Aurelia Butler

(Reuters) – A look at the day ahead in Asian markets from Jamie McGeever, financial markets columnist.A deepening sense of caution descends over Asian markets as the trading week reaches its mid-point, as investors give a lukewarm reaction to China’s interest rate cut and await key remarks from Federal Reserve Chair Jerome Powell later on Wednesday.Adding to the lackluster market tone and feeling among investors that the global policy tightening cycle is not yet over, UK inflation data on Wednesday will be closely watched ahead of the Bank of England’s expected rate hike on Thursday.The Asian economic data calendar on Wednesday is light, with Japan’s tankan manufacturing index for June one of the few releases on tap and the one most likely to stir markets.The Bank of Japan is one of two outliers among leading monetary authorities, and remarks from governor Kazuo Ueda on Wednesday could determine whether the yen pulls back from a seven-month low against the dollar, or extends its decline.The other is the People’s Bank of China, which is now actually cutting rates for the first time in almost a year. On Tuesday it lowered key lending benchmarks by 10 basis points as officials seek to shore up a slowing economic recovery, but investors weren’t impressed.The one-year loan prime rate (LPR) was cut to 3.55% and the five-year LPR was cut to 4.20%. Investors had hoped the five-year LPR would be reduced by more.For the yuan, the PBOC was stuck between a rock and a hard place – more aggressive easing would further reduce the attractiveness of Chinese bonds, which is bad news for the yuan; a more cautious easing probably won’t give the economy much support, which is also bad news for the yuan.The yuan has been trading through 7.00 per dollar every day since May 18, and is now approaching 7.20/dollar. Last October’s weak point around 7.30/dollar, a low not seen since late 2007, may soon come onto traders’ horizon.On the Chinese corporate front, investors are digesting the news of changes at the top of e-commerce giant Alibaba (NYSE:BABA) Group. The company said on Tuesday its CEO and chairman Daniel Zhang will step down from the roles, which will be filled by Eddie Yongming Wu and Joseph Tsai, respectively.China’s stocks are on the defensive, but they are not alone. The MSCI Asia-ex Japan index on Tuesday had its worst day this month; world stocks fell for a third day, their longest losing streak since early May; and Wall Street ended in the red.The main global event for markets on Wednesday is likely to be Fed Chair Powell’s semi-annual testimony to the House Financial Affairs Committee. Investors will be parsing his words for any extra steer on the policy outlook, no matter how slight.Here are key developments that could provide more direction to markets on Wednesday:- Japan tankan survey (June)- BOJ Governor Kazuo Ueda speaks- Fed Chair Jerome Powell speaks (By Jamie McGeever; Editing by Deepa Babington) More

Chancellor Jeremy Hunt is to call in banks to address what one Tory MP called a “mortgage bomb that is about to go off”, but he ruled out giving fiscal support to households struggling with the rising cost of mortgages.Hunt on Tuesday said he wanted to help the Bank of England “strangle” inflation and that pumping more money into the economy would put further upward pressure on prices and interest rates.The official inflation rate for May will be published on Wednesday, with economists expecting the headline rate to fall from 8.7 per cent to 8.4 per cent. The drop is unlikely to be sufficient to stop the Bank of England raising interest rates on Thursday by another 0.25 percentage point to 4.75 per cent, the highest level since 2008, because of concerns that underlying inflationary pressures are still too strong.Hunt on Tuesday rejected calls from Tory MPs to bring back a Thatcher-era tax break — called mortgage interest relief at source — to cut monthly repayments. The tax perk was abolished by Labour chancellor Gordon Brown in 2000.“We won’t do anything that will prolong the inflationary agony that people are going through,” Hunt told MPs at Treasury questions in the House of Commons.Instead, the chancellor will call in big lenders on Friday to assess the state of the mortgage market and to see what additional help they can give people struggling with their monthly payments.On Monday, the cost of a two-year fixed rate mortgage in the UK rose above 6 per cent for the first time since December. Virgin Money on Tuesday became the latest lender to raise the cost of its mortgage products after financial markets raised their expectations of more interest rate rises by the BoE following poor inflation data.One senior executive at a main bank said the chancellor’s move to hold talks with the lenders was unsurprising.He added there were various ways his company could assist households with their mortgages, but said arrears were not increasing.Other lenders were more sceptical of the move.“It’s nothing more than the chancellor playing to the crowd,” said one bank executive who added that lenders were already doing their utmost to avoid repossessions. “It will just allow him to show he’s doing something.”Under a December 2022 agreement between banks, regulators and the Treasury, lenders are required to offer tailored support to those struggling to pay their mortgages.Andrew Griffith, City of London minister, said lenders could offer mortgage term extensions or a switch to interest-only repayment holidays. “Any repossessions should be an absolute last resort,” he added.Meanwhile, there was only lukewarm Treasury support for the suggestion by Michael Gove, the cabinet minister responsible for housing, that 25-year fixed rate mortgages could help alleviate the situation.Griffith said there were already long-term fixed rate mortgages on the market but that “the constraining factor is consumer demand”. He added they had not proved very popular.The idea of a “lifetime” mortgage was proposed in the Conservatives’ 2019 election manifesto, but Treasury insiders said markets would have to settle — in other words, interest rates would have to come down considerably from their current levels — before they were likely to be popular.Richard Donnell, research director at property website Zoopla, said the expense of 10 or 20-year finance discouraged borrowers from breaking the habit of picking cheap short-term deals and hoping rates would come down next time round.“My view is the government has to come in and pump-prime this market to open it up,” he added. “I don’t think the market will get there on its own.”Labour’s Treasury spokesperson Pat McFadden said the UK was still paying the price for the “giant economic experiment” conducted by Liz Truss, former prime minister, last year, which forced up mortgage rates.The problem is also starting to worry Conservative MPs as they prepare for a general election expected in 2024. Sir Jake Berry, a former Tory minister, said there was “a mortgage bomb about to go off”.But Treasury officials have taken some comfort from data showing home repossessions and arrears on mortgage payments are below pre-pandemic levels.Prime minister Rishi Sunak has insisted his pledge to halve inflation by the end of 2023 to about 5.5 per cent is still on track, and that this is the best way to address the mortgage problem.Downing Street said the government was doing much to help people with the cost of living crisis, but has not signalled any intention to go beyond existing plans. Additional reporting by Jim Pickard and Siddharth Venkataramakrishnan More

Germany’s top carmakers have been accused of using forced labour in their Chinese supply chains, in one of the first official complaints against domestic companies to be brought under the country’s new supply chain law.On Tuesday, the European Center for Constitutional and Human Rights, a non-profit organisation based in Berlin, said it had filed a complaint with German regulators against Volkswagen, BMW and Mercedes-Benz alleging their links with forced labour in China’s region of Xinjiang. The complaint was filed under a German law that came into effect at the start of 2023, which requires large companies to ensure human rights and environmental issues in their supply chains are monitored and addressed. Penalties range from a fine of up to 2 per cent of total annual global sales and exclusion from government contracts for up to three years.European companies operating in Xinjiang now face political and regulatory pressures at home and abroad, as a wave of advocacy groups start to bring legal cases in European courts over products made in Xinjiang. The US has already banned imports from the territory.Looming regulatory scrutiny adds to the growing controversy over Volkswagen’s factory in Xinjiang. Human rights protesters were among those disrupting the carmaker’s annual general meeting last month, while investors demanded an independent audit of its Xinjiang plant. “The presence of the factory in Urumqi alone is sufficient to establish a high likelihood that the company may be receiving labour transfers of Uyghur workers,” the complaint against VW alleged, referring to the state-sponsored forced labour programmes that Beijing is accused of administrating.The complaints against Mercedes-Benz and BMW centred on a few indirect and direct suppliers based in or near Xinjiang, which the ECCHR said were likely to have been at risk of using forced labour.The carmakers’ relationship with CATL, which produces nearly a third of all electric vehicle batteries, was also singled out, as the Chinese battery maker last year began to expand its footprint in Xinjiang.All three complaints claimed that raw materials coming out of Xinjiang, such as copper, lithium and aluminium, carried an especially “high risk” of being linked to forced labour. VW, BMW and Mercedes-Benz all declined to comment on the complaints, stating that they had not yet been contacted by German regulators.Mercedes-Benz added that “whenever concerns are raised, we push suppliers for clarification” and said that it regularly carried out spot checks with suppliers in China.BMW said that it was “continuously” monitoring suppliers’ compliance with its standards and “consistently” investigating potential breaches.CATL and SAIC Motor did not respond to requests for comment.The cases will now be reviewed by the German Federal Office for Economic Affairs and Export Control, which said it would take “the necessary time”. The authority said it has received 10 complaints or tips relating to supply chain problems in the past six months.European companies operating in China face conflicting regulations. While European Union member states are rolling out laws to compel firms to conduct corporate supply chain due diligence, China has made doing so highly dangerous with its recent Anti-Espionage Law and crackdown on consultancy and auditing firms. In March, US due diligence firm Mintz was raided — partly as a result of its work in Xinjiang.“As long as there are no credible and effective due diligence mechanisms in place, companies should cease their business activities in the Uyghur Region,” said Miriam Saage-Maaß, legal director at ECCHR.Unfettered access to Xinjiang has been impossible since the government enacted a high-security crackdown on Uyghur and other Turkic Muslims, surveilling and tailing journalists who enter the region.

Last year the United Nations concluded that there had been “large-scale arbitrary detention” in the region, and that atrocities there might even amount to crimes against humanity.Earlier this year, Volkswagen’s China head Ralf Brandstätter announced that its Xinjiang plant was no longer producing cars and that there were no plans to resume production; instead, it quality checks cars for sale in the region. Volkswagen has a minority stake in the joint venture that operates the plant, which is controlled by the Chinese state-owned SAIC Motor. Brandstätter visited the company’s Xinjiang plant in February and said the company did “not see any evidence of human rights abuses at the plant”. More

German chancellor Olaf Scholz has pushed new Chinese premier Li Qiang to ensure western companies have a “level playing field” in China, while stressing his opposition to any economic decoupling from Beijing.At a joint press appearance in Berlin with Li, who is making his first overseas visit since becoming premier in March, Scholz voiced concerns about “access to the Chinese market and fair competitive conditions” for German companies.But Scholz also insisted Germany — which in 2022 counted China as its most important trade partner for the seventh year running — wanted economic co-operation to continue. The visit by Li comes amid intense debate within Scholz’s three-way ruling coalition, and among German businesses and Berlin’s international allies, about how to manage Europe’s economic dependence on China.Scholz, who is more dovish on China than ministers from the Green party in particular, said it had been “important” for him to explain to Li recent talk of encouraging diversification by German companies.“We do not want to close ourselves off to one partner, but rather to establish and expand balanced partnerships throughout Asia and beyond,” the chancellor added.Li’s visit is part of a charm offensive by Beijing aimed at retaining foreign investment at a time when China’s economy is struggling to recover from pandemic lockdowns and turmoil in its real estate sector.“Protecting against risk and co-operation are not opposites. Not working together is the biggest risk; lack of development is the biggest insecurity,” Li told German businesses in Berlin on Monday, according to the Chinese foreign ministry.In its annual report published on Tuesday, Germany’s domestic intelligence agency, the Bundesamt für Verfassungsschutz, accused China of seeking to buy German companies with cutting-edge technology as a “gateway to political influence, espionage and sabotage”.Scholz also called on Beijing to step up its pressure on Russia over its “brutal” war in Ukraine and pledged to increase German-Chinese co-operation on climate change.The European Commission has been urging EU capitals to consider a new outbound investment regime that would scrutinise companies’ involvement in China, and a better-co-ordinated system of controls on exports of highly sensitive technology.But the commission has faced opposition from member states including Germany and France. Speaking on Monday, Scholz underlined that he was against subjecting “the entire export process” to investigation by authorities.Opposition politicians on Tuesday criticised the German chancellor for not allowing questions at his joint “press conference” with Li, even as he called for greater freedom for German journalists to operate in China. Noah Barkin, an expert on Europe-China relations at research firm Rhodium Group, said Scholz had also “steered clear of the controversial themes”, making no mention of Taiwan, Hong Kong or human rights abuses in China’s north-western Xinjiang region.“It looked very much like the kind of press conference that [former chancellor] Angela Merkel might have given years ago when relations were in a better place,” Barkin added. “The only difference is that she insisted that journalists be allowed to ask questions.”While the US and EU have agreed on the need for “de-risking” of economic ties with China, interpretations of what this means vary widely.During Li’s meeting with executives from some of Germany’s most powerful companies — including industrial conglomerate Siemens, carmakers Volkswagen, Mercedes-Benz and BMW and chemicals producer BASF — the Chinese premier said decisions on “de-risking” should be taken by businesses rather than governments.Li encouraged German businesses to continue to work with Chinese ones, particularly on renewable energy and low-carbon technologies. More