Aurelia Butler

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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The writer is president of Queens’ College, Cambridge, and an adviser to Allianz and GramercySeemingly everywhere you look these days across economies and markets, a tug of war is playing out. On the one hand, there is a brighter outlook that boosts hopes for sustainable prosperity, attractive investment returns and genuine financial stability. On the other is the legacy of over-indebtedness, low quality growth and policy mistakes. This must be dealt with while transitioning away from exhausted economic management approaches that fail to deliver durable and inclusive prosperity consistent with the wellbeing of our planet.Fortunately, most of the historical burden is manageable. Where it is not, more timely responses from both the public and private sectors can make it so. Let’s start with the economic prospects. Advanced countries rightly anticipate a year of lower inflation, less costly borrowings and more ample funding. This means improved affordability and increased mortgage availability for households, while companies benefit from easier access to market financing at notably low levels compared with borrowing benchmarks.The challenge for both sectors lies in handling the legacy of recent years. The full impact of central banks’ aggressive interest rate hiking cycle is yet to be felt, and household debt levels have risen to quite near worrisome levels. A looming debt “maturity wall” awaiting corporates will need to be refinanced at less favourable terms than originally contracted.Robust demand underpinned by a healthy labour market is not sufficient to ensure the management of these historical challenges. Policymakers are also constrained.Governments have limited fiscal space owing to high deficits, debt and more costly refinancing. Central banks, eager not to lengthen an already long list of 2021-23 policy mistakes, will be hesitant to aggressively reduce policy rates. Additionally, there’s a growing recognition that old-style stimulus is not just less feasible but also less desirable now that we operate in a world of insufficiently flexible supply of goods and services — a vulnerability exacerbated by geopolitical shocks. Despite some economic bright spots in Asia and among Gulf countries, the developing world lacks the capacity to act as a global growth engine that would help lift debt overhangs. This is most striking in China. There has been some progress here in pivoting to “quality growth” through a focus on technological development, green energy and a transition towards more domestic consumer-led activities. But there is enormous pressure to crank up an old debt-fuelled, public sector-led growth engine that is inefficient and creates unintended consequences.In financial markets, the excitement about new highs in the stock markets of a growing number of advanced countries must be balanced against the threat posed by the stock of overleveraged and unreasonably valued assets. The leading example is, of course, commercial real estate where the revaluation lower of projects underwritten in the heydays of floored interest rates is happening too slowly.Fortunately, it is a problem that poses only limited risk to overall financial stability. Yet the longer it takes for overleveraged investors to grasp their unfortunate reality, the longer readily-investible funds will wait lest they be contaminated by the eventual recognition of large unrealised losses, and the greater risk of contagion to adjacent asset classes.Stronger steps to overcome debt overhangs and revamp growth models would help pave the way for overcoming past mistakes and exploiting future opportunities. It is a path that can be better secured by, first, timely government actions to help enable the new drivers of growth; second, greater realism on the part of some households, corporates and investors that we are not returning to a world of artificially low interest rates; third, better safety nets to protect the most vulnerable in society; and fourth, a more rapid restructuring of non-viable debt.These challenges have been made harder by the darkening geopolitical backdrop, which fuels fragmentation, unleashes stagflationary winds and hinders international co-operation. This of course matters not just for the economic outlook. Ongoing wars have come to the boil in a shockingly destructive manner that has seen hundreds of thousands of innocent civilians lose their lives, livelihoods and homes. The economic and market tug of war will always pale in comparison with such profound suffering.  More

Food industry bodies in Europe and the UK are warning of impending supply chain disruption as Britain introduces new border bureaucracy on EU food and drink and imports for the first time since Brexit.The introduction of complex paperwork to certify all EU products of plant and animal origin entering the UK from January 31 risks fouling up the supply of a number of products, including pork and sugared liquid eggs used in cake and sauces.A shortage of vets to sign export health certificates on the continent, the failure to fully introduce a trusted trader scheme and continued lack of clarity about the application of some rules and regulations were heightening the risk of disruptions, they added.“The entire EHC [system] is based on stuff arriving on a slow boat from China. It is not designed for short shelf life and quick supply chains,” said Karin Goodburn, director-general of the Chilled Food Association, which represents some of the UK biggest chilled food manufacturers. She added that her members were “deeply concerned” about the impact of border delays on perishable products where shelf life was critical to their value.The introduction of the new border controls, with physical inspection beginning from the end of April, will see European companies facing the pain of border bureaucracy for the first time since the EU-UK post-Brexit trade deal came into force in January 2021.The British government has delayed the introduction of the checks five times since 2021, but now says the border is essential to both deliver biosecurity and level the playing field for British business in its interactions with Europe.The UK meat industry, which imports 50 per cent of its pork from Europe, said it was particularly concerned about the lack of official veterinarians in key markets such are German and Italy who are licensed to sign off consignments.The British Meat Processors Association said that British love of particular cuts of pork, including bacon, made the country reliant on the EU for more than 700,000 tonnes of pork meat every year.“That volume means we are highly dependent on imports for market balance. If there is any delay there will be shortages,” said Peter Hardwick, trade policy adviser for the BMPA.Germany, the second largest EU supplier of pork to the UK, was a particular area of risk because of the bureaucratic approach taken by its government-run veterinary service, Hardwick added.Several German state authorities contacted by the Financial Times warned of the difficulties created by the new system.“The introduction of EHCs . . . is creating serious difficulties for the companies concerned, as well as the relevant authorities,” the rural affairs ministry for the south-western state of Baden-Württemberg said in a statement.The agriculture ministry of the western state of North Rhine-Westphalia said the new border rules were “leading to challenges and more work for the relevant veterinary authorities”.The Italian agrifoods trade association Confagricoltura said the British had held seminars to try to prepare Italian exporters to cope with the new system, but warned a lack of capacity would mean the transition could be rocky.“The official vets are already busy and we have so many controls, and this is something that doesn’t help,” said Cristina Tinelli, Confagricoltura’s director of EU relations and international affairs. “In the end, we will be able to do everything to comply but it won’t be easy.” Hardwick added that BMPA members had raised concerns that Ireland, a key UK supplier of beef, would not be able to supply vets for industry at weekends, with some members warning they might have to close factories two days a week if the issue was not addressed.The Chilled Food Association has warned that UK health certificates do not always match industry requirements meaning that products such as liquid eggs mixed with sugar — a key ingredient for food businesses — will no longer be allowed to enter the UK. In 2022 the UK imported more than 40,000 tonnes of liquid eggs from the EU, according to the CFA, which has warned in a letter to Stephen Barclay, the environment, food and rural affairs secretary, that food businesses will face shortages if the certificates are not amended.“British food businesses producing, for example desserts, mayonnaise, sauces, baked goods, will have insufficient supply to continue to produce these and other foods using them,” the CFA wrote.Both EU and UK industries bodies have also warned that the new border paperwork and inspections will drive up costs for consumers. The government said last October that it estimated the paperwork would cost businesses £330mn a year and add 0.2 per cent to inflation over three years. The government has still not announced the final cost to business for each border inspection, but said it could be up to £43 per individual consignment of a good, with a single lorry potentially containing multiple consignments.The Italian agribusiness association, Coldiretti, said it was concerned about the prospect of a “flat charge” for all incoming products, “regardless of whether they are inspected or not”.The CFA has estimated that since 2021 the food industry has spent a total of £170mn on more than 850,000 EU export health certificate charges, a sum that does not include the additional costs to business for management and oversight.Arne Mielken, a customs expert and managing director of trade facilitation business Customs Manager, said European companies sending goods to the UK would try to pass on the cost of the new border requirements on to their British customers, who would in turn pass on that cost to the consumer.  “Your prices are going to go up,” he said. “If you’ve been to Switzerland and wondered why everything is so expensive, welcome to what we have created here.”Industry has also complained about the weak Whitehall management of the new border controls, with poor communications and last minute changes to rules and regulations and the failure to get trusted trader schemes fully operational.The flower and horticulture industry in both the UK and the EU has already warned that the introduction of physical border inspections in April is an “accident waiting to happen” because of a lack of capacity at border posts.Adding to the confusion, the UK food department last week unexpectedly reclassified a range of fruit and vegetables from low to medium risk, meaning that produce such as apples, carrots and avocados will be subject to physical checks at the border alongside animal products. However, officials have not said when the checks will begin.Marco Forgione, director-general of the Institute of Export & International Trade, said that the lack of communication from the government around the reclassification was “not very encouraging”.“Business leaders have revealed to me their frustration that their preparation efforts are undermined because of a lack of clear communication,” he said. The Cabinet Office, which is responsible for implementing the new border, said it had consulted extensively with industry and was phasing in the extra controls progressively to give business time to adapt.“The changes we’re bringing in will help keep the UK safe, while protecting our food supply chains and our agricultural sector from disease outbreaks that would cause significant economic harm,” the department added.This article has been amended to reflect that the food industry has spent an estimated £170mn on EU export health certificate charges since 2021 More

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SINGAPORE (Reuters) – Singapore’s central bank on Monday kept its monetary policy settings unchanged, as expected, in its first review of the year as inflation pressures continued to moderate and growth prospects improved.The Monetary Authority of Singapore (MAS) said it will maintain the prevailing rate of appreciation of its exchange rate-based policy band known as the Nominal Effective Exchange Rate, or S$NEER.The width and the level at which the band is centred did not change.”Barring any further global shocks, the Singapore economy is expected to strengthen in 2024, with growth becoming more broad-based. MAS core inflation is likely to remain elevated in the earlier part of the year, but should decline gradually and step down by Q4, before falling further next year,” MAS said in a statement.Maybank economist Chua Hak Bin said the central bank is maintaining the current tightening bias as both core and headline inflation gauges are above 3% and historical comfort zones.Core inflation in December was 3.3% year-on-year, slowing from its peak of 5.5% early last year. MAS said core inflation is projected to ease to an average of 2.5–3.5% for 2024 after rising in the current quarter because of a 1 percentage point sales tax hike from January that MAS said will have a “transitory impact”.Gross domestic product (GDP) was up 2.8% on a yearly basis in the fourth quarter of last year, according to advance estimates published by the trade ministry in early January.GDP for the full year of 2023 was 1.2%, and the trade ministry projects GDP to grow by 1-3% in 2024.”Prospects for the Singapore economy should continue to improve in 2024,” said the MAS, although both upside and downside risks to the inflation outlook remain.OCBC economist Selena Ling said that suggests the MAS is on an extended policy pause for now.”April monetary policy is likely another hold and the earliest window for an easing could only come later in the year when core inflation eases more convincingly,” she said.The MAS policy decision on Monday was the first under its new review schedule, in which the central bank will make policy announcements every quarter instead of semi-annually.The central bank left monetary policy unchanged in April and October last year, reflecting growth concerns, having tightened policy at five consecutive reviews prior to that.As a heavily trade-reliant economy, Singapore uses a unique method of managing monetary policy, tweaking the exchange rate of its dollar against a basket of currencies instead of domestic interest rates like most other countries. More

KARACHI (Reuters) -Pakistan’s central bank is widely expected to hold its key rate at 22% for the fifth policy meeting in a row on Monday, though an expected easing of inflation could leave the door open for rate cuts in the future, analysts said.The decision is the last under a caretaker government before the country’s general election next month. It also comes in the midst of Pakistan’s $3 billion Standby Arrangement (SBA) with the International Monetary Fund (IMF). While the rescue programme has helped avert a sovereign debt default, some of its conditions have complicated efforts to curb inflation. Nine out of 10 analysts polled by Reuters predicted the State Bank of Pakistan (SBP) would keep interest rates unchanged on Monday, with one analyst predicting a 50 basis point (bps) cut. “A rate cut is not justified. It will give the wrong signals to the IMF and show that Pakistan is not serious about controlling inflation,” said Ali Farid Khwaja, co-founder of KTrade. Pakistan’s key rate was raised to an all-time high of 22% in June.Sami Tariq, head of research at Pak Kuwait Investment Company, expected the policy rate to be cut by 50 bps because real interest rates are positive on a forward looking basis. Ahead of the IMF bailout, the latest tranche of which was approved on Jan. 11, Pakistan had to undertake a slew of measures, including revising its budget, hiking its benchmark interest rate, and increasing electricity and natural gas prices. The policy rate was raised in an off-cycle meeting in June in a last-gasp attempt to secure funds from the IMF as part of a reform programme aimed at bringing stability to the troubled $350 billion economy.Under the bailout deal, the IMF also required Pakistan to raise $1.34 billion in new taxation to meet fiscal adjustments. The measures fueled record high inflation of 38% year-on-year in May, and it is still hovering above 30%.The measures required by IMF also have dampened business sentiment, with businesses now asking for some respite in the form of a rate cut. “There is mounting pressure on the SBP to start cutting rates, (but) the justification for doing so does not exist, and IMF has cautioned against it, too,” said Khurram Husain, an economic analyst and journalist. Still, some respite could be seen later this year if inflation continues to ease as expected.The Institute of International Finance (IIF), in a country report on Wednesday, flagged that inflation would gradually decline to an average of 24% in the current fiscal year and 14% in fiscal year 2024/25.The report added that while food and fuel inflation will ease this year, the IIF expects a depreciating rupee, rising energy prices, and increased taxes to feed into inflation, partly offsetting gains from falling commodity prices.The rates decision will be the last under caretaker Prime Minister Anwaar ul Haq Kakar, with the country set to go to the polls on Feb. 8. Caretaker governments are usually limited to overseeing elections, but Kakar’s set-up is the most empowered in Pakistan’s history thanks to recent legislation that allows it to make policy decisions on economic matters, though analysts say the central bank itself operates independently. The legislation is aimed at keeping on track the conditions for the bailout secured in June. #. Name/ Organization Expectation 1. Ammar Habib Khan 0 2. Arif Habib Limited 0 3. FRIM Ventures 0 4. JS Capital 0 5. K Trade 0 6. Pak Kuwait Investment Co. -50 7. SCS Trade 0 8. Spectrum Securities 0 9. Topline Securities 0 10. Uzair Younus 0 Median 0 More

HONG KONG (Reuters) – China Evergrande (HK:3333) Group goes back to a Hong Kong court on Monday in a high-profile case to decide whether to liquidate the Chinese property developer that has been at the centre of a spiralling debt crisis in the world’s second-biggest economy.Evergrande, the world’s most indebted developer with more than $300 billion of total liabilities, sent a struggling property sector into a tailspin when it defaulted on its debt in 2021. The low point for the firm deepened a debt crisis in the sector and sparked many other company defaults in a damaging economic blow that to this day remains a drag on growth. A liquidation ruling of the developer which has $240 billion of assets would likely jolt already fragile Chinese capital and property markets. Low investor and consumer confidence remains a major drag on China’s economy, and any fresh hit to markets could further undermine policymakers’ efforts to rejuvenate growth. The liquidation process could be complicated, with potential political considerations, given the many authorities involved.But it is expected to have little impact on the company’s operations including home construction projects in the near term, as it could take months or years for the offshore liquidator appointed by the creditors to take control of subsidiaries across mainland China – a different jurisdiction from Hong Kong.Evergrande had been working on a $23 billion debt revamp plan with the ad hoc bondholder group for almost two years. Its original plan was scuppered in late September when it said its billionaire founder Hui Ka Yan was under investigation for suspected crimes.The ad hoc group, which was “firmly opposed” to the revised terms proposed by Evergrande in December, plans to join a petition to liquidate Evergrande at the hearing on Monday, which could increase the chances of an immediate liquidation order from the court, Reuters reported last week. The winding-up petition was first filed in June 2022 by Top Shine, an investor in Evergrande unit Fangchebao which said the developer had failed to honour an agreement to repurchase shares it had bought in the subsidiary.The winding-up proceedings have been adjourned multiple times and Hong Kong High Court Justice Linda Chan has said previously the December hearing would be the last before a decision was made whether to liquidate Evergrande in the absence of a “concrete” restructuring plan. More

“The logic is simple: stay away from all yuan assets,” said Rain Yang, a retail investor in southern Jiangxi province, who spent last year selling everything but his apartment in order to fund purchases of U.S. stocks, gold and cryptocurrencies.World stocks went up 20% last year, gold rose 13% and bitcoin 155%. China’s blue-chip CSI300 fell 11% and collapsed to a five-year low last week.Promises of official government support have driven a mild bounce this week. But having heard it all before, long-suffering local investors look to be taking the reprieve as a window for escape – leaving a market which is traditionally largely driven by retail money precariously adrift.Since China limits investment abroad under a quota scheme introduced in 2006, the qualified domestic institutional investor programme (QDII) and other official channels are jammed, and banned assets such as bitcoin are booming.There are nearly 400 dollar-denominated wealth management products issued by Chinese banks and their units, according to data from China’s banking regulator, and those are in heavy demand. In January alone, more than 131 outbound products have been issued, quadrupling from a year ago, the China Business News reported.China announced a tripling for individual quotas to access overseas products in Hong Kong and Macau this week, after the wealth connect scheme saw a 12-fold increase in outbound investment last year to 4.9 billion yuan ($682.54 million).Yuan deposit rates are down, reflecting households continue to hoard of cash given the shaky economic outlook.In recent days, flows into China-listed funds tracking foreign markets have also surged far beyond their quota-constrained capacity to invest, sending prices on some funds 30% or 40% above asset values, prompting suspensions and warnings from asset managers and stock exchanges.Investors unable to buy newly-created ETFs from fund managers due to quota restrictions are bidding up the prices in the secondary market.”The premium reflects frictions in the Chinese outbound investment mechanism, when buying exceeds selling,” said Jason Hsu, founder and chief investment officer of Rayliant Global Advisors. Yet investors such as Lu Deyong in the northeastern Liaoning province are undeterred.”There is nothing worth buying in the domestic market,” he said. “Everything is tumbling.”WHERE ELSE?Small investors’ decisions mirror those of big foreign institutions, which have pulled back from China’s markets for months as a much anticipated post-pandemic recovery quickly fizzled and the country’s property sector plunged deeper into crisis.But with retail investors responsible for some 70% of Chinese equity turnover, as per official data, the impact of their desertion is likely to be more lasting.Roughly a dozen retail investors told Reuters lately they either had opened overseas accounts or were looking to do so, citing reasons such as the tumble in property and stocks, a weakening currency, and increasing policy and geopolitical risks.Tech-industry employee Simon Lee has been regularly purchasing gold, China’s premium national liquor Moutai in bottles and U.S. dollars since last year.China’s economy grew 5.2% for 2023, slightly above the government’s target, but the comparison was flattered by a weak, lockdown-hit 2022 and the recovery has been highly uneven. December data published last week showed lacklustre consumption and the fastest fall in home prices for nine years.”None of these problems have shown any signs of improvement,” said Roy Xu, a retail investor in his 20s.These problems will take five to six years to fix, Xu reckons and hence he doesn’t think the market can recover.Morgan Stanley estimates 70 of 80 global emerging market funds they track are either equal or underweight China and like large investors, smaller ones are chasing uptrends in the U.S. and Japan.This week, as markets in the U.S. and Japan made milestone highs, the premium on a China-listed exchange-traded fund (ETF) based on the MSCI USA 50 Index exceeded 40% – a record – and another tracking the Nikkei hit 21%.Premiums also leapt for ETFs that track the S&P 500 Index, the Nasdaq 100 Index and the France CAC40 Index, prompting risk cautions, subscription curbs and trading suspensions from money managers.To be sure, a bigger-than-expected cut in bank reserve requirements announced by the central bank during the week seems to have put a floor under the selling, at least for now. Chinese stocks closed out their best week in six months.Then again, six months ago was when the Politburo pledged to step up policy support and since then the CSI300 has lost 11%.And many analysts say much more stimulus is needed, along with structural reforms, to get the economy and confidence back on track. For now, Yang in Jiangxi province said he’s happy with his hoard of gold coins, bitcoin and half a million yuan in U.S.-tracking ETFs. “If you don’t invest in U.S. stocks, gold and cryptocurrency, where else can you put your money?” ($1 = 7.1791 Chinese yuan renminbi) More