Aurelia Butler

Watch this space: China and the US continue to build military capacity in the Indopacific © Noel Celis/AFP via Getty ImagesIn late 2022, Germany’s domestic intelligence chief, Thomas Haldenwang, put it well: “Russia is the storm,” he told German parliamentarians. “China is climate change.”Last year was also the first time the US administration acted as if it truly believed that distinction. Though most of president Joe Biden’s attention was directed at Russia following its invasion of Ukraine in February, his most consequential steps in 2022 targeted China. The uncertainty is no longer about whether US-China decoupling will happen but how far it will go. Much of the answer will become clear in 2023.Vladimir Putin’s “special military operation” offered Biden a perfect case study in the dangers of weaponised interdependence. Having shuttered almost all of its nuclear power sector, Germany’s reliance on Russian gas and oil meant there was no constraint on Putin’s war aims. Germany’s so-called Zeitenwende shortly after Russia’s invasion brought to an end its decades-long bet that deep commercial ties would moderate Russia’s hostilities towards its neighbours. Biden is trying to apply that lesson to the west’s far greater supply chain dependence on China.This raises two pressing questions. What does Biden mean by decoupling? And will the US be able to bring its allies and partners along?On the first, the US administration is still feeling its way. Biden inherited a series of ad hoc punitive trade measures that Donald Trump’s presidency imposed on China — tariffs on steel and aluminium exports, as well as various export controls on Chinese telecoms companies, notably Huawei and ZTE. None of these have been reversed. Biden has even retained Trump’s metal tariffs on most of the US’s non-Chinese trading partners. Last month, Washington rebuked the World Trade Organization’s ruling that the US had broken world trading rules in having done so. This implies the US has no intention of returning to the rules-based WTO global trading order that it designed.

In October, Biden took the world a step closer to full blown economic bipolarity. The US commerce department issued orders to shut off China’s access to advanced semiconductors. This action was taken on the basis that Chinese leader Xi Jinping’s drive for “civil-military fusion” meant China’s economic development could no longer be disentangled from its accelerating military reach. Jake Sullivan, Biden’s national security director, reassured nervous US and allied chipmakers and suppliers that this would be a “small yard” with a “high fence” — the scope of affected commercial activity would be limited. Yet he added Washington was considering similar restrictions on US-China biotechnology and clean energy ties. The effects on swaths of economic activity — from artificial intelligence and quantum computing, to critical minerals, batteries and commercial drones — are hard to quantify.The reality is that Biden is improvising as he goes along. His administration includes classic free traders, who still believe in positive sum globalisation, and others who see US-China rivalry as a zero sum contest in which only one power can prevail. The White House’s national security strategy does not clarify things much. It gives top billing to great power competition between the US and China, while stressing the need for co-operation to confront common threats, like global warming and the next pandemic. The suspicion is that, on China, Biden’s competition imperative will take precedence over his co-operative one.If that is Biden’s path, he will need to bring key US allies and commercial partners with him. Official talk is of “friendshoring”. This would involve relocating China-centric supply chains to like-minded countries such as Vietnam, India and Mexico. Some of that was already happening because of China’s now abandoned zero-Covid policy. For example, Apple plans to produce about a quarter of its iPhones in south India. But the extent of global reliance on China as a supplier of intermediate goods across most areas of modern production means the US’s implicit goal is little short of bifurcation.

The reality of Biden’s relations with Xi is that the US leader is improvising as he goes along © Saul Loeb/AFP via Getty Images

That would slow global growth and sharpen the dilemma for US friends that are highly interdependent with China. Examples include the UAE and Singapore. Neither wants to be forced to choose between the US and China and such a choice could boomerang on the US. Friendshoring could “shut off avenues for regional growth and co-operation”, says Singapore’s prime minister, Lee Hsien Loong, and may prompt “the very conflicts that we all hope to avoid”.China and the US continue to build military capacity in the Indopacific. Last month, a senior US defence official said 2023 would be “the most transformative year in US force posture in the region for a generation”. This came days after Chinese planes intruded on Taiwanese airspace — the latest egregious incursion that followed the passage of the US budget that allocated $10bn in Taiwan military assistance.Whatever its pace over the present year, the US-China relationship is heading in an ominous direction. Businesses, countries, regions and the world are only just starting to grapple with the potential consequences. More

WASHINGTON (Reuters) -The Federal Reserve on Tuesday told the six largest U.S. banks to compile data on how their businesses would be impacted by climate change outcomes and the transition to a lower-carbon economy in what it called a pilot effort to ensure the financial system is prepared for the risks posed by global warming.The scenario analysis, including estimates of how real estate portfolios might be affected by “physical risk” and how corporate lending might be affected by the transition to a net-zero carbon economy by 2050, “are neither forecasts nor policy prescriptions,” the U.S. central bank said. “They do not necessarily represent the most likely future outcomes.”Instead, the analysis is meant to “build understanding of how certain climate-related financial risks could manifest” in terms of changes in the likelihood of loan defaults, losses, and internal risk assessments. “The Fed has narrow, but important, responsibilities regarding climate-related financial risks – to ensure that banks understand and manage their material risks, including the financial risks from climate change,” Fed Vice Chair for Supervision Michael Barr said in a statement. “The exercise we are launching today will advance the ability of supervisors and banks to analyze and manage emerging climate-related financial risks,” he said.The 52-page set of instructions asks for responses by July 31 from Bank of America (NYSE:BAC), Citigroup (NYSE:C), Goldman Sachs Group (NYSE:GS), JPMorgan Chase (NYSE:JPM), Morgan Stanley (NYSE:MS) and Wells Fargo (NYSE:WFC).The Fed said it would publish a summary of the results around the end of 2023, and would not disclose any bank-specific findings.’EXPLORATORY IN NATURE’The pilot assessment has banks map out what would happen to their residential and commercial real estate loan portfolios in the event of a severe hurricane in the Northeast, as well as a second climate shock of their choosing — like fires or drought — in another part of the country. A second module of the pilot requires banks to analyze the 10-year impacts on their corporate and commercial real estate lending books under two different “transition” scenarios — one where fossil fuel use continues, and the other where energy use is transitioned to zero-carbon output by 2050. Fitch Ratings senior director Mark Narron called the two-armed exercise a “positive step” toward understanding banks’ vulnerabilities, governance and risk controls. Dennis Kelleher, president and CEO of Better Markets nonprofit in Washington was less enthusiastic.“It’s a step. Something is better than nothing,” Kelleher said. But it’s a “weak start” because of two omissions, he said: Banks are not required to evaluate the performance of their trading books or their investment banking portfolios, nor will they need to assess how commercial loans fare in the event of a hurricane or other climate shock. “They should be covering 100% of every area where the biggest risks come from,” Kelleher said.To Christina Parajon Skinner, a business and legal professor at the Wharton School of the University of Pennsylvania, the pilot walks the line between protecting the financial system against new risks but also not straying beyond the Fed’s legal mandates. “Big picture, I’m much less concerned about overreach in the context of climate change today than I was a year ago,” Skinner said. “The Fed has really, I wouldn’t say stepped back, but I think it’s become more discerning and more judicious in terms of what’s on the table for its approach to climate change.”Representatives for Morgan Stanley and JPMorgan Chase declined to comment; the other banks did not immediately respond. The climate analysis is separate from the “stress tests” that the Fed conducts as part of its oversight of banks to see if they have enough capital to cover losses in the event of an immediate economic shock.By contrast, the climate analysis is a more tentative step described by the Fed as “exploratory in nature” and without any “bank capital or supervisory implications.”Still, it represents a move into contested territory.Some members of Congress, particularly Republicans, have urged the Fed to avoid climate policy, and Fed Chair Jerome Powell has insisted in response – as recently as last week – that the central bank has no plans to use its authority to shape credit decisions or try to steer investment away from the fossil fuel industry, for example. At the same time, Fed officials say their responsibility for the stability of the financial sector requires acknowledgement of and preparation for the risks posed over time by warmer temperatures, more volatile weather and the potential disruptions involved in a transition away from fossil fuels. Even that notion has drawn opposition. When the U.S. central bank last month published a broad set of guidelines for large banks on climate-risk mitigation, Fed Governor Chris Waller dissented on the grounds that climate change doesn’t pose financial stability risks, and that the regular stress tests already show banks are resilient.Other central banks, however, have been taking steps to better understand the risks involved. The Bank of England published its first climate scenario analysis on the UK financial system last year, assessing both insurers and banks for risk exposure to the physical threats of climate change and to stresses during the expected transition to net-zero carbon emissions in coming decades. The European Central Bank published its own climate scenario testing scheme last year. More

TOKYO (Reuters) – Japan’s decades of ultra-low interest rates may reach a turning point on Wednesday as the central bank debates the fate of its yield control policy, which is creaking under pressure as markets repeatedly break a limit set less than a month ago.The Bank of Japan (BOJ) also awaits a leadership transition as Governor Haruhiko Kuroda’s second five-year term ends in April. Below are key dates to watch:BOJ LEADERSHIP RACEPrime Minister Fumio Kishida will hand-pick nominees for the governor and deputy governor posts from a list crafted by his close aides and finance ministry officials.The government is expected to present the nominees to parliament on Feb. 10, sources have told Reuters, which is most likely to be approved as the ruling coalition holds a majority in both houses of parliament.Under the current Diet schedule, the lower house will likely conduct a hearing of the BOJ nominees on Feb. 16-17 and the upper house on Feb. 20-21, according to the sources.Kuroda’s term ends on April 8, while those of his deputies Masayoshi Amamiya and Masazumi Wakatabe expire on March 19.There is a slim chance Kuroda might step down early from his post, so that the new governor can assume the post together with the new deputies on March 20.People seen as top candidates for the BOJ governor post include incumbent deputy governor Amamiya, as well as former deputy governors Hiroshi Nakaso and Hirohide Yamaguchi.BOJ RATE-SETTING MEETINGSAfter Wednesday’s policy-setting meeting, the final one for Kuroda and his two deputies will be held on March 9-10.The subsequent meeting will be held on April 27-28 under a new BOJ leadership. At the April meeting, the BOJ will issue for the first time its quarterly growth and inflation projections for fiscal 2025, which will offer clues on how quickly the central bank could move toward an exit from ultra-easy policy.By the time the BOJ holds its April meeting, big firms would have agreed with unions on next year’s annual pay in “shunto” spring wage negotiations.OTHER KEY EVENTSJapan’s consumer inflation data will remain in the spotlight as the central bank gauges the timing of an interest rate hike.Already, core consumer inflation exceeded the BOJ’s 2% target for eight straight months in November, as companies hike prices to pass on higher raw material costs to households.Data due out on Friday is likely to show core consumer inflation hit a fresh 41-year high of 4.0% in December, according to a Reuters poll. Analysts expect it to stay above the BOJ’s 2% target for several more months, before slowing due to recent declines in global commodity costs.Consumer inflation data for January is due out Feb. 18, and that for February on March 18.The new BOJ governor will also be busy with international meetings. The first major one involving travel will likely to be the spring International Monetary Fund (IMF) meetings to be held in Washington D.C. on April 10-16.Japan will also chair this year’s Group of Seven (G7) meeting of advanced economies, where inflation and monetary policy will likely be among key topics of debate. More

Here is a timeline of key moments in the Bank of Japan’s battle with decades-long deflation and low inflation.1999February – BOJ introduces zero interest rate policy.2000August – BOJ raises short-term target to 0.25%, a move criticised as premature as Japan suffers a domestic banking crisis.2001March – BOJ adopts quantitative easing (QE), shifts policy target from interest rates to pace of money printing.2006March – BOJ exits QE, shifts back to interest rate target.July – BOJ raises short-term rates to 0.25%.2007February – BOJ raises short-term rates to 0.5% from 0.25%.2008October – BOJ cuts short-term rates to 0.3% from 0.5% to fend off economic shocks from the collapse of Lehman Brothers.December – BOJ cuts short-term rates to 0.1% from 0.3%.2010October – BOJ cuts short-term rates to 0-0.1%, starts buying risky assets like exchange-traded funds (ETF) as part of a newly introduced asset-buying programme.2013January – BOJ adopts 2% inflation target, signs agreement with government pledging to meet the target “at the earliest date possible.”April – BOJ Governor Haruhiko Kuroda adopts new asset-buying scheme dubbed “quantitative and qualitative easing” (QQE), commits to achieving 2% inflation in roughly two years.2014October – BOJ expands QQE, increases purchases of government bonds, ETFs.2016January – BOJ adds negative interest rate policy, and applies a 0.1% charge to a small pool of excess reserves financial institutions park with the central bank.July – BOJ eases monetary policy, ramps up ETF buyingSeptember – BOJ adopts yield curve control (YCC), shifts policy target to interest rates from pace of money printing and introduces 10-year bond yield target of around 0%.2018April – Governor Kuroda re-appointed for a second term.July – BOJ clarifies it will allow the 10-year yield to move 10 basis points either side of its 0% target.2021March – BOJ conducts “comprehensive assessment” of YCC to address its side-effects. It decides to taper ETF buying, widen the 10-year yield band to 25 basis points up and down the 0% target, and adopts new market operation that allows it to buy unlimited amount of 10-year bonds at a fixed rate.2022May – BOJ begins to offer buying unlimited amount of 10-year bonds at a fixed rate on a daily basis, as long-term interest rates approached its 0.25% cap more frequently than beforeDecember – BOJ widens 10-year yield band to 50 basis points up and down the 0% target, a move aimed at easing some of the cost of prolonged stimulus.2023January – BOJ offers 1 trillion yen ($7.8 billion) worth of two-year funds at 0% interest to financial institutions against collateral, a move seemed as part of efforts to keep short-term government bond yields from rising too much.($1 = 128.1700 yen) More

Beijing’s hopes for an economic revival after recording slowing growth last year will depend in large part on the animal spirits of small and medium-sized enterprises, which account for the majority of output, urban employment and tax revenues but were hit hard by the pandemic.While China’s best-known private-sector companies are tech groups such as Alibaba and Tencent, SMEs — officially defined as companies with 1,000 or fewer employees — account for about 80 per cent of total employment and 70 per cent of corporate revenue, making them a crucial driver of any economic recovery.China’s National Bureau of Statistics announced on Tuesday that the economy expanded by just 3 per cent last year, far below the government’s target of 5.5 per cent and the second-weakest growth figure since 1976.“The government’s challenge now is to rebuild private-sector confidence, which will be essential to boost household consumption and private investment,” said Eswar Prasad, a China finance expert at Cornell University.SME owners, however, say their operations continue to be hamstrung by government-mandated costs, including recent double-digit increases in social security payments, which could derail policymakers’ hopes of a rapid economic recovery this year.“The official message is that they are propping up SMEs,” said Shaun Rein, a longtime China market analyst and founder of a research firm in Shanghai. “But as a business owner, I don’t see enough of it.”

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Senior figures have made repeated assurances in recent weeks that President Xi Jinping’s administration is determined to support the private sector.Liu He, China’s top economic official, said at the World Economic Forum in Davos on Tuesday that “entrepreneurs will play an important role as the engine driving China’s historical pursuit of common prosperity”, a policy priority of Xi’s. “If wealth doesn’t grow, common prosperity will become a river without source or a tree without roots,” Liu said.But since late last year, more than a dozen cities and provinces have increased minimum employer-funded social security payments, which for small businesses are often a fixed sum rather than a percentage of wages, by 10 per cent or more. Regional authorities argue that the rises were needed to keep pace with strong wage growth since 2021, when global demand for Chinese exports surged, helping insulate the world’s second-largest economy from the impact of the Covid-19 pandemic.Small business owners counter that China’s economic environment has worsened dramatically since then, and the outlook remains uncertain as the country battles a Covid outbreak that has claimed at least 60,000 lives since pandemic controls were abandoned last month.“I pay so much money for my employees’ pension and health insurance that I can barely break even, let alone grow my business,” said Li Anquan, owner of a market research firm in eastern Shandong province.Business prospects have been further clouded by the sharp downturn in global demand for Chinese products, with exports falling about 10 per cent year on year in November and December.Consumer price rises have been less severe in China than in much of the world, increasing just 0.9% in 2021 and 2% in 2022 compared with double-digit growth elsewhere © Eduardo Leal/BloombergThe pressure has been particularly acute on small companies in the services sector, for which labour is often a leading expense, with social security expenditures typically accounting for as much as one-third of total operating costs.On January 6, the Shandong provincial government said it would increase minimum social security payments by 10 per cent this year. Three days later Jiangsu province, an industrial and export powerhouse that borders Shanghai, announced plans to raise payments 6 per cent this year after a 12 per cent bump in 2022.David Li, owner of a Beijing-based advertising company, said he had to scrap plans to hire two account executives after the municipal government raised social security payments by 15 per cent.“I am not going to hire another person until the government makes social security more affordable,” Li said.

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The steep increases in employer contributions are out of step with inflation, which has been more subdued in China than in Europe or the US over the past year. Chinese consumer prices rose just 0.9 per cent in 2021 and 2 per cent in 2022, far lower than double-digit average wage increases used to justify higher social security payments.According to the Beijing municipal government, average wages in the capital increased 13 per cent in 2021 while the city’s CPI rose 1.1 per cent. For the same year, Hunan, a relatively poor province in southern China, reported average annual wage growth of 8 per cent.SME managers said such increases did not reflect their experience weathering the pandemic, which forced many of them to reduce salaries and headcounts. The discrepancy may be due in part to the fact that official statistics reflect the state sector more than private-sector SMEs.“Small businesses are under-represented in the official wage numbers even though mom-and-pop shops employ more than half of China’s workforce,” said a Beijing-based government policy adviser, who asked not to be identified. SMEs also account for more than 50 per cent of total output and tax revenues.

Two middle managers at state-owned enterprises in south-eastern Fujian province told the Financial Times they had recently received generous increases in their nominal salaries, but the adjustments simply made up for corresponding decreases in additional benefits that may not be captured by official wage surveys.The social security tax rises may also reflect official unease about the outlook for the country’s pension funds. China’s population fell for the first time in 60 years in 2022, according to official figures released on Tuesday.“The government needs to strike a difficult balance between reducing small businesses’ financial burden and keeping the social security system from going under,” said the government adviser. “For now, the top priority is to make sure retirees get paid on time.”Additional reporting by Tom Mitchell in Singapore and Andy Lin in Taipei More

LONDON (Reuters) – Pay awards by British employers held at 5% for the second month in a row in December, well below annual inflation of close to 11%, data from human resources company XpertHR showed on Wednesday.UK inflation slowed from a 41-year high of 11.1% to 10.7% in November 2022, but the Bank of England is concerned that double-digit price rises could be harder to tame if pay deals keep growing.The latest inflation data is due to be published later on Wednesday. Economist polled by Reuters expect prices rises to have eased to 10.5% in December.Fresh figures from the Office for National Statistics showed wage growth ticked up again in the quarter to November. Average earnings excluding bonuses were 6.4% higher than a year previously – the biggest increase since record began in 2001.The BoE’s Monetary Policy Committee is expected to deliver its 10th consecutive interest rate hike, up from 3.5% to 4% at its next meeting in February.XpertHR senior content manager Sheila Attwood said employers should seek to support workers better in the face of a recession and as the cost of living crisis continued to be a key factor for firms setting pay.The squeeze on living standards has seen workers across Britain including nurses, teachers and public transport staff stage a series of strikes. “We have noted previously that several organisations have made off-cycle pay awards to help employees deal with the cost-of-living crisis,” Attwood said. “It will be interesting to see if this continues into 2023 or whether the forecasted fall in inflation from the middle of next year, together with the current 5% median pay award becoming the norm as we predict, will obviate the need for such measures.”Looking at the 12 months to the end of December, the median pay deal was 4% in the private sector and 3.8% in the public sector – a jump from 1.4% in 2021. More

(Reuters) -U.S. federal prosecutors will have greater leeway to decline to prosecute companies that self-report criminal matters and cooperate with government investigations, the Justice Department said on Tuesday.The policy aims to boost incentives for companies to disclose any misconduct they uncover to authorities, Assistant Attorney General Kenneth Polite said at Georgetown University.Polite’s remarks mark a further softening of tone from the Biden administration’s more aggressive stance with Corporate America initially outlined in October 2021 and detailed in more balanced terms in September 2022.”This demonstrates that the Department is looking to strike a balance between ‘tough on corporate crime’ rhetoric and giving companies a reason to disclose conduct,” said former prosecutor Justin Weitz, now a partner with Morgan, Lewis & Bockius LLP.Previous use of such so-called declinations applied in foreign corruption matters and prosecutors was limited when there were aggravating circumstances, such as the involvement of key executives and a significant profit from the wrongdoing. Now the policy will apply to a greater variety of white collar matters, and the Justice Department can decide against prosecuting even under such aggravating circumstances if companies meet certain guidelines.The guidelines include the immediate disclosure of issues when they are uncovered, and “extraordinary” cooperation and remediation, Polite said.Even if a criminal resolution is warranted, companies can earn discounts of 50% to 75% off the low end of prosecutors’ sentencing guidelines for penalties. But Polite cautioned that steep discounts would not be the norm.”Each and every company starts at zero cooperation credit,” Polite said. “This is not a race to the bottom.”Some have said that even the tougher rhetoric under Biden does not go far enough to address corporate misconduct. “The DOJ is right to incentivize and reward companies for self-reporting. The key is getting the balance of carrots and sticks right,” said Dennis Kelleher, the president and CEO of Better Markets nonprofit. “Individuals must be meaningfully and personally prosecuted in every case.” More