Aurelia Butler

George Magnus is an associate at Oxford University’s China Centre, research associate at SOAS, and author of Red Flags: Why Xi’s China is in Jeopardy.De-dollarisation is a frightful word that is chronically over-used to describe things that really aren’t happening much. Yet it is all the rage as people again seek simple narratives in volatile and highly geopolitical times.FT Alphaville set out one of the more reasoned expositions here but even that, by seasoned foreign currency analyst Stephen Jen, failed to convince. Here is why.We can all agree that some central banks have in the past moved significant proportions of their reserves away from US dollars — for example China 2005-2015, and Russia more recently has been frozen out of dollars and euros. But there hasn’t been any substantial evidence to demonstrate that the dollar’s reserve status as such is under threat.There is no question that the weaponisation of the dollar as part of the creation of an infrastructure of restraint aimed at Russia and China has made these two autocracies and some countries jumpy, and keen to try and sanction-proof themselves financially — if indeed this is possible. Yet, the suggestion that the decline in the dollar component of global reserves fell significantly faster — by an additional eight percentage points according to Jen — in 2022, vindicating the notion of a global shift away from the dollar as the primary reserve asset is far-fetched.If you want to get into the entrails of this reserves statistics salad, you should read Brad Setser at the Council For Foreign Relations. He demonstrates that the fall in reserves, reported by the IMF and used by Jen, is principally due to valuation changes in central banks’ bond portfolios as the Fed’s monetary regime shift gathered momentum. Further, it is quite common to see central banks do a bit of asset allocation away from dollars in the wake of periodic surges, such as that from 2020 to September 2022.Moreover, data from neither the US balance of payments accounts on official reserve assets nor from the Treasury International Capital (TIC) system, which records portfolio capital flows in and out of the US indicate that anything was unusual in the last year. Flows into US Treasuries, agencies and other debt instruments continued to rise.It is reported that the BoJ sold over $50bn in its attempt to halt and reverse the fall in the yen last summer. There was no change, as far as we know, in China’s holdings of dollar reserves, nor of any major central banks that would have made a difference to the aggregate data.Importantly too, in modern times you can’t look at central bank asset movements alone. The activities of sovereign wealth funds and state banks (notably in China, but elsewhere too) are also key. The former typically hold fewer portfolio assets and fewer dollars, but are no slouches in US debt markets, while the latter are often used as proxy agents for central banks to hide dollar reserve acquisitions. Incorporating these institutions is possible using wider data sets than just the IMF, and again do not reveal de-dollarisation in the way its proponents assert.To return to sanction-proofing and the China and Russia pied-pipers leading the world towards a monetary system in which the dollar is an also-ran, the reality is not quite like it is painted, often self-servingly.Again, we can all acknowledge that there is a shift towards paying invoices in other currencies, and trying to set up alternative payments and clearing systems that bypass SWIFT and the TIC system. The yuan’s share in Russia’s import and export settlements during 2022 jumped to 23 percent and 16 percent, respectively, from, 4 percent and 0.5 percent. China has created emergency yuan swap lines with some other central banks in a bid also to encourage more local currency trade financing that bypasses the US dollar. It is developing its own international payments infrastructure has also encouraged Saudi Arabia, other oil states and Brazil to finance more trade in yuan. Most of these amount to pretty small beer.Use of Chinese currency to settle more bills, though, does not advance the cause of the yuan as a reserve currency, let alone an alternative to the US dollar. Recipients of yuan are still left with the issue of either keeping a currency asset that is still barely used globally, or selling it for readily tradable currencies with open and transparent financial architectures. That’s to say nothing of trust and other properties that full internationalised currencies must have.While the IMF has shown that reserve diversification in Australian and Canadian dollars and even the Swedish krona and Korean won has been remarkable, these currencies should be considered as parts of the dollar-based monetary system’s orbit. There really isn’t an alternative as things stand, and the idea that the yuan might become a truly internationalised currency is a narrative that lacks credibility.It could only happen if China allowed the rest of the world to accumulate large claims in yuan, meaning either sustained large external deficits, or free outward movement of capital. Neither is desired by this mercantilist state, which also fears capital flight and threats to its own $60tn domestic banking system. Xi’s China is, therefore, stuck between the devil of balance of payments surpluses and the deep blue sea of a closed capital account.If de-dollarisation is really going to happen some time in the future, the US will be the agent. But it really isn’t happening now, even if usage of other currencies for settling bills and denominating swaps is becoming more popular and acceptable.Further readingDollar 🙁 More

Russia’s defence ministry has admitted bombing its own city by mistake during a raid on Ukraine.A Russian fighter jet accidentally dropped a bomb on Belgorod, just 20km over the border from the northeastern Ukrainian city of Kharkiv, during a night-time bombing attack, the ministry said in a statement late on Thursday. Video footage of the incident that emerged Friday showed several cars driving through an intersection in a residential area before the bomb landed, causing a fiery explosion, hitting a car, and leaving a 20m crater in the road.The ministry described the bombing as “an abnormal descent of aviation ammunition” and did not explain why it happened.Viacheslav Gladkov, the local governor, said two people were hospitalised with injuries from the incident. More

Xi Jinping’s China is bouncing back and making overtures to western business. While breathing new life into multinationals’ top lines, it is also bringing a fresh quandary: whether to invest in the world’s second-largest economy as geopolitical tensions over the fate of Taiwan intensify.Since Beijing ditched all Covid-19 restrictions in December, pent-up demand in the retail sector has fuelled a faster than expected recovery. China’s 4.5 per cent economic expansion in the first quarter has made its way into western brands’ earnings, especially at the top end of the consumer spectrum. Take Porsche, which reported a record 18 per cent jump in sales driven by China, the German luxury car maker’s largest market. Or LVMH, similarly boosted by buoyancy in the world’s biggest luxury goods market, which the French group said had driven a 17 per cent surge in first-quarter sales just as growth plateaued in the US. Meanwhile, its Paris-based rival Hermès hailed “a very good Chinese new year” as it revealed a 23 per cent jump in revenue across Asia. In these higher spheres, consumers can be charged 30 per cent more for luxury goods in China than in Europe, according to Morgan Stanley.But there is an “elephant in the room”, as UniCredit economist Erik Nielsen noted in a post-IMF spring meetings briefing: rising geopolitical tensions between China and the west are bringing “the most profound change in a generation in economic policy thinking, and policy priorities”. “In the US,” he wrote, “it’s all about containing China. In Europe, it’s partly a softer version of the same. This means that if (or when?) US-China relations deteriorate further in this tit-for-tat, leading to further protectionist measures including export bans and sanctions, European businesses will most likely be caught between the two parties.”Companies have been aware of this risk since former US president Donald Trump imposed a slew of economic sanctions on Chinese companies, marking a more confrontational shift towards Beijing that has continued under his Democratic successor Joe Biden. For supply chains this stance, coupled with huge trade disruptions during the Covid pandemic, has prompted companies to ditch the notion of “just in time” for “just in case” — with groups from Intel to Apple revisiting their reliance on China and trying to move parts of their production elsewhere, to countries such as India and Vietnam.But such is the interdependence with China built over the past two decades that this is no easy task, as shown by Apple’s difficulties in India. And if there is one lesson from the much smaller uncoupling between Russia and the west following the invasion of Ukraine, it is that the process is painful for western brands, and entered only reluctantly.China’s economic recovery will only make these plans to diversify supply chains more difficult to implement, especially for publicly listed groups. With increasing pressure from shareholders, and pay incentives that are tied to share price performance, the temptation will be greater to play down the geopolitical risks or even ignore them (a US general recently predicted that Washington and Beijing would probably go to war over Taiwan in 2025). Sure enough, German carmaker Volkswagen, which owns Porsche, this week announced a plan to invest €1bn to build an innovation centre in China. This came after a decision last year to spend €2.4bn on a venture with Chinese chip designer Horizon Robotics. Not exactly a sign of prudence regarding a country that an increasing number of policymakers consider the biggest threat to the west. More

EU countries are pushing back against an influx of syrup-laced honey from China and other exporters which is flooding the bloc’s €2.3bn honey market and driving down prices.The bid by 20 member states, led by Slovenia, to tighten regulation against what one official dubbed “honey laundering” follows a European Commission study that found a surge in fraud. Almost half of the honeys surveyed broke EU rules, with ingredients such as sugar syrups, colourings and water, according to findings released last month.“It’s basically sugar water,” said one EU official.Because imported honey is sold at a lower price than the European product, beekeepers across the continent said honey fraud risked hurting small businesses, misleading consumers and, by discouraging would-be apiarists, posing a risk to bees’ environmental role. “There’s unfair competition coming from outside the EU, principally China,” said Yvan Hennion, an apiarist with 300 hives in Houllin, northern France. “It’s not real honey and it’s making the price plummet.”The 20 member states called this week for new rules on honey labelling and a strengthening of checks to make detecting fraudulent samples easier, officials said. It follows an earlier proposal on honey labelling led by Slovenia in January.The commission will on Friday publish proposals on revising marketing standards for agri-food products, including a new approach to honey labelling. It declined to comment ahead of that publication.Four in five jars sold in supermarkets are blends, often including honey from both within and outside the bloc. A proposal by Slovenia has called for EU honey labels to indicate each country of origin and their respective share in blends, rather than the current approach of simply stating that blends contain a mix of EU and non-EU honey.The countries also want the commission to improve its detection of honey that has been adulterated and increase the number of labs approved to assess it.“We want traceability and an end to trafficked honey,” said an official backing the proposal.While European member states broadly support the upcoming proposal, two people said they feared that the commission could lack ambition. One said they were concerned that it would not push to require percentages from different countries of origin to be stated on each jar, for example.Four in five jars of honey sold in supermarkets are blends, often including honey from both within and outside the EU © Ute Grabowsky/Photothek/Getty ImagesDespite the calls for a clampdown, the EU relies on imports to meet the honey demands of its sweet-toothed population. It produces 218,000 tonnes of honey but also imports 175,000 tonnes per year, with the vast majority coming from just eight destinations, including China, Ukraine, Turkey and several Latin American countries.The commission study, conducted from 2021 to 2022, found that 46 per cent of honey samples surveyed broke EU rules, a figure that had risen from just 14 per cent in 2015-17. Some 70 of 123 companies assessed had exported honey suspected of containing sugar syrups, which can be made more cheaply than the genuine article.Of those exporters, 21 came from China, more than any other country, followed by Ukraine. Adulterated jars also came from Argentina, Brazil, Mexico and Turkey, while every operator surveyed from Great Britain had exported at least one jar suspected of failing to meet EU rules. Researchers said the finding was probably the result of honey from other countries being repackaged in the UK, although the UK’s overall exports to the EU were comparatively low.Hennion, the beekeeper, said that while direct sales from his farm had held up well, the prices he received from wholesalers had dropped in recent years. He charges wholesalers at least €3.50 per kilo of honey but imported honey can be bought for less than €1 a kilo, putting pressure on his prices.This hurt the entire bee-based economy, said Hennion, who also sells queen bees to those starting apiary businesses. “Everything goes together,” he said. “The honey is sold at a good price, the seller sells equipment, beekeepers set up, we sell queen bees. It’s a circular, bee profession that we must maintain.” Stanislav Jaš, a Finland-based beekeeper and vice-chair of the honey working party for European farming groups Copa and Cogeca, said he was forced to sell more honey directly to consumers than on a wholesale basis because of the fall in prices. “It is problematic because it requires lots of time. I’d like to concentrate on working with the bees,” he said. The beekeeping industry is vital to the environment and agriculture because of bees’ role in pollination, Jas and Hennion said.Pollinators including honey bees contribute €22bn each year to the European agriculture industry and pollinate 80 per cent of crops and wild plants in the continent, according to EU figures. They face a decline caused by pesticides, pollution and other factors, which the EU has said it wants to reverse by 2030.Hennion is a “pastoral” beekeeper, or a “flower chaser”, he says. To ensure his bees have access to rapeseed, he regularly travels with them from the Ardèche in southern France to Halluin, a town on the Belgian border.This way of life, and that of other beekeepers in Europe, was at risk if prices remained low, said Aapo Savo, a Finnish honey packer who works with 150 Finnish beekeepers to pack honey into containers that are then sold into supermarkets. “What is the future of professional beekeeping in Europe?” Savo said. “All the time it will be more difficult to produce honey. I don’t think it’s sustainable.” More

As the term of their mortgage neared its end in September last year, Iona and her husband began the search for a new deal. The couple, both architects in their mid-30s who asked to remain anonymous, saw their 1.6 per cent rate leap to 4.7 per cent on the best three-year fixed deal they could find, meaning that their payments will rise by £500 a month to about £1,700.“All of our take-home from work goes to mortgage, childcare, groceries and bills — there is no extra at all”, Iona explained, adding that one day last month she woke up to find she had only £3 in her current account. In the year leading up to Iona’s mortgage switch, record high levels of inflation sent the Bank of England on an extensive tightening campaign, putting an end to more than a decade of ultra-low borrowing costs. Fixed-rate mortgages, which reflect expectations of medium-term borrowing costs, followed suit. Millions of middle-income households like Iona’s, whose earnings had kept them relatively immune to the cost of living crisis last year, could now see their incomes take a hit as they roll off old mortgage deals in 2023. A report by Oxford Economics and financial services company Hargreaves Lansdown found that while almost 90 per cent of the UK’s lowest-income families had poor financial resilience when inflation hit record highs last year, many of those on middle incomes now find themselves squeezed as higher mortgage costs bite. The most recent forecast by the National Institute for Economic and Social Research showed that middle-earning households will see their real incomes fall by around 6.2 per cent, or £1,077 per year, in 2023-24. In its Autumn Statement last year, the government announced additional cash payments totalling up to £900 for families on lower incomes, in 2023-24. According to NIESR, this will help offset some inflationary pressures, resulting in a 2.3 per cent net income gain for the poorest households. But wealthier households receive less help to defray rocketing prices. “Of course [low-income families] are still facing an incredibly difficult situation. Let’s not pretend it’s easy, but that cash help will make a difference to those poorest households [. . .] whereas middle-income earners don’t have the help but face all the costs,” said Adrian Pabst, economist at NIESR. By mid-October 2022, the ill-fated “mini” Budget of then-chancellor Kwasi Kwarteng pushed the already ballooning mortgage rates beyond 6 per cent. With some 1.4mn UK homeowners set to roll off their fixed-rate mortgages this year, according to analysis by the Institute for Fiscal Studies, many could see their monthly payments balloon.The latest official inflation figures, released on Wednesday, showed that UK inflation remained unexpectedly high at 10.1 per cent, outstripping economists’ predictions and making it more likely that the BoE will increase interest rates next month. The average two-year fixed rate mortgage deal at the start of 2021 was 2.57 per cent, according to price comparison site Moneyfacts. Two years later, the rate for families due to refinance shot up to 5.32 per cent. A recent report by the BoE showed that housing costs will also surge for the 1.7mn homeowners on tracker mortgages, which mirror the bank’s soaring benchmark rate. “Couple this with a cost of living crisis, high energy prices, along with inflation, and running the home could now become unaffordable for many, leaving no other option but to sell up and downsize,” said Iain Swatton, head of mortgages at Dashly.For Iona’s family, this means that more often than not they resort to savings to cover monthly expenses, echoing projections by the Office for Budget Responsibility that UK household saving rates will drop to near zero in 2023 and 2024.“We are both people who are handy with spreadsheets and have a relatively OK grip on our finances and are also earning a fine amount of money, and we are finding this whole thing messy and stressful,” Iona said. The squeeze means that the number of mortgage holders at risk of default could surge by nearly 20 per cent during 2023, covering 425,000 extra households, according to Oxford Economics and Hargreaves Lansdown. Rising costs are likely to have a disproportionate impact on single and self-employed people, as well as younger generations. Despite accounting for just 46 per cent of the market, the report shows that millennial and Gen Z mortgage holders will shoulder 61 per cent of the increase in housing costs.That said, the latest data by the Financial Conduct Authority showed that in the final quarter of 2022, the proportion of mortgage holders in arrears was still near its lowest level since the regulatory body began recording in 2007. 

“The rise in delinquencies is all yet to come,” said ​​Innes McFee, an economist at Oxford Economics. “It can tend to be quite a lagging process.”The numbers going into arrears might worsen during the year, warn experts, after people gradually roll off their existing deals and try to adjust to the new level of repayment. Even with the challenges, “home ownership is still a major aspiration for most people”, said Ashley Osborne, chief executive and co-founder of MyPropTech. “That means people are willing to make big sacrifices to get on the housing ladder and stay on it. Whether that is foregoing holidays and going out, living in otherwise less than ideal circumstances.” For Iona, this has meant switching to cheaper childcare, accepting more extra work, and overhauling the family’s day-to-day spending habits. “We are trying to be much more savvy about ordering [groceries] online, and making sure that we are getting all of the lowest-cost odd veg that you can find,” she said.“It’s sort of funny, because you are trying to mediate between really small-scale savings on single food items, and the massive ‘oh, it’s just going to be another £500 a month’, for reasons that seem very arbitrary”, she said.  More

The au Jibun Bank flash Japan manufacturing purchasing managers’ index (PMI) rose to a seasonally adjusted 49.5 in April, from a final 49.2 in the previous month.The index remained below the 50-level that separates contraction from expansion for a six straight month in April, pointing to the persistent struggles for factories even though the worst appeared to be over for the sector.On the plus side, service-sector activity expanded for an eight straight month in April supported by gains in new orders and new export business, the same survey showed. “Japan’s private sector continued to expand solidly at the start of Q2, according to latest Flash PMI data, with a resurgent service economy helping to offset a weak manufacturing sector performance,” said Annabel Fiddes, economics associate director at S&P Global (NYSE:SPGI) Market Intelligence, which compiles the survey.”While service providers anticipate further improvements in demand and operating conditions as the impact of COVID-19 fades, a number of manufacturers expressed concerns over the economic outlook, rising costs and component shortages,” Fiddes said.Reuters Tankan survey showed on Wednesday big Japanese manufacturers remained pessimistic in April for a fourth straight month as jitters over Western banks added to slowing global growth. But it also showed the service sector mood improved for a second straight month to a four-month high. The au Jibun Bank flash services PMI grew to a seasonally adjusted 54.9 this month, little changed from 55.0 in March, and marked the second highest reading since October 2013. The au Jibun Bank Flash Japan composite PMI, which covers both the manufacturing and service sector activities, was at 52.5 in April, remaining above the 50-level for a four straight month. More

TOKYO (Reuters) -Japan’s consumer inflation held steady above the central bank’s target in March and an index excluding fuel costs rose at the fastest annual pace in four decades, data showed, indicating broadening price pressure in the world’s third-largest economy.The data may keep alive market expectations that the Bank of Japan (BOJ) could phase out later this year a massive stimulus programme that has drawn public criticism for distorting bond markets and crushing financial institutions’ margins.The core consumer price index (CPI), which excludes volatile fresh food, but includes energy costs, rose 3.1% in March from a year earlier, government data showed on Friday, matching a median market forecast.It followed February’s increase of 3.1%, which was a sharp slowdown from January’s 41-year high of 4.2%, due largely to the effect of government subsidies to curb utility bills for homes.An index stripping out the effect of both fresh food and energy, which is closely watched by the BOJ as a better gauge of underlying price trends, rose 3.8% in March from February’s 3.5% and accelerated for the 10th straight month.The year-on-year rise in the so-called “core core” index was the fastest since December 1981, when Japan was experiencing an asset-inflated bubble economy.Persistent rises in global commodity prices have prodded many Japanese companies, long reluctant to hike prices, to finally pass on their higher costs to consumers, pushing up consumer inflation to well above the BOJ’s 2% target.BOJ officials, including new governor Kazuo Ueda, have vowed to keep monetary policy ultra-loose until there is more evidence that the rise in inflation has become sustainable and driven by strong demand rather than supply pressures.At Ueda’s first policy-setting meeting next week, the central bank is widely expected to make no major changes to its bond yield control policy and dovish guidance on the outlook for interest rates, say sources familiar with its thinking.Markets are focusing on the BOJ’s quarterly outlook report due after the meeting, which will include inflation forecasts extending through fiscal 2025. More