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China’s manufacturing expanded and input costs climbed, underscoring the case for more interest- rate increases to tame inflation pressures in the fastest- growing major economy.

A reading of 52.9 for a purchasing managers’ index released by China’s logistics federation on its website exceeded the 50 level dividing expansion and contraction. A PMI from HSBC Holdings Plc and Markit Economics rose to 54.5 from 54.4.

A rebound in input costs shown by the logistics federation survey underscored why companies from Baoshan Iron & Steel Co. to Starbucks Corp. have raised prices. The central bank may boost benchmark interest rates immediately after a Chinese Lunar New Year holiday, which begins tomorrow and ends Feb. 8, BNP Paribas SA. said.

“Intensifying inflation pressure shows the government may need to strengthen policy tightening,” said Isaac Meng, a Beijing-based economist at BNP Paribas. Economic growth may moderate “which may be desirable for policy makers as they seek to control inflation and asset bubbles,” he said.

The yuan strengthened for the first day in four, trading at 6.5924 per dollar as of 11:36 a.m. in Shanghai. The Shanghai Composite Index of stocks rose 0.2 percent.

The central bank has raised benchmark interest rates twice since mid-October and pushed banks’ reserve requirements to the highest in more than two decades to drain away cash that could stoke inflation. The government last month expanded measures to cool the real-estate market, including by raising minimum down- payment requirements for second-home purchases.

Property Prices

Home prices rose 1 percent in January, the biggest month- on-month gain in half a year, property website owner SouFun Holdings Ltd. said today.

“The strong growth momentum leaves room for Beijing to fully focus on checking liquidity and inflation pressure,” said Qu Hongbin, the Hong Kong-based chief China economist for HSBC. “Quantitative tightening in the form of reserve requirement ratio hikes will remain the most effective policy tools.”

The PMI released by the Beijing-based logistics federation and the National Bureau of Statistics gives an indication of manufacturing activity by surveying more than 820 companies in 20 industries, including energy, metallurgy, textiles, automobiles and electronics.

The HSBC/Markit study is of more than 400 businesses.

Below Estimates

The reading for the logistics federation’s PMI was below the 53.9 level in the previous month and the median estimate of 53.5 in a Bloomberg News survey of 13 economists. A measure of employment slid to 49, the lowest reading since March 2009, as migrant workers returned home ahead of the holiday payday loan lenders.

An input-price index rose to 69.3 from 66.7 in December as food costs climbed.

Bank of America Merrill Lynch economist Lu Ting said the data in the study were heavily distorted by the holiday and there are “no big worries on growth.”

Zhang Liqun, a senior researcher at the State Council’s Development Research Center, said that companies face “difficulties” as cost pressures intensify and new orders grow at a slower pace. He commented in a statement released with the logistics organization’s survey.

Domestic demand is stable, a slowdown in industrial output may be “bottoming out,” and inflationary pressure appears to be rebounding, the federation said in another statement. Slower output growth in real-estate related industries such as furniture, textiles, glass and cement needs attention, it said.

Outpacing U.S.

The World Bank estimates that China’s economy will expand 8.7 percent this year, three times the pace of the U.S., as developing economies continue to outperform richer nations. China’s expansion was 9.8 percent in the fourth quarter.

UBS AG estimates that China’s inflation exceeded 5 percent last month after slowing to a 4.6 percent annual pace in December. November’s 5.1 percent rate was the highest in 28 months.

The central bank indicated in a Jan. 30 report that capital inflows and higher labor and resource costs may add to inflation pressures. Tools for reining in liquidity and credit growth include interest rates, bill sales and reserve requirements, the People’s Bank of China said.

Policy makers aim to hold growth in M2, the broadest measure of money supply, at about 16 percent this year. Last year, the actual 19.7 percent gain compared with a target of 17 percent. Local-currency lending totaled 7.95 trillion yuan ($1.2 trillion) in 2010, exceeding the government’s 7.5 trillion yuan ceiling.

The latest measures to cool the property market include increasing down-payment requirements for second homes to 60 percent from 50 percent and trials of property taxes in Shanghai and Chongqing.

–Li Yanping, with assistance from Marco Lui, Belinda Cao, Huang Zhe and Jay Wang. Editors: Paul Panckhurst, Ken McCallum.

To contact Bloomberg News staff for this story: Li Yanping in Beijing at +86-10-6649-7568 or yli16@bloomberg.net

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The pound posted weekly losses against most of its 16 most-actively traded peers as data showed the economy shrank and confidence plunged, fueling concern the government’s austerity measures are hurting growth.

The pound fell against the dollar for the first time in three weeks and declined against the euro for the fourth consecutive week on speculation the Bank of England may not be able to raise interest rates to fight inflation as growth slows. GfK NOP Ltd.’s index of sentiment fell 8 points from December to minus 29, the lowest since March 2009, data yesterday showed. The country’s gross domestic unexpectedly shrank 0.5 percent in the three months through December.

“We continue to see the pound as responding negatively to the stagflationary environment,” said Ian Stannard, a senior currency strategist at BNP Paribas SA in London. “We prefer to sell the pound against the dollar on rallies.”

The pound fell 1 percent in the week to $1.5838 as of 5:17 p.m. in London yesterday. Against the euro, it weakened 0.9 percent to 85.93 pence. The British currency declined the most against the yen in a month, shedding 1.6 percent to 129.99.

The currency has fallen 7 percent against nine of its developed-nation peers in the past 12 months, according to Bloomberg Correlation-Weighted Currency Indexes.

U.K. two-year government notes rose for the first time in four weeks as signs of economic slowdown prompted investors to seek a refuge in the safest assets. The yield on two-year securities fell eight basis points to 1.26 percent. The 10-year yield was five basis points lower on the week at 3.65 percent.

‘Tough Year’

“It’s going to be a tough year for gilt investors as the market is caught between data which suggested the economy is slowing and rising inflation,” said Nick Stamenkovic, a fixed- income strategist at RIA Capital Markets Ltd. in Edinburgh. “We see gains in gilts as short-lived as we believe policy makers will increasingly focus on inflation.”

Minutes released on Jan. 26 from the Bank of England’s monetary policy meeting earlier this month showed a second policy maker favored higher rates to curb consumer-price growth. Inflation accelerated to an eight-month high in December, rising 3.7 percent from a year earlier, as fuel and food prices climbed.

The bank’s Governor Mervyn King said on Jan. 26 that rising prices would be temporary. European Central Bank Executive Board member Lorenzo Bini Smaghi said on Jan. 27 that policy makers can no longer afford to ignore imported inflation after ECB President Jean-Claude Trichet pledged to do what’s needed to ensure price stability.

The U.K. 10-year breakeven rate, a market gauge of inflation expectations derived from the yield gap between nominal and index-linked bonds, rose nine basis points to 3.21 percentage points, the biggest weekly gain since the week ended Dec. 10.

U.K. gilts handed investors a 2.2 percent loss this month, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. It underperformed German bonds and Treasuries which lost 1.67 percent and 0.14 percent respectively.

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There will be lots more state workers joining the unemployment line this year.

Public employees are getting hit hard in the latest round of spending cuts as state officials look to close billion-dollar deficits. Governors across the nation are promising to eliminate thousands of positions and freeze or reduce salaries.

Texas lawmakers are proposing shedding 9,300 jobs, while Georgia’s governor said he’d erase 14,000 positions. New York’s governor is looking to lay off more than 10,000 workers and freeze salaries. And California’s and Nevada’s governors are proposing pay cuts of up to 10% and 5%, respectively.

Though state workers have suffered years of furloughs and downsizings, this year could prove to be the toughest yet. Federal stimulus money that kept many on the job is drying up, and some newly elected officials are bent on shrinking the role of the state.

"Many politicians have long talked about reducing the size of the government," said Georgia Gov. Nathan Deal in his State of the State address earlier this month. "My friends, we are doing it."

Public sector jobs were long thought to be more secure during economic downturns. But that’s not been the case during the Great Recession. State and local governments have shed 397,000 jobs since August 2008, falling to their lowest level since the late 1980s, according to the Center on Budget and Policy Priorities.

Asking for more sacrifice

Shortly after taking office on Jan. 1, New York Gov. Andrew Cuomo said he would reduce his salary by 5%. Soon after, he called for a wage freeze for workers whose contracts are up April 1 to help the Empire State deal with a projected $24 billion budget deficit over the next two years.

"We have to start with an emergency financial plan to stabilize our finances, we need to hold the line and we need to institute a wage freeze in the state of New York," he said in his State of the State address.

Cuomo is also looking to cut more than 10,000 jobs from a payroll of 190,000, which would be the largest layoff in New York in years. His predecessor, David Paterson, shed 900 posts shortly before leaving office.

The state’s unions, however, say there are other ways to address the budget shortfalls.

"We all understand the state’s fiscal crisis and the need to find solutions, but any suggestion of reducing the state workforce by 10,000 to 15,000 would not only cripple the delivery of essential services, it would have a chilling effect on the state’s economy and undermine the state’s fragile recovery," the Public Employees Federation, the second-largest union, said in a statement us fast cash. "We should all be working together to create jobs, not more layoffs."

In Texas, Gov. Rick Perry often boasts that his state leads the nation in job creation. But that doesn’t include positions in state government.

The budget unveiled by House lawmakers last week calls for the elimination of 9,300 posts during fiscal 2011-2012. The department of public safety and criminal justice would be hit the hardest, losing 6.3% of its staff. The budget recommends closing a prison and three youth facilities.

But the job cuts would be spread across the board. For instance, some 565 caseworkers who investigate child abuse would lose their paychecks when stimulus funds dry up.

Meanwhile, Nevada Gov. Brian Sandoval is looking to avoid layoffs. Instead he wants state workers to give up 5% of their pay. The state, among the worst hit in the recession, is facing a $1.2 billion budget deficit for fiscal 2012. The pay cuts replace a furlough program that temporarily sliced 4.6% off of employees’ wages. But the suspension of merit and longevity pay remains in place.

The governor tried to soften the blow by saying that he and his staff would take the same pay cut. He also pointed out that the salary reductions mean more people would get to keep their jobs.

"I believe this is a far better alternative than the mass lay-offs chosen by other state and local governments," he said in his State of the State address Monday.

Someone has to do the job

Shedding thousands of state workers is easier said than done, experts said. Someone still has to process driver’s licenses, patrol the highways and take care of state parks.

In some states, such as Georgia, many of the positions to be eliminated are vacant. In others, such as New York, the layoff proposal comes as union contracts are about to expire and could be used as a bargaining chip.

Governors are more willing to cut public employees than trim programs, said Steven Kreisberg, director of collective bargaining for the American Federation of State, County and Municipal Employees, which has 1.6 million members.

"It’s easy to say and it’s a great applause line," he said. "But there is work there to be done."  

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A law firm that says it represents ailing casino baron Stanley Ho is taking some of his wives and children to court, saying they improperly seized his stake in his Macau gambling empire.

The legal action is the latest twist in a family feud over who will control a multibillion dollar business that vies with Las Vegas Sands and Wynn Resorts for dominance in the world’s biggest gambling market.

Law firm Oldham Li and Nie released a statement through a public relations firm Thursday saying it has filed a writ of summons in Hong Kong’s High Court.

It said that shares were improperly issued to benefit Ho’s second and third wives and their families. Ho has 16 living children by four women he calls his wives. Lawyer Gordon Oldham said Ho had intended to divide his assets equally among his families.

The controversy erupted after casino operator Sociedade de Jogos de Macau Holdings, known as SJM, told the Hong Kong stock exchange on Monday that Ho had given nearly all his shares to five of his children and one of his wives.

Oldham said the billionaire disputed the share transfer and was vowing legal action while the family members released a flurry of statements and documents that they said proved he agreed to it.

The issue seemed to be resolved Wednesday when the 89-year-old read out a statement on local television saying that the “big issues have been settled.” He also said he no longer needed the services of Oldham, who later released a statement saying he was still representing Ho following a meeting with him.

In another twist, a daughter by Ho’s deceased first wife issued a statement late Wednesday also disputing the share transfer.

“I cannot believe that my father would leave my mother’s family with nothing,” Angela Ho said.

Oldham’s firm said Thursday it is seeking to restrain Ho’s third wife and three of Ho’s daughters by his second wife from selling or disposing of the shares.

Ho had surgery in 2009 for unspecified reasons and spent seven months in hospital before being discharged in March. Local media reported that he underwent brain surgery after hitting his head. He has rarely appeared in public since.

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French President Nicolas Sarkozy wants to persuade the Group of 20 nations to establish a smaller forum to address global currency issues because the larger body is too unwieldy, three French government officials said.

For Sarkozy, who holds the rotating leadership of the G-20 and Group of Eight this year, establishing the club underscores the top item on his G-20 agenda: mediating the dispute between China and the biggest economies with freely traded currencies, said the officials, who spoke on condition of anonymity because he has yet to agree to a plan.

While the G-20 replaced the G-7 as the main body for international economic policy making in 2009 to reflect the rise of emerging markets such as China, it has failed to follow its tradition of forging positions on currencies because not all of its members allow their currencies to float freely.

“The French appear to want a smaller group of countries to address currency matters because the G-20 looks too large and the G-7 too small,” said Gerard Lyons, chief economist at Standard Chartered Bank in London.

Possible outcomes include opening the G-7 to China or shrinking it to a G-5, with one euro-region representative, the officials said. Other emerging economies could also join, they said. The G-7 comprises the U.S., Japan, Germany, the U.K., France, Canada and Italy. Russia makes it the G-8.

Sarkozy has regularly complained that the euro is too strong against the yuan and the yen, hurting European export competitiveness. The euro is 8.2 percent overvalued against the dollar even after weakening 4 percent in the past 12 months, according to an index compiled by the Organization for Economic Cooperation and Development.

‘Multipolar World’

He has also raised the issue of reducing the dollar’s role as a reserve currency. At the World Economic Forum in Davos last January, Sarkozy said: “We can’t have on one hand a multipolar world and on the other hand a single reserve currency.” Sarkozy is scheduled to go to this year’s Davos meeting on Jan. 27.

Like the debate over adding permanent members to the United Nations Security Council, Sarkozy’s ambition may founder on political rivalries and policy disputes, says Jean Pisani-Ferry, a former European Union and French government economic adviser who runs the Bruegel research institute in Brussels.

China may view it as a “risk” that it will be pressed to let the yuan rise, he said. Other hurdles include drawing the line on membership and the risk of weakening the G-20, he said.

The U.S. wants to keep currency matters at the G-20, Charles Collyns, assistant U.S. Treasury secretary for international finance, said Jan. 20 in Washington.

‘Premier Forum’

“Inevitably, currencies are discussed and will continue to be discussed at the G-20,” he told a panel discussion on the topic. The G-20 is “the premier forum for international economic coordination.”

The most “pragmatic” decision would be to add Brazil, Russia, India and China to a G-7 where euro countries would merge in order to “keep it smaller than the G-20 and by that way more powerful in terms of quick decisions,” said Sebastian Wanke, an economist at Dekabank in Frankfurt.

Finance Minister Christine Lagarde has hinted at the French plans. In October in Washington, she said she was “not sure that 20 is the absolute right number” to “discuss effectively currencies.” Earlier this month, Lagarde wished journalists luck in explaining G-20 talks, including how to “legitimize the existence of a G-5 rather than a G-14 or a G-20.”

China ‘Seminar’

Sarkozy is convening what he has called a “seminar” in Beijing in March to discuss the monetary system.

It was a French leader, President President Valery Giscard d’Estaing, who in 1975 gathered the leaders of West Germany, Italy, Japan, the U.K. and the U.S. at a summit in Rambouillet, France.

The group soon expanded to the G-7. Its influence reached its zenith through the Louvre and Plaza currency accords of the 1980s and with its responses to financial crises in Asia, Latin America and Russia in the 1990s. It hasn’t intervened in foreign exchange markets since a rescue of the euro in September 2000.

“In 1975, when President Giscard d’Estaing had the idea to create the G-7 it was after a monetary crisis and it was above all to talk about currency,” Sarkozy said at a press conference today. “The question that we have to ask today is: is the G-7, which has become the G-8, legitimate to talk currencies. I challenge this idea because it doesn’t include China.”

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Rural Australian towns braced for another week of flooding Sunday as a vast lake continued to spread across the country’s southeast and a potential tropical storm threatened the northeast.

The flooding began more than a month ago in Australia’s northeast Queensland state, where 30 people have died, more than 30,000 homes have been damaged or destroyed and at least 3 billion Australian dollars ($3 billion) in crops and coal exports have been lost.

Record rains have shifted the flood emergency focus to southeast Victoria state, which is usually parched during the southern summer.

Deputy Prime Minister Wayne Swan said in a statement Sunday that the floods will rank as one of the most costly natural disasters in Australian history and its impact on the economy will be felt for years.

The government will announce its first cost estimates on Friday, he said.

The State Emergency Service has warned that a lake about 55 miles (90 kilometers) long northwest of the Victorian capital of Melbourne will continue coursing inland for the next week until it spills into the Murray River.

Emergency services were focusing their efforts 210 miles (340 kilometers) northwest of Melbourne at Swan Hill, a town of 10,000 where the Murray meets the swollen Lodden River and flood waters are expected to peak mid week, SES spokesman Sam Bishop said Sunday.

SES said 75 towns in the state have been affected by flooding and another five to 10 towns are still in the floodwaters’ northern path across flat wheat-growing country.

Almost 2,000 homes and businesses were flooded or isolated and close to 5,000 people have been evacuated, SES said.

Meanwhile, the Australian Bureau of Meteorology warned Sunday that a low pressure system off the north Queensland coast could develop into a cyclone over the next few days.

The bureau rated the chances of a cyclone _ which could lash the coast with gale-force winds and torrential rains _ at between 20 percent and 50 percent.

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The European Central Bank expects to be able to keep inflation in check, Executive Board member Gertrude Tumpel-Gugerell said.

“We expect price stability to be maintained over the medium term,” Tumpel-Gugerell said, according to the text of a speech delivered in Melk, Austria late yesterday.

Inflation accelerated to 2.2 percent last month, breaching the ECB’s 2 percent limit for the first time in more than two years. The central bank today signaled in its monthly report it sees no immediate need to raise interest rates even though inflation warrants “very close monitoring flat irons for hair.”

Tumpel-Gugerell said inflation expectations are “firmly anchored” and that price developments over recent years are “far more stable if one takes out energy and food prices.”

The policy maker also said money markets are “improving” and that the ECB’s withdrawal of some of its emergency measures introduced during the worst recession in over 60 years is “continuing.”

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JPMorgan Chase & Co. admits that it overcharged 4,000 members of the U.S. military on their mortgages and accidently foreclosed on 14 homes, mistakes that it is working to resolve.

JPMorgan (JPM, Fortune 500) said it is mailing $2 million in refunds to the overcharged military personnel. The bank also said it has resolved 13 of the accidental foreclosures and is working to resolve the last.

"We made mistakes here and we are fixing them," said the bank, in a prepared statement.

"We are deeply appreciative of those who fight to protect our country and Chase funds a number of programs that provide benefits to military personnel and veterans — and while any customer mistake is regrettable, we fell particularly bad about the mistakes we made here," said the bank saving account payday loan.

The New York-based bank reported on Jan. 14 that it made a profit of $4.8 billion, or $1.12 per share, in the latest quarter, beating Wall Street estimates. 

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New Zealand consumer prices rose in the fourth quarter by the most since 1989 after the one-time effects of the government’s increase in the sales tax on goods and services.

Consumer prices increased 2.3 percent from the third quarter, when they advanced 1.1 percent, Statistics New Zealand said in Wellington today. The median estimate in a Bloomberg News survey of 12 economists was for a 2.4 percent gain. Annual inflation accelerated to 4 percent, near economists’ projection for a 4.1 percent increase.

New Zealand’s dollar fell as traders bet that central bank Governor Alan Bollard will refrain from raising borrowing costs in the first half of this year because underlying price pressures remain subdued. Last month, the central bank said it seemed “prudent” to keep the benchmark interest rate low until the recovery strengthened and inflation showed more signs of accelerating.

“Inflationary pressures are contained for now,” Christina Leung, economist at ASB Bank Ltd. in Auckland, said in an e- mailed note. “There is little urgency for the Reserve Bank to resume the reduction of monetary policy stimulus. We expect it will wait until the September meeting to lift the cash rate.”

The local dollar fell after the lower-than-expected gain in prices. It bought 76.54 U.S. cents at 2:31 p.m. in Wellington compared with 76.96 cents immediately before the report.

15 Percent

Prime Minister John Key’s government raised the goods and services tax to 15 percent from 12.5 percent on Oct. 1, while lowering income taxes the same day.

The tax increase boosted prices by 2 percent, and excluding the change, prices from October through December rose by 0.3 percent from the previous quarter, statistics agency officials told reporters.

“General underlying inflation in the December quarter remained relatively modest,” Finance Minister Bill English said in a statement after the report. Excluding the sales tax, “annual inflation stayed around 2 percent in calendar 2010 and is forecast to remain relatively muted for the foreseeable future.”

Bollard is required by the government to keep annual inflation within a range of 1 percent and 3 percent. Still, he has scope to tolerate one-time events such as an increase in sales tax and other government charges when it comes to setting interest rates.

Bollard’s Outlook

Last month, he forecast inflation would be 1.4 percent excluding government charges in the year ended Dec. 31.

All 15 economists surveyed by Bloomberg News expect he will leave the official cash rate at 3 percent at his next review on Jan. 27. At least four economists expect he may not raise rates until September.

Gross domestic product unexpectedly contracted in the third quarter, according to a government report last month. Business confidence rose in the fourth quarter, adding to signs the economy expanded in the final three months of the year, avoiding a recession, the New Zealand Institute of Economic Research Inc. said last week.

Bollard’s primary focus is on non-tradable inflation, a core measure of prices that isn’t influenced by currency fluctuations and fuel. The gauge includes the rise in sales tax.

Non-tradable prices rose 2.2 percent from the third quarter, today’s report showed. The measure gained 4.6 percent from a year earlier.

Non-tradable inflation was stoked by increases in power prices, property maintenance and land taxes. Medical services increased 5 percent. The cost of purchasing a new house, which reflects construction expenses, rose 2 percent.

Tradable prices rose 2.5 percent from the third quarter, also reflecting the sales-tax increase. Fruit, meat and grocery prices rose, while fresh vegetable prices declined. Air travel was more expensive and fuel prices surged 6.8 percent. The price of imported audio-visual and computing equipment fell. From a year earlier, tradable prices increased 3.3 percent.

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Belgium’s Peter Praet and Slovakia’s Elena Kohutikova were nominated to succeed Gertrude Tumpel- Gugerell on the European Central Bank’s Executive Board.

Luxembourg Prime Minister Jean-Claude Juncker announced the candidates at a press conference late yesterday after a meeting of euro-area finance ministers in Brussels. Kohutikova is a former deputy governor of the Slovakian central bank and Praet is a director at the National Bank of Belgium.

The ECB’s six Executive Board members oversee the central bank’s operations and are part of the rate-setting Governing Council. Austria’s Tumpel-Gugerell, currently the only woman among the 23 council members, will step down at the end of May when her term expires.

ECB appointments are made by euro-region governments. The decision of who will replace Tumpel-Gugerell may be part of a package deal between European governments. The term of ECB President Jean-Claude Trichet expires at the end of October.

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