Serbia's election

Blow West

A surprise in Serbia, as voters back the pro-European party of President Boris Tadic

EXPECT the unexpected. That has long been a useful guide to the Balkans, as the election in Serbia on Sunday May 11th proved. Preliminary results show a big swing in favour of parties campaigning to continue on the path of European integration. This was totally unforeseen. Analysts relying on usually accurate polling data had predicted that Serbs would vote for a government which would halt or even reverse Serbia's efforts to join the European Union (EU). That has not happened, but a strong and stable Serbian government is still far from assured.

For weeks polls had predicted that the pro-European coalition led by President Boris Tadic would take about a third of the votes and that the nationalist Radical Party would take a little bit more. The founder of the Radicals is currently on trial for war crimes at the UN tribunal in The Hague. The polls also suggested that the coalition led by Vojislav Kostunica, the outgoing prime minister would, as before, be kingmaker, but that this time around he would form a new government with the Radicals.

What has happened has been a sharp knock to expectations. Mr Tadic's coalition of parties scored almost 39% of the vote, giving it a projected 102 seats in the 250-seat parliament. The Radicals have slumped to some 29%, and 77 seats; Mr Kostunica's coalition is disappointed to get just 11.3% and 30 seats. The Socialists— the party of Slobodan Milosevic, the former Serbian strongman who led his country into four disastrous wars in the 1990s—and their allies, who had been expected to do far worse, got almost 8% and 20 seats.

Marko Blagojevic, a pollster, notes that pro-European forces did roughly as well as they were expected to do. The surprise was that many supporters of the Radicals—the largest party in parliament after elections in 2003 and last year—stayed at home. Why they did so seems to boil down to three events in the run up to the election. On April 29th the EU signed an agreement with Serbia which is widely seen as putting it on track for eventual membership. This was followed by an announcement that Serbs would no longer have to pay for visas for 17 European countries. Finally a big deal was signed between Fiat, the Italian carmaker, and Zastava, a Serbian cars-to-Kalashnikovs conglomerate. This foresees an investment of €700m ($1.1 billion) and the creation of thousands of jobs. Many, especially in Brussels, had agonised that the European concessions might rebound if they were seen as bids to bolster the pro-Europeans. In fact, the ploys worked.

All this is good news for those who believe that stability in this part of Europe is best served by a Serbia heading towards the EU. But the hardliners are not entirely defeated. Now complicated bargaining will begin. The magic number of seats needed in parliament to secure a majority is 126. This means that, mathematically, the Radicals together with the Socialists and Mr Kostunica could still form a government with a tiny majority. Mr Tadic plus his allies appear to have one or two seats fewer. However, it appears that a lot of work has already been done to lure the Socialists over to support the pro-European block. This will not be easy, and could take weeks or months to accomplish. But according to Ivan Vejvoda, who heads the Balkan Trust for Democracy, a donor to good causes, the Socialists “are looking at their future…they must see the way the wind is blowing.”

Chinese Manufacturers Shun Low-Wage Inland for Vietnam, India

May 12 (Bloomberg) -- Edward Kang spent 15 years building textile maker Ever-Glory International into a symbol of China's world dominance in cheap clothes, shoes and toys. With $70 million in annual sales, the company has won customers including Levi Strauss & Co. and Tesco Plc.

With rising labor costs and the yuan's appreciation against the dollar threatening profits, Kang, 45, considered moving from Nanjing, near China's Pacific coast, to the interior to take advantage of a government program to entice businesses into lower-wage provinces. He decided instead to shift 40 percent of his manufacturing capacity to a new plant in northern Vietnam's port city of Haiphong within five years.

The provincial Chinese workers didn't have the appropriate experience, and transportation to distant ports was too expensive, Kang says: ``If we cannot meet customers' price expectations, they will say `Bye-bye, Ever-Glory.'''

Thousands of companies are arriving at similar conclusions. With Vietnam, India and other Asian nations mounting aggressive campaigns for foreign investment, a third of the manufacturers in Guangdong province -- which produces 30 percent of China's exports -- will be closed in three years, according to an April 29 report by Tao Dong, chief Asia economist at Credit Suisse in Hong Kong.

``The end of an era in terms of China's mighty export industry has just begun,'' he said.

Foreign Shores

The factory closures and departures to foreign shores aren't likely to dampen growth in the world's fastest expanding major economy, as China increases its production of higher- value goods -- computer chips, electronic gadgets, automobiles.

What it does, in the world's largest Communist country, is increase the disparity between residents in the wealthy coastal areas and the more than 700 million people in inland provinces -- more than half China's population -- who may find themselves excluded from the country's success story.

``It is absolutely key that China push its development model westward,'' says Stephen Roach, chairman of Morgan Stanley's Asia division in Hong Kong. ``The jury's out on whether they will pull it off.''

China's shipments of higher-technology products surged 412 percent since 2002 to 347.8 billion yuan ($47.6 billion) last year, or 28.5 percent of total exports, fueling 11.9 percent growth in gross domestic product. The economy is forecast to expand 10 percent this year and 9.5 percent in 2009, according to 21 economists surveyed by Bloomberg.

Cheap Labor

Growth is concentrated mainly in four provinces on China's southeastern coast: Guangdong, Jiangsu, Fujian and Zhejiang. Clothing, shoe and toymakers there sparked China's manufacturing boom, with much of the initial push coming from foreign companies attracted by cheap labor, easy access to ports and special economic zones that offered duty-free imports and other tax incentives.

China won more than 65 percent of the $792 billion in investment received by 21 Asian countries during the past five years, according to the Asian Development Bank. Such dominance prompted Singapore's founding father, Lee Kuan Yew, to say in 2002 that China is ``a vacuum cleaner for foreign direct investment.''

About 90 percent of the money has gone into the coastal southeast, which accounts for 60 percent of the country's total exports. That's helped to double average monthly pay in the Guangdong province city of Dongguan, China's largest manufacturing center, to 2,594 yuan in December 2006 from 1,284 yuan in 2001, according to New York-based CEIC Data, an economic-research firm.

Poorest Regions

So far, the rest of China hasn't shared in the prosperity. Incomes in western China's poorest regions are one-tenth those of the richest areas on the east coast. The average monthly wage for the city of Gansu in the northwest is 1,437 yuan.

To help encourage investment and narrow the disparity, the government adopted a ``Go West'' policy in 2000. It spent 1 trillion yuan through 2005 on 70 major infrastructure programs including a 1,140 kilometer railway to Lhasa, Tibet's capital, according to China's National Development and Reform Commission. In mid-2006, the government added 168 billion yuan for regional airports, hydropower stations and other projects.

Even with the improvements, power failures, substandard roads and congested railways reduced production in 2004 by 9.5 percent in Kunming, the capital of Yunnan province in the southwest, according to a World Bank report. Such issues cut output during the same period only 2.3 percent in Shanghai, on the Pacific coast.

`Fragmented and Inefficient'

The transportation industry remains fragmented and ``inefficient,'' Beijing-based World Bank economist Zhao Min wrote in a recent report. Better integration of rail lines, waterways and roads ``could considerably reduce'' costs and increase ``the competitiveness of the interior regions,'' she said.

Other disadvantages: The expense of setting up a business in the inland southwest is nearly three times higher than in the coastal southeast, and obtaining credit takes more than twice as long, according to the World Bank in ``Doing Business in China 2008.''

The yuan's 4.45 percent rise against the dollar in the first four months of 2008, nearly twice the rate of last year's appreciation, is also eroding profits because China's exports are priced in dollars. The currency climbed 7 percent in 2007.

Investment Intentions

Foreign companies announced last year that they intend to invest $11.6 billion in central and western China, up 30 percent from $8.9 billion in 2003, according to Belfast-based FDI Intelligence, a provider of data on foreign direct investment. That's well below companies' investment intentions for Vietnam, which totaled $40.1 billion in 2007, up 354 percent from 2003, and for India, which rose 174 percent to $52.6 billion, FDII said.

Zhejiang Hefeng Shoes Co., with one factory in Zhejiang province employing 1,000 people, is examining relocation options that include Vietnam, according to export manager Ray King. ``Customers say our prices are crazy,'' he says. ``They always say other suppliers in Vietnam and Thailand are cheaper.''

Vietnam and India have become more aggressive in luring low-cost industries. Vietnam joined the World Trade Organization in 2007, giving it greater access to world markets. PricewaterhouseCoopers last July ranked it as the most competitive destination for manufacturing businesses among the world's top 20 emerging markets; China was second.

Low Wages

Vietnam's laborers earn an average of 1.669 million dong ($104) a month, 41 percent less than China's lowest-paid workers in the central province of Jiangxi, according to World Bank data.

India's wages are lower than Vietnam's, averaging 3,843 rupees ($87) a month, according to CEIC. India is copying China's special economic zones, building more than 400 that will provide low-cost land and rents, five- to 10-year tax breaks and duty-free imports.

It has been a member of the WTO since Jan. 1, 1995, and ranked 7th in the PricewaterhouseCoopers report, behind Vietnam, China, Poland, Chile, Malaysia and Thailand.

The labor-cost comparison became even more favorable for Vietnam and India in January, when a new Chinese labor law required companies to pay minimum wages and severance pay. The law contributed to a 22 percent increase in labor costs during the past year, according to the Federation of Hong Kong Industries.

The absence of such laws ``anchored China's status as the world's factory,'' Tao said in the Credit Suisse report. That advantage ``has gone overnight.''

Clinton Deadline Looms for Recouping $11 Million Personal Loan

May 12 (Bloomberg) -- Hillary Clinton may have a financial incentive to remain in the presidential race for a while. And she has Senator John McCain to thank for it.

Clinton loaned her struggling campaign $11 million in recent months. A little-known provision of a 2002 campaign- finance law cosponsored by McCain prevents candidates who drop out of the race from raising money after the nominating conventions to repay themselves for personal loans.

Should Clinton fail to come up with the funds by the Democratic convention in August, she'll be out the $11 million. If she quits the campaign before then, she may find it hard to get people to keep giving cash just so she can retire her debt.

That may ratchet up pressure on Clinton to cut a deal with rival Barack Obama to help her through his supporters. Obama may oblige since he would love to get her out of the race for the nomination so he could focus on the general election.

``Helping to pay off the debt would certainly be a clear signal of Obama's desire to bring the two candidates together,'' said Anthony Corrado, a professor of government at Colby College in Waterville, Maine.

Obama, 46, is keeping the door open to the possibility of helping pay her debt, which includes more than $10 million in unpaid bills to vendors and consultants -- including strategist Mark Penn, who remains a flash point of criticism for backing a trade deal she opposed.

`On the Team'

In the interest of unifying the party, Obama will seek ``a broad-ranging discussion with Senator Clinton about how I could make her feel good about the process and have her on the team,'' he told reporters in Oregon on May 9.

Clinton spokesman Howard Wolfson said ``there have been no discussions along those lines'' and ``no contemplation of it.''

In the past, victorious candidates have helped their vanquished opponents pay off campaign debts. Supporters of Clinton, 60, aided former Iowa Governor Tom Vilsack after he dropped out of the race last year. And McCain's backers gave to Kansas Senator Sam Brownback, a failed Republican contender.

There is one sleight-of-hand -- though legal -- tactic Clinton could use to pay off debts to others, though not to herself.

Through March 31, she had collected $23 million in donations designated for the general election.

Redirect Contributions

She could ask those donors to redirect the contributions toward her 2012 Senate re-election campaign rather than the 2008 presidential race, said Kenneth Gross, a former Federal Election Commission lawyer now at Skadden, Arps, Slate, Meagher & Flom LLP. The Senate campaign could then pay off the current debt to vendors and consultants, including Penn, to whom she owed $4.5 million through March 31.

In the past, such donations could have also gone to pay back a candidate's personal loans. The 2002 law, which banned corporate, union and unlimited individual contributions to campaigns, put a stop to that. It limited such repayments to $250,000.

``She has between now and the convention to raise money to retire the loan or else she will have made an $11 million contribution to her campaign,'' former Federal Election Commission Chairman Michael Toner said.

Federal election law prohibits Obama from directly aiding Clinton through his campaign war chest; nothing stops him from asking his donors to do so.

Obama Donors

Yet while Obama has mostly relied on smaller contributors to fuel his record-setting fundraising, he's unlikely to ask them to shell out any money for Clinton, who together with her husband earned $109 million from 2000 through 2007. And many of those donors are unlikely to be willing to help her after this hard-fought campaign.

Democratic consultant Peter Fenn, who is neutral in the race, said Obama will need to call upon those donors for the general election should he decide not to take public funding for the campaign, or to give to the Democratic Party if he does.

``They're very loyal Obama people,'' Fenn said. ``You're not going to raise that much money from those people for Hillary.''

More probable sources of financial help for Clinton would be those who have given the maximum $2,300 to Obama's campaign, said Democratic consultant Erik Smith.

``Few campaigns would mobilize their grassroots supporters for something like this, and Obama certainly wouldn't,'' said Smith, an adviser to Richard Gephardt's 2004 presidential race. ``The most likely scenario would be that some of Obama's largest donors would work discreetly and independently of the campaign to raise money.''

Dollar Bulls Gain Control as Euro May Be Near Peak (Update4)

May 12 (Bloomberg) -- For the first time since December 2005, futures traders are turning bullish on the dollar.

The difference in the number of wagers by hedge funds and other large speculators on a gain in the greenback versus the euro, known as net longs, was 21,315 on April 29, figures from the Commodity Futures Trading Commission in Washington show. There were net-short positions in each of the previous 123 weeks. At the same time, traders have stepped up their purchases of options that profit from the dollar's appreciation.

The measures are making long-suffering proponents of the dollar optimistic that this time the currency's rally may hold, especially if the Federal Reserve's Open Market Committee refrains from additional interest-rate cuts. The Dollar Index traded on ICE Futures in New York, which tracks the currency against six trading partners, is up 3.7 percent from an all-time low of 70.698 set on March 17.

``There is kind of a sea change taking place at the moment,'' said Mitul Kotecha, head of foreign-exchange research in London at investment bank Calyon, whose forecasts on the euro-dollar exchange rate in the first quarter were more accurate than those of the two biggest currency traders. ``It's probably the early sign of perhaps a more sustained turnaround.''

The Dollar Index fell 0.1 percent to 73.006 by 10:19 a.m. in London. The dollar has appreciated 3.3 percent to $1.5493 since dropping to $1.6019 per euro on April 22, the lowest since the European currency's debut in 1999. The dollar will strengthen by the end of the year to $1.50, according to the median estimate of 40 strategists surveyed by Bloomberg News.

Gaining Traction

The dollar's rebound gained traction last month after the Open Market Committee said ``substantial'' rate cuts since September would help foster growth. U.S. employers also eliminated fewer jobs in April than forecast by economists.

Meanwhile, a slide in business confidence in Germany and France, which account for about half the euro-region economy, renewed speculation the European Central Bank will reduce rates this year. An end to lower rates in the U.S. and the possibility of cuts in Europe raises the appeal of dollar-denominated assets.

``The recent shift to a neutral FOMC stance and from a very hawkish European Central Bank stance, together with U.S. data pointing to a stagnation rather than a deep contraction, have already contributed to the dollar's rally,'' said Marc Chandler, global head of currency strategy in New York at Brown Brothers Harriman Inc. Chandler said he expects the dollar to reach $1.44 per euro by year-end.

Rate Futures

Interest-rate futures on the Chicago Board of Trade show an 84 percent chance the Fed will keep its target unchanged at 2 percent when policy makers next meet on June 25, with the balance of the odds calling for a quarter-percentage point cut.

The ECB will lower its 4 percent main refinancing rate to 3.75 percent by the end of September and 3.50 percent by year- end, according to the median estimate of 31 economists surveyed by Bloomberg.

As declining home sales and mortgage losses curbed economic growth, investor sentiment grew so negative on the dollar that even longtime pessimists such as Jim Rogers, chairman of Rogers Holdings, say the U.S. currency is due to rebound.

``I expect a nice rally in the American dollar because so many have been bearish on the American dollar, including me,'' he said on May 8 in Singapore. Rogers, who co-founded the Quantum fund with George Soros in the 1970s and correctly predicted the start of the commodities boom in 1999, cited the benefit of surging prices for U.S. agricultural products.

Contrarian Indicator

Futures can be viewed as a contrarian indicator because traders often rush to reduce positions when momentum in a currency shifts. The last time net longs were this high, in December 2005, the dollar was nearing the end of a one-year, 13 percent rally versus the euro. It weakened 11 percent in 2006 and depreciated by the same amount in 2007.

``It is more likely than not that reasons for speculators returning to selling the dollar will be greater than reasons for them to sell the euro,'' said Derek Halpenny, head of global- currency research in London at Bank of Tokyo-Mitsubishi UFJ Ltd., who expects the euro to reach a record high within three months. ``I see risk that the ECB doesn't do anything this year and expect the Fed will ease again in 2008.''

Between May 2005 and the end of that year, futures traders were net long the dollar versus the euro 73 percent of the time. The U.S. currency gained 7.9 percent in that period.

Call Options

Net-short positions versus all currencies fell to $10 billion in the week ended April 29, from $22 billion in the prior period, according to CFTC data tracked by Morgan Stanley. Speculators had net-long bets on the dollar versus the pound and the euro. Hedge funds and other large speculators were net-short the euro for a second week in the period ended May 6.

In another bullish signal for the dollar, demand for one- month options that grant the right to sell the euro is greater than for those allowing for purchases. The so-called risk- reversal rate had a 0.44 percentage point premium for euro puts relative to calls on May 9.

As recently as March, demand for call options was greater than put options. On Jan. 28, the premium for euro calls reached 0.495 percentage point, the highest since April 2007.

``We may very well have seen the bottom in the dollar,'' said Stephen Jen, the global head of currency research at Morgan Stanley in London, who forecasts the dollar will rise to $1.40 per euro by year-end. ``The dollar has regained some traction lately. Against the euro, the U.S. dollar is around 25 percent undervalued.''

U.S. Stocks Rise as Oil Drops; Wal-Mart Stores, MBIA Advance

May 12 (Bloomberg) -- U.S. stocks gained, rebounding from the first weekly drop in a month, as a retreat in oil prices boosted consumer shares and the world's largest bond insurer said it has enough cash to cover the securities it guarantees.

Wal-Mart Stores Inc., the world's biggest retailer, rallied the most in two weeks as a decline in crude leaves consumers with more money to spend. MBIA Inc., which reported its third consecutive quarterly loss, rose for the first time in four days after saying it has ``ample liquidity'' and won't have to raise more capital. Exxon Mobil Corp. and Chevron Corp. led energy shares lower, limiting the market's advance.

The Standard & Poor's 500 Index added 6.89 points, or 0.5 percent, to 1,395.17 at 10:47 a.m. in New York. The Dow Jones Industrial Average increased 74.5, or 0.6 percent, to 12,820.38. The Nasdaq Composite Index advanced 20.19, or 0.8 percent, to 2,465.71. Two stocks climbed for each that fell on the New York Stock Exchange.

``If oil prices come down and gasoline prices at the pump come down, that's a big benefit to the consumer,'' said Kevin Rendino, a senior fund manager who helps oversee about $16 billion at BlackRock Inc. in Plainsboro, New Jersey. ``We're getting more positive on financials.''

Nine of 10 industry groups in the S&P 500 advanced today, trimming its 2008 loss to 5.3 percent. The benchmark for U.S. equities has rebounded 9 percent from a 19-month low on March 10 as first-quarter earnings topped analysts' estimates at 61 percent of companies that have reported results so far, according to data compiled by Bloomberg.

Oil's Retreat

Crude oil for June delivery fell 0.5 percent to $125.30 a barrel in New York. Gasoline futures dropped 0.6 percent.

Wal-Mart, which relies on consumers' disposable income, climbed 61 cents to $57.79. Citigroup raised its share-price forecast to $67 from $57, citing the potential for increased earnings at its overseas stores. The retailer reports first- quarter earnings tomorrow.

``We're coming into the end of an earnings season which was OK,'' said Jonathan Monk, a U.S.-stock fund manager at Aerion Fund Management in London, which oversees about $23 billion. ``Oil prices coming down helps.''

Airlines also rallied as fuel costs declined. Continental Airlines Inc., the fourth-biggest U.S. carrier, gained 12 cents to $17.50. Northwest Airlines Corp., the fifth-largest, increased 6 cents to $8.67.

MBIA, Banks Gain

MBIA climbed 81 cents, or 8.6 percent, to $10.24. The company will give $900 million of capital to its insurance unit after regulators expressed concern over the bond insurer's decision to keep the money at the parent company.

Bank of America Corp., the second-biggest U.S. bank by assets, rose 43 cents to $37.08. JPMorgan Chase & Co., the third- largest, climbed 51 cents to $47.08.

Financial shares also advanced after HSBS Holdings Plc, Europe's biggest bank by market value, set aside $3.2 billion for bad loans in the U.S. Three analysts surveyed by Bloomberg predicted the first-quarter loan loss would range from $4.2 billion to $4.8 billion.

Citigroup Inc. gained 15 cents to $23.78 even after Oppenheimer Co. analyst Meredith Whitney said in an interview on Bloomberg Television that Chief Executive Officer Vikram Pandit faces an ``impossible feat'' in turning around the biggest U.S. bank as it faces ``seismic'' costs to restructure.

Apple, RIM

Apple Inc. advanced $1.89 to $185.34. The maker of Macintosh computers had its share-price target raised 14 percent to $205 at BMO Capital Markets, which said new phones and an expanding share of the personal computer market may boost earnings.

Research In Motion climbed $5.60 to $138.37. The company introduced a BlackBerry phone with quicker Web browsing and more room for songs and videos, getting a jump on Apple's faster iPhone that analysts expect next month.

AnnTaylor Stores Corp. added $2.44 to $26.99. The clothing retailer that targets women age 25 to 55 said it expects first- quarter earnings per share will exceed a previous forecast because of expense reductions and ``stronger results'' at its Loft stores.

Cablevision Systems Corp. dropped 62 cents to $24.35. The New York-area cable provider agreed to buy 97 percent of Long Island's Newsday newspaper from Tribune Co. for $650 million.

El Paso Corp., owner of the largest U.S. network of natural- gas pipelines, gained 28 cents to $19.51 after JPMorgan Chase & Co. upgraded the stock to ``overweight'' from ``neutral.''

Sprint, Sovereign

Sprint Nextel Corp. gained 33 cents to $9.71. The wireless company reported first-quarter profit excluding some items of 4 cents a share, topping the 2-cent average of analysts compiled by Bloomberg. Sales fell 7.5 percent to $9.33 billion, compared with the $9.39 billion average estimate of analysts. Sprint said it's exploring whether to get rid of ``non-core'' assets.

Sovereign Bancorp Inc. added 13 cents to $7.99 after the second-biggest U.S. savings and loan said it plans to raise about $1.5 billion in capital as the company tries to rebound from losses in 2007.

FedEx Corp., the second-largest U.S. package-shipping company, fell 63 cents to $89.74 after saying fourth-quarter profit will trail its forecast. Earnings will be $1.45 to $1.50 a share in the quarter ending May 31, compared with a previous target of $1.60 to $1.80, as surging fuel prices raised costs by at least $100 million more than estimated.

United Parcel Service Inc., which delivers half of U.S. packages, lost 19 cents to $70.10.

U.S. stocks completed their first weekly drop in a month May 9 after American International Group Inc. said it needs to raise $12.5 billion to cover writedowns.