Aurelia Butler

Deposits at large U.S. banks rose $47.0 billion to $17.344 trillion from a week earlier, on a seasonally adjusted basis.Commercial bank lending increased $9.7 billion to a seasonally adjusted $12.123 trillion during the week.Residential lending increased $3.3 billion, commercial real estate loans climbed $1.2 billion, while consumer loans were up $1.1 billion from the prior week. Commercial and industrial loans were down $2.9 bilion from a week ago on a seasonally adjusted basis. More

At a summit in Tianjin this week, the Chinese premier Li Qiang took the opportunity to make the foreign executives in attendance feel welcome. Li, seen as the most business friendly member of President Xi Jinping’s inner circle, wrapped up a talk at the World Economic Forum’s New Champions meeting with a play on words in Chinese — mixing the word “laowai”, which means foreigner, with the term “laoxiang”, which means “townspeople”.“I hope you can become our townspeople,” he told a business round table.Li’s charm offensive at the meeting — nicknamed the “Summer Davos,” in reference to the far larger WEF event held in Switzerland in January — was intended to make attendees from overseas abandon all thoughts of “decoupling” and “de-risking”. But here and elsewhere it is hard to escape the geopolitical tensions between his country and the US-led west, which many in China fear are peaking at a critical juncture for its economy. After the country’s zero-Covid restrictions ended last year, the economy had a robust recovery in the first quarter. But this has slowed in recent months, with the government reporting on Friday that manufacturing activity fell for the third straight month while services were at their weakest in six months. Beijing blames part of the geopolitical tensions on Washington after it imposed controls on high-technology exports to China and shot down a suspected Chinese spy balloon early this year. There are signs that the US and China are trying to improve relations. When President Xi Jinping met US secretary of state Antony Blinken in Beijing last week, the two sides said there was “progress” towards stabilising ties — though it was quickly undone just a day later when US President Joe Biden called Xi a “dictator” at a private fundraising event.China has also been making overtures to US business leaders as its economic recovery stalls. Jamie Dimon, chief executive of JPMorgan, was wooed by senior officials in Shanghai in late May, and Tesla’s Elon Musk was invited to meet government ministers in Beijing the same week. Apple’s Tim Cook and GM’s Mary Barra also visited China this spring, while Microsoft co-founder Bill Gates met with Xi himself in June. But foreign investors have been unnerved at Beijing stepping up security measures. This week, just two days after Li’s comments at the WEF meeting, the government passed a new foreign relations law that strengthens the legal basis for “countermeasures” against western threats to national and economic security. This follows crackdowns on foreign consultancies and expanded espionage and data security laws.With the economic recovery weakening, however, many wonder if Beijing will soon be forced to choose whether to prioritise the economy over security — or whether China is entering a new phase in which the government will tolerate relatively low growth, while clamping down further to strengthen resilience to external threats. Inside China, anxiety is running deep. “This is the first time in 40 years that the Chinese public are not sure if things are going to get better,” says one Chinese commentator on the economy, who did not want to be named. Among the townspeopleThe sharp changes in China over the past three years were on display at the WEF this week. Some of these were technological, from the prevalence of electric vehicles on Tianjin’s streets to the conversion of China to a near cash-free society. Anyone without an indigenous payments app such as WeChat or Alibaba could not wander far from the venue. Many complained that even foreign credit cards did not work.Others hinted at the more visible presence of the Chinese Communist party. A bookstand at the venue’s entrance was stacked with titles such as the multi-volume Xi Jinping, The Governance of China and Why the Communist Party of China is Confident. US secretary of state Antony Blinken meets with President Xi Jinping in the Great Hall of the People in Beijing last week © Leah Millis/APA deeper change, however, was the paucity of global CEOs at the forum, say some who had been to previous WEFs in China, and the constrained nature of some of the debate. Set up at short notice after the end of zero-Covid, it was harder for bosses to incorporate the forum into their schedule, organisers say. But others blame geopolitics, which is forcing many US CEOs in particular to keep a low profile. Those who attended JPMorgan’s Shanghai summit in May did so behind closed doors.Among the range of attendees in Tianjin, some welcomed the chance to see China for themselves after years of hearing about the “China threat” in the US.“This is my first time in China. I thought I should be a little bit nervous,” says JD LaRock, president of the Network for Teaching Entrepreneurship, a New York-based non-profit organisation. “I find everybody that I’ve met has been friendly, open, interested in talking about how we can work together. It’s a different perspective from what the US politicians say.” A German business executive, however, expressed his frustration with how many participants, particularly Chinese executives and academics, seemed to stick closely to the Chinese government’s official narrative. A Volkswagen electrical vehicle on display at a car show in Shanghai. Ralf Brandstätter, head of VW China, has pointed to the plethora of competition in the Chinese auto market, which supports over 100 carmakers © Qilai Shen/Bloomberg“They are keen to create the impression that everything is back to normal but it’s not,” says the executive. “It’s such a different meeting because, five years ago, they had all those top-level people from the industries in China, but also from the US and Europe. Everybody was discussing openly.” Yet some present were content to speak freely. At a business roundtable, Volkswagen China head Ralf Brandstätter pointed to the plethora of competition in the Chinese auto market, with over 100 carmakers, saying it was destructive of capital. He also raised the issue of China’s cross-border data security laws, which carmakers have complained are too vague.Frank Bournois, dean of China-Europe International Business School (CEIBS), which has campuses in several large Chinese cities, praises the “spirit of entrepreneurship” at the event. But he says the after-effects of the pandemic are still being felt at his business school, with international students numbering just below 100 of the 1,200 full-time MBA students. Normally it would be up to double this.“International students are hesitant because of the pandemic and repercussions related to the pandemic,” says Bournois. “Geopolitics [at] the moment doesn’t help us much.” While the US and Beijing are trying to cool tempers this year ahead of a possible meeting between Biden and Xi later this year, the longer-term trajectory of their great power competition is clear, analysts say, particularly on high technology.“The US realises this is an important juncture in China’s development,” says Eswar Prasad, a senior fellow at the Brookings Institution, a US think-tank. Washington knew that China’s bid to invest more in advanced manufacturing and other areas of high technology meant it needed to also look abroad for foreign investors. “At the moment China needs foreign technology.”Reigniting the recoveryThat helps explain Li’s presence at the Tianjin event, among other outreach initiatives. But the immediate priority for Beijing will be to stabilise the recovery. The property sector, a growth engine of the economy, is locked in a long slump. After steadying briefly this year, it began to slip again in recent months, threatening consumer confidence. China’s exports and manufacturing sectors are also struggling.A real estate complex under construction in Huai’an, Jiangsu province. The property sector, a growth engine for the economy, is suffering from long-term oversupply © Costfoto/NurPhoto/Getty ImagesSome believe there is a risk of a “balance sheet recession”, when the indebted focus on paying down debt, as happened in Japan in the 1990s after its bubble burst.“I think some of the challenges the Chinese are facing are equal to or perhaps more challenging than the Japanese faced 30-something years ago,” says Richard Koo, chief economist at the Nomura Research Institute, who coined the term.He says the only way to fix a balance sheet recession is a very large fiscal response. The government needs to borrow the money that individuals and corporates are saving and recirculate it in the economy, Koo says, otherwise GDP will contract.The best path to achieving this might be to complete unfinished apartments left over from the sector’s bust in recent years, Koo adds. While local government finances are strained, the central government is in better shape. “The central government this time will really have to come out and borrow the money,” he says.One Chinese economist with a Beijing think-tank says large monetary stimulus is needed, as well as fiscal. The government has cut interest rates but only marginally. “I’m very worried about near-term growth prospects,” he says, calling for steps to put a floor under the property market.Policymakers led by Li Qiang, who took office in March, have yet to announce a comprehensive stimulus plan. The politburo, the party’s top decision-making body, is due to meet in July to discuss economic policy and insiders say any stimulus would likely come after that session.But few are expecting anything at the scale of the $570bn fiscal rescue package China unleashed in 2008. The Chinese economy is working through important structural changes that will take time, said economist Zhu Min at a WEF panel on the country’s rebound.Li Qiang’s charm offensive at the WEF meeting was intended to make attendees from overseas abandon all thoughts of ‘decoupling’ and ‘de-risking’ © Andy Wong/APThe property sector was suffering from long-term oversupply with demand this year 24 per cent less than the industry’s capacity, said the former IMF deputy managing director. Trade is also undergoing structural change as the share of exports going to the US and Europe fell. But the economy was shifting rapidly towards new industries, Min added, such as electric vehicles and the green economy. “Really, I observe the whole economy structure shifting,” he told the audience. “You will see volatility [but] that’s OK.”The lingering question is how US-China geopolitical tensions will play into that shift. World Trade Organisation director-general Ngozi Okonjo-Iweala said at the WEF that there was evidence that investment was shifting out of China to other parts of Asia. “If the investment patterns shift, the trade patterns will shift,” she said. In the near-term, the focus for China will be to try to achieve this year’s growth target of 5 per cent, its lowest in decades. For that, it may need to lower the geopolitical temperature, especially with the US, but also with other trade partners. Beijing may also wish to reconsider the security state approach, which intensified during Covid, says the Chinese commentator, and which still weighs on the economy and on society. “The whole state-society relationship has changed and people can feel that. And they [the government] need to dial it back.” More

The writer, an FT contributing editor, is chief executive of the Royal Society of ArtsThe chorus of consensus on UK inflation and interest rates has risen several decibels recently. Economists, financial markets, commentators and politicians have been clear in their conviction that UK interest rates need to continue marching north to curb price pressures. With its 50 basis point rate rise last week, and accompanying messaging, the Bank of England is whipping this herd forward. The latest set of UK inflation figures explain why, as headline inflation falls less than expected and core rates pick up to levels well above those of other countries and target levels. For many, this left the BoE with “no alternative” but to raise rates, with more to come until “every last drop” of inflation was squeezed out, as chancellor Jeremy Hunt put it. Not to do so, in their view, threatened the bank’s credibility.There are good grounds for healthy scepticism about this herd mentality. Indeed, other policy choices are not just possible but desirable. Of course, many of these same people completely failed to foresee the rise in inflation in the first place. Those who, 18 months ago, saw all inflation misses as temporary hiccups now interpret them as persistent heart attacks. This risks overreaction and overcorrection, the zealousness of the late convert.Higher and stickier inflation most likely reflects the UK’s more acute supply shortages than in other countries, notably in the labour market. These constraints are raising the level of prices, probably on a persistent basis. On this diagnosis, the textbook role of monetary policy is to tolerate, not offset, these temporary inflation misses provided inflation expectations remain anchored. Not to do so inflicts unnecessary further damage on growth.This the UK economy can ill-afford. Growth is stalled and many households and businesses face double jeopardy. Knocked sideways by a large wave of cost of living rises, they are now about to be struck by a second wave of cost of borrowing rises. This will mean about 3.5mn mortgaged households see incomes fall by more than 8 per cent, to say nothing of the 4.6mn renters also affected if their landlords have mortgages.Given a quarter of UK households have essentially no savings, this risks an outsized response to past monetary tightening in the form of lower spending and, ultimately, jobs. Past tightening of the monetary elastic is about to propel a brick towards the financially vulnerable. For the UK, that would spell recession.But there is another way. Despite the headline inflation rise, inflation expectations remain anchored. Cost and price pressures are, or are about, to abate in the second half of the year. A year from now, a reasonable view would see inflation at 3-4 per cent without any further tightening. At those levels, it is highly questionable whether those last inflationary drops need to be squeezed out at greater speed. At 3-4 per cent, inflation no longer enters the public consciousness. That is why there is essentially no evidence it would impose costs that are any greater than at 2 per cent. But the costs of lowering inflation those extra few percentage points, measured in lost incomes and jobs, are larger at these levels of inflation. In the jargon, the Phillips curve flattens. Squeezing the last drops, at speed, would mean sacrificing many thousands of jobs for negligible benefit. It could be argued that tolerating above-target inflation for a little longer than usual is to ignore the inflation target mandate. It is no such thing. That framework and its open letter system gives the BoE and the chancellor all the latitude they need to extend the horizon over which inflation is returned to target. Indeed, this flex was built in precisely for these circumstances. The oddity is it is not being used.Doing so would enable the bank to pause and take stock, smoothing the path of rates facing borrowers and thereby lowering the risk of policy-induced recession. Other options, such as leaning on lenders as both main UK political parties have proposed, are better than nothing but plainly far inferior to smoothing at source. Imagine a doctor, uncertain about the nature and severity of a disease, who has administered a large medicinal dose which has yet to take effect. Prudence would cause them to pause to see how the patient responded before doubling the dosage. That principle is one central banks should heed now to avoid overdosing the economy. Over a decade ago, in pursuit of lower debt, the UK enacted fiscal austerity. This ruptured growth and was self-defeating for debt. Today, in pursuit of lower inflation, monetary austerity risks the same fate. It is time to steer the stampeding herd away from the cliff edge, for the sake of the financial security of millions of people and the credibility of our policy institutions. More

Today’s top storiesApple’s market valuation surpassed the $3tn mark again as its shares hit a fresh record of $191.42 in New York.France was braced for more riots after a third night of unrest sparked by the police killing of a teenager at a traffic stop in a Paris suburb.Lord Zac Goldsmith quit as a UK environment minister, a day after being censured by a senior group of MPs, but took the chance to lambast prime minister Rishi Sunak for being “uninterested” in green issues.For up-to-the-minute news updates, visit our live blogGood evening.Markets today enjoyed an end-of-week boost as encouraging inflation data in the US and the eurozone suggested the Federal Reserve and the European Central Bank were having some success in their battle to restrain rising prices.Eurozone inflation eased more than expected to 5.5 per cent in June, the lowest since the start of last year, although the news was tempered by a small (but still less than forecast) increase in the core measure.The annual headline rate fell from 6.1 per cent in May, while the core reading, which excludes volatile items such as energy and food, rose from 5.3 per cent to 5.4 per cent. The data follows a few days of hawkish comments from ECB policymakers, who have been convinced by stubbornly high inflation in the UK that they need to maintain their aggressive stance on raising interest rates. “We have seen what happened in the UK and we don’t want the same thing to happen to us,” said one. “It is better to sound a little more hawkish and be prudent about how fast inflation will fall than to be caught out by a negative surprise, which is a problem for a central bank.”Their mission to get core inflation back to their 2 per cent goal is complicated by the varying rate of progress across the single currency bloc. Spain, Belgium and Luxembourg all fell below target for the first time in over a year and France hit its lowest level in 15 months but inflation in Germany, the eurozone’s biggest economy, accelerated from 6.3 per cent to 6.8 per cent thanks to a surge in transport prices after the government cut subsidies for bus and train travel.Caveats still abound. Tight labour markets and increases in eurozone wages, especially in the labour-intensive services sector, could still wreck progress, ECB chief Christine Lagarde warned earlier this week. Deputy head of the IMF Gita Gopinath added to the debate on Monday, saying that central banks had to accept the “uncomfortable truth” that they may have to tolerate a longer period of inflation above their 2 per cent target to avert a financial crisis.Meanwhile across the Atlantic, new data showed the core personal consumption expenditures index, the Fed’s preferred measure of inflation which strips out volatile food and energy items, rose by 0.3 per cent last month, taking the annual rate down to 4.6 per cent from 4.7 per cent in April.Despite nagging fears about the stubborn core figure in the eurozone, investors took the US and European figures as a double dose of good news, giving them hope that, finally, global interest rates might be approaching their peak.Need to know: UK and Europe economyUK energy regulator Ofgem is to crack down on power station owners gaming the electricity system to make “excessive profits”.British households pulled a record £4.6bn from banks and building societies in May, suggesting more consumers are looking for higher interest elsewhere and tapping their savings to maintain living standards. New data this morning confirmed real household disposable income fell in the first three months of the year.Need to know: Global economyChina passed a new law deepening President Xi Jinping’s control over external relations and strengthening his legal basis for “countermeasures” against western threats to national and economic security. Manufacturing activity shrank for the third consecutive month, adding to pressure on the country’s policymakers.US companies fear they will be next to experience a wave of legal challenges to their diversity initiatives after the Supreme Court ruled against affirmative action in university admission programmes.Pakistan reached agreement with the IMF on a $3bn rescue plan to stave off the threat of default.María Corina Machado, the most popular contender to challenge Venezuelan president Nicolás Maduro in elections next year, warned that another victory for Maduro would further destabilise a region already facing waves of migration from the country’s economic collapse.Need to know: businessBankers’ fees have hit a near-decade low as dealmaking dries up thanks to higher interest rates, stricter antitrust enforcement and geopolitical tensions.The largest US banks would lose $541bn in a hypothetical doomsday economic scenario but still have enough capital to absorb the losses, according to Federal Reserve stress tests. As long as banks match or exceed Fed requirements, they are free from restrictions on how much capital they can put towards shareholder dividends and stock buybacks.Many of Europe’s leading companies signed an open letter criticising the EU’s proposed Artificial Intelligence Act, arguing that it will “harm competitiveness and technological sovereignty without effectively tackling the challenges we are and will be facing.” The new Twitter chief executive Linda Yaccarino is preparing measures to lure back advertisers including a video ads service, wooing more celebrities and raising headcount. Merlin, Europe’s largest theme park operator with attractions in 25 countries, is back in profit thanks to the return of international tourism.A Big Read looks at the Chinese carmakers gearing up for a sales drive in Europe, using their expertise in electric vehicles to take advantage of the continent’s coming ban on the sale of new petrol and diesel cars.

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Science round upThe Bill & Melinda Gates Foundation and Wellcome Trust are to fund a $550mn large-scale clinical trial of what would be the world’s first new tuberculosis vaccine for more than a century.Insilico Medicine began the first human trials of a drug designed by artificial intelligence. The biotech is one of a new generation of companies aiming to revolutionise drug development and capitalise on a $50bn market opportunity. Antarctic sea ice hit a record low for the month of June, increasing calls from scientists to intensify research and monitoring of the Earth’s polar ice caps. UK chancellor Jeremy Hunt rejected claims that talks over rejoining the EU’s Horizon research programme were foundering after criticism from scientists that the delay was damaging the country’s aspirations to be a science superpower. Public policy editor Peter Foster writes that the clock is ticking to get something done before Europe’s long summer break and the next round of Horizon projects comes up for funding in September.The EU has started looking into geoengineering, a contested technology that involves manipulating the weather to fight climate change.Brussels has ignored calls from businesses and campaign groups to set binding targets to prevent soil erosion and pollution, a sign of the EU’s increased hesitancy to follow through on environmental laws that are part of its green agenda. Controversy is growing about the validity of behavioural science, a field that has risen to prominence over the past 15 years and whose findings in areas such as decision-making and team-building in business are widely put into practice.Something for the weekendTry your hand at the range of FT Weekend and daily cryptic crosswords.Some good newsEurope’s €1.4bn ‘Euclid’ space telescope, set for launch on Saturday, will map billions of galaxies across the cosmos, providing observations for scientists trying to solve the mystery of the “dark universe”. More