money went after he stepped down from office in 2003.

The bulk of it appears to be going into operating expenses, including higher wages for the more than 1.4 million civil servants who are mostly ethnic Malays, Mahathir says.

Since Najib took office in 2009, operating expenses have risen by almost 16 percent. Development spending, which includes education, security and healthcare, has stayed flat.

Increased wages are a recurring cost, Mahathir pointed out in an interview from his office on the 83rd floor of the Petronas Towers. Once pay goes up, he said, it is difficult to cut in lean years.

“So the result is, you take more from development expenditure because development expenditure is not a statutory requirement,” he said. “You can cut.”

EXPANDING ABROAD

As domestic oil supplies shrink, Petronas has been expanding abroad, investing in Sudanese oil, South African petrol stations and European liquefied natural gas. Its corporate operations map shows a presence on five continents.

But 29 percent of the company’s international production is concentrated in Sudan and South Sudan, and clashes along their border have virtually shut down most of the pipelines. Shamsul warned that a halt in Sudan production would cost the company 3 billion ringgit.

That is one reason behind the planned purchase of Canada’s Progress Energy. Shamsul said Thursday that the deal would boost the company’s gas resources in “a geopolitically stable region.”

Deals like this take money, and Petronas argues it cannot fulfill its mission when it is handing over more than half its profits to the government.

Petronas board member Mohammed Azhar Osman Khairuddin told unidentified U.S. diplomats that the oil company “feels tremendous pressure to grow its business in order to maintain Malaysia’s political status.” Azhar said Petronas wanted the money invested in oil and gas assets “to promote future profitability rather than be spent now on domestic programs for political gain”, according to a diplomatic cable released by Wikileaks in June of last year.

Neither Azhar nor Petronas responded to requests for comment.

The tug-of-war between government payments and corporate investments is a sore point with other oil companies as well.

Petronas faces a milder version of the dilemma facing Mexico’s national oil company, Pemex. The Mexican government is extracting so much cash from the business that Pemex is having trouble investing in production – and output has waned. Fitch assigned a “BBB” rating to the oil company’s latest debt issuance, citing a substantial tax burden and “exposure to political interference risk.”

With global energy demand expected to rise by around 30 percent by 2050 as the population rises to 9 billion, oil executives are asking whether governments are a major obstacle to ensuring future supplies at affordable levels. Exxon Mobil Chief Executive Rex Tillerson told the World Gas Conference that regulation, taxes and subsidies are placing at risk the projects needed to fuel global growth. If the situation persists, governments will find their economies “walking backwards,” he said.

Petronas has four oil projects in Iraq, which are expected to achieve commercial production this year. Shamsul estimates that Petronas’s share of Iraqi output will peak at 800,000 barrels of oil per day by 2015 – about 45 percent more than Malaysia’s annual crude oil production.

The company has not disclosed how much it is investing in Iraq, but as much as $8 billion is going into one field alone, Gharf Oilfield, which Petronas is developing along with Japan Petroleum Exploration Co.

“The reason (Petronas) does not want to give money to the government is because it needs the money to reinvest,” Mahathir said. “This is a very costly business as you know. Everything runs into the billions of dollars.”

GOOD GOVERNANCE

As state oil companies go, Petronas has a good reputation for governance. A 2011 World Bank working paper on governance and performance of national oil companies ranked Petronas slightly above the global average.

But it has been called upon to bankroll some questionable projects, both under Najib and his predecessors. Twice – in 1984 and 1989 – Mahathir asked Petronas to bail out scandal-ridden Bank Bumiputra Bhd from collapse. In those two rescues, Petronas injected a total of 3.3 billion ringgit into the bank.

Mahathir drew criticism for tapping Petronas to bail out a debt-burdened shipping concern controlled by his eldest son, Mirzan, and again to support Malaysian auto company Proton, which makes the Lotus Formula One car.

Mahathir denied he had bailed out his son. Petronas “drove a very hard bargain” and ended up turning a profit on the deal, he insisted. Petronas has repeatedly declined to discuss the bailouts.

The strains between Petronas and the government spilled out into the public after Najib took office in 2009.

Hassan Marican, Petronas’s CEO at the time, disagreed with Najib over issues ranging from who should be named to the Petronas board to which Formula One car to sponsor.

Reuters has learned that Najib gave Hassan just six days’ notice that his contract would not be renewed in 2010, ending a 21-year career. Three people with direct knowledge of the situation said Hassan was let go because he did not get along with Najib.

“Six days to pack up a career spanning more than two decades,” said a person close to Hassan.

Hassan, now a board member at U.S. oil major ConocoPhillips and chairman of utilities company Singapore Power, did not respond to repeated interview requests.

Appointed by Mahathir, the 59-year-old accountant by training had considerable freedom before the clashes with Najib. Mahathir said Hassan often said “no” to his suggestions, though he did agree to bail out the national car company that was the prime minister’s pride and joy and the company owned by Mahathir’s son.

Hassan refused to use inexperienced Malaysian companies to develop Malaysia’s oil and gas industry, or to pursue costly ventures to develop the country’s marginal oil fields, the source close to Hassan said.

Those two projects are now part of Najib’s ambitious $444 billion economic transformation program launched in September 2010 – just seven months after Hassan’s removal. ($1 = 3.1985 Malaysian ringgit)

(Additional reporting by Mica Rosenberg in Mexico City and Yantoultra Ngui in Kuala Lumpur.; Editing by Bill Tarrant and Michael Williams)

Chief executive Shamsul Azhar Abbas took to the stage and
declared that the government’s policy of subsidising fuel was
plain wrong. A murmur ran through the crowd – his boss, Prime
Minister Najib Razak, was sitting in the front row.

Moments later, Najib went to the podium himself to remind
everybody that the subsidies – for which Petronas foots the bill
- have “social-economic objectives.”

The subtext of that rejoinder: Malaysians pay among the
lowest electricity rates and petrol-pump prices in Asia. While
the government has vowed to “rationalize” that, it’s highly
unlikely to happen before elections expected in a few months.

The polite but pointed disagreement was the latest sign of
assertiveness from an oil company that prime ministers have
treated as a piggy bank for pet projects since it was
established in 1974.

Interviews with current and former officials and an
examination of Petronas and government documents show that
strains have been building behind the scenes over how much money
the company hands over to the government in the form of fuel
subsidies, dividends and taxes.

Financial data reviewed by Reuters show the government has
increasingly relied on Petronas’s payments – a “dividend” to its
sole shareholder – to plug fiscal deficits that have begun to
alarm ratings agencies and analysts.

The data also show these payments grew over the past several
years as oil prices soared, along with government spending. But
Malaysia’s official accounts do not show how the money is being
spent – and the government has steadfastly refused to disclose
any details about that.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

VIDEO on Petronas: link.reuters.com/zav98s

GRAPHICS links:

Map of Petronas holdings worldwide: link.reuters.com/huk78s

Petronas capital expenditures and revenue by region: link.reuters.com/muk78s

Petronas payments to the Malaysian government: link.reuters.com/kuk78s
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

“WE NEED CASH”

Petronas is Malaysia’s largest single taxpayer and biggest
source of revenue, covering as much as 45 percent of the
government’s budget. Unlike other oil-rich nations such as Saudi
Arabia, Norway or Brazil, Malaysia runs chronic, large budget
deficits that have expanded even as oil revenues increased. Last
year’s fiscal gap, at 5 percent of gross domestic product,
trailed only India’s for the dubious distinction of biggest in
emerging Asia, and it may widen this year.

Subsidies account for a big chunk of the deficit. They have
other downsides as well, Shamsul noted in his speech to the gas
conference. “Subsidies distort transparency, reduce competition
and deter new investments,” he said, adding that Petronas paid
between 18 billion and 20 billion ringgit ($5.75-6.35 billion) a
year to subsidize gas consumption.

Malaysia isn’t facing a fiscal crisis. Foreign investors
eagerly buy Malaysian government bonds, confident the country’s
reserves of oil, gas and foreign currency are deep enough to
ensure the debt will be repaid.

That faith will be tested over the next few months.

Falling oil and gas prices will likely constrain Petronas’s
2012 profits, and a worsening euro-zone crisis may hurt the
country’s exports. Smaller Petronas payouts and slowing economic
growth would pinch government finances.

Shamsul argues now is an opportune time to pursue foreign
acquisitions on the cheap as Malaysia’s domestic energy supplies
deplete. On Thursday, the company announced it was acquiring its
Canadian joint-venture partner, Progress Energy Resources
Corp (PRQ.TO: Quote, Profile, Research), for $4.7 billion. More may be in the offing.

“Mind you, for that to happen, we need cash,” Shamsul said
in his speech.

The trouble is, the government needs the cash, too.

TOWERS OVER MALAYSIA

Petronas, Malaysia’s only global Fortune 500 company, towers
over the Southeast Asian country – literally and figuratively.
Its 88-storey twin towers, once the world’s tallest buildings,
dominate the skyline of Kuala Lumpur.

Petronas’s oil and gas reserves rank 28th in the world,
according to data from PetroStrategies in Plano, Texas, ahead of
some better known players such as Norway’s Statoil and CNOOC,
China National Offshore Oil Corp.

Unusual for a state-owned enterprise, Petronas’s debt is
rated stronger than the sovereign state’s. The company had about
$15.6 billion in total borrowing as of March 31 and counts U.S.
insurer Aflac Inc (AFL.N: Quote, Profile, Research) among the debt holders.

Petronas’ CEO and board, however, serve at the pleasure of
the prime minister. Over the years, prime ministers have tapped
into Petronas funds to build their dream projects and bail out
their mistakes. Political leaders were used to dealing with
yes-men in the company, which on Malaysia’s organisation chart
is part of the prime minister’s office.

Now Petronas is trying to say no.

Like all state-owned oil companies, Petronas is expected to
pass along a share of profit to the government, just as a
private sector oil company pays dividends to shareholders.
Those dividends gobbled up almost 55 percent of its net
profits in the fiscal year ended March 31, 2011, well above the
average of 38 percent paid by national oil companies around the
world, Petronas figures show.

Including taxes, export duties and the dividend, Petronas
estimates its total payments to the Malaysian government added
up to 65.7 billion Malaysian ringgit ($21.10 billion) in that
fiscal year.

SWELLING DEFICIT

Petronas has been pushing for a new dividend policy that
would set the annual payout to the government at 30 percent of
profits instead of the flat 28 billion Malaysian ringgit ($8.75
billion) it will pay this year.

A lower payout would preserve money to reinvest in global
oil and gas exploration in order to compensate for declining
domestic supplies.

A Reuters analysis of Petronas and government financial
data shows Petronas would have paid close to 17 billion ringgit
in the March 2011 fiscal year if the 30 percent dividend formula
was in place.

A smaller dividend payment would have deepened Malaysia’s
fiscal deficit, swelling it to about 6.5 percent of gross
domestic product. That’s nearly triple the average among the
world’s emerging-market economies, according to International
Monetary Fund data.

With less Petronas money under the new formula, Prime
Minister Najib would have three unpopular options: cutting
spending, increasing taxes or ramping up the deficit. Worsening
public finances could unsettle foreign investors, who hold about
39 percent of the government’s local currency debt, the highest
share in emerging Asia.

The Petronas CEO put a brave face on it when Reuters asked
him if the new formula might be put in place this year, with
elections now expected as soon as September.

“The government is fairly aware of Petronas’s need to have
our own funding for growth,” Shamsul said after the company
released financial results on May 31. “They respect that and
they will agree to our request.”

Najib’s office declined to comment.

ELECTION STIMULUS?

Najib, who took over mid-term from his predecessor and has
yet to receive an electoral mandate as prime minister, can
ill-afford to accommodate Petronas right now on the dividend. He
has raised civil-servant wages and approved cash payouts to
low-income households – vote-winning measures paid for in part
by Petronas.

Ratings agency Fitch warned in February that Malaysia’s
budget was too reliant on petroleum receipts, and elections
could drive up spending and deepen the budget deficit.

“If aggressive stimulus measures were implemented and this
led to a sustained increase in public debt ratios, it would be
negative for the ratings,” Fitch wrote.

That may already be happening. The government in June asked
parliament to approve another 13.8 billion ringgit in
supplementary spending – more than half of it for food and fuel
subsidies – which would swell the fiscal deficit to 6 percent of
GDP.

Petronas only began detailing its contributions to the
government two years ago – around the time it began lobbying for
a change in the dividend policy. Indeed, the word “dividend”
does not even appear in its annual reports for 2001 through
2009.

Reuters has filled in some of the gaps from previous years,
obtaining figures from former Prime Minister Mahathir Mohamad,
now adviser to the oil company, dating back to 1976. Petronas
declined to confirm their accuracy.

NO PUBLIC DISCLOSURE

Mahathir’s data show Petronas payments to the state more
than doubled between 2005 and 2011 as oil prices soared.
Malaysia’s spending swelled too, widening the budget deficit
even though revenues rose. But Malaysia won’t disclose what the
Petronas money is being spent on.

Reuters placed an official request for that data from
Malaysia’s accountant general’s office, but the audit agency
said it could provide budgetary figures for everything except
Petronas’s contributions.

Without access to official figures, it is difficult to
determine how the government spends Petronas money. Mahathir
told Reuters he released additional Petronas data on his blog as
an “appeal” for more clarity on where the money went after he
stepped down from office in 2003.

The bulk of it appears to be going into operating expenses,
including higher wages for the more than 1.4 million civil
servants who are mostly ethnic Malays, Mahathir says.

Since Najib took office in 2009, operating expenses have
risen by almost 16 percent. Development spending, which includes
education, security and healthcare, has stayed flat.

Increased wages are a recurring cost, Mahathir pointed out
in an interview from his office on the 83rd floor of the
Petronas Towers. Once pay goes up, he said, it is difficult to
cut in lean years.

“So the result is, you take more from development
expenditure because development expenditure is not a statutory
requirement,” he said. “You can cut.”

EXPANDING ABROAD

As domestic oil supplies shrink, Petronas has been expanding
abroad, investing in Sudanese oil, South African petrol stations
and European liquefied natural gas. Its corporate operations map
shows a presence on five continents.

But 29 percent of the company’s international production is
concentrated in Sudan and South Sudan, and clashes along their
border have virtually shut down most of the pipelines. Shamsul
warned that a halt in Sudan production would cost the company 3
billion ringgit.

That is one reason behind the planned purchase of Canada’s
Progress Energy. Shamsul said Thursday that the deal would boost
the company’s gas resources in “a geopolitically stable region.”

Deals like this take money, and Petronas argues it cannot
fulfil its mission when it is handing over more than half its
profits to the government.

Petronas board member Mohammed Azhar Osman Khairuddin told
unidentified U.S. diplomats that the oil company “feels
tremendous pressure to grow its business in order to maintain
Malaysia’s political status.” Azhar said Petronas wanted the
money invested in oil and gas assets “to promote future
profitability rather than be spent now on domestic programs for
political gain”, according to a diplomatic cable released by
Wikileaks in June of last year.

Neither Azhar nor Petronas responded to requests for
comment.

The tug-of-war between government payments and corporate
investments is a sore point with other oil companies as well.

Petronas faces a milder version of the dilemma facing
Mexico’s national oil company, Pemex. The Mexican government is
extracting so much cash from the business that Pemex is having
trouble investing in production – and output has waned.
Fitch assigned a “BBB” rating to the oil company’s latest debt
issuance, citing a substantial tax burden and “exposure to
political interference risk.”

With global energy demand expected to rise by around 30
percent by 2050 as the population rises to 9 billion, oil
executives are asking whether governments are a major obstacle
to ensuring future supplies at affordable levels. Exxon Mobil
(XOM.N: Quote, Profile, Research) Chief Executive Rex Tillerson told the World Gas
Conference that regulation, taxes and subsidies are placing at
risk the projects needed to fuel global growth. If the situation
persists, governments will find their economies “walking
backwards,” he said.

Petronas has four oil projects in Iraq, which are expected
to achieve commercial production this year. Shamsul estimates
that Petronas’s share of Iraqi output will peak at 800,000
barrels of oil per day by 2015 – about 45 percent more than
Malaysia’s annual crude oil production.

The company has not disclosed how much it is investing in
Iraq, but as much as $8 billion is going into one field alone,
Gharf Oilfield, which Petronas is developing along with Japan
Petroleum Exploration Co.

“The reason (Petronas) does not want to give money to the
government is because it needs the money to reinvest,” Mahathir
said. “This is a very costly business as you know. Everything
runs into the billions of dollars.”

GOOD GOVERNANCE

As state oil companies go, Petronas has a good reputation
for governance. A 2011 World Bank working paper on governance
and performance of national oil companies ranked Petronas
slightly above the global average.

But it has been called upon to bankroll some questionable
projects, both under Najib and his predecessors. Twice – in 1984
and 1989 – Mahathir asked Petronas to bail out scandal-ridden
Bank Bumiputra Bhd from collapse. In those two rescues, Petronas
injected a total of 3.3 billion ringgit into the bank.

Mahathir drew criticism for tapping Petronas to bail out a
debt-burdened shipping concern controlled by his eldest son,
Mirzan, and again to support Malaysian auto company Proton,
which makes the Lotus Formula One car.

Mahathir denied he had bailed out his son. Petronas “drove a
very hard bargain” and ended up turning a profit on the deal, he
insisted. Petronas has repeatedly declined to discuss the
bailouts.

The strains between Petronas and the government spilled out
into the public after Najib took office in 2009.

Hassan Marican, Petronas’s CEO at the time, disagreed with
Najib over issues ranging from who should be named to the
Petronas board to which Formula One car to sponsor.

Reuters has learned that Najib gave Hassan just six days’
notice that his contract would not be renewed in 2010, ending a
21-year career. Three people with direct knowledge of the
situation said Hassan was let go because he did not get along
with Najib.

“Six days to pack up a career spanning more than two
decades,” said a person close to Hassan.

Hassan, now a board member at U.S. oil major ConocoPhillips
and chairman of utilities company Singapore Power, did not
respond to repeated interview requests.

Appointed by Mahathir, the 59-year-old accountant by
training had considerable freedom before the clashes with Najib.
Mahathir said Hassan often said “no” to his suggestions, though
he did agree to bail out the national car company that was the
prime minister’s pride and joy and the company owned by
Mahathir’s son.

Hassan refused to use inexperienced Malaysian companies to
develop Malaysia’s oil and gas industry, or to pursue costly
ventures to develop the country’s marginal oil fields, the
source close to Hassan said.

Those two projects are now part of Najib’s ambitious $444
billion economic transformation programme launched in September
2010 – just seven months after Hassan’s removal.

($1 = 3.1985 Malaysian ringgit)

(Additional reporting by Mica Rosenberg in Mexico City and
Yantoultra Ngui in Kuala Lumpur.; Editing by Bill Tarrant and
Michael Williams)

((emily.kaiser@thomsonreuters.com)(+65 6318 4763)(Reuters
Messaging: emily.kaiser.reuters.com@reuters.net))
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China’s March inflation rate stayed below Beijing’s 4 percent target and appeared to be on a softening trajectory, and South Korea’s dropped to a 20-month low. But other figures show price pressures actually picked up last month, and factories paid more for raw materials.

The disconnect stems from the way inflation is measured. The primary indicator in many Asian economies compares prices against a year earlier, not the prior month as is common in the United States and Europe.

That can be misleading.

Asia’s inflation looks tame now largely because prices were high a year ago, when oil spiked because fighting in Libya threatened supplies, and shortages of pork and other food drove up costs. Economists call that the base effect.

Central bankers trying to calibrate interest rates need to know where prices are headed, not where they’ve been. Otherwise, they risk missing the warning signs of a build-up in inflation that will only become harder to contain.

“The month-on-month data gives you a better gauge of the inflation pulse, what’s happening right now,” said Rob Subbaraman, chief Asia economist for Nomura in Hong Kong. “I’m a little bit sceptical of looking too closely into the year-on-year numbers now.”

Each data set has its limitations.

Few of the statistics agencies in Asia adjust data for seasonal factors, such as the Lunar New Year which distorts month-on-month readings in China and some neighbouring economies every January and February.

Comparing year to year solves that problem, but introduces another set of concerns over base effect and timeliness.

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

GRAPHIC on commodity prices: r.reuters.com/hyk57s

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Seasonal adjustment is notoriously difficult to get right. Some economists think the U.S. government mismeasured seasonal shifts in the labour market this past winter, reporting an abnormally sharp drop in the jobless rate.

Nomura’s Subbaraman said he thinks inflation will become a bigger problem for Asia later this year. Rising commodity prices, easy monetary policy and tight labour markets suggest that as demand picks up, inflation will quickly follow.

The Bank of Korea and Bank Indonesia both hold policy-setting meetings this week, and are expected to keep rates steady, mindful of the inflation threat even though price pressures are currently subdued.

CONFLICTING SIGNALS

China’s inflation numbers on Monday were a case study in how confusing the data can be. The consumer price index rose 3.6 percent year on year, more than economists polled by Reuters had expected. But a measure of producer prices pointed the other way, dropping 0.3 percent from a year earlier.

That suggests little inflationary pressure in the pipeline because manufacturers would feel the effects of rising costs before consumers do.

Yet the month-on-month figure showed the producer price index rose 0.3 percent between February and March, which indicates price pressures may indeed be building.

Because China does not seasonally adjust the data, it is hard to read too much into changes between February and March. The lunar new year fell in January this year, so prices for food and other holiday-related items spiked that month and then eased somewhat in February. The pickup in March may have had more to do with the fact that prices had subsided in February.

Food was the primary driver behind the unexpected pickup in the March CPI, although unlike a year ago the main culprits were fruits and vegetables, not pork.

Vishnu Varathan, an Asia economist with Mizuho in Singapore, said he was “watchful” of signs that inflation was re-emerging as a threat, but saw little to fear in Monday’s data. High pork prices persisted last year, but it takes longer to rear a pig than to grow a cabbage.

“What we know about food inflation tells us there’s no reason to get distressed,” he said. “What we know about fuel inflation tells us there may be a problem but it hasn’t come home to roost yet.”

Varathan said he would be more worried about Asia’s inflation threat if conflict in the Middle East sent oil prices back up to 2008′s record high near $150 per barrel.

WHAT’S EATING ASIA

Food and energy account for about 40 percent of the consumer price index basket in most Asian economies outside of Japan, so watching commodities provides the clearest window into where inflation is heading.

Commodity price moves also explain why the yearly inflation data clashes with the month-on-month figures.

The Thomson Reuters-Jefferies CRB index .CRB, a broad measure of commodity prices, fell by as much as 15 percent from mid-March 2011 to mid-March 2012. But it was up 1.5 percent from mid-February to mid-March this year.

Even more worrisome to some inflation watchers is how rising commodity prices seem to be filtering through the economy and ultimately into higher wages. The big worry is a wage-price spiral, where pricier goods lead to higher wage demands, which in turn feeds back into higher prices.

China has been at the forefront of raising wages. Its latest five-year economic plan calls for an average annual minimum wage increase of 15 percent through 2015. Rival exporting economies may follow their lead, knowing that they too can boost wages without losing their competitive edge.

Rahul Bajoria, an economist with Barclays in Singapore, points out that wage hikes have been implemented or planned in Thailand, Malaysia and parts of Indonesia, bolstering his view that inflation pressures are building.

“The trough in inflation is going to be a lot shallower than what we were earlier expecting,” Bajoria said. “You have to look beyond the headline (inflation rate) and understand that the price dynamics are turning a bit more unfavourable.”

(Reporting by Emily Kaiser; Editing by Mathew Veedon)

China’s March inflation rate stayed below Beijing’s 4 percent target and appeared to be on a softening trajectory, and South Korea’s dropped to a 20-month low. But other figures show price pressures actually picked up last month, and factories paid more for raw materials.

The disconnect stems from the way inflation is measured. The primary indicator in many Asian economies compares prices against a year earlier, not the prior month as is common in the United States and Europe.

That can be misleading.

Asia’s inflation looks tame now largely because prices were high a year ago, when oil spiked because fighting in Libya threatened supplies, and shortages of pork and other food drove up costs. Economists call that the base effect.

Central bankers trying to calibrate interest rates need to know where prices are headed, not where they’ve been. Otherwise, they risk missing the warning signs of a build-up in inflation that will only become harder to contain.

“The month-on-month data gives you a better gauge of the inflation pulse, what’s happening right now,” said Rob Subbaraman, chief Asia economist for Nomura in Hong Kong. “I’m a little bit skeptical of looking too closely into the year-on-year numbers now.”

Each data set has its limitations.

Few of the statistics agencies in Asia adjust data for seasonal factors, such as the Lunar New Year which distorts month-on-month readings in China and some neighboring economies every January and February.

Comparing year to year solves that problem, but introduces another set of concerns over base effect and timeliness.

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Food inflation back on the table:

China March inflation:

GRAPHIC on commodity prices: r.reuters.com/hyk57s

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Seasonal adjustment is notoriously difficult to get right. Some economists think the U.S. government mismeasured seasonal shifts in the labor market this past winter, reporting an abnormally sharp drop in the jobless rate.

Nomura’s Subbaraman said he thinks inflation will become a bigger problem for Asia later this year. Rising commodity prices, easy monetary policy and tight labor markets suggest that as demand picks up, inflation will quickly follow.

The Bank of Korea and Bank Indonesia both hold policy-setting meetings this week, and are expected to keep rates steady, mindful of the inflation threat even though price pressures are currently subdued.

CONFLICTING SIGNALS

China’s inflation numbers on Monday were a case study in how confusing the data can be. The consumer price index rose 3.6 percent year on year, more than economists polled by Reuters had expected. But a measure of producer prices pointed the other way, dropping 0.3 percent from a year earlier.

That suggests little inflationary pressure in the pipeline because manufacturers would feel the effects of rising costs before consumers do.

Yet the month-on-month figure showed the producer price index rose 0.3 percent between February and March, which indicates price pressures may indeed be building.

Because China does not seasonally adjust the data, it is hard to read too much into changes between February and March. The lunar new year fell in January this year, so prices for food and other holiday-related items spiked that month and then eased somewhat in February. The pickup in March may have had more to do with the fact that prices had subsided in February.

Food was the primary driver behind the unexpected pickup in the March CPI, although unlike a year ago the main culprits were fruits and vegetables, not pork.

Vishnu Varathan, an Asia economist with Mizuho in Singapore, said he was “watchful” of signs that inflation was re-emerging as a threat, but saw little to fear in Monday’s data. High pork prices persisted last year, but it takes longer to rear a pig than to grow a cabbage.

“What we know about food inflation tells us there’s no reason to get distressed,” he said. “What we know about fuel inflation tells us there may be a problem but it hasn’t come home to roost yet.”

Varathan said he would be more worried about Asia’s inflation threat if conflict in the Middle East sent oil prices back up to 2008′s record high near $150 per barrel.

WHAT’S EATING ASIA

Food and energy account for about 40 percent of the consumer price index basket in most Asian economies outside of Japan, so watching commodities provides the clearest window into where inflation is heading.

Commodity price moves also explain why the yearly inflation data clashes with the month-on-month figures.

The Thomson Reuters-Jefferies CRB index .CRB, a broad measure of commodity prices, fell by as much as 15 percent from mid-March 2011 to mid-March 2012. But it was up 1.5 percent from mid-February to mid-March this year.

Even more worrisome to some inflation watchers is how rising commodity prices seem to be filtering through the economy and ultimately into higher wages. The big worry is a wage-price spiral, where pricier goods lead to higher wage demands, which in turn feeds back into higher prices.

China has been at the forefront of raising wages. Its latest five-year economic plan calls for an average annual minimum wage increase of 15 percent through 2015. Rival exporting economies may follow their lead, knowing that they too can boost wages without losing their competitive edge.

Rahul Bajoria, an economist with Barclays in Singapore, points out that wage hikes have been implemented or planned in Thailand, Malaysia and parts of Indonesia, bolstering his view that inflation pressures are building.

“The trough in inflation is going to be a lot shallower than what we were earlier expecting,” Bajoria said. “You have to look beyond the headline (inflation rate) and understand that the price dynamics are turning a bit more unfavorable.”

(Reporting by Emily Kaiser; Editing by Mathew Veedon)