Aurelia Butler

For evidence that Brics summits are adopting the routine features of the global governance circuit, observe the familiar jostling during this week’s meeting in South Africa to manufacture an announcement and maintain the impression of forward momentum. The closest to a “deliverable”, to use the familiar grating term, is a commitment in principle to expand the grouping’s membership beyond the current five (Brazil, Russia, India, China and South Africa). Even that’s uncomfortable for India and Brazil, which are concerned about accepting more members strongly aligned with China.The Brics’ weaknesses as a policymaking forum are evident. The club has insufficient unity of purpose and little ability to enforce decisions. But the difficulty of maintaining coherence within an informal grouping is hardly new. The Brics’ incumbent rival — the G7 club of rich countries for decades regarded as a steering committee for the world economy — has also often struggled for consensus.Effective international institutions fulfil various functions, including as a repository of specialist knowledge or powers and a means of setting and enforcing rules. Properly employed, the last of these means that collective decisions can weigh heavily in their members’ domestic policymaking debates.Among formal institutions, these attributes are clear, though inevitably constrained by their shareholder governments. The IMF, for example, has specialised knowledge of financial crises and a rapid rescue lending capacity. It attaches conditions to those loans such as rapid fiscal tightening, the imperative of meeting which helps borrower governments resist domestic opposition to sometimes wrenching change.It’s harder to discipline members within informal groupings. The G7 built a reputation in the 1990s and 2000s as a steering group for institutions such as the IMF. But while it could agree on imposing tough fiscal and deregulatory conditions on borrower governments and move quickly to solve systemic problems, such as the Asian and Russian financial crises of 1997-98, it had more problems constraining its own members.Even the heyday of the G7 was marked by continual conflict over structural economic policy and exchange rates. France, tired of continually being bullied by the US into pledging economic deregulation, in 2003 brilliantly sabotaged its commitments by employing a creative translation of a G7 communique into French, promising the cuddlier “réactivité” rather than the harsh “flexibilité” (“flexibility” in the original) that Washington had demanded.While the G7’s predecessor, the G5, had successfully orchestrated a weakening of the dollar in the Plaza Accord of 1985, there was tension between Tokyo and Washington (particularly Capitol Hill) in the 1990s and 2000s about Japan holding down the yen.Washington also complained that its more general campaign against exchange rate misalignments and current account imbalances in the 2000s and 2010s, largely aimed at China, was undermined by Germany’s export obsession. In both cases, G7 solidarity was less important to Japan and Germany than protecting their growth models. The G7 was also largely absent during the eurozone sovereign debt crisis, the EU insisting that European governments design the rescue packages.True, the G7 has acquired a new sense of purpose after Vladimir Putin’s invasion of Ukraine, co-ordinating sanctions and capping the price of Russian oil. But it is no longer economically big enough to cripple Putin’s war effort, and nor is it united around US proposals for more aggressive measures against Russia such as a broad export ban.Brics has the G7’s problems and then some. It is notoriously geopolitically divided, India’s strategic rivalry with China weakening it as a forum for trade and regulatory policy. The EU (whose three largest economies are G7 members) and the US, despite different approaches to data privacy, have worked diligently to mesh their digital economies through data-sharing agreements. By contrast, India in 2020 unilaterally banned 59 China-based apps including TikTok and WeChat, declaring them a security threat.The Brics’ general moaning about US hegemony, including complaints about the rich world’s control over the international financial institutions, doesn’t extend to a coherent plan to replace it. Each time a new head has been appointed to the IMF or World Bank, Europe and the US respectively have maintained their traditional lock on appointing one of their own because low- and middle-income countries have never been able to unite behind a challenger.Neither India nor China has ever pushed a credible candidate to run either institution: although World Bank head Ajay Banga was born in India, he is a US citizen and was nominated by Joe Biden. There is not enough trust between New Delhi and Beijing to put one of the others’ officials in charge. Meanwhile, Brics’ collective development finance institutions such as the New Development Bank are tiny next to China’s vast bilateral lending programmes.Enlarging a grouping does not automatically make it more powerful. The G20, which largely replaced the G7 as the world’s foremost economic policy forum in 2008 during the global financial crisis, is beset by entrenched differences. Consensus cannot be reached purely by fiddling with structures or expanding membership. A global steering committee needs to start with internal consensus. For the Brics, so far that’s largely [email protected] More

UK ministers are set to confirm a fifth delay to the implementation of post-Brexit border controls on food and fresh products coming from the EU, pushing the launch of the new regime into next year.Jeremy Hunt, the chancellor, backed the delay owing to fears that the new red tape will push up food prices during an inflationary crisis, while traders have also asked for more time to get ready for the new system.The new regime for animal and plant products was originally meant to start in 2021, but the latest delay will mean that new paperwork will not be required until January and checks on imports will not start at ports until April 2024.The Cabinet Office said an announcement of the new regime and timetable would be made “shortly”; officials said it would come as early as Thursday — or by next week at the latest.Labour condemned as “absolutely shambolic” the government’s handling of the issue, which means that food and other animal and plant products will continue to enter the UK from the EU without any controls. Full checks have applied on British exports heading in the other direction since January 2021, to the fury of UK farmers, who believe they are operating against continental rivals on an uneven playing field.“They have delayed new border checks time and time again, creating huge uncertainty for businesses,” said Gareth Thomas, shadow international trade minister.The Financial Times revealed earlier this month that the new food import regime would be delayed, although ministers said as recently as April that it was their “firm intention” for it to begin on October 31.Government officials said Hunt wanted to delay the costs associated with the post-Brexit checks, which would add to food bills.The government will confirm the delay when it publishes its new “border target operating model”, the supposedly streamlined and modern regime that it will apply to animal and plant products.Under the new timetable, health certification on imports of “medium risk” products — due to be introduced on October 31 — will be pushed back to January, according to those briefed on the government’s plans.Physical checks that were due to start in January have been pushed back until April, government insiders said. The final rollout, if it is not delayed again, will be completed in October 2024, with the introduction of safety and security declarations for EU imports.Traders said the delay would give ports and hauliers more time to prepare, while the delay in physical checks until April 2024 would avoid the busiest winter period, when British supermarkets rely heavily on imported products.A government spokesperson said: “The government remains committed to delivering the best border in the world. The border target operating model is key to delivering this and introduces an innovative approach to importing that will be introduced progressively.”William Bain, head of trade policy at the British Chambers of Commerce, said: “Shifting back some of the milestones will give businesses and their suppliers more time to prepare and allow them to operate in a context where food price inflation may have peaked. “For the companies we represent, the key issue before new controls and processes are introduced, is whether the physical and digital infrastructure is ready at Dover, Holyhead and entry ports across Great Britain. The focus must now be squarely on this if the new approach is to work.”  More

The writer is chief executive of Fidelity International“Inflation acts as a gigantic corporate tapeworm,” Warren Buffett wrote in 1982 when US consumer prices rose just over 6 per cent over the year. “That tapeworm pre-emptively consumes its requisite daily diet of investment dollars regardless of the health of the host organism.”With apologies to those reading this over breakfast, Buffett’s graphic assessment still rings true 41 years later. Open a company annual report published in the past three years and you are likely to read a litany of events such as Russia’s invasion of Ukraine and the Covid-19 pandemic that have blown the best-laid strategy off course and often into uncharted waters.However, while the initial market impact of these has dissipated, the longer-term legacy remains in the form of increased energy and food scarcity, disrupted international supply chains and, in some countries including the UK, high levels of inflation.After dealing with a series of sharp operational shocks, chief executives have had to adapt once more, this time to rising input costs. In this environment, companies fall into two categories: those that can find ways to raise their product prices to protect margins while maintaining volumes, and those that can’t.The best businesses in the latter category, according to Buffett, are those that don’t need to make significant and continuing capital investments. But that constrains their ability to innovate for the future. It is a truism that you can’t cut your way to growth.There are other ways to deal with an inflationary environment for both types of companies. Building a solid brand to maintain market pricing power and volume is valuable in times of rising prices.Adapting products and services swiftly to new realities is another strategy, changing their composition or components to mitigate the pressure. According to a McKinsey study of the impact of inflation on corporate decision making and supply chains, some car manufacturers stripped down features to maintain production, pricing and sales amid shortages or to handle rising input costs.During the pandemic, many companies established response centres to co-ordinate recovery efforts. Similarly, some have set up central, cross-departmental inflation centres to manage the potential downside of inflationary pressures.These silo-busting efforts can help reduce interdepartmental friction and decision-making times, ensuring that investments are identified and made more quickly, or unnecessary costs halted at an earlier stage.This creates a market environment where the strong companies are more likely to get stronger compared with their weaker competitors, as the cumulative effect of rising costs on the bottom line takes hold over time. And the high inflationary environment of the past 12 months is finally showing signs of cooling following central bank action. At the height of inflationary pressures towards the end of 2022, producer prices in the euro zone area briefly rose at annual rates exceeding 40 per cent following increases in energy prices.

Now, inflation in the US is back down to 3 per cent, while levels in the UK and the eurozone have returned to single digits. Longer term, we may also find that positive productivity shocks from artificial intelligence, advances in computing power and more efficient energy transmission will allow companies to do more with less reinvestment.On its own, inflation does not necessarily present a problem for executives, particular for today’s raft of C-suite executives with well-toned crisis management muscles. Reasonable increases in input costs can be measured and mitigated.But the fragility of the post pandemic economy, combined with the fractured nature of global politics, makes business models more susceptible to further unexpected shocks. These conditions, when mixed into an environment of price instability, increase the risks of a corporate mis-step and deepen its potential impact.It’s harder, too, to keep other choices open when capital is constrained. Optionality, already a valuable commodity in a changing world, becomes more expensive on a relative basis.There are no easy answers. Inflation has been billed as a cost of living crisis, which it is. But it also represents a cost of capital crisis, a cost of investment crisis and a cost of hiring crisis, challenging company leaders to find new ways of living with — or preferable expunging — the inflationary tapeworm.   More

SEOUL (Reuters) -South Korea’s central bank on Thursday held interest rates steady for a fifth straight meeting, as policymakers turn their attention to fine-tuning monetary settings amid softer inflation and slowing growth.The Bank of Korea (BOK) said its seven-member monetary policy board voted to keep the base rate unchanged at 3.50%, as it did on four previous meetings this year. Domestic markets hardly budged as the decision was in line with the prediction from 43 economists surveyed by Reuters.The BOK kept its economic growth expectation for this year at 1.4%, unchanged from its May forecast, but cut next year’s to 2.2% from 2.3%. Inflation forecasts were unchanged, it said in a statement accompanying the rate decision. The BOK has kept monetary policy unchanged since its last interest rate hike in January and most economists believe the central bank is done with its tightening campaign, which saw 300 basis points worth of hikes between August 2021 and January 2023.South Korea’s annual consumer inflation has eased since peaking at a 24-year high of 6.3% in July 2022. The rate stood at 2.3% in July this year, still slightly higher than the central bank’s medium-term target of 2% and expected to rebound to the 3% range in the next couple of months.Thursday’s policy decision comes as investors worry about a slowdown in Asia fourth-biggest economy, which is heavily reliant on trade, with consumer sentiment weakening in August for the first time in six months.Softening global demand led by China’s sputtering economy, South Korea’s biggest export market, and a delayed recovery of the semiconductor industry have undercut some of the benefits from easing prices.Policymakers are also concerned about rising household debt which grew at its fastest pace in 1-1/2 years in the second quarter on rising mortgage demand. More

Once known as one of China’s most impoverished provinces, the mountainous region of Guizhou has over the past decade become famous for a different reason: it is home to some of the world’s tallest bridges.From the 565-metre-high Duge Beipan river bridge that links Guizhou and neighbouring province Yunnan to the 332-metre-high Pingtang bridge that spans the Caodu river canyon, Guizhou’s investment in infrastructure has helped lift the province out of poverty, earning it special praise from President Xi Jinping.But the high ground has come with a high cost. Guizhou’s debt totalled Rmb1.2tn ($165.7bn) at the end of 2022. With a debt-to-gross domestic product ratio of 62 per cent, it is one of the most indebted provinces in the country. Including off-balance-sheet debt, the figure could be as high as 137 per cent, according to one estimate.The enormous amount of borrowing accumulated by China’s provinces, much of it through opaque local government financing vehicles — investment companies that raise debt and build infrastructure on behalf of local governments — has become a huge problem for the world’s second-largest economy. Increased tension between local and central governments over the debt comes as Beijing searches for new models of regional economic growth.“LGFVs are a legacy of the old supply-expansion growth model that relied on heavy investments to create jobs and income,” said Chi Lo, senior investment strategist at BNP Paribas Asset Management in Hong Kong. “China’s growth structure is now changing . . . when it changes, the old funding vehicles catering for the old economy have become outdated.”Local governments, typically sustained by funding from Beijing and the profits from land sales, have long been encouraged to borrow money to fund regional development. The first LGFV was set up around 1998 to fund the construction of a highway. The practice gained momentum after a Rmb4tn stimulus package in 2009 that encouraged provinces to invest and boost growth. Banks saw LGFVs — implicitly backed by local governments — as safe clients, and by the end of 2022, China’s official local government debt totalled Rmb94tn, according to an estimate from Goldman Sachs.

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Local government finances collapsed during the coronavirus pandemic, in part because of a surge in Covid-related public spending and a drop in land sales on which they relied for revenue. With a massive pile of onshore debt repayments due in 2023 and 2024, the stress on local governments, already struggling during an economic slowdown, has intensified.“Local debt is going up in a very uncontrollable fashion,” said Victor Shih, professor of Chinese political economy at the University of California, San Diego. “Local governments’ reliance on central government, and on debt issuance, is getting worse and worse in a very rapid way.”A near default by Guizhou’s second-largest city Zunyi in December fuelled concerns of a systemic financial crisis and hopes for central government bailouts. Zunyi restructured its Rmb15.6bn loan with banks in January, shocking creditors. The China Securities Regulatory Commission last week vowed to prevent LGFV bond defaults.Beijing has decided to send teams of officials from the central bank, finance ministry and securities watchdog to more than 10 of the financially weakest provinces to scrutinise their books and find ways to cut their debts. They will assess the governments’ balance sheets and decide how best to cut bad assets and reduce debt. Scholars, experts and others have briefed officials including China’s premier Li Qiang, according to representation documents obtained by the Financial Times.

The Duge bridge is one of many high-cost infrastructure projects that Guizhou has pursued using debt © AFP/Getty Images

One suggestion is swapping some of the estimated Rmb59tn in “hidden debt” — borrowing that is off the books and often raised through private channels into official local government bonds. Chinese financial media outlet Caixin reported on Sunday that as much as Rmb1.5tn could be swapped. But as former finance minister Lou Jiwei has repeatedly argued in public speeches, too many of these swaps would only delay resolution of the problem, ultimately increasing leverage.Experts are also expected to suggest increasing the maturity of loans to LGFVs to 25-30 years and cutting interest rates, giving LGFVs some breathing space to find new sources of revenue. Banks would indirectly absorb the costs. The risk of such restructuring has prompted some investment banks to reassess the ratings of state banks with high exposure to LGFVs. Commercial banks’ profits would be 6 per cent lower if 10 per cent of their LGFV loan holdings were restructured, according to a historical stress simulation conducted by Wang Jian, an analyst with Guosen Securities.

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The most straightforward way to reduce debt would be to sell assets. In the case of Guizhou, experts for years have suggested the sale or pledge of some of its stake in Kweichow Moutai, the world’s most valuable liquor maker, a person familiar with the talks said. But despite central government pressure for disposals, local governments have proved reluctant.“The central government’s assumption is that the asset is more than enough to pay the debt, which is true to a certain extent,” said Ivan Chung, managing director at Moody’s Investors Service. “But it’s a matter of how quickly those assets can be turned into cash, especially in weaker western provinces.”This reluctance speaks to a tension between local and central governments over the debt problem.“The underlying mentality [of resistance] is political,” said a senior state banker who deals with Guizhou local government debt. “Bridges and roads are built in response to calls for economic growth and poverty alleviation. But why should the localities now shoulder all the cost on behalf of the central government?”In a statement directed at local authorities, the Ministry of Finance in February said: “If it’s your baby, you should hold it yourself . . . The central government won’t bail [you] out.”In May, the finance bureau of Guiyang, the province’s capital, said in a statement that it had “done everything possible” to deal with its debt. The statement was later taken down from the bureau’s website.

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In the long run, experts argue the role of LGFVs in China’s economy needs to be fundamentally reformed.In a presentation to Premier Li in July, Luo Zhiheng, chief macroeconomic analyst at Yuekai Securities said local governments should reduce their debt-fuelled spending and rely more on tax revenues or funds from the central government for investment. This would be in line with China’s attempt to “rebuild the foundation of tax revenues”, Luo said, according to a copy of the presentation seen by the FT. More taxes on real estate and personal income could be rolled out when the time is right, other experts said.Another solution is to allow the central government to raise more money. “There is still some room for the central government to run deficits. But I think it’s widely understood by economists in China to be the last fiscal ‘ammunition’ that the Chinese government has,” said Shih.The impact of the debt crisis has been apparent in the services provided by local governments.In the northernmost province of Heilongjiang, residents struggled to heat their homes in the winter after local gas providers restricted supply. The companies blamed a lack of government subsidies.

In the city of Zhangjiakou in Hebei province, where part of the 2022 Beijing Winter Olympics Games were held, local budgets are increasingly strained.One civil servant in Zhangjiakou, who requested anonymity because he was not authorised to talk to the media, said he was no longer confident about getting paid. “Receiving wages is just like throwing dice,” said the civil servant. “You never know how much you will get for the next monthly payment.”Construction of the bridges in Guizhou was a decades-long process. Unpicking the complex web of local finance may also take years.“The cleansing process is likely to be costly and economically painful,” Lo from BNP Paribas said. “It’s a controlled default process to weed out bad assets and to deleverage the system by allowing the more bad LGFVs to fail . . . as debt restructuring and reduction processes move ahead.”Additional reporting by Edward White in Seoul More