Aurelia Butler

A top Federal Reserve official has said she expects the US central bank to implement one more quarter-point rate rise in its battle against high inflation, despite lingering concerns about the stability of the banking system.Susan Collins, president of the Boston Fed, on Thursday said inflation across the country remains too high, arguing there is “more work to do” to get it back to the central bank’s 2 per cent target.“I currently anticipate some modest additional policy tightening, and then holding through the end of this year,” she said as she endorsed this month’s projections from the Fed, which showed most officials backing the federal funds rate rising to 5 per cent to 5.25 per cent this year.The benchmark rate currently hovers at 4.75 per cent to 5 per cent, following the central bank’s decision to plough ahead with a quarter-point rate increase last week despite the recent turmoil that has engulfed the regional bank sector.Speaking at a conference hosted by the National Association for Business Economics, Collins described the Fed’s latest forecast as “reasonably balancing the risk of monetary policy not being restrictive enough to bring inflation down, and the risk that activity slows by more than needed to address elevated price pressures”.

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In the press conference that followed the latest rate decision, Fed chair Jay Powell warned of a potential credit crunch as lenders pull back — a view Collins echoed on Thursday.She said it was “likely” banks would now “take a somewhat more conservative outlook and tighten lending standards, thus contributing to slowing the economy and reducing inflationary pressures”.“These developments may partially offset the need for additional rate increases,” Collins added. Powell has said the recent tightening of financial conditions could be the equivalent of a “rate hike or perhaps more than that”. In a discussion that followed her remarks, Collins said she had planned to raise her forecast for the fed funds rate this year before the implosion of Silicon Valley Bank.

Collins on Thursday reiterated her belief that the Fed can pull off a so-called “soft landing”, avoiding a recession as it damps demand through higher borrowing costs.“I am well aware of the many risks and uncertainties facing our economy, including the risk of a self-fulfilling loss in business and consumer confidence,” she said.“However, I’ve also mentioned reasons to be optimistic the economy may prove more resilient to tight financial conditions than in the past — including business and household fundamentals that remain relatively strong,” she said. More

This month, Russia and China are sparking new jitters in Washington. That is primarily because of their stage-managed displays of diplomatic unity, around Ukraine and much else.But it is also down to money: during a visit by Xi Jinping to Moscow last week, Vladimir Putin pledged to adopt the renminbi for “payments between Russia and countries of Asia, Africa, and Latin America”, in a bid to displace the dollar. And this comes as Moscow is already increasingly using the renminbi for its swelling trade with China and embracing it in its central bank reserves, to reduce its exposure to “toxic” — American — assets. Does this matter? Until recently, most western economists would have said “heck, no”. After all, it has long been assumed that the closed nature of China’s capital account is an impediment to wider use of its currency.But right now Putin’s announcement is packing an unusually emotional punch. One reason is that concerns are afoot that this month’s US banking turmoil, inflation and looming debt ceiling battle is making dollar-based assets less attractive. “The dollar is being debased in order to fund the bank bailouts,” Peter Schiff, the libertarian economist, thundered this week, echoing a view widespread on the American right. Meanwhile, Jim O’Neill, the former Goldman Sachs economist who launched the “Brics” tag (short for the Brazilian, Russian, Indian and Chinese bloc), published a paper this week arguing that “the dollar plays far too dominant a role in global finance”, and calling on emerging markets to cut their risks.But the other factor sparking unease is that even before Xi’s visit to Moscow, the Saudi government announced that it will start invoicing some oil exports to China in renminbi. Separately, France just did its first liquid natural gas sale in RMB and Brazil has embraced the currency for some of its trade with China. There is absolutely no sign that these token gestures are hurting the greenback right now. Yes, the dollar’s proportion of global reserves has sunk from 72 per cent in 1999 to 59 per cent, as central banks increasingly diversify their investment funds and discard currency pegs. And it is also true that the advent of wholesale (bank-to-bank) central bank digital currencies could theoretically accelerate this diversification by making it easier for non-American central banks to deal directly with each other in their own currencies. But the dollar still dominates debt markets, and the volume of dollars held overseas has soared this century. And one striking, and overlooked, detail about this month’s turmoil is that the currency has retained its “near record strength vs the G10 and emerging market currencies”, as Robin Brooks, chief economist of the Institute for International Finance, recently tweeted. Indeed, so many global investors wanted to grab the greenback during the recent crisis that the Federal Reserve launched a daily swaps programme with other central banks. “This enhanced use of dollar swap lines will, ironically, further strengthen the global dollar system and its powerful network effects,” predicts David Beckworth, a research fellow at George Mason University’s Mercatus Center. Or to put it another way, the dollar might not deserve to win any beauty contests right now, given the fiscal problems plaguing America, but many investors still consider it the least ugly option in a very ugly world, due to that network effect and the fact that the euro and RMB capital markets are, respectively, shallow and closed. However, before anyone concludes that this means they can completely ignore Putin’s threat, they should look at some thought-provoking research on trade invoicing published last year by the Centre for Economic Policy Research.A decade ago, it was widely assumed that another factor underpinning the dollar was the “stickiness” of trade invoicing patterns, as Gita Gopinath, deputy head of the IMF, has noted. But the CEPR paper suggests this might now be slowly shifting — as Chinese trade has expanded in recent years, RMB use has risen too. So much so, in fact, that it now exceeds euro-usage for trade invoicing, which is “striking, given China’s low degree of capital account openness”, the CEPR says. And it argues that “contrary to conventional wisdom, lack of capital account openness may not fully prevent the RMB from playing a stronger role as an international and reserve currency”. After all, it notes, a $200bn offshore RMB market has already emerged — and the currency is being “use[d] in invoicing and settling China’s foreign trade and payments” and “a global network of clearing and payments”. The net result, the CEPR predicts, is that a “multipolar” currency world could emerge in the coming years, of the sort that O’Neill is now calling for. That would not be as dramatic a switch as Putin or Xi might like to see, or that Washington alarmists fear. But, to my mind, it seems a sensible medium-term bet. And even “just” a multipolar pattern could come as a shock to American policymakers, given how much external financing the US needs. So investors and policymakers alike need to watch the geeky details of trade invoicing in the coming months. Putin’s bluster may turn out to be toothless; but it could also be a straw in the wind. [email protected] More

The writer is a visiting scholar at the Yale Law School’s Tsai China Center and the technology analyst at Gavekal DragonomicsBeijing’s opening-up party took place last weekend in a notably subdued mood. The China Development Forum was a setting for western business leaders to gather with the new leadership that will govern the country for the next five years. While plenty of American chief executives attended, they made quiet entrances and kept their demeanours sober throughout.As business grows challenging, who can blame them? In 2022, companies found their sales or their operations jammed up by China’s zero-Covid strategy. US executives invested in the country face the prospect of being dragged to Capitol Hill to face hostile questioning from lawmakers. Recent headlines on the disappearance of China’s capable tech dealmaker Bao Fan and a raid on the Beijing offices of Mintz Group offer no comfort. Small wonder that for the first time in 25 years a majority of US businesses no longer view China as a top investment priority.It’s time to acknowledge that today China is a complicated creature with three heads, like the Underworld watchdog Cerberus in Greek mythology.Head one is the China of old: a vast market with unparalleled production efficiencies, which showers riches on the savvy. China’s growth prospects continue to look appealing for many consumer-focused companies. Some, including Starbucks, McDonald’s, and Ralph Lauren, are gearing up to open more stores there after Beijing’s abandonment of the zero-Covid policy. And as the country focuses on dominating green technologies — in 2022 it became a bigger auto exporter than Germany — western companies can still count on plenty of growth sources.But perhaps fewer of them can do so than before. That’s where head two comes in. Think of Japan — an enormous market that probably won’t boom again.China’s growth rates have gently slowed over the past decade, notching only 3 per cent in 2022, and the State Council’s target of around 5 per cent this year is disappointingly low. The government is not fully confident of a recovery after the messy transition out of Covid lockdowns. A bigger problem, though, are those long-term issues which have been exacerbated by the pandemic. Demographics are becoming a drag on the economy and the critical property sector is close to a structural peak in demand as the pace of urbanisation slows. These headwinds have blown in earlier than expected.The most alarming problems, though, have to do with politics. Meet head three: Russia, a large market from which western businesses may have to beat a hasty retreat. Before Russia’s invasion of Ukraine, multinationals could comfortably put off thinking about Beijing’s designs on Taiwan. That’s no longer an option after Russian aggression invited devastating rounds of western sanctions.Head three first reared up after former US president Donald Trump launched his trade wars. Multinationals had to start dealing with novel regulatory actions and growing complexities around export controls, data flow management, and US sanctions. Congressional hearings have forced CEOs to answer for their operations in Xinjiang, their sponsorship of the Beijing Olympics and other activities that touch on human rights. Russia’s invasion of Ukraine brings political friction into sharp relief. Foreign companies can no longer ignore what their home governments might do if Beijing decides to seize Taiwan. And that is alarming given that Beijing keeps forcefully restating its claim on the island.Unfortunately for multinational companies, head three keeps on growing. Political problems threaten to suppress dynamism in the rest of China’s economy. Last year was not only horrible for economic growth, it also raised doubts about the effectiveness of the Chinese state. Investors could reasonably ask why President Xi Jinping stuck to the zero-Covid policy after the Omicron variant sent Shanghai into a two-month lockdown, only to give it all up later; why he embraced Russia on the eve of its invasion of Ukraine; or why he is reasserting party control over the business sector, and indeed society as a whole. Chinese entrepreneurs themselves are decamping in droves to Singapore. The prospect of five — and potentially even ten — more years of Xi’s rule does little to soothe nerves.Companies would be delighted to see head three withdraw. Indeed, Chinese policymakers insist that they value private enterprise. But who can be sure that ideology won’t triumph again? If it does, foreign companies may find their assets stranded like the dead souls trapped in the underworld guarded by Cerberus. More