Aurelia Butler

China’s vice-premier Liu He privately met a group of top corporate executives in Davos to tell them that the world’s second-largest economy was back, in an effort to rekindle economic ties damaged by the pandemic and tensions with the US.Executives at the lunch said Liu’s message had fuelled renewed optimism about the prospects for the Chinese economy, which has been battered by Beijing’s recently abandoned “zero-Covid” policy, a property slump and a regulatory crackdown on the tech sector.But analysts cautioned it was unclear whether Beijing would follow through on the picture of openness and reform offered by Liu, who is China’s top economic official but is expected to leave the government this year. Guests at the lunch, which followed Liu’s address to the World Economic Forum on Tuesday, included Stephen Schwarzman, founder of US private equity group Blackstone, Cisco chief Chuck Robbins, Qualcomm head Cristiano Amon and the boss of Intel, Pat Gelsinger, according to people with direct knowledge of the meeting.Stéphane Bancel, chief executive of Covid vaccine maker Moderna, Nestlé head Mark Schneider and Martin Brudermüller of German chemicals maker BASF were also invited. One person attending, who declined to be named because of the confidential nature of the discussions, said the message was “China is back”.“It was very much like 2017,” the person said, referring to Xi Jinping’s trip to Davos, during which the Chinese leader defended globalisation.Another said it was clear that Liu, Xi’s closest economics adviser, had been sent to Davos “to reconnect” with the west. A third described Liu’s responses as “frank” and said the meeting was “part of a charm offensive”. “They are reversing everything that has been done in the last three years,” said one attendee. “They will be business-friendly and [know] that the economy cannot be successful without the private sector.”The war in Ukraine was not discussed, several attendees said.Liu’s speech to the forum, the private lunch and the upbeat assessment of executives in attendance fed into a sense of renewed optimism on the Chinese economy, following Beijing’s decision to finally drop its zero-Covid policy this month. Liu, who is past the retirement age of 68 for party officials and is expected to step down from his post as vice-premier this year, met US Treasury secretary Janet Yellen in Zurich on Wednesday. The encounter — the first between the top US and Chinese economic officials since president Joe Biden came to office — is seen as a further sign that Beijing and Washington are seeking to reduce tensions. “Foreign investments are welcome in China and the door to China will only open up further,” Liu told the WEF in his speech on Tuesday. He added that the Chinese economy would “see a significant improvement in 2023”.In an apparent effort to demonstrate greater openness, Beijing’s securities regulator on Thursday gave JPMorgan approval to take full ownership of its China mutual fund venture and allowed the Hong Kong unit of Standard Chartered to set up a fully owned securities unit in mainland China.While welcoming Liu’s overtures, analysts expressed caution as to whether substantive action would follow.

Rana Mitter, professor of the history and politics of modern China at Oxford university, said Chinese officials had a habit of coming to Davos with promises of reforms. “Xi’s political project is still very much in place. Businesses in China will be further entwined with the party and will still be expected to adapt their corporate messages to the narrative of China’s rise in the world,” Mitter said.Mark Williams, chief Asia economist at Capital Economics, said: “People keep looking to Liu He as a standard bearer for economic reform. Meanwhile, the years in which Liu has operated as Xi’s right-hand-man on the economy have seen market freedoms significantly rolled back.”However, an attendee of the lunch parried those concerns. “This is real,” they said. “When China changes its mind everyone lines up. There are no accidents in communication from China.” Additional reporting by Tom Mitchell in Singapore and Yuan Yang in London More

The recent fall in energy prices means there is “more optimism” about an “easier path” out of the current inflation crisis, according to the Bank of England governor.Andrew Bailey said December’s fall in inflation to 10.5 per cent, reported this week, had been expected but was “the beginning of a sign that a corner has been turned”.The BoE’s most recent forecasts already showed inflation falling rapidly from the spring — an outcome that is almost inevitable because last year’s surge in energy prices following Russia’s invasion of Ukraine is unlikely to be repeated.But since the central bank issued those projections in November, wholesale gas prices have fallen sharply on the back of an unusually mild winter.“That isn’t actually yet feeding through [to inflation] . . . but it will do,” Bailey told the Western Mail newspaper. “And that is encouraging . . . It does mean there is more optimism now that we are sort of going to get through the next year with an easier path.”His comments suggest that if energy prices continue to undershoot market expectations, the BoE may be able to bring an earlier end to its cycle of interest rate rises than would otherwise be possible. However, Bailey gave no hint any change of course on monetary policy was imminent.The BoE’s Monetary Policy Committee has raised interest rates nine times since December 2021, with its latest 0.5 percentage point move taking them to 3.5 per cent, the highest since the global financial crisis of 2007-08.Traders are betting the MPC will continue raising rates to a peak of 4.5 per cent by the summer.Bailey said he did not endorse the market’s view, but he noted the MPC had openly questioned traders’ judgment in November, when they were pricing in a peak in interest rates above 6 per cent.More recently, at the December MPC meeting, “we did not include the comment that we made in November about the market being . . . rather out of line”, he added.Bailey also called attention to pressures in the UK labour market that have been fuelling wage growth and could lead inflation to remain above the BoE target of 2 per cent for longer than elsewhere.“The labour market remains very competitive and that has been influencing pay negotiations,” he said.Bailey said the most likely outcome for the UK economy was a long, shallow recession with a pattern of “weak activity over quite a prolonged period”.UK wholesale gas prices have more than halved since the start of December as unseasonably warm weather over the festive season allowed European countries to generally inject gas into their storage facilities, rather than withdraw it.This provided traders with greater confidence that Europe would survive the winter without shortages.However, UK gas prices, which are currently trading at about 150p per therm, are still nearly three times higher than they were at the start of 2021, when they began their upward trajectory even before Russia’s invasion of Ukraine.

The falls in wholesale gas and power prices in recent weeks have pushed analysts to revise their expectations for UK household energy bills this year.Energy consultancy Cornwall Insight on Thursday wiped hundreds of pounds more from its forecasts for a typical domestic energy bill this year — the second time it has lowered its forecasts since the beginning of January. Cornwall is now expecting a typical annual bill to be about £3,200 from April, before falling to £2,200 in July, and edging up slightly to £2,240 from October 1.In November, before the fall in wholesale prices, Cornwall had been forecasting a typical annual bill of £3,921 from April, about £3,350 in July and £3,370 from October 1. More

This week Christian Ulbrich, chief executive of the JLL global real estate group, has been prowling around the World Economic Forum in Davos, trying, like other executives, to parse a confusing world. One of his conclusions, he says, is that CEOs are surprisingly optimistic about future growth. Another is that the inflationary regime has changed.The Davos elite used to view a 2 per cent inflation rate as normal, not least because it was embedded in central bank targets. But now “we have a lot of fundamental trends” which mean that “inflation will stay persistently around 5 per cent”, Ulbrich says. He expects that “interest rates will stay around 5 per cent too”, noting that this will push down real estate prices. For Ulbrich and his ilk, in other words, four (or five) is the new two. Investors should take note. This week, global bond markets have signalled an end to last year’s inflationary scare. Ten-year treasury yields, for example, have tumbled to around 3.3 per cent after news of lower consumer and producer price growth, and prices imply further inflation declines next year, as the rate cycle turns.To some financiers, this makes sense. Anne Walsh, chief investment officer of Guggenheim, for example, expects US inflation to be under 3 per cent by the end of 2023 since “many of the factors that drove inflation higher [like supply bottlenecks] are now reversing sharply”. Maybe so. But this seems to be a minority view. For while most Davos attendees do not expect to see the world return to last year’s inflation shock, and double-digit rates, they do not anticipate a return to the pre-2019 pattern of ultra-low inflation and near zero interest rates either. The base has changed.Why? One factor is China. At the start of this month, the World Economic Forum organisers seemed doubtful whether Beijing would even send a delegation to Davos this year. But one surprise of the week has been that Liu He, Chinese vice-premier, publicly addressed the event, and insisted that China is reopening and re-engaging with the world. In private dinners, he has underscored this message even more forcefully. That has boosted executive optimism about global growth. But the rub, as Nicolai Tangen, head of Norway’s oil fund, observes is that China’s return creates a “big, big uncertainty [over] what will happen with global inflation”. A decade ago China was a deflationary force; now it is more likely to boost commodity demand — and global prices. A second issue is supply chains. This year’s meeting has revealed that most executives expect far less US-China decoupling than Washington rhetoric might currently imply. “It is just not realistic,” says one tech CEO.But the debates have also shown that almost every corporate board is restructuring their supply chains to create more flexibility and resilience, in anticipation of future shocks. That will inevitably raise costs in the medium to long term, since “wherever we are moving our production has higher wages”, as one manufacturing CEO says, stressing this is a multiyear process.A third issue is the environment. Last year’s rightwing backlash against the environmental social and governance movement has left some executives — particularly those based in America and/or running big banks — increasingly wary of extolling their ESG credentials. “Green hushing” is afoot.However, few corporate boards seem to be backing away from their decarbonisation plans. On the contrary, they are accelerating — particularly in America, following the contentious Inflation Reduction Act. Green warriors tend to think (or pray) that decarbonisation will be deflationary in the long term, since the cost of renewable energy is falling. Hopefully so. But in the short to medium term, most CEOs see this shift as another big cost pressure, since the components and skills needed for a green transition are in short supply. They are almost certainly correct.Then there is a fourth, more subtle, factor: the cultural zeitgeist. Until recently, most Davos attendees thought they lived in a free-market world in which global competition would inexorably cap the cost of labour and goods. But the war in Ukraine, US-China tensions, the Covid-19 pandemic and social unrest are creating a new global political economy: more government intervention, restive labour and a constant threat of protectionism. Chief executives do not know how long this might last. But, quite rightly, they sense that almost every aspect of this new regime could be inflationary — not just in the short term, but in the medium term as well. Of course there is at least one wild card in this outlook: if central banks such as the US Federal Reserve remain truly committed to their 2 per cent targets, they might yet crush economic activity in a way that delivers this.But the longer the Davos cabal thinks that “four is the new two”, the harder the Fed’s task is likely to be — in both a political and economic sense. Or, to put it another way, those bond investors who are now betting that we will return to the benign inflation patterns of the past may be ignoring the nature of the new political economy. It is structural shifts, not just business cycles, that matter [email protected] More

The chief executives of two of Wall Street’s leading investment banks are at odds over how much more the US Federal Reserve will need to raise rates to get a grip on inflation. In separate interviews on Thursday, Jamie Dimon of JPMorgan and James Gorman of Morgan Stanley laid out divergent views about the persistence of US price pressures and what more the Fed must do after its most aggressive tightening campaign since the early 1980s. Dimon took a more hawkish position and said the Fed would likely need to lift its benchmark policy rate above 5 per cent in light of inflation, which he said would be more persistent than expected. “I actually think rates are probably going to go higher than 5 per cent . . . because I think there’s a lot of underlying inflation, which won’t go away so quick,” he told CNBC at the World Economic Forum in Davos, Switzerland.In separate remarks last week, Dimon said the federal funds rate may even need to rise to 6 per cent. His concern was some of the drivers that have helped to bring inflation down recently, including lower energy prices and slow growth across China owing to Covid-19 lockdowns, may be temporary.By contrast, Gorman told CNBC inflation had “clearly” peaked and that rates hitting 6 per cent would be “surprising”. He predicted a scenario where the Fed would lift rates 25 basis points at its next two meetings, and then pause to assess the impact of tighter monetary policy on the economy. “I’ve been in a happy land of four, four and four — roughly 4 per cent unemployment, 4 per cent inflation, 4 per cent rates,” Gorman said. “Rates will be a little higher. Employment at this stage is a little lower, and inflation has been higher. But if we get in that kind of zone, we can deal with it. That would be an appropriate time to pause.”Their comments come as the Fed is preparing to again slow the pace of its interest rate increases and deliver a quarter-point rate rise on February 1, after its next two-day meetings. Such a move would lift the federal funds rate to a new target range of 4.5 per cent to 4.75 per cent.

Video: Davos: why stakeholder capitalism is under attack | FT Moral Money

But despite a slower pace, which would mark a departure from the half-point and 0.75 percentage point moves the Fed employed last year, officials have underscored that the central bank is not yet done with its monetary tightening plans even as economic activity more notably slows and inflation eases.Most policymakers still support the policy rate surpassing 5 per cent, backing projections released in December that showed the median estimate for the fed funds rate peaking between 5 per cent and 5.25 per cent this year. No official has endorsed rate cuts in 2023, in stark contrast to market pricing, which shows traders expect roughly half a percentage points’ worth by year-end. More

Britain’s economic prospects appear a little brighter than in November, when the Bank of England forecast one of the longest recessions since the second world war. Growth was surprisingly strong in that month and the labour market, while cooling, remains robust. But don’t put it down to UK exceptionalism: our economy was merely reflecting wider European and global resilience in the fourth quarter of last year.On almost all relevant international comparisons, the UK’s economy looks sickly. Since the eve of the pandemic, growth has been lower than in all other G7 economies, reflecting weakness in private sector consumption and investment. Forecasts from international bodies diagnose a chronic rather than acute problem, with no recovery in the UK’s relative decline in sight. Covid’s scars appear to run deeper in London than elsewhere. Unlike in the brief and disastrous Trussonomics period, Prime Minister Rishi Sunak and Chancellor Jeremy Hunt are competent economic managers. They have every chance of meeting Sunak’s New Year economic promises of halving inflation by the end of this year, returning the economy to growth and getting public debt on a declining path. But these pledges are a downgrade on his mission a year ago to “build a future economy that restores hope and opportunity” by nurturing the nation’s capital, people and ideas. If the UK’s economic problem is relative decline and chronic weakness, we first need to be honest about the causes before thinking about solutions. Three proximate causes are difficult to deny.The first is Brexit. Over six years since the EU referendum and two years since new trade barriers with Europe came into force, all credible economic analysis suggests that leaving the bloc caused the UK serious economic harm — raising prices but not wages, reducing trade, stymying investment and creating a significant worker shortage. For all their competence in economic management, senior ministers deny this reality. The Labour party calls for a treaty renegotiation, but by rejecting calls to rejoin the single market, it merely wants to make the best of a bad job. A second fundamental cause of the UK’s woes is the inability to finance acceptable public services. The state has long squeezed necessary functions of justice, local government, welfare, housing, transport and education in a bid to fund an ageing society that needs better health and social care. All of these services are now losing their never-ending battle to do more with less. Despite strikes and crises across the public sector, the government again pretends it is (almost) business as usual. Labour slams the government’s performance but builds no credibility with suggestions that transformation can be achieved by the odd windfall tax or levy on private schools. Public finances, of course, are not helped by the third impediment to progress, which is simply the difficulty of getting anything built. Whether it is severe restrictions on building in places where people want to live and work, or the rights given to objectors to development, the UK is held back by impediments to construction — more than half of capital investment. Conservative MPs, fearful of losing their seats, have given up on reform and Labour will not rock this particular boat. Here it is in a nutshell. Three big economic weaknesses hold Britain back compared with our more prosperous peers. In each case there is no strong political voice for change.The important lesson is not that our politics is broken. Rather, we, the people of Britain, are ultimately to blame. We voted for Brexit, we insist on a European-style welfare state with US levels of taxation, and while we desire new homes, a large majority, young and old together, don’t want them built near where we live. The outcome is not working, but it is not somebody else’s [email protected] More

“I actually think rates are probably going to go higher than 5% … there’s a lot of underlying inflation, which won’t go away so quick,” Dimon said.U.S. Federal Reserve officials in December predicted that the rate, currently in the 4.25%-4.50% range, would rise to just over 5% by the end of 2023 and likely remain there for some time.Policymakers at the central bank have said they will continue to push with interest rate hikes to get inflation firmly under control even as the economy shows signs of a slowdown.U.S. consumer prices fell for the first time in more than two-and-a-half years in December, adding to hopes that inflation is now on a downward trend.However, Dimon said the recent easing of inflation was coming from temporary factors such as a pullback in oil prices and a slowdown in China due to the pandemic, according to the report. More