Aurelia Butler

China’s economy has fallen into deflation after consumer prices declined for the first time since early 2021, in one of the starkest indicators of the challenges facing policymakers as they struggle to revive consumption.The consumer price index fell 0.3 per cent year on year in July, according to official statistics released on Wednesday, after registering no change a month earlier. The producer price index, a gauge of the prices of goods as they leave factory gates, was down 4.4 per cent in July.Consumer prices, which last slipped into negative territory in February 2021, have been on the brink of deflation for months as an expected rebound in consumer spending failed to materialise after authorities lifted pandemic restrictions at the beginning of the year.The move into deflation is set to fuel calls for more government stimulus at a time when policymakers are also grappling with a property sector slowdown and weakness in trade, all of which have dragged on economic momentum.

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“The Chinese economy is now at serious risk of sliding into a deflationary episode that could spark a self-reinforcing downward spiral in growth and private sector confidence,” said Eswar Prasad, a China finance expert at Cornell University. “The government needs to act quickly and decisively to put a floor on growth and limit deflation before matters get out of hand.”China has bucked the global inflation trend of other large economies, many of which unleashed sweeping stimulus efforts during the pandemic. Beijing, by contrast, sought to control the virus through a three-year zero-Covid policy.Chinese policymakers have attempted to project confidence in the economy since the reopening, cutting some interest rates and offering tax incentives to businesses, but they have stopped short of major stimulus. The ruling Communist party politburo conceded late last month that the recovery was making “tortuous progress” and said it would “actively expand domestic demand”.

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The National Bureau of Statistics on Wednesday said average consumer price inflation over the year to date was just 0.5 per cent, far trailing the government’s target average inflation rate of 3 per cent this year, highlighting the growing divergence between expectations and the reality on the ground.Beijing’s gross domestic product growth target of 5 per cent for 2023, the lowest in decades, was originally seen as cautious, but months of consistently weak data have fuelled wider pessimism over the growth outlook.The economy expanded just 0.8 per cent between the first and second quarters of the year, while data published on Tuesday showed July exports slumped 14.5 per cent year on year, the steepest fall since the start of the pandemic. Imports declined 12.4 per cent year-on-year in dollar terms, the biggest fall since January.

Dan Wang, a Shanghai-based economist at Hang Seng Bank, said the inflation and trade numbers were “a reflection of lower purchasing power and weak consumer confidence”.Further data releases next week will provide a broad overview of economic activity in July, including industrial production and retail sales.Consumer prices in China have been strongly affected in recent years by pork prices, which the NBS said declined 26 per cent in July year on year. Core inflation, which strips out more volatile food and energy prices, rose 0.8 per cent.Producer prices, which are heavily driven by the cost of commodities and raw materials, have been mired in negative territory for the past 10 months, while manufacturing activity has contracted for four consecutive months, reflecting flagging demand for Chinese exports. More

Late last year in Beijing, officials from several of China’s technology, trade and defence agencies were called to a series of secret meetings with a single purpose: to respond to America’s sweeping restrictions on selling computer chips to Chinese companies.In July, Beijing announced its response: it imposed restrictions on the exports of gallium and germanium, metals used in the production of a number of strategically important products, including electric vehicles, microchips and some military weapons systems.“We had many options,” says one official directly involved in the talks. “This was not our most extreme move . . . it was a deterrent.”To the outside world, this was a one-two punch from Beijing. First, it showed China controlled the supply chain for dozens of minerals classified in the US as critical to economic and national security. It also showed China was prepared to potentially use this as geopolitical leverage.Matthew Funaiole, a China expert with the Center for Strategic and International Studies, a US think-tank, says the move was a “shot across the bow” which caught some in Washington off guard.“Outside of technical circles and the defence industry, it [gallium] is not a critical mineral that people were aware of,” he says.The episode has highlighted an inconvenient truth for the west: China is by far the lowest-cost and biggest supplier of many of the key building blocks for clean technologies. The two metals are among a series of products vital to the energy transition in which China dominates.China is responsible for the production of about 90 per cent of the world’s rare earth elements, at least 80 per cent of all the stages of making solar panels and 60 per cent of wind turbines and electric-car batteries. In some of the materials used in batteries and more niche products, China’s market share is close to 100 per cent.China’s cornering of the clean tech supply chain has drawn comparisons to the high level of influence that Saudi Arabia enjoys in the oil market. Just as petrochemical production provides an immovable strategic buffer for the Gulf state, China’s dominance over these clean energy sectors is adding to growing geopolitical competition and has the potential to complicate the world’s fight against global warming.The stakes are incredibly high.The rise and rise of China’s clean tech companies poses a massive competitive threat to western manufacturing industries, including legacy carmakers and energy giants. But in the context of a worsening technological cold war with the west, those capabilities could become a source of leverage for China.“People are starting to realise that control of the supply chain is important, otherwise you have systemic risk because it’s easy for China to shut down supply,” says Ross Gregory, Seoul-based partner of consultancy New Electric Partners.Western governments are now desperately attempting to catch up with China’s ascendance to the top of the world’s critical minerals and renewable energy industrial supply chains. US president Joe Biden and his counterparts in Europe have started deploying hundreds of billions of dollars in taxpayer-funded subsidies.Analysts, however, diverge on how long it will take the west to extricate itself from Chinese control of large swaths of the clean tech supply chain — or if this can be achieved at all.Most believe it will be impossible for Europe to meet its ambitious climate change goals without maintaining a very deep relationship with Beijing. Even the US — which boasts deeper pockets and stronger political support to decouple from China — will face a mammoth task in creating a new clean tech supply chain that excludes China.“The US has got to go on a war footing to build up these industries to be able to compete,” says Neil Beveridge, a Hong Kong-based analyst who leads Bernstein’s energy research. “The reality is China is still the workshop of the world.”Beijing’s supply chain stranglehold In the middle of the vast industrial compound of Rio Tinto’s Oyu Tolgoi mine in southern Mongolia’s Gobi Desert, scores of trucks wait to be loaded with two-tonne sacks of unrefined copper before making the 80km journey south to the Chinese border.Over the next few years, this will become the world’s fourth-biggest mine for copper, a metal central to the energy transition. As with many other extractive projects around the world, everything that is dug up here will be sent to China for processing.While many western governments are pushing to reduce their reliance on China, Jakob Stausholm, Rio Tinto’s chief executive, pointed out that part of the Anglo-Australian group’s success in recent decades was due to demand from China. “We work well with our Chinese customers because our Chinese customers, like us, think long term,” he said in an interview at Oyu Tolgoi in July.Nikhil Bhandari, co-head of Goldman’s Asia-Pacific natural resources and clean tech research team, says China’s grip on raw materials is “more than it appears”. This is thanks to equity investments in overseas mining operations by Chinese companies such as metals group Huayou Cobalt, carmaker BYD and battery giant CATL. In lithium, for instance, China only has a small share in mining, yet by next year Chinese interests will control more of the resource than the country needs for domestic purposes.And there is no sign that China’s interest in tying up resources is close to being quenched. The country’s overseas metals and mining investments are on track to hit a record this year, according to data published last week by Fudan University in Shanghai. Spending in the first six months of 2023 hit $10bn, more than the total in 2022, and investments this year are likely to surpass the previous annual record of $17bn in 2018.Experts point to less obvious parts of the supply chain, especially materials processing and refining, to highlight where the west faces its biggest challenge in competing with China.For decades, developed economies shunned these sorts of industrial activities, content to offshore the environmental damage to the developing world where costs would also be lower.China is the leading producer of at least one stage of the supply chain for 35 of the 54 mineral commodities that are considered critical to the US, according to an analysis by the US Department of the Interior and the US Geological Survey.In some cases, China’s position appears insurmountable. China produces a “staggering” 98 per cent of the world’s supply of raw gallium, according to CSIS, despite the product’s US military applications, including in next-generation missile defence and radar systems.In electric-car batteries, for example, China’s share of the raw materials they require is lower than 20 per cent but it holds a 90 per cent share of the market for processed versions of the same materials, according to Goldman Sachs. The production of graphite, used in the anodes in the heart of a lithium-ion battery, is instructive. While China’s market share of graphite reserves is just over 20 per cent, its market share for graphite processing is nearly 70 per cent, according to Goldman. But the cheapest way of producing graphite uses hydrofluoric acid, a highly toxic material that carries significant environmental risks, and another product for which China is the largest producer. In several other important clean tech industries previously dominated by western companies, including wind turbines, China now enjoys a rock-solid position.

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More than half of all new wind turbines installed this year will be in China, according to the Global Wind Energy Council, an industry lobby group. In the production of nacelles, which house the turbine’s power generation equipment, China has a market share of 60 per cent. It is currently building more than 60 new nacelle assembly facilities, adding to the 100 already in operation.Further down the turbine supply chain, the GWEC data shows China has more than 70 per cent market share of many crucial components including castings, forgings, slewing bearings, towers and flanges. Lance Guo, an expert on Chinese politics and economy at the National University of Singapore, says the world has for decades been taken by surprise by how successful the Chinese system has been in concentrating resources to focus on major national projects. “The rest of the world was not prepared for that,” he says. “If you work on a free market basis, you can’t move so fast.” Ilaria Mazzocco, an expert on Chinese industrial policy with CSIS, says while the growth in many of the clean tech industries predates China’s leader Xi Jinping, who came to power in 2012, the focus on industrial policy, strategic industries and climate change has been “strengthened” under his administration.She also points to a significant difference between how these industries have developed compared to the west: “China has been much more careful about promoting the ‘whole of supply chain’ development.”Cut-throat competition When Jorge Guajardo arrived in Beijing in 2007 as the new ambassador from Mexico, one of his key jobs was to convince Chinese companies to set up factories in his home country. Given Mexico’s existing landscape of low-cost car plants, China’s fledgling auto groups seemed the natural place to start.But if he thought the task would be easy, a meeting with BYD, a little-known battery maker supplying Nokia and Motorola phones, proved otherwise. Founder Wang Chuanfu, who had just acquired a failing state-owned car business, cut short a discussion about American trade rules.“The battery is about 50 per cent of the [cost of the] car and I’ll never do the battery outside of China,” Guajardo recalls him saying. “It was 2007, this made no sense.”Looking back, Guajardo, who is now based in Washington DC, says the rejection from BYD boss Wang “makes perfect sense. There was a vision . . . he was just thinking ‘electric’.”BYD’s plug-in hybrid Destroyer at a car show in May. The Chinese automotive group, the world’s second-biggest producer of batteries, is the beneficiary of generous government subsidies © Getty ImagesToday BYD, which is backed by Warren Buffett’s Berkshire Hathaway, is viewed by industry experts as emblematic of an existential challenge confronting legacy auto industries in Germany, France, the US and Japan. In the first half of the year the company sold 1.15mn vehicles in China, or more than one-third of total sales of plug-in hybrids and battery vehicles, according to data from Automobility, a Shanghai consultancy. BYD is also the world’s second-biggest producer of batteries, part of a vertically integrated business model which is the envy of Tesla and VW.Alongside the world’s EV battery king, CATL, Wang’s company is also among the clearest examples of how private sector ingenuity has married with Beijing’s industrial policy to create dominant positions in renewable energy and EVs. CSIS, the US think-tank, estimates Beijing’s cumulative state spending on the EV sector is more than $125bn between 2009 to 2021. Beijing was ruthless. Domestic industry was prioritised with heavy-handed local requirements, and from 2016 South Korea’s leading battery makers, LG, SK and Samsung, were cut off from accessing generous subsidies, setting up a boom in CATL and BYD’s battery production.The advantages that China now boasts when it comes to manufacturing clean tech products are underpinned by massive economies of scale benefits. Goldman data suggests that China can build an EV factory in about a third of the time it takes in other countries while a battery factory in the US will cost nearly 80 per cent more than in China. Bernstein says the cost of some manufacturing in the US can be three times more than in China. This highlights how China’s rivals must grapple with not only limited access to resources and upfront technology costs, but also labour shortages, wage inflation and higher environmental standards.It is a similar story in solar and wind. Buoyed by massive domestic demand, Chinese manufacturing of polysilicon and its processing results in costs that are two-thirds the price of a European-made product, the IEA says. Chinese wind turbines are half the price of western rivals, according to S&P data. Across these industries, Mazzocco says it is important to credit the role of intense private sector competition. “It is something we miss from the outside: we think it’s just about the subsidies. But in reality, it’s also because [companies] have been able to overcome their competitors within China in an extremely cut-throat environment,” she says. “They are the best of the best at squeezing every cent out of their operations.”Weapons or wildfires As China’s clean tech industry expands, analysts note distinct echoes of the geopolitical and economic disruptions caused by years of cheap Chinese steel, cement and aluminium flooding international markets. Complaints over Chinese manufacturing have led to periods of toxic bilateral tensions and thorny World Trade Organization disputes.Around €7bn worth of Chinese solar panels are currently sitting in European warehouses, for instance, as supply outpaces demand, according to Rystad Energy, a consultancy. The stockpile is nearly enough to power all the homes in London and Paris, combined, for a year.And yet there is deeper fear: an over reliance on a China that appears increasingly willing to weaponise its dominance, just as it did for gallium.Funaiole of CSIS says that while China’s control over some sectors “seems like an impossible problem” it will be possible for the US to reduce its exposure over time.

Workers install solar panels in Wuhan, China. Buoyed by massive domestic demand, Chinese manufacturing of polysilicon and its processing results in a product that is two-thirds the price of a European-made product © Kevin Frayer/Getty Images

“If you take it one by one, prioritise the ones that are more necessary for the defence industry . . . you can start to chip away at the vulnerability,” he says. Gore at NUS cautions that Beijing, too, needs to be careful in weaponising its clean tech dominance because China still remains deeply reliant on the west for many high-tech products.“This could come back to haunt China,” he warns. Still, other experts believe that ultimately western policymakers will face a choice between the competing strategic priorities of trying to decouple from China to achieve their national security goals, or co-operating to achieve their climate and economic goals.“On one hand, you really want to protect these industries [in the west]. On the other hand, you’ve got wildfires in the Mediterranean,” says Beveridge. “What do you do?” More

Who do you think said this: oil production is “very significant” for our country because we need secure domestic energy supplies.Or this: we will take “proactive and prudent steps” to advance our climate policies without disrupting people’s lives.Or this: the “stability and consistency” of our climate policies makes them better than those of other countries.Here’s a clue. It wasn’t Rishi Sunak, although the UK prime minister has spent weeks insisting domestic oil supplies are vital, and his “pragmatic and proportionate” net zero plans won’t add “hassle to people’s lives”.Nor was it Sunak’s energy secretary, Grant Shapps, who repeatedly says the UK has decarbonised faster than any other G7 nation and over-delivered on its carbon budgets. It was not in fact anyone in any western nation struggling to decarbonise and keep the lights on affordably. All three comments came in the past two years from China — the first two from President Xi Jinping, the third from his climate envoy Xie Zhenhua. They echo Sunak and Shapps because of this: the clean energy transition needed to tackle climate change is rarely as unique as it feels.Parallels abound even in the UK, birthplace of the fossil-fuelled industrial revolution that drove global warming, and China, the world-leading greenhouse gas polluter that will shape the future of that warming.It’s the extent to which governments manage the energy transition that will ultimately define them. And 2023 is turning into a year like no other for exposing leaders and laggards as rising temperatures press governments to enter uncharted political waters. Unlike previous energy transitions from, say, horses to cars or wood to coal, this one has a deadline. The climate extremes seen this year have come when average global temperatures are 1.1C higher than they were before the industrial revolution.To limit warming to 1.5C, greenhouse gas emissions must nearly halve by 2030 and come down to nearly zero by 2050. That’s hard, when more than 75 per cent of those emissions come from burning fossil fuels that still supply about 80 per cent of the world’s energy. How do you pay for this transition? Can you repurpose fossil fuel infrastructure? What do you do with redundant coal, oil and gas workers? I still remember learning on a 2014 trip to Beijing that policymakers there were as divided about climate action as those back home in London. No surprise, since China’s coal companies alone then had about 5mn workers.China had climate sceptics, too, with one big difference. They claimed climate change was a capitalist plot to stop developing countries industrialising. Western sceptics said it was a socialist hoax designed to undermine capitalism. But it’s what happened next that is instructive. By 2014, China’s sceptics were wilting as Beijing embraced a sweeping green growth strategy.While western leaders mocked wind turbines (Donald Trump) or demanded ministers cut the “green crap” (the UK’s David Cameron) or approvingly brandished coal in parliament (Australia’s Scott Morrison), China was steadily becoming a green energy juggernaut. Today it is a leader in the manufacture and deployment of renewables, batteries and electric vehicles, with a grip on many critical minerals these technologies need. To be clear, its fossil fuel thirst is still huge. It issued permits for the equivalent of two new coal power plants a week in 2022 and its emissions are on track to soar to a new annual record this year as its Covid-scarred economy rebounds. But it may also be close to a turning point. This year, renewables and other low-carbon power sources overtook fossil fuel generating capacity for the first time.Some analysts think these cleaner technologies may soon meet all new energy demand. That could start relegating fossil fuels to structural decline faster than expected and, if it does, some countries will be much more ready to deal with the fallout.The Biden administration has pushed the US into the clean energy race with the green incentive-packed Inflation Reduction Act it championed. The EU, Japan, Canada and others have this year set out measures in response. But not the UK. As Sunak’s government lags behind in polls ahead of an expected 2024 election, it has delayed its IRA response, vowed to “max out” fossil fuel reserves and review green transport policies. As with so much else in transition politics, this might bring short-term gains for Sunak. But the long-term dangers of falling behind in the global economy of the future have never been so [email protected] More

A closely watched gauge of long-term inflation expectations in the eurozone has reached its highest level since 2010, in a sign that some investors think the European Central Bank will struggle to bring inflation back to its 2 per cent target.The so-called five-year, five-year forward inflation swap — a measure of markets’ assessment of price growth over the second half of the next decade — hit 2.66 per cent this week, despite signs that the current burst of inflation has peaked as tighter monetary policy takes effect. Inflation expectations have edged higher in most big economies in recent weeks, driven partly by climbing oil prices. But the rise is particularly notable in the eurozone, where inflation was persistently below the ECB’s target in the decade after the 2008 financial crisis, leading to widespread predictions that the region was headed for a Japan-style deflationary slump. “The Japanification of Europe is likely to be a thing of the past,” said Florian Ielpo, head of macro at Lombard Odier. “This will be a sharp contrast to the previous decade.”Lombard Odier estimates the eurozone’s inflation could be as much as 1.5 percentage points on average higher in the decade to 2032 than it was in the previous 10 years, as rising energy and goods prices, exacerbated by Russia’s invasion of Ukraine, feed through to wage demands.The increase in long-term inflation expectations could be uncomfortable for the ECB, which has hinted that it is close to the end of its tightening cycle after delivering nine consecutive interest rate rises, lifting its deposit rate to a 22-year high of 3.75 per cent last month. The central bank has already had some success curbing price pressures. Headline inflation was 5.3 per cent in July, down from a peak of 10.6 per cent last October. Core inflation flatlined at 5.5 per cent last month, even as services inflation, partly fuelled by higher wages, rose to a record high of 5.6 per cent.Investors are evenly split on whether the ECB will deliver one more rate increase later this year.“At some point you would expect the five-year, five-year to plateau — the fact it has been rising steadily in the past six months makes me wonder if markets are concerned that we are not out of the inflationary spiral,” said Tomasz Wieladek, chief European economist at T Rowe Price. He added that the eurozone in particular is at risk of stagflation, a scenario where activity deteriorates but prices keep rising rapidly, in part owing to powerful collective wage bargaining agreements in big economies which increase the risk of a self-reinforcing upward spiral between prices and pay.Large fiscal packages launched in response to the Covid-19 pandemic, as well as to tackle last year’s energy crisis and to boost military budgets following Russia’s invasion of Ukraine, have supported demand and contributed to price growth — even if some are now being wound down.“I think the structural deflationary forces that pulled down headline inflation in the post-crisis era have faded — partly because balance sheets are stronger, but also because of pandemic-related fiscal support,” said Neil Shearing, chief economist at Capital Economics.

However Shearing, in keeping with most economists, believes the ECB will succeed in bringing inflation back to its 2 per cent target, even if it takes a couple of years, “albeit with overshoots more likely than undershoots over the next decade”.The five-year, five-year swap rate is designed to strip out the current economic cycle and show where the market thinks inflation will settle in the longer term. However, in practice it often moves in tandem with the short-term price pressures and has been buoyed by a recent rise in energy prices. It can also be skewed by a rise in hedging activity. Former ECB president Mario Draghi drew particular attention to the measure by citing its fall below 2 per cent in a 2014 speech at the Federal Reserve’s annual Jackson Hole conference that laid the groundwork for the start of quantitative easing in Europe a few months later.However, since Draghi’s departure in 2019, the ECB has appeared to give the measure less prominence. Its chief economist Philip Lane prefers to highlight “market-based indicators of inflation compensation”, which include several other elements, including inflation-linked bonds. The ECB believes that after stripping out the “risk premium” element of long-term market measures of inflation — based on investors’ hedging activity — the remaining expectations component would be close to its 2 per cent target. Staff at the central bank cross-check this against its survey of professional forecasters, which last month found they expected eurozone inflation of 2.1 per cent in the long term.Even so, investors’ bets on future inflation are a far cry from the pre-pandemic world when expectations languished well below the ECB’s target despite successive waves of stimulus. Core inflation — excluding energy and food prices — in the eurozone averaged 1 per cent between January 2013 and December 2019, driven in part by the looseness of the labour market. “Now the backdrop is quite different,” said Ryan Djajasaputra, an economist at Investec. “Unemployment is at a record low, participation is at a record high, employment growth remains solid and wage growth has strengthened from what were subdued levels pre-pandemic.” More

(Reuters) -Commonwealth Bank of Australia, the country’s biggest lender, posted record annual profit on Wednesday as rising interest rates helped it charge customers more, but warned higher living costs were pushing up debt arrears and competition was squeezing margins.The update from the supplier of a quarter of Australia’s A$2 trillion ($1.3 trillion) of mortgages signals a turning point for a sector that benefited from a property boom through COVID-19 restrictions then 400 basis points of rate hikes. Banks now must sacrifice profit to keep customers who are struggling to make repayments on time.Profit for the year to June rose 5% to A$10.16 billion, slightly ahead of analyst forecasts, but CBA put aside $A1.47 billion more in provisions due to “ongoing cost of living pressures and rising interest rates”. Loan repayments past 90 days late rose slightly since December, although they remained below long-term averages, the bank said.The bank’s net interest margin – a closely watched metric which shows takings from loan repayments minus interest payouts to depositholders – shrank since December and the bank expected pressure to continue into 2024.”There are signs of downside risks building as rising interest rates have a lagged impact on mortgage customers and other cost of living pressures become a financial strain for more Australians,” CEO Matt Comyn said in a statement.”We are seeing consumer demand moderate and economic growth slow and we are closely monitoring the impact of reduced discretionary spend, particularly on our small and medium sized business customers,” he added.Sweetening the results announcement for investors, CBA said it would buy back A$1 billion of stock and declared a final dividend of A$2.40 per share, taking total dividends for the year to a record of A$4.50.Shares of CBA, Australia’s second-largest company by market capitalisation, were up 2% in early trading, against a flat overall market, as analysts noted the bank’s exposure to a gloomy economy remained limited.”Despite rising arrears off historical lows, the credit experience remains benign,” Citi analysts said in a client note, adding the “supporting metrics will add to the stock’s defensiveness in the current environment”.CBA’s smaller rivals National Australia Bank (OTC:NABZY), Westpac and ANZ Group are expected give third-quarter updates over the course of the month. ($1 = 1.5298 Australian dollars) More