Chinese stocks traded in New York fell to a two-month low, led by E-Commerce China Dangdang Inc. (DANG) and Baidu Inc. (BIDU), after U.S. regulators barred the four largest accounting firms from conducting audits in the Asian nation.

The Bloomberg China-US Equity Index of the most-traded Chinese stocks in the U.S. dropped 3.5 percent to 100.48 yesterday as the ruling sparked concern that the companies won’t be able to put together their 2013 earnings reports in time to meet listing requirements in the U.S. Dangdang, China’s biggest web book retailer, sank 11 percent while SouFun Holdings Ltd. (SFUN), a real-estate information website, posted the biggest drop since October. Baidu, China’s largest web search engine, fell the most in nine months.

The decision was made after the accounting firms’ units in China failed to comply with Securities and Exchange Commission orders for documents needed for a series of accounting fraud probes. The firms receiving six-month bans are Deloitte Touche Tohmatsu CPA Ltd., Ernst & Young Hua Ming LLP, KPMG Huazhen and PricewaterhouseCoopers Zhong Tian CPAs Ltd. The ruling, if finalized, could impact the 425 Chinese companies with market capitalization of $185 billion traded in New York

“There’s a fear that the U.S.-listed Chinese companies may not file their 2013 annual reports in compliance with SEC rules, leading to the possibility that they may fail to meet listing requirements,” Jeff Papp, a Lisle, Illinois-based senior analyst at Oberweis Asset Management, which oversees $1 billion in assets, said by phone. “This issue has been dragging on for a long time, and this will act as an overhang on U.S.-traded Chinese stocks.”

The sanctioned firms said in an e-mailed statement that they will appeal the decision.

Dangdang Drops

Dangdang’s American depositary receipts fell to $9.89 in the biggest drop since Oct. 22. The slump cut Beijing-based Dangdang’s gain to 3.6 percent this year, compared with a 130 percent surge in 2013. Baidu’s ADRs slid 6.2 percent to $163.58, a two-month low. SouFun’s ADRs sank 7.7 percent to $87.47. YY Inc. (YY), owner of an entertainment website, retreated 7.4 percent to $63.77, falling the most since Nov. 6.

The accounting firms have 21 days to file a so-called petition for review with the SEC before the decision by U.S. Administrative Law Judge Cameron Elliot would become final and go into effect. If the five-member commission were to uphold the judge’s decision, the firms could then take it to the U.S. Court of Appeals in Washington.

‘Law Violations’

The SEC enforcement division was “gratified” by the decision, chief litigation counsel Matthew Solomon said in an e-mailed statement. “These records are critical to our ability to investigate potential securities law violations and protect investors.”

NQ Mobile Inc., a Chinese mobile-security service provider, was accused by Muddy Waters LLC of inflating sales in a October report. Beijing-based NQ Mobile has denied the allegations and set up an independent committee to review Muddy Waters’s report.

Carson Block, founder of Muddy Waters, sent a letter to NQ Mobile auditor PricewaterhouseCoopers urging the accounting firm to take a closer look at NQ’s accounting books, according to a Twitter posting of the short-selling firm on Jan. 22. In 2011, Block accused Sino-Forest Corp., a Chinese plantation company listed in Canada, of fraud, leading it file for bankruptcy protection.

Sino-Forest

Ernst & Young didn’t conduct audits of Sino-Forest in accordance with accounting industry standards, the Ontario Securities Commission said in a statement of allegations issued in December 2012, and the accounting firm agreed to pay C$117 million ($118 million) to settle claims in a Canadian class action suit in the largest settlement by an auditor in Canadian history.

“This is a preliminary ruling,” Kim Titus, senior director of corporate communication at NQ Mobile, said by phone from Dallas. “All the reports are going to be out as scheduled. All the work with PricewaterhouseCoopers will continue as it has.”

The worst possible time for the suspension would be in the next month or two, as companies need to file an annual report with an audit opinion on Form 20-F, which is due on April 30, Paul Gillis, a professor of accounting at China’s Peking University, said in a post in his China Accounting blog.

Ctrip, NetEase

“If the firms are suspended, they cannot issue audit reports, so the clients cannot file Form 20-F,” he wrote. “Under exchange rules, this should lead to the companies being suspended from trading since investors do not have the data they need to be able to trade.”

More than two-thirds of web traffic in China, which has more than 618 million Internet users, was disrupted on Jan. 21, according to the online security provider Qihoo 360 Technology Co. Affected sites included those of Alibaba Group and Baidu. China said hackers may have been to blame.

Ctrip.com International Ltd., the biggest online travel agency in China, and NetEase Inc., a web game operator, are scheduled to report their 2013 full-year results on Feb. 12, according to their statements this week. Calls seeking comments from the companies after regular business hours in China weren’t returned.

The iShares China Large-Cap ETF, the largest Chinese exchange-traded fund in the U.S., tumbled 4.5 percent to $35.02, the largest retreat since November 2011. The Standard & Poor’s 500 Index declined 0.9 percent after a China manufacturing index showed contraction and investors analyzed corporate earnings.

The preliminary reading of 49.6 for January in a Purchasing Managers’ Index released by HSBC Holdings Plc and Markit Economics yesterday was below a final figure of 50.5 in December and all 19 estimates of analysts in a Bloomberg News survey.

To contact the reporter on this story: Belinda Cao in New York at lcao4@bloomberg.net

Tesla Motors Inc. (TSLA)’s Elon Musk said sales of electric Model S cars in China should match U.S. levels as early as next year, with demand from the world’s largest auto market eventually requiring a local plant.

The electric-car maker said yesterday the Model S will be priced from 734,000 yuan ($121,280) in China when deliveries begin. Musk, Tesla’s billionaire co-founder and chief executive officer, will travel to China in late March to inaugurate the company’s entry there, he said in a phone interview.

For Tesla, “it could be as big as the U.S. market, maybe bigger. I don’t want to get overexcited about it,” Musk said yesterday. “Even without building there locally, it’s always going to be the second-biggest market after the U.S.”

After a rocky start ramping up Model S assembly in 2012, Palo Alto, California-based Tesla surprised analysts and investors this month when it said fourth-quarter deliveries were 20 percent above its target. Musk, 42, has pinned his goal of selling hundreds of thousands of electric autos annually to a global strategy in which China, Europe, Japan and other markets bolster its U.S. business.

If all goes well, Model S shipments to China can match U.S. sales by 2015, Musk said. “It’s not my firm prediction — it’s more like a low-fidelity guess.”

The company named for inventor Nikola Tesla more than quadrupled in value in 2013. Tesla rose 1.6 percent to $181.50 yesterday in New York, the highest in three months. The shares have gained 13 percent since Jan. 14, when it announced quarterly deliveries.

Pricing Comparison

The price of Tesla’s flagship Model S in China, a version equipped with a premium 85 kilowatt hour battery pack, puts it in the same bracket there as Volkswagen AG (VOW)’s Audi S5 sedan and Bayerische Motoren Werke AG’s 5-series GT sedan, according to Autohome, a car-pricing website. It’s also 50 percent more expensive than in the U.S., where the equivalent model sells for $81,070, according to a Tesla statement.

In the U.S., Audi’s S5 is priced at $64,117 and BMW’s 5-series GT costs $70,429, according to Edmunds.com, a Santa Monica, California-based auto pricing and data company.

While more costly than the U.S. version, the Model S price in China appears “well below expectations,” John Lovallo, an equity analyst for Bank of America who rates Tesla underperform, said yesterday in a research note.

Since the Model S is imported to China from California, a duty of as much as 25 percent is added to the price tag, Musk said. The company also must cover shipping costs and taxes. Tesla could have charged more than $160,000 had it followed standard industry practices.

‘Huge Idiots’

“They’re basically calling us huge idiots for not ripping off customers in China.” Musk said. “I don’t think ripping off customers is a good long-term strategy.”

Foreign companies have come under scrutiny in China for their pricing practices, with state broadcaster China Central Television producing reports accusing companies from Tata Motors Ltd.’s Jaguar Land Rover to Starbucks Corp. of overcharging consumers in the country.

“It’s a good price,” John Zeng, Shanghai-based managing director of researcher LMC Automotive, said of Tesla’s Model S. “This should attract premium customers to try this product, especially in big cities.”

Tesla’s entry is also being closely watched by other automakers that have been trying to convince local consumers that electric vehicles are worth the hassle. China is lagging behind its target to have 5 million alternative energy-powered vehicles by 2020 because of a lack of charging stations and high costs, even amid mounting concerns over worsening air pollution.

Rigorous Standards

Gaining China’s approval to sell Model S there was the toughest the company has faced to date, Musk said.

“They were the most rigorous of any in the world,” he said.

Beyond safety issues, government officials even inspected the leather used in Model S seats, Musk said. “They seemed to be quite concerned about quality.”

To eliminate tariffs and potentially qualify for Chinese incentives for non-pollution autos, Tesla must produce there, he said.

“Long-term there’s no question we’ll have a factory in China,” he said. “There is an argument for having that be our first major factory outside the U.S.”

At Tesla’s flagship store in a Beijing mall populated by high-end boutiques such as Van Cleef & Arpels and Mulberry, hotelier Kevin Chen says he’s interested in buying the Model S to bump up his green credentials.

“I heard about the car from my friends overseas and we are very interested in getting one,” said Chen, a 28. “Smog in China is getting so bad that we should do whatever we can to help.”

— with assistance from Alexandra Ho in Shanghai and Tian Ying in Beijing. Editors: Niamh Ring, Jamie Butters, Ben Livesey

To contact Bloomberg News staff for this story: Alan Ohnsman in Los Angeles at aohnsman@bloomberg.net

UBS AG’s China securities unit, the leading foreign underwriter of debt sales in the country, says the market wants policy makers to allow the first onshore bond default to reduce long-term hazards to the financial system.

“Systematic risk will pile up without any default happening,” Bi Xuewen, head of China debt capital markets at UBS Securities Co., said in an interview in Shanghai. “Market participants would like to see a default in China’s bonds. Only after defaults can the overall risk pricing system be normalized.”

Bi, who has led the bond underwriting unit at UBS since 2010, said he doubts there will be a note default in China this year, following previous cases in which local authorities stepped in to avert non-payment. The yield premium on five-year AA- rated corporate bonds over similar-maturity sovereign securities jumped to 404 basis points this week, the highest since May 2012, as concern mounts about trust defaults.

As Premier Li Keqiang drives up money market rates to deleverage the economy, speculation is mounting yields may increase further after Industrial & Commercial Bank of China Ltd. said it won’t bail out a 3 billion yuan ($496 million) trust-bank product it marketed to its clients. China needs credit-market defaults to help encourage better risk pricing, according to Adam McCabe, deputy head of Asian fixed income at Aberdeen Asset Management Plc, which manages $321 billion.

Risk Reminders

“The policy makers need to remind investors from time to time that there are risks they’re taking,” McCabe said in a briefing in Hong Kong on Jan. 21. “A default will help the Chinese market re-profile itself.”

Authorities in the world’s second-biggest economy must balance efforts to sustain economic growth, which slowed in the fourth quarter to 7.7 percent from 7.8 percent in the previous three months, with steps to trim record borrowings without sparking a financial panic.

Liabilities at non-financial companies may rise to more than 150 percent of gross domestic product in 2014, raising default risks, according to Haitong Securities Co., the nation’s second-biggest brokerage. The ratio of 139 percent at the end of 2012 was already the highest among the world’s 10 biggest economies, according to the most recent data.

“If you don’t allow defaults now, risks will rise,” said Zhang Ming, a senior research fellow at the government-backed Chinese Academy of Social Sciences in Beijing. “If you allow defaults, there will be risks but they are controllable. The sooner the default comes, the better for the long-term growth of the Chinese economy.”

Changzhou Wintafone

Changzhou Wintafone Chemical Co., a maker of herbicides and insecticides based in the eastern province of Jiangsu, said this week it has stopped production and couldn’t repay an aggregate bond due in March. Changzhou Qinghong Chemical Co., the note’s guarantor, repaid 36.9 million yuan on its behalf on Jan. 17, according to a statement from Changzhou Wintafone.

As default concerns escalate, the cost of insuring the nation’s debt against non-payment is rising. China’s credit-default swaps increased 19.5 basis points this month to 99.5, set for the biggest monthly gain since June.

The yuan strengthened 2.9 percent last year, and was little changed at 6.0517 per dollar yesterday, according to China Foreign Exchange Trade System prices.

Bubble Inflating

If defaults come at a time when the currency is no longer appreciating that would spur “massive capital outflows” as Chinese assets would lose their allure for foreign investors, according to Zhang at CASS.

“The bubble is gradually inflating, and sooner or later will burst,” he said. “This year is the best time to squeeze it.”

China Credit Rating Co. lowered the rating for Wuhan Urban Construction Investment & Development Corp., a local-government financing vehicle in the capital of the central Hubei province, from AA to AA-, according to a statement posted on the Chinamoney website on Jan. 6. The Beijing-based rating agency also downgraded Sichuan Coal Industry Group’s rating from A+ to A, according to a statement on Chinamoney on Jan. 13.

The yield on AA- rated five-year corporate bonds has climbed nine basis points this month to 8.34 percent. The rate on the benchmark five-year government bond dropped 14 basis points to 4.32 percent.

Yao Wei, Hong Kong-based China economist at Societe Generale SA, said local governments have helped some companies avert defaults. CHTC Helon Co., a fiber maker that used to be called Shandong Helon Co., repaid 400 million yuan of bonds in April 2012 even as it failed to make loan repayments.

‘Explosive’ Debt

There have been no defaults in China’s publicly traded domestic debt market since the central bank started regulating it in 1997, according to Moody’s Investors Service.

Issuance by LGFVs, which has been “explosive,” is set to rise further this year, according to UBS’s Bi. The National Development & Reform Commission, China’s top planning agency, said Dec. 31 that units facing funding shortfalls for projects will be allowed to sell notes for refinancing.

“The NDRC’s statement is actually a signal to encourage LGFVs to sell bonds,” Bi said. “Previously, the NDRC didn’t allow LGFVs to sell new bonds to roll over their debt and the approval of bond sales was based on new projects.”

UBS led underwrote 27.5 billion yuan of debt onshore in 2013, the most among all the foreign-invested securities firms and banks, according to data compiled by Bloomberg.

Xie Ping, deputy general manager at China Investment Corp., the nation’s sovereign wealth fund, said Jan. 11 China’s local governments won’t default and the central government won’t allow them to go insolvent either, Hexun reported on its website.

While a default in shadow banking would help investors better price risk, it would hurt local funding units and property companies that rely on them for capital, according to Ping An Securities Co.

“A default in the trust product will facilitate the healthy development of the market,” said Ping An’s Shi. “If there is a default, the trust market may shrink and those small LGFVS and small property companies which rely on trust financings will be impacted.”

To contact Bloomberg News staff for this story: Judy Chen in Shanghai at xchen45@bloomberg.net

Alibaba Group Holding Ltd., the owner of China’s biggest e-commerce business, and Yunfeng Capital said they will buy control of Citic 21CN Co. (241) for HK$1.33 billion ($171 million) to enter the drug-data industry.

Alibaba, through wholly owned Perfect Advanced Holding Ltd., has agreed to buy 4.4 billion Citic 21CN shares at 30 Hong Kong cents each, taking a 54.3 percent stake, Citic 21CN said in a filing to Hong Kong stock exchange today. Yunfeng, a private equity firm co-founded by Alibaba Chairman Jack Ma, will buy a 29.8 percent stake in Perfect Advance before the share sale is completed, according to the statement.

“The transaction is the foundation for a strategic partnership aiming at jointly driving development of a pharmaceutical-product information platform,” Alibaba said in an e-mailed statement today. The platform will use Citic 21CN’s drug data and Alibaba’s e-commerce, cloud computing and “big data” capabilities, it said.

Alibaba may use the purchase to help it compete against Tencent Holdings Ltd. for China’s 618 million Internet users who spend money online. Tencent earlier this month said it plans to invest HK$1.5 billion for a 9.9 percent stake in a logistics center operator China South City Holdings Ltd.

On completion of the deal, Alibaba will hold 38.1 percent of Citic 21CN and Yunfeng 16.2 percent, Alibaba said. The buyers will seek a waiver from Hong Kong rules that require purchasers of a majority stake in company to make a buyout offer for all outstanding shares, Citic 21CN said.

Citic 21CN mainly engages in system integration, software development and services for drug authentication, tracking and logistics, according to its filing.

Trading in Citic 21CN, suspended since Jan. 16, will resume in Hong Kong tomorrow. The stock has gained 48 percent in 2014, including a 43 percent single-day surge on Jan. 6

To contact the reporter on this story: Jasmine Wang in Hong Kong at jwang513@bloomberg.net

Goose Island is the new Bud. So are Shock Top and ZiegenBock. And Leinenkugel’s and Blue Moon, for that matter, could be called the new Coors or Miller.

Those brands are all owned by the world’s biggest brewers, which are aggressively rolling out products designed to appeal to fans of craft beer. But they’re not putting the microbrewers who started the movement out of business.

Instead, the new labels are taking sales from already-troubled mass-market brands owned by the industry giants peddling these crafty brews. Analysts say that may actually be a boon for their owners as margins can be “considerably higher” for craft beers, according to researcher Canadean.

“I don’t really drink Bud Light anymore,” said Tait Foster, a 27-year-old who works at a foreign policy research group in New York. Instead, he’s started sampling a wider range of brews such as Goose Island and Blue Moon. “Bud Light, Coors and all those others are like beer-flavored water.”

Sales of craft beers grew 16 percent in volume over the past year versus a 1.7 percent decline for the biggest U.S. beer brands, according to researcher Symphony IRI Group. Sales of Bud Light were off by 1.3 percent and Miller Lite slid 4.4 percent.

That’s prompted multinationals like Anheuser-Busch InBev NV (ABI) and MillerCoors LLC, with about 75 percent of the U.S. market between them, to introduce their own craft-like brews — many of which make little or no mention of their corporate parentage.

Hard Ciders

AB InBev paid $38.8 million for Goose Island in 2011, five years after it signed a distribution deal with the Chicago brewer. And in 2006 it created Shock Top, a Belgian-style wheat ale, to take on Blue Moon, the biggest of the craft-like labels owned by industry leaders. The Goose Island brands soared 69 percent last year, AB InBev said, citing Symphony IRI data, while Shock Top beers jumped 14 percent.

MillerCoors, co-owned by SABMiller Plc (SAB) and Molson Coors Brewing Co. (TAP), in 2010 set up a unit called Tenth & Blake to focus on Blue Moon and other niche brews as well as premium imports such as Pilsner Urquell from the Czech Republic and Cusquena from Peru. Today, it has more than a dozen brands, including two hard ciders.

“We looked at where the growth sectors were, and craft was exploding,” said Tom Cardella, president of Tenth & Blake. “When you look at the marketing of craft, it requires a different approach.”

Mid-Sized Labels

AB InBev’s shares were little changed at 76.49 euros at 10:20 a.m. in Brussels trading, giving the company a market value of about 123 billion euros. MillerCoors co-owner SABMiller’s shares slid 0.8 percent to 3,013.5 pence in London, and Molson Coors Brewing’s shares rose 0.4 percent in New York yesterday to $55.35.

As the popularity of these beers cuts into sales of the biggest brands, it’s fostering a new crop of mid-sized labels, according to Trevor Stirling, an analyst at Sanford C. Bernstein. Moreover, craft brews are wooing drinkers back from wine and spirits. While craft beer currently has only about 6 percent of the market, that share could more than triple in the next five years, Canadean predicts.

“There’s a new generation choosing a much broader repertoire of drinks,” Stirling said. “It’s virtually inevitable that the larger brands will lose market share to craft.”

Lighter Beers

That’s not to say that the big brands are going to give up on their mass market brews anytime soon. With about 21 percent of the beer market by volume, Bud Light alone is about triple the size of the entire craft sector, Symphony IRI data show.

“I don’t see the era of big brands being over, but more that there’ll be a bigger mix of beers,” said Lawrence Hutter, who heads the European corporate solutions unit at consultant Alvarez & Marsal. “Don’t forget people still like those lighter, lager-style beers; They’re very drinkable”

The U.S. Brewers Association defines “craft” as beers with annual sales below 6 million barrels and ownership by a big player of no more than 25 percent. Despite the industry’s homespun image, 60 percent of drinkers don’t give much thought to what company owns the brand of beer they drink, according to a survey by AB InBev.

“It’s kind of a disconnect for me that being bigger is necessarily bad,” said Paul Chibe, head of U.S. marketing at AB InBev. “What’s important is that if a beer gets bigger, it has to stay true to what it is.”

Rich Uncle

Even as the giant brewers lose share with their leading brands, the shift could shore up their profits since their craft-like beers enjoy higher margins, analysts and the companies say. Goose Island retails for an average of about $33.10 per case versus $20.17 for Bud Light, according to Symphony IRI. Some offshoots can be far pricier. Goose Island sells a brew called Bourbon County Stout one day a year, the Friday after Thanksgiving, at about $25 for a four-pack of 12-ounce bottles.

The higher prices help offset the added costs the industry’s giants face in producing more small brands. They are typically more labor-intensive, use a wider range of ingredients, and have more elaborate packaging and marketing.

The big companies also gain an edge over smaller rivals by producing the craft-like brands in their industrial-scale breweries. Blue Moon is brewed at MillerCoors’ facilities across the U.S. And some Goose Island beers are made by AB InBev in Fort Collins, Colorado, and Baldwinsville, New York, in addition to the brand’s original brewery in Chicago.

“We’ve been a great home for craft brands like Goose Island,” helping out with additional production capacity as their popularity grows, said AB InBev marketing boss Chibe, who plans to leave his job in February. “They have their own leadership team, their own innovation group, the brewers do their own things. We primarily behave as the rich uncle. When they need resources, we give it to them.”

To contact the reporter on this story: Clementine Fletcher in London at cfletcher5@bloomberg.net

Lung Yen Life Service Corp. (5530), Asia’s second-biggest cemetery and funeral-service operator, plans to expand to Hong Kong and Singapore as populations across the region age.

The company is in talks with the respective governments to obtain licenses and will invest at least NT$10 billion ($331 million) in each market, Chairman and Founder David Lee said in an interview on Jan. 22. The company has formed a unit to study overseas markets including China and Malaysia, he said.

“We plan to become the world’s largest brand among the Chinese community, with a focus in Asia,” Lee said. “We are also optimistic on the China market because of its large population.”

Lung Yen, based in Taipei, is expanding outside Taiwan to serve a bigger population pool. Those over 65 years of age accounted for 11 percent of China’s 1.3 billion population as of 2012, and 24 percent of Japan’s population, Citigroup Inc. analyst Eric Lau wrote in a Jan. 22 report, citing data from Euromonitor. China’s death-care service industry reached 46.5 billion yuan ($7.7 billion) in 2012, Lau said.

Columbarium Towers

The company expects to receive government approval to enter Hong Kong and Singapore in two years, Lee said. The investments will include cemeteries, columbariums — or vaults with niches for urns containing the ashes of cremated bodies — and funeral services, Lee said at his True Dragon Tower, a columbarium in New Taipei City, about 20 miles northwest of Taipei. He declined to name his Hong Kong partner or the location of the planned site.

Lung Yen also wants to enter 10 Chinese cities in the next 10 years, Lee said. The company announced last June a 2 billion yuan investment in China’s eastern city of Wenzhou in Zhejiang province. The price of land still under negotiation, Lee said this week.

“The key is to win support from local governments,” Lee said. “We would also consider mergers or acquiring some local partners in China.”

About 90 percent of the company’s profit comes from the columbarium and cemetery business, according to Lee, who is targeting 10 percent growth in both revenue and profit this year compared with 2013.

Luxury Property

Burial plots in some luxury cemeteries in Taiwan have become more expensive than homes. Plots cost as much as NT$500,000 per ping, or $460 per square foot, according to taiwanfuneral.com, the biggest funeral service data tracking site in Taiwan.

Taiwan home prices in the third quarter last year were NT$241,000 per ping, the latest data from Ministry of the Interior. That is equivalent to $222 per square foot. A ping, a standard measure in Taiwan, is about 36 square feet or 3.3 square meters.

Prices for a standard one-person columbarium niche, measuring about 1.7 square feet, start from NT$80,000 and sell for as much as NT$500,000, according to taiwanfuneral.com. Prices at Lung Yen’s True Dragon Tower range start at NT$300,000 for a one-person niche and a space for a family of 24 can go for as much as NT$12.5 million, Lee said.

Lung Yen’s top line porcelain urns manufactured by Okura Art China, a favorite brand of the Japanese royal family, according to the company’s marketing materials, sell for as much as NT$500,000.

Spa Treatments

The company also offers a spa service for the deceased, where the embalmer follows a 35-step process including hair and body washing, massage, hair dying and manicure, he said. Families can watch the process. A two-hour spa treatment costs about NT$25,000.

Lung Yen shares gained 0.4 percent to NT$84.30 at the market close in Taipei trading today after rising as much as 1.1 percent. Taiwan’s GreTai Securities Market Index (TWOTCI), which includes all stocks that have been listed for more than a month on the island’s secondary board, fell 0.5 percent.

The company, with a market capitalization of about $1.1 billion, may also list in Hong Kong, Lee said, without giving a timetable.

Asia’s biggest operator of cemeteries and funeral facilities by market capitalization is China’s Fu Shou Yuan International Group Ltd. (1448), which debuted in Hong Kong in December and is valued at about $1.4 billion, according to data compiled by Bloomberg.

To contact Bloomberg News staff for this story: Cindy Wang in Taipei at hwang61@bloomberg.net; Bonnie Cao in Shanghai at bcao4@bloomberg.net

Argentina devalued the peso the most in 12 years after the central bank scaled back its intervention in a bid to preserve international reserves that have fallen to a seven-year low.

The peso has plunged 12.7 percent over the last two days to 7.8825 per dollar at 3:45 p.m. in Buenos Aires, after falling to as low as 8.2435, according to data compiled by Bloomberg. The decline in the peso marks a policy turn for Argentina, which had been selling dollars in the market to manage the foreign-exchange rate since abandoning a one-to-one peg with the U.S. dollar in 2002.

President Cristina Fernandez de Kirchner, who said May 6 that the government wouldn’t devalue the peso, is struggling to hold onto dollar reserves which have fallen 31 percent to $29.4 billion amid annual inflation of more than 28 percent. Reserves are the government’s only source to pay foreign creditors. Since changing her economy minister, cabinet chief and the head of the central bank on Nov. 18, the peso has fallen 25 percent, the most in the world, according to data compiled by Bloomberg.

Related:

• Argentine Default Chaos Relived as Blackouts Follow Looting
• Argentina’s Fernandez Appears on TV to End Criticism of Absence

“They’re running out of cash and they’re sitting in the corner at the moment,” Phillip Blackwood, who oversees $3.5 billion in emerging market assets as a managing partner at EM Quest Capital LLP, said in a phone interview from London. “There’s a feeling in the market that they’re not going to intervene any more.”

The tumble in the currency is the biggest since March 2002, the year the government abandoned a one-to-one peg with the U.S. dollar following a record $95 billion default.

Bonds Tumble

Dollar-denominated bonds due 2033 sank 2.7 cents on the dollar to 66.6 cents. The extra yield investors demand to own Argentine bonds over U.S. Treasuries surged 24 basis points to 975. Argentina’s dollar bonds have plunged 8.2 percent this year, the biggest loss in emerging markets, according to JPMorgan Chase & Co.’s EMBIG Diversified index.

Yesterday, the peso declined 3.5 percent to 7.14 per dollar after the central bank abstained from intervening in the market.

Cabinet Chief Jorge Capitanich told reporters earlier today the government isn’t intervening in the peso’s decline, allowing the market, which is mostly closed to buyers of dollars, to adjust prices.

“It wasn’t a devaluation induced by the state,” Capitanich said. “For the lovers of free markets, supply and demand was expressed in the capital markets yesterday.”

The central bank’s press office didn’t answer phone calls seeking comment on plans to depreciate the peso or a targeted exchange rate.

The government has changed its strategy which is leaving the market confused on the direction of their policies, Gustavo Quintana, a trader at Rabello & Cia in Buenos Aires said.

‘Deliberate Strategy’

“There’s no doubt this is a deliberate strategy,” Quintana said in a telephone interview. “All of this is really hard to predict. No one saw the dollar at 8 pesos in January so it’s difficult to speculate where it will end up.”

The central bank intervened briefly when the rate hit 8.50, Quintana said.

A free-floating peso may fall as low as 14 per dollar, Citigroup Inc. strategist Dirk Willer wrote in a report today. The central bank sold a net $5.9 billion over the last year in the foreign-exchange market to help bolster the peso.

Since her re-election in 2011 when capital flight almost doubled to $21.5 billion, Fernandez has put into effect more than 30 measures to keep money from leaving the country. Her policies have included blocking most purchases of foreign currencies, taxing vacations abroad and online purchases, banning units of foreign companies from remitting dividends, and restricting imports.

Black Market

The controls cut the total amount traded last year in the local foreign-exchange market in half from 2010, according to data compiled by Argentina’s Mercado Abierto Electronico automated trading system.

Banned from purchasing dollars for savings to protect against inflation, Argentines have turned to an illegal currency market, where the price per dollar soared to a record 12.75 per dollar, according to Buenos Aires-based newspaper Ambito.

Argentina posted the largest current account deficit in the first three quarters of 2013 since 2001, when a crisis in South America’s second-largest economy led to the default. International reserves have fallen or remained unchanged for 14 consecutive business days and fell $80 million yesterday, according to central bank data.

As dollars vanish from the central bank, the government has sought to normalize relations with foreign creditors.

Foreign Creditors

On Jan. 20, Argentina presented a proposal to the Paris Club of creditors to seek a negotiated resolution to outstanding debt of about $10 billion. The government also has begun talks to compensate Repsol SA for the stake in oil company YPF SA it nationalized in 2012, and is preparing to unveil new inflation and growth data to address International Monetary Fund concerns over the accuracy of official statistics.

The government reported inflation was less than half of the 28.4 percent estimate by private economists in 2013.

In addition to devaluing the peso, Argentina must boost interest rates to stem outflows, according to JPMorgan economist Vladimir Werning. Argentina’s benchmark deposit rate, known as the badlar, is 21.5 percent.

“Longer term, it’s a question of inflation, it’s out of control,” EM’s Blackwood, who recently sold Argentine bonds, said. “They need to clear up the holdouts and open access to the international capital market. We don’t think they’ll take that route. They have a range of options but politicians always have better ideas.”

To contact the reporter on this story: Katia Porzecanski in New York at kporzecansk1@bloomberg.net

For Jeffrey Gundlach, the U.S. housing recovery isn’t so rosy.

The founder of $49 billion investment firm DoubleLine Capital LP is largely avoiding the subprime-mortgage bonds that jumped about 17 percent last year after home prices surged by the most since 2006, deterred by the lengthy process to sell foreclosed houses and the destruction that’s creating.

“These properties are rotting away,” Gundlach, 54, said last week on a conference call with investors, about homes stuck in foreclosure pipelines, adding that it could take six years to resolve defaulted loans made to the least creditworthy borrowers before the real-estate crash.

DoubleLine is giving up potentially higher yields that last year attracted money managers including Western Asset Management Co. along with hedge funds as 21 percent of foreclosed homes across the U.S. are in limbo, vacated by former owners and not yet seized by lenders, according to data company RealtyTrac.

Those residences are a sign of an uneven U.S. recovery, which has left blighted neighborhoods in cities from Los Angeles to Detroit and about 8 million borrowers still owing more on their mortgages than their homes are worth.

“The housing market is softer than people think,” Gundlach said, pointing to a slowdown in mortgage refinancing, shares of homebuilders that have dropped 13 percent since reaching a high in May, and the time it’s taking to liquidate defaulted loans.

Loss Severities

A measure of losses on mortgage debt rose last quarter for the first time since 2011, Fitch Ratings said in a report yesterday. The reversal was driven by an aging pool of loans in the foreclosure process, particularly in states such as Florida and New Jersey which give added legal protections to homeowners against repossessions.

About 32 percent of seriously delinquent borrowers, those at least 90 days late, haven’t made a payment in more than four years, up 7 percent from the beginning of 2012, according to Fitch analyst Sean Nelson.

“These timelines could still increase for another year or so,” Nelson said, leading to even higher losses because of added legal and tax costs, and a greater potential for properties to deteriorate.

Loss severities on subprime debt, tied to risky mortgages that inflated the housing bubble, increased to 75.9 percent from 74.1 in the last three months of the year. The severities — a measure of losses suffered on a liquidated loan — peaked at 77.1 percent in early 2012 from 12.8 percent at the end of 2006, during the property boom.

Keeping Pace

Improvements in loss severities have failed to keep pace with the 24 percent gain in house prices since the 2012 trough. Real-estate values have been recovering for about two years, with prices climbing in October at the fastest pace since 2006, according to a Case-Shiller index of 20 cities.

“You see Case-Shiller price data showing strong markets, and you expect in a certain logical way that these loss severities should be coming down as home values are increasing,” said Gundlach, who started Los Angeles-based DoubleLine Capital in December 2009 and built it into the fastest growing mutual-fund firm ever in its first year. “Unfortunately, that’s being trumped or neutralized by this rotting away problem.”

Investors including Blackstone Group LP and Colony Capital LLC have been central to the rebound, buying more than 366,200 single-family homes in cities such as Phoenix, Las Vegas and Atlanta, since January 2011 to turn into rentals, according to Port Street Realty and RealtyTrac data. Federal Reserve policies that reduced borrowing costs and increased homeowner refinancing also lifted the market.

Improving Economy

While rising prices, and an improving economy have resulted in a steep drop in foreclosures, there are more than 1.2 million properties in the repossession process or owned by banks that the market is absorbing, according to RealtyTrac.

“With the average timeline for foreclosure increasing, these properties are sitting in limbo for a longer period,” said RealtyTrac Vice President Daren Blomquist.

Florida had the highest foreclosure rate last year, with more than 3 percent of households receiving a filing. It’s one of about 20 judicial states including New Jersey, New York and Connecticut, requiring a court review of home repossessions, and lengthening the time it takes to seize a property.

There are about 8 million borrowers still underwater, who owe more on their mortgages than their homes are worth, which increases the probability of default, Deutsche Bank AG wrote in a report this month. Florida and California have the highest concentration, each with more than one million single-family houses in negative equity.

Negative Equity

Subprime and option adjustable-rate mortgages originated at the peak of the market, with weaker underwriting standards, have the highest exposure to negative equity, Deutsche Bank analysts led by Steven Abrahams wrote in the report. Defaults and losses to bondholders are expected to decline as home prices continue to rise, with estimated gains of about 6.8 percent this year, the report said.

An index tied to subprime bonds created in the second half of 2006 that were issued with AAA ratings rose to 59.5 cents on the dollar this month from a low of 31.1 cents on the dollar in October 2011, according to London-based administrator Markit Group Ltd. The debt last year outpaced returns for less risky non-agency mortgage debt, such as Alt-A, which is backed by borrowers who often qualified with limited documentation.

‘Very Bullish’

“In 2013, we were very bullish on subprime,” said Anup Agarwal, head of mortgage-backed and structured products at Pasadena, California-based Western Asset Management. “It was overall a big winner and you saw that reflected in prices.”

Agarwal, whose firm managed $443 billion in fixed-income assets as of Sept. 30, has in the past six months turned more negative on subprime and started shifting money into Alt-A securities.

One William Street Capital Management LP, a hedge fund firm with $2.7 billion in assets, is expecting reduced losses as home prices continue to rise, according to a letter sent to investors this month. The investment firm said increased regulations have added to costs for firms that deal with troubled mortgages.

For subprime prices to make sense, recoveries must improve but won’t because of the backlog of loans, Gundlach said.

The money manager has cautioned investors before about avoiding subprime. In 2012, he said investors can’t assume the “lines will head south” speaking about loss severities for loans and then last year, referred to the debt as being stubborn.

Brash Pronouncements

Gundlach has a history of making contrarian and brash pronouncements. After a conference in April 2012, he said he thought the Federal Reserve should be abolished, and that same month that investors should short Apple Inc. (AAPL), after it had risen more than sevenfold from January 2009.

Most of DoubleLine’s assets are in the $31 billion Total Return Bond Fund, which as of last year had 31 percent, the highest allocation, in residential mortgage-backed securities not backed by the U.S. government.

Gundlach has traditionally favored higher quality non-agency debt in the fund rather than subprime. He balances those securities with bonds that are backed by the government and adjusts the mix to help the fund weather different scenarios in the housing market and changes in interest rates.

Gundlach’s fund returned 6.3 percent over the past three years, ahead of 93 percent of peers, according to data compiled by Bloomberg. Last year was the fund’s worst absolute and relative returns since opening in April 2010, with it gaining just 0.02 percent and beating 80 percent of peers. Investors pulled $6 billion, according to estimates from Morningstar Inc., its first year of net withdrawals.

During a webcast this month Gundlach said that he’s “re sculpted” DoubleLine Total Return Bond Fund (DBLTX), decreasing its holdings of agency mortgages and adding holdings of non-agency and commercial mortgage debt. This year through Jan. 22, the fund returned 1.5 percent, moving it ahead of 99 percent of similarly managed funds, Bloomberg data show.

To contact the reporters on this story: Heather Perlberg in New York at hperlberg@bloomberg.net; Alexis Leondis in New York at aleondis@bloomberg.net

The smell of fresh paint lingers at the renovated Vaneheim microbrewery in northeast Seoul, a sign of owner Kim Jung Ha’s optimism after a decade of struggling with the economics of South Korea’s lopsided beer market.

Under revisions to alcohol laws announced by the finance ministry yesterday, house brewers like Kim will be allowed to distribute their beer through other bars and restaurants for the first time, while paying a lower rate of tax. The changes are expected to bring more competition to a $1.3 billion beer market that grew 6 percent in 2013 and is dominated by Hite Jinro Co. (000080) and Oriental Brewery Co., re-acquired this week by the world’s biggest beer maker Anheuser-Busch InBev NV.

The changes come as President Park Geun Hye begins her second year in office promising a more “creative” economy that supports small- and medium-sized companies.

“The past 10 years have been a process of bitter learning,” Kim, a 34-year-old who studied both culinary arts and business in college, said last month at Vaneheim, which has seating for 110 people on wooden tables with a window allowing customers to see the polished metal brewing tanks. “Although it’s a small and incremental change, I’m thankful things are finally moving in the right direction,” she said.

Oriental Brewery and Hite Jinro, who’ve been making beer in South Korea since 1933, have dominated the market thanks to legislation that limits licenses based on brewing capacity and a tax system that rewards economies of scale.

Bomb Shots

The government began granting licenses to microbreweries in 2002, when the nation co-hosted the soccer World Cup and consumer perceptions of beer changed. Beer was mainly used for “poktanju,” or bomb shots, in which Korean soju or rice wine is tipped into a glass of beer and downed in one go, said Kim, who opened Vaneheim in a two-story brick building in the primarily residential district of Nowon-gu in 2004.

New licensees found the market tilted against them. Under the current system, Jinro Hite and Oriental Brewery pay an effective 72 percent tax rate, or about 395 won ($0.37) per 355 milliliters (12 ounces) of beer, according to Hong Jong Haak, a lawmaker campaigning for support for small brewers.

While the effective rate for smaller breweries is 57.6 percent, their typical payment is about 710 won because the levy is calculated based on cost of production, allowing the biggest brewers to remain dominant as demand grows, Hong said.

“Compared to the regular brands I’ve always had, I’m surprised to find the rich flavors in these craft beers,” company worker Jeon Mi Young, 36, said at a downtown branch of the Oktoberfest microbrewery chain last month. “Although I like drinking beer, I’ve never really had a chance to try craft beers as they’re still hard to find.”

Paying More

AB InBev (ABI) said this week it is paying $5.8 billion for Oriental Brewery, a business it sold to KKR & Co. (KKR) in 2009 for $1.8 billion as it sought to cut debt. Since then, Oriental Brewery has become South Korea’s largest beer maker and more than doubled earnings, boosted by its Cass brand.

South Korea’s beer market was worth $1.3 billion in 2013, a 6 percent increase from a year earlier, and is forecast to reach $1.6 billion by 2017, according to a Bloomberg Industries report published this week. Oriental Brewery and Hite Jinro had a combined 94.8 percent market share in 2012, according to the report, which cited data from Euromonitor International.

“Korean consumers have become more sophisticated and interested in what else is out there, not just beer,” said Daniel Tudor, one of three partners of the Booth microbrewery in Seoul. “This is bottom-up stuff, and people enjoy it because rough around the edges. Five or ten years from now, the whole landscape for beer will be different.”

Lower Taxes

The finance ministry said yesterday the lower tax rate for microbreweries – an effective 43.2 percent – will take effect from April, and they’ll be able to sell their beer off-site from Feb. 21.

While microbreweries may still pay more than Hite Jinro and Oriental Brewery, the reduction will help smaller brewers operating with slim profit margins to stay afloat, said Lee Won Sik, whose Oktoberfest has eight branches, including one in the Gangnam neighborhood made famous by rapper Psy.

“Many small beer producers closed because they couldn’t reach economies of scale and suffered due to the excessive tax burden, low sales and expensive management costs,” he said.

For Platinum Brewing Co., high taxes were a major reason for its decision to relocate from South Korea to Yantai, northeast China, in 2010. With signs of industry deregulation at home, Platinum is planning to return in three to five years, according to spokesman Song Byeong Chul.

‘Impossible’

“The environment back then was almost impossible for us,” Song said by phone. “The government had no idea what it needed to do to accommodate the emerging small beer makers.”

Even more than the reduced tax burden, microbreweries will benefit from a broader sales network allowed under the rule changes, according to Craftone owner Chung Hyun Chul, whose American-style beer is called ‘Mingle.’

“It’s an opportunity for us,” Chung said. “We weren’t even allowed to compete with major companies before.”

Oriental Brewery and Hite Jinro, whose main Cass and Hite beers are identically priced with the same 4.5 percent alcohol content, are already responding to the market changes. Hite introduced its Queen’s Ale in September, while Oriental Brewery said it will introduce a new ale beer early this year.

“We will further develop new products and try to improve our existing products to meet consumer demand,” said Hite Jinro spokesman Choi Yong Woon, who predicts competition may intensify further if Oriental Brewery’s new owner sells more of its international brands, including Budweiser and Corona.

Oriental Brewery spokeswoman Lee Eun Ah said South Korea’s beer market will be “invigorated” by microbreweries selling in more locations and the arrival of Lotte Liquor, a unit of South Korea’s fifth-biggest industrial group, which broke ground on a 50,000-kiloliter capacity beer factory last year.

For Kim at Vaneheim, the changes are welcome even if they bring more competition from other brewers. She likens the surging interest in beer with the sudden spread of coffee shops across the country over the past decade.

“People have just started to pay more attention to beer,” she said.

To contact the reporter on this story: Heesu Lee in Seoul at hlee425@bloomberg.net

Bond investors are losing their aversion to difficult-to-trade corporate debt that handed them some of the biggest losses in the credit crisis.

The extra yield note buyers demand to own older, smaller junk bonds that trade infrequently has shrunk to an average 0.25 percentage point this month from more than 1 percentage point a year ago, according to Barclays Plc data. JPMorgan Chase & Co. money manager Jim Shanahan said he’s preferring “good credit quality and less liquidity” when picking bonds, while Howard Marks, the head of distressed debt investor Oaktree Capital Group LLC (OAK), said he’s finding bigger potential gains in private, less-traded debt.

The evaporating premium for illiquid assets is showing the depths to which money managers are reaching to boost returns after a five-year rally that pushed relative yields on junk bonds to the least since August 2007. With Federal Reserve monetary policies suppressing interest-rate benchmarks for a sixth year, credit buyers are showing more concern that they’ll miss out on a continued rally than get stuck with debt that lost 26 percent during the market seizure in 2008.

“For the past several years, people have been concerned about liquidity,” said Eric Gross, a credit strategist at Barclays in New York. “Now we’re hearing more about people seeking out illiquid bonds.”

Fragile Market

Such debt tends to be more vulnerable to price swings when market sentiment deteriorates, because there are fewer buyers to bid on it when investor withdrawals force money managers to sell. Those risks intensified after stricter banking rules accelerated a pullback by Wall Street dealers that used their own money to facilitate trading.

Primary dealers that trade directly with the Fed cut their holdings of corporate bonds by 76 percent to $56 billion after peaking at $235 billion in 2007, Fed data through March show. After the central bank changed the way it reported the holdings in April, net speculative-grade bond holdings fell as much as 24 percent to a low of $5.63 billion in May before rising to $7.7 billion on Jan. 8.

Investors are demanding an average yield of 5.94 percent to own bonds sold at least 18 months ago in batches of less than $250 million, Barclays data show. That compares with an average 5.7 percent for newer debt offerings of at least $500 million. The gap, which averaged 0.5 percentage point last year and 0.92 percentage point in 2012, reached as much as 1.95 percentage points at the peak of the financial crisis in March 2009.

‘Classic’ Cycle

The yield on MGM Resort International’s $238 million of 6.875 percent notes, which were issued in 2006 and mature in April 2016, has dropped 2.4 percentage points during the past year to 1.85 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. That compares with a decline of 0.5 percentage point to 5.4 percent on the casino owner’s $1.25 billion offering of nine-year, 6.625 percent securities in December 2012.

“As people continue to look for yield and performance, they’re willing to move into less-liquid areas of the market,” said Shanahan, who manages high-yield credit investments for JPMorgan’s $1.5 trillion asset management unit. “You’re seeing a classic market cycle of people looking for pockets of value.”

‘Intoxicating Brew’

With corporate borrowers selling record volumes of debt to lock in all-time low yields amid global central bank stimulus, “there is a tremendous and potentially unsustainable amount of paper in investors’ hands, and this harsh reality is causing much angst,” according to a McKinsey & Co. and Greenwich Associates report in August.

Federal Reserve Bank of Dallas President Richard Fisher, a former managing partner of a fund that bought distressed debt, said in a speech last week that he’d “have to hire Sherlock Holmes to find a single distressed company priced attractively enough to buy.”

Five years after the Fed started holding benchmark rates at about zero and pumping more than $3 trillion into the financial system to ignite growth, Fisher warned in the Jan. 14 remarks to the National Association of Corporate Directors that signs are emerging that Fed stimulus has made for “an intoxicating brew.”

Economic Boost

Even as the central bank starts slowing monthly bond purchases to $75 billion from $85 billion, yields on dollar-denominated speculative-grade bonds have fallen to 6.21 percent, 0.22 percentage point from the record low in May 2013, according to Bank of America Merrill Lynch index data.

The securities, which provide bigger cushions of extra yield over benchmark rates than higher-rated debt, are governed by idiosyncratic deal documents and aren’t as frequently traded. While trading in speculative-grade bonds has risen, volumes have failed to keep pace with a market that’s expanded 71 percent since 2008 as Wall Street’s biggest banks reduce their holdings of riskier assets in the face of new regulations.

Speculative-grade, or junk, bonds are rated below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s.

Investors are emboldened by a U.S. economy that will probably expand by 2.8 percent this year and 3 percent in 2015 from 1.9 percent in last year, according to a Bloomberg survey of 83 economists. High-yield bond funds have received $3.85 billion of deposits since the end of September, according to data compiled by Royal Bank of Scotland Group Plc, as investors gained conviction that the U.S. economic recovery was strengthening. The unemployment rate dropped to 6.7 percent by Dec. 31 from 10 percent in October 2009.

More Homework

“Money has found it very easy to flow into public, mainstream things,” said Marks, Oaktree’s chairman, in a Dec. 10 presentation for investors. “The best credit opportunities are in niche markets.”

He said the firm is earning about 11.5 percent to extend loans to smaller companies, about twice as much as the yield on a junk bond of comparable quality.

These deals are small and “entirely illiquid,” he said. “It requires a lot of due diligence.”

Publicly traded business-development corporations, which lend to the smallest and riskiest companies, attracted $4.1 billion last year, the most since 2007, as the firms known as BDCs gained an average 16.4 percent. The firms are juicing returns by borrowing about 50 cents for every dollar raised from equity investors, up from 36 cents in 2011, according to data compiled by Keefe, Bruyette & Woods analysts.

Filling Gap

BDCs and other alternative asset managers that lend to small and mid-sized companies are filling a role traditionally dominated by banks, J.P. Morgan Asset Management’s Shanahan said in a telephone interview. Holding smaller, less-traded securities can boost investor returns while maintaining a higher level of credit quality, he said.

“Credit is good and likely to be good over the horizon,” he said. “People become less concerned about liquidity as you’re less likely to need it in the near term.”

Elsewhere in credit markets, the cost to protect against losses on U.S. and European corporate bonds jumped to the highest in five weeks. La Banque Postale SA is turning to the covered bond market to fund its mortgage business that has grown by about 50 percent over the past four years and can no longer be financed solely by customer deposits.

Credit Benchmarks

The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark used to hedge against losses or to speculate on creditworthiness, rose 1.5 basis points to 67 basis points as of 9:52 a.m. in New York, according to prices compiled by Bloomberg. In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings increased 2.6 to 75.2.

Both gauges, which typically rise as investor confidence deteriorates and fall as it improves, are trading at the highest intraday levels since Dec. 19. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

The banking unit of France’s postal service, which has a home loan portfolio of 50 billion euros ($67.8 billion), will now fund 20 percent of that business with covered securities, according to Stephane Magnan, head of asset and liability management at the bank in Paris.

The lender is now the sixth-biggest mortgage lender in France, having taken market share from Credit Agricole SA (ACA) and BNP Paribas SA, according to S&P. The bank’s business expanded even as France’s economy struggles to grow after exiting recession last year and unemployment touches a 16-year high.

To contact the reporter on this story: Lisa Abramowicz in New York at labramowicz@bloomberg.net

The American consumer’s readiness to kick the economy into high gear comes down to a question of who’s right: Yale’s Stephen Roach or Harvard’s Martin Feldstein.

To Roach, Americans are still working to rebuild savings and will be slow to increase spending as long as wage growth is sluggish and household debt exceeds long-run averages. “We have a long, long way to go,” says Roach, 68, a senior fellow at Yale University’s Jackson Institute of Global Affairs in New Haven, Connecticut, and former chairman for Morgan Stanley Asia.

Over at Harvard University in Cambridge, Massachusetts, Feldstein, 74, predicts “we finally are going to see a good year in 2014,” thanks to stock-market and home-price gains that have boosted household wealth and given consumers the confidence to spend.

Which view proves true will have a lot to do with whether consumer spending, which constitutes about 70 percent of the U.S. economy, makes this the break-out year for the expansion. Consumption gained momentum in 2013, and more vigor this year could spur still-hesitant businesses to hire and invest, augmenting growth.

“After saying year after year that the Fed and others have been too optimistic,” Feldstein says he thinks this year will be different. The former economic adviser to President Ronald Reagan and former chairman of the Council of Economic Advisers commented in a Jan. 13 Bloomberg television interview.

Feldstein’s Camp

Feldstein has more economists on his side, a Bloomberg survey this month shows. Consumer spending will grow 2.6 percent this year and 2.8 percent in 2015 following a projected 2 percent gain last year, according to the median forecast of economists in the survey. That would make 2014 and 2015 the strongest years since 2006.

Feldstein and those who agree with him, including Goldman Sachs Group Inc. Chief Economist Jan Hatzius, cite gains in household net worth, which stood at $77.3 trillion on Sept. 30, $8.2 trillion more than its pre-recession peak. Wealth fell almost 20 percent during the recession that started in December 2007, and didn’t recover the lost ground until the third quarter of 2012.

Contributing to the gains: The Standard and Poor’s 500 Index last year posted its biggest annual advance since 1997. Home prices in 20 U.S. cities climbed 13.6 percent in October 2013 from a year earlier, the biggest increase in more than seven years, S&P/Case-Shiller data show.

Debt Easing

Meanwhile, household debt loads have eased as Americans shied away from borrowing and banks hesitated to lend in the wake of the financial crisis. Revolving consumer-credit, primarily credit-card debt, plummeted 18 percent from 2008 to 2011, and had recovered just 2.6 percent through November 2013. Outstanding home mortgage debt remains below its 2008 peak. The deleveraging has left consumers with room to borrow.

“The main reason we’ve become more optimistic is that the household balance sheet looks much healthier,” Michelle Meyer, a senior U.S. economist at Bank of America Merrill Lynch in New York, said in an interview. “Consumers should continue to heal and feel ever more comfortable and confident in spending.”

Non-revolving credit is already rallying as Americans take out loans to buy cars and other big-ticket items, increasing by $11.9 billion in November after a $13.9 billion gain the month before, data from the Federal Reserve showed.

Drag Dissipating

Goldman economists see an even “more important swing factor” taking shape in 2014: Consumers have adjusted to the hit to incomes from last year’s increase in payroll and income taxes, which won’t be repeated this year. That could help boost consumption growth to 2.9 percent in 2014, from their estimate of 2 percent in 2013.

Payroll and income tax increases last year held the growth rate for real disposable income to 1 percent, Hatzius, 45, wrote in the Dec. 27 analysis, and shaved 0.75 percentage point from consumption growth. This year, income growth should accelerate to 3 percent, boosting purchases and GDP, the New York-based economist said.

“The drag seems to have dissipated at this point,” said Peter D’Antonio, an economist at Citigroup Global Markets Inc. in New York. “The fundamentals of the consumer sector are going to show through in a big way.”

Gross domestic product climbed at a 4.1 percent annualized rate in the third quarter of 2013, boosted by consumer purchases that increased 2 percent, according to a Dec. 20 Commerce Department report. GDP growth was up from a 2.5 percent rate in the second quarter and 1.1 percent in the first. Fourth-quarter data come out Jan. 30.

Wealth Rebounding

Adding fuel to consumption, Feldstein said consumers who have rebuilt their net worth will be willing to spend more of their discretionary income.

The personal saving rate averaged 4.5 percent last year through November, down from 5.3 percent in the same period a year earlier. The saving rate is still up from a record-low 2 percent reached in July 2005.

“Last year, the consumer by reducing the savings rate boosted GDP,” Feldstein said in the television interview. “We’re going to see more of that as a result of this big increase in wealth that occurred though the stock market.”

Goldman Sachs economists wrote in a Dec. 27 note to clients that “the saving rate can fall a bit further as household wealth is increasing, credit conditions are easing, and the labor market is improving.”

Roach isn’t buying it. Savings will rise closer to historical levels and that will keep a lid on spending, he says. The saving rate averaged about 9 percent between 1970 and 2000.

‘Anemic’ Spending

“We’ve got several more years of surprisingly anemic consumption growth,” Roach said in an interview, predicting “at least two to three years” of 2 percent advances in consumer spending. “The path is well short of 3 1/4 percent norms we’ve become used to historically in the United States.”

Job market healing could help. Though a Jan. 10 report showed employers added 74,000 jobs in December, the smallest gain since January 2011, that was at odds with better gains throughout the year. Employment increased by 2.19 million positions in 2013, averaging more than 180,000 jobs a month.

Still, that’s little changed from 2012, and it’s shy of the sustained 250,000 readings Roach says would boost his economic outlook.

Plus, the portion of prime working-age adults in the labor force dropped to 62.8 percent in December from 65.8 percent five years before. Some 3.9 million Americans have been out of work for more than 27 weeks, and Congress hasn’t reached a deal to continue extended unemployment insurance, which expired in December.

Tempered Growth

Roach’s outlook for tempered consumption growth gets some support from Russ Koesterich, the San Francisco-based chief investment strategist at BlackRock Inc. and from Yelena Shulyatyeva, an economist at BNP Paribas in New York.

“The labor market is recovering very slowly, and really the missing ingredient of this recovery has been income growth,” Koesterich said during a Bloomberg Television interview last week. “With income growth very slow, that means that consumption may not grow as fast as some people think.”

The economy’s inability to generate bigger wage gains is also a concern for Shulyatyeva. “Wages have to pick up, and even when we see growth in payrolls we don’t see much of an acceleration,” she said in an interview. “Consumers are still deleveraging, and there’s really not that much willingness on the consumer side to start borrowing again.”

While the job market is in better shape, it’s still weak, said Harvard’s Lawrence Katz, a former Labor Department chief economist. Wage gains have been slow, he said, long-term unemployment remains high, and many of the pluses in the economy mainly benefit upper-income consumers.

Income Inequality

“If you are sitting on a large bonus from Wall Street or you’re a post-college graduate in a steady job, you’re probably pretty confident going out and spending,” said Katz, 54. “For a large part of Americans, it’s still a very tenuous economy.”

Rising inequality could become an increasing concern, Katz said, as people in poorer households struggle to access education and job opportunities.

Wealth gains have accrued at the higher end of the income spectrum, while wages have been expanding more slowly. Hourly earnings climbed 1.8 percent in 2013, the slowest pace in three years. Rising home and stock prices primarily benefit those who hold the assets.

“The upper-income earners who have benefited from the rise in wealth have been spending, will continue to spend, but I just don’t think that the lower-income consumers who are still facing high unemployment rates and low wages are going to spend a lot more in 2014,” Michelle Girard, chief U.S. economist at RBS Securities Inc. in Stamford, Connecticut, said in an interview.

Aggregate Spending

The income gap might not matter for economic growth in the short term. As long as consumers in the aggregate spend more, it will add to GDP, said Deutsche Bank Securities Inc. Chief U.S. Economist Joseph LaVorgna.

Through 2014, continued monetary easing from the Federal Reserve could keep providing fuel for the so-called wealth effect. Central bank policy makers have indicated that the Fed will keep its main interest rate near zero even as it slows its unprecedented pace of asset purchases, which it scaled back to $75 billion a month from an $85 billion pace.

Fed policy makers, who meet Jan. 28-29, will probably reduce their bond purchases in $10 billion increments over the next six meetings before announcing an end to the program no later than December, according to a Bloomberg News survey of economists following the latest jobs report.

Slower Easing

“The Fed is still easing, they’re just easing at a slower pace,” New York-based LaVorgna said. Consumers have already started to exhibit the sort of vitality that may lie ahead, he said. Retail sales increased 0.2 percent in December after a 0.4 percent advance in November, Commerce Department figures showed. Excluding cars, demand jumped by the most in almost a year.

“The consumer did better in the fourth quarter than at any point in recent history,” LaVorgna said. “Barring a negative, exogenous shock, there is no reason why the consumer won’t spend at a healthy pace this year, and we expect real GDP growth to reach the promised land of 3 percent-plus growth.”

To contact the reporter on this story: Jeanna Smialek in Washington at jsmialek1@bloomberg.net