GDP GROWTH SURPRISES-ON LOW SIDE

Following years of double-digit growth in its gross domestic product, China's economic growth came in at a weakerthan-expected 9% in the third quarter. While the country is clearly feeling a draft as a result of the global economic slow-down, it is unlikely to catch a cold, much less anything worse, economists say.

China's policymakers are expected to move quickly to stimulate economic growth through further monetary and fiscal moves, following the decline from a 10.8% growth rate in the first half of 2008 and nearly 12% growth in 2007.

"People who are predicting doom and gloom for China's economy say that the economic and financial market crisis in the developed world has to translate into a period of sub-par economic growth in China," says Carl Weinberg, chief economist at Valhalla, New York-based High Frequency Economics. "We see no sign of that so far," he says.

China's trade surplus in the third quarter widened to $84 billion from $57 billion in the second quarter. "Exports continue to chug along, averaging 20%-plus yearly gains," Weinberg says. The true engine of economic growth in China is domestic investment spending, he says. Private investment has generated half of China's GDP growth in the past five years, and it continues to expand rapidly.

"Unlike the G-7 [Group of Seven industrialized] countries, which have built their recent prosperity on top of a pyramid of debt with very shaky foundations, China's economy is anchored by a foundation of savings," Weinberg says.

China cut interest rates and lowered banks' required reserves on October 8 as part of a coordinated effort by global central banks. The government also was preparing last month to announce tax cuts and increased infrastructure investment, according to officials. Meanwhile, China's consumer price inflation fell to a 15-month low of 4.6% at an annual rate in September.

ARGENTINA SEEKS END TO DEFAULT SAGA

In a major policy reversal, the Argentine government is reaching out to holdouts from its $100 billion debt workout in which bondholders received a 70% haircut in 2005. Some 25% of investors did not accept the deal's draconian terms. President Cristina Kirchner, whose husband, former president Nestor Kirchner, completed the debt restructure three years ago, hopes a new offer will close an uncomfortable chapter in the country's history and bring to an end Argentina's banishment from global markets.

Argentina defaulted in 2001 amid a financial crisis that included a peso devaluation, soaring inflation, capital flight and a freeze on bank deposits. In the workout, 76% of defaulted paper was exchanged for a series of longer-term bonds. At the time, president Nestor Kirchner vowed not to make any new offers to holdouts. While the government said its offer was all it could afford, Argentina's later GDP growth and rising reserves led to lawsuits from bondholders.

The Cristina Kirchner administration has hired Citi, Barclays and Deutsche Bank to restructure the remaining $20 billion in defaulted debt. Cabinet chief Sergio Massa says the new deal, unlike the 2005 restructure, will involve direct negotiations between banks and creditors, which can then present the government with a swap proposal. There are indications that debt would be swapped for a single bond issue, likely with a haircut near 60%, and takers would be forced to buy additional new debt.

While the government hopes to complete the process by the end of this year, some investors have already rejected the plan. The new proposal "appears worse than the terms of the 2005 swap," said a group that represents Italian holdouts.

Rejecting the deal is a risky proposition, as analysts warn Argentina may be poised for a new default unless it can raise funds abroad. Oil-rich Venezuela's president Hugo Chavez, who has bought several billion dollars worth of Argentine bonds, remains Buenos Aires' only international financial lifeline. With oil prices on the decline, the lifeline may soon be severed.

BUSINESSES FIND INTERNAL SOLUTION TO LIQUIDITY SHORTAGE

The banking sector is under siege, with unprecedented nationalizations globally and a widespread assumption that the extraordinary profits of the past decade may never return. However, in one not-so-small corner-transaction banking-of many giant banks titans, most notably Citi, Deutsche Bank, HSBC and J.P. Morgan, these are boom times. Demand for cash and liquidity management services in particular is rocketing as corporates struggle to find credit in the capital markets and many banks restrict balance sheet lending. Companies are rediscovering that the best source of liquidity is their own operations and are looking for solutions to liberate it.

Liquidity management is the business of moving excess cash-once bills and salaries have been paid-between various entities within a company using physical transfers, known as cash concentration, or aggregating balances in different locations using what's known as notional pooling. Once the cash gets to the company's headquarters or regional treasury center-often in the most tax-effective location-it can be put to work, reducing overdrafts and paying down debt or being invested to earn a return.

Cash and liquidity management remains Incredibly fragmented, with most companies simply using their local bank. However, the market is consolidating rapidly, and for the top banks it offers tempting margins. In the third quarter of 2008, CItI reported revenues at its Transaction Services division up 20% on the previous year to a record $2.5 billion, reflecting double-digit revenue growth. The business made a stunning 174% return on risk capital. In the second quarter of 2008, Deutsche Bank's Transaction Banking unit made a 109% pre-tax return on equity.

Even in a global recession, transaction volumes are unlikely to slump. And certainly demand for services that improve the speed of cash flowing through a company can only increase.

SOVEREIGN FUNDS EYE SANTIAGO PRINCIPLES

The International Working Group (IWG) of 26 member countries of the International Monetary Fund last month released a statement of Generally Accepted Principles and Practices, or GAPP, for sovereign wealth funds. With some $3 trillion in assets, SWFs comprise a major source of liquidity for the global financial system.

Known as the Santiago Principles, after the capital of Chile, where agreement on the text was reached, the accord could provide a framework for good governance and transparency for SWFs, while helping to fend off protectionism by governments of countries where investment targets are based. The proof will be in the pudding, however, and it remains to be seen how many of the funds will actually sign up for and implement the principles.

"Though some of the funds have been operating quiedy for decades, their sudden rise to prominence over the past 18 months has fueled some anxiety in the West about the possibility that their investments could have a political as well as a financial dimension," says Jerry Leamon, global services leader at Deloitte Touche Tohmatsu. "The creation of the IWG was intended to confront this anxiety head on and to help diffuse it," he says.

"GAPP for sovereign wealth funds is potentially a real watershed event in promoting better understanding of these funds in their home countries and in the countries where they choose to invest," Leamon says.

Ironically, the agreed principles come at a time when SWFs may shift their investment focus to closer to home as a result of the global financial meltdown. SWFs will likely seek to invest in domestic companies that are capable of going global, according to Eckart Woertz, an analyst with the Dubaibased Gulf Research Center.

OPPORTUNITY LOST

With the global financial system on life support, the old world order has been crumbling with alarming speed. Sadly, the dreams of the emerging markets have crumbled even faster than the financial system that helped enable their meteoric growth. What has been perhaps most shocking, though, is the speed with which many of the developing economies abandoned their independence and thrust themselves into the clumsily welcoming arms of a magically revitalized International Monetary Fund. And while we might have hoped that both the IMF and its hapless clients had learned from past mistakes and taken a different approach to stabilizing stumbling economies, the reality is quite the opposite.

As Global Finance was going to press it was becoming apparent that the new crop of countries seeking help from the IMF would be coerced into taking the same old medicine-an IMF-sanctioned fiscal straitjacket whose purpose is not so much to ensure the longterm economic and social health of the borrower nation as to make sure the IMF gets its money back.

Both the IMF and the World Bank have come under heavy-and mostly reasonable-criticism for the flaws in their rescue and development efforts in emerging markets over the past decade or so. That the IMF is apparently not viewing this crisis-and the IMF's own dramatic revival from near-irrelevance-as an opportunity to remake its model and to provide support that does foster long-term, sustainable economic growth in its client states is a true tragedy.