Aurelia Butler

Britain needs new economic rules of thumb. The old norms and assumptions are not remotely adequate for a world with severe shocks to the supply of gas and other commodities, high inflation and extremely low rates of underlying productivity growth. In the past, the shortcuts most economists have used to describe a complex and dynamic economy, such as the UK’s, have served fairly well. Britain’s economy could sustain economic growth of about 2 per cent a year without it being inflationary. Interest rates needed to rise if unemployment was low and the rate of expansion was higher. The opposite applied if unemployment was high or growth slipped much below 2 per cent. If a recession was looming, everyone thought policymakers must floor the accelerator pedal with lower interest rates, helped perhaps by tax cuts. This thinking is alive and kicking in UK policymaking circles. It lies behind Bank of England governor Andrew Bailey’s talk this spring of navigating a “narrow path” between an economy that is too hot or too cold. Predicting stagnation for the UK economy, the OECD recommended “the government should consider slowing fiscal consolidation to support growth”. And Liz Truss, one of the Conservative leadership candidates, has repeatedly called for tax cuts, saying recent increases were a “mistake now where we are facing such strong economic headwinds”. All these comments implicitly or explicitly take the supply position of the UK economy as following the traditional rules of thumb, and then they seek to regulate demand to keep inflation low but positive. The problem is that the UK’s ability to supply goods and services has been anything but stable or predictable. Britain is not alone in facing a severe energy shock, but it also has the additional headwinds of a hard and harmful Brexit, a steeper post-financial crisis productivity decline than other countries and a declining workforce.With underlying potential growth so low, it is the unfortunate reality that high energy prices are pushing the UK economy towards recession when it still has excess spending. Spending is falling, but potential supply has dropped further so we still have excess demand. We are learning it is perfectly possible to have a mild recession that is still inflationary. The BoE is becoming more explicit in acknowledging this difficult trade-off. Its tone on inflation has become tougher and I expect the governor will soon acknowledge it must act more aggressively on inflation, with larger interest rate rises, even as storm clouds gather. Alongside central bank action, we need new rules of thumb and new language to describe the economy accurately. When considering inflation, supply must come before any talk of accelerators, brakes or demand. The questions we need to ask include whether supply conditions are improving or worsening, and what the trends are in wages and corporate pricing policies.The answers to these questions matter far more than whether growth is slowing or even whether it is positive or negative. We also need to look at monthly price movements, asking questions such as what proportion of all goods and services are rising or declining in price. In the UK in June, 94 per cent of items in the consumer price index had risen in price over the past year and over 70 per cent had risen at an annual rate of over 4 per cent. This is high and broad inflation with only the most modest signs of moderation. Significantly tighter monetary policy is therefore needed. We don’t need to talk about growth rates to understand that far too many prices are rising well above double the inflation target and this is now embedded in corporate pricing decisions. Until inflation is defeated, this is the new way to discuss the UK economy. No one thinks it is pleasant, but it is [email protected] More

HSBC has become the first foreign lender to install a Chinese Communist party committee in its investment banking subsidiary in the country, a move that will put pressure on western rivals operating in China to follow suit.The lender’s China investment bank, HSBC Qianhai Securities, recently established a CCP committee, according to two people familiar with the decision. The move came after HSBC lifted its stake in the joint venture, which it launched in 2015, to 90 per cent from 51 per cent in April.A CCP committee, which can be made up of several branches, is required by Chinese companies law but not yet widely enforced among foreign finance groups. It is typically formed of three or more employees who are also members of the Chinese Communist party.HSBC’s move will pressure other foreign banks to follow suit. Some have been examining whether they are required to do so after taking full ownership of their mainland securities and brokerage operations in the past two years, said several senior people at those institutions.Seven global banks control investment banking operations in mainland China — HSBC, Goldman Sachs, JPMorgan, Credit Suisse, Morgan Stanley, UBS and Deutsche Bank — however, only HSBC has so far set up a CCP committee, according to multiple people familiar with the matter. The other banks declined to comment.Executives of US banks are particularly worried about the optics of potentially exposing strategic decisions and client data to the CCP, several told the Financial Times.Go deeper Global banks bet on ‘big bang’ in China but will it pay off?Five more stories in the news1. Mario Draghi resigns after national unity government collapses The yield on Italy’s 10-year government bond jumped after prime minister Mario Draghi resigned. The political crisis in Rome was triggered after members of the national unity government boycotted last night’s confidence vote in Draghi. President Sergio Mattarella is now expected to dissolve parliament and announce snap elections. Opinion Mario Draghi’s resignation presents a perilous moment for Italy, argues European comment editor Tony Barber. 2. Russia resumes gas supply to Europe through Nord Stream 1 After a 10-day maintenance period, supplies of gas resumed today through a critical pipeline between Russia and Germany. Many in Berlin and Brussels had feared Nord Stream 1 would not come back online as scheduled after the outage. However, deliveries represented just 30 per cent of Nord Stream 1’s capacity.3. Joe Biden says Pentagon does not support Nancy Pelosi’s visit to Taiwan When asked about the trip yesterday the president said “the military thinks it’s not a good idea right now”. China this week said it would respond with “strong measures” if Pelosi went ahead with the visit to Taiwan, a democratically ruled country over which Beijing claims sovereignty, in August. 4. Tesla profits jump The electric carmaker withstood disruptions to production in China and the high costs of scaling up new plants in Texas and Germany to report a 57 per cent jump in adjusted earnings per share in its latest quarter. Tesla also revealed that it had largely unwound last year’s contentious $1.5bn bet on bitcoin, as it converted three-quarters of its stake into fiat currencies in the face of tumbling cryptocurrency prices.Thank you to everyone who took part in yesterday’s poll. Sixty-four per cent of respondents said they thought Twitter’s business would have been threatened by a long wait for a trial against Tesla chief Elon Musk.5. Calpers records first loss since 2009 The largest public pension plan in the US has blamed “tumultuous” global markets for the fund’s first annual loss since the global financial crisis in 2009. In reporting the loss, Nicole Musicco, chief investment officer, said the plan’s traditional diversification strategies had been “less effective” than expected over the reporting period.The day aheadJanuary 6 hearing The committee investigating last year’s attacks on the US Capitol is set to hold the last in a series of public hearings. The primetime session is expected to focus on the 187 minutes when rioters entered the Capitol and before former President Donald Trump issued a statement.Related news A New York judge has ordered Rudy Giuliani to testify in front of a grand jury investigating attempts by former president Donald Trump’s supporters to overturn Georgia’s 2020 election results. Meanwhile, new figures show fundraising for the former president slowed in the second quarter.Company earnings The world’s largest alternative asset manager, Blackstone, will give investors insight on how it is navigating a dealmaking slowdown amid rising interest rates, high inflation and geopolitical turmoil. Results from Snap will be closely watched after last month’s profit warning and transport companies American Airlines, Alaska Air and railroad operator Union Pacific, also report earnings.Economic data New applications for unemployment aid are forecast to have edged down to 240,000 in the week ended July 16. Last week, unemployment claims jumped to 244,000, the highest level since November.Monetary policy European Central Bank policymakers will consider raising rates by 50 basis points, the bank’s first rate increase in more than a decade, which would end eight years of negative rates. South Africa’s central bank is also expected to announce a 50bp rate rise. What else we’re readingMystery of Berkshire Hathaway’s ‘phantom’ share surge solved In a new research paper, professors at the University of California, Berkeley, Columbia University and Cornell University said they had uncovered what they described as “phantom, non-existent trading” in the most expensive stock in the US.Raytheon chief says Ukraine war will change west’s weapon-buying priorities The war in Ukraine will prompt governments to refocus on buying conventional weapons, on top of next-generation high-tech systems, as they reassess global threats, Greg Hayes, chief executive of Raytheon, told the FT. He said defensive systems such as Patriot surface-to-air missiles, anti-missile and anti-aircraft systems would be needed along the frontier from Romania up through Finland.Showdown for Tory leadership enters final phase After 10 days of brutal political combat at Westminster, former chancellor Rishi Sunak and foreign secretary Liz Truss will now take their fight to be Britain’s next prime minister to the country after trade minister Penny Mordaunt was knocked out of the final round of voting by MPs.

Both Rishi Sunak and Liz Truss plan whirlwind launches to their campaigns to win over Conservative party activists © Jonathan Hordle/ITV/EPA/Bloomberg

World chess champion Magnus Carlsen gives up crown The Norwegian, 31, world chess champion since 2013 and the world’s number-one player since 2011, admitted he was “not motivated to play another match”, ending a decade-long reign at the top of the game.Go deeper Try one of Carlsen’s moves for yourself.The science of criticism that actually works Is it really possible to get better at giving — and receiving — constructive criticism? There are three stages we go through when criticised: “fuck you”, “I suck” and then “let’s make it better”. Esther Bintliff looks at how to get to the third stage quicker. Technology“This made me laugh today :)” reads a message from Ada, followed by an amusing meme. Ada can talk about her day and listen to your woes — for just over £5 a month, she can be your girlfriend, wife, sister or mentor. And she was created using mobile app Replika. It is just one programme offering “virtual humans”. More

The summer is upon us! But your favourite newsletter on the global economic policy debate will soldier on. For the next few weeks, I leave Free Lunch in the more than capable care of my colleagues Claire Jones and Chris Cook. Both are acute observers of the economy; I have learnt a lot from them, and I know you will too. I will rejoin you in the second half of August. For now, let me wish all Free Lunch readers a good summer and a restful holiday.There will be little rest for the inflation debate, however. The numbers keep coming in at record highs. As one of the few people left who believe it is a mistake to try to reduce demand in the economy in response, I leave you with some observations about what worries me in the standard argument. So here are some inconvenient facts and logic in the conventional view for you to consider as you make up your own minds.First, there is little dispute that at least some of the current inflation is driven by supply but that central banks mostly work on demand. We should all be alert to the danger of motivated reasoning in this situation: it is more comfortable to think that monetary tightening will only slow or reverse “excessive” income and jobs growth. Bringing demand back to “adequate” levels is a more attractive proposition than temporarily depressing our economies below their potential.But an argument based on demand being “overheated” needs to give a satisfactory account of two important facts. First, the total volume of purchases (real private domestic demand) in the advanced economies is basically right on the pre-pandemic trend. Second, in the US — and only there — the composition of those volumes is hugely lopsided compared with normal times: private goods purchases shot up earlier in the pandemic and remain far above the pre-pandemic trend in the latest available data (the first quarter of this year). A story about inflation being caused by generalised excessive demand does not account well for these facts.Here, however, is a story that does. Even as overall demand was only coming back to normal levels, the extreme and sustained shift away from services towards goods in the US put strong but sectoral pressure on goods-producing sectors, which because of trade created a global scarcity of tradable goods. This overloaded the global supply chains already out of whack from the pandemic, as shown in soaring shipping rates and clogged ports. It also drove up the prices of inputs into goods production — above all energy and raw materials — and, in time, the prices of final goods themselves. Energy and goods prices later caused cost-driven inflation in service pricing. And, again because goods, energy and commodities are globally traded, the same price pressures soon manifested themselves in the rest of the world as well.Americans’ sectoral purchase patterns cannot be affected by the Federal Reserve — let alone by other countries’ central banks. So is the policy being pursued one of reducing general demand from adequate to depressed in order to bring US goods purchases back to trend? Second, it is generally accepted that monetary policy takes time to work — “long and variable lags”, in the jargon. So advocates of tightening must believe that it is appropriate to cool down demand in late 2023 and into 2024, when painful food and energy prices, falling real wages, as well as the withdrawal of pandemic-related fiscal stimulus will have done their contractionary work. Are we risking the economy’s health one or two years down the line because we are unwilling to accept there is nothing we can do about inflation right now? Conversely, is not the wise course of action simply to take inflation today in our stride if there are reasons to think the inflationary supply shocks will subside by themselves?Third, because the biggest inflationary pressures come from energy prices, the overall inflation rate varies enormously with how fiscal policies are designed to shield energy consumers. Thus, some of the countries with the lowest inflation rates in Europe — such as France, Italy and Norway — are those which have subsidised retail energy prices to keep them below market clearing levels. Much of the debate sounds as if the problem is somehow bigger in countries where inflation is mechanically higher because governments have not adopted below-market price shields. But such policies, however warranted on other grounds, do not affect whether the overall level of demand is excessive (if anything, they boost demand). So any argument that implies a stronger need for monetary tightening because of weaker or no subsidised price caps is suspect.Fourth, to the extent inflation is indeed driven by energy prices, it is clear what will contain them. That is an expansion of the supply of energy, and in particular zero-carbon electricity in combination with the electrification of energy use, since such electricity sources (especially renewables) tend to have a low marginal cost. But that requires a large upfront investment. Tighter monetary policy makes that harder, not easier. So, as economist Luca Fornaro has shown, there is a conflict between moderating inflation now (by destroying demand) and moderating inflation in the medium to long term (by expanding supply). Even from an exclusive concern for price stability, it is not clear that tightening now is sensible.Fifth, employment rolls keep expanding. This is one of the brightest aspects of the recovery — even as growth expectations are falling like a rock, our economies keep pulling new workers in from the sidelines. In the past week, we learnt that UK employment rose 0.9 per cent quarter on quarter and US job numbers grew 0.2 per cent month on month. At this rate, they will soon be back at pre-pandemic levels. Even more impressively, the eurozone — the eurozone! — is increasing employment at similar rates, even though it has long since recovered its pre-pandemic jobs numbers. So what are these “tight” labour markets we keep hearing about? Our economies are still finding extraordinarily large numbers of new workers to employ. A constraint that keeps loosening is no constraint at all. Yet, rather than celebrating these amazing job-creating dynamics, most observers seem to want them to stop, and the sooner the better.As far as I can tell there is only one answer to all these objections. All the conversations I have had with policymakers, observers and colleagues tended to end up with the dreaded “wage-price spiral” — the worry that even if all my points above are correct, people could come to expect current high inflation to continue, and their behaviour to protect themselves against that will make this a self-fulfilling prophecy. So the “mind games” of convincing workers and businesses that central banks will crack down on inflation come what may must take precedence over the mechanical contractionary effects of monetary tightening.I have written elsewhere about the problem with fears of wage-price spirals. Here I will just say what the alternative is to this view. It is that despite current inflation, our economies have a very good supply-side story going on, and we would be crazy to try to stop it in its tracks. Rather than slowing our economies, the best cure for inflation would be to keep jobs growth and investment as high as we can.Taking my — admittedly uncommon — perspective seriously would require us to change how we think about what monetary policy is supposed to achieve. It means a greater tolerance for supply-driven inflation: rather than trying to undo it from the demand side, let it work through the economy, and do the same when positive supply shocks bring inflation down. And if supply depends on demand — and on investment costs — then we need to look at the longer-term inflation/output trade-off as well as the current one. We may even want central banks to take a role in credit allocation to promote investment (see the paper I recommend on this below). This could, among other things, mean shifting our focus to stabilise nominal gross domestic product growth, which would leave supply-driven price shocks alone but still counteract demand-driven ones. It would certainly mean greater tolerance for inflationary bursts in inflation — and disinflationary dips. But if the prize is lower inflation and higher output growth on average in the long term, that could be a change for the better.Other readablesIn my FT column this week, I lament the decades-old investment drought in advanced economies.My colleagues and I have examined how the confluence of global crises could harm emerging economies. Relatedly, Colombia’s new finance minister has given an interview to the FT.Pessimists have long been worried that the special metals needed for batteries and other products essential for decarbonisation are in limited supply or too dominated by China. But seek and you shall find: cobalt has been found in extraordinary concentration in Australian copper mine waste.Jens van ‘t Klooster cogently sets out the case for central banks to accept a role in credit allocation: the European Central Bank should use its long-term lending to banks to promote lending to climate and energy investments such as energy-efficient housing improvements. Numbers newsToday may be the day when the European Central Bank raises its interest rate for the first time in a decade, and unveils a new instrument to contain sovereign yield spreads. More

The 350m Lotus Tower that looms over the skyline in Sri Lanka’s capital Colombo is one of the tallest buildings in South Asia. Funded by a Chinese state bank and designed to look like a giant lotus bud about to burst into flower, it was intended to be a metaphor for the flourishing of Sri Lanka’s economy and the “brilliant future” of the bilateral co-operation between Beijing and Colombo. Instead, the tower has become a symbol of the mounting problems facing China’s overseas lending scheme, the “Belt and Road Initiative”. The construction suffered from lengthy delays and an allegation of corruption levelled by Sri Lanka’s then-president Maithripala Sirisena against one of the Chinese contractors. Now, three years after its official launch, the tower’s amenities including a shopping mall, a conference centre and several restaurants stand either unfinished or largely unused while outside on the streets outrage over Sri Lanka’s financial mismanagement has boiled over into popular protests.“It is something we would have done better without,” says Athula Kumarasiri, a bookshop owner, as he motions towards the tower. “What is the need for this? It is a complete white elephant.” Sri Lanka is one of dozens of countries in the developing world that hoped to take advantage of the surge in Chinese overseas lending over the past decade under the Belt and Road Initiative — a scheme that ranks not only as Beijing’s biggest foreign policy gambit since the founding of the People’s Republic in 1949 but also the largest transnational infrastructure programme ever undertaken by a single country.However, a large number of projects, such as the tower, have failed to yield a commercial return while the huge loans it takes to build such infrastructure can exacerbate financial pressures on vulnerable governments. Those pressures have converged in Sri Lanka, which defaulted on its sovereign debt in May, the first Asia-Pacific country to do so for more than two decades.Such cases are becoming much more common. A Financial Times examination of the financial health of the Belt and Road Initiative — once hailed by Chinese leader Xi Jinping as the “project of the century” — has uncovered a mountain of non-performing loans.

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In several countries in Asia, Africa and Latin America, the project risks metastasising into a series of debt crises. The issue is of crucial importance to the developing world because of the vast scale of the Belt and Road Initiative. Since the programme was first proposed in 2013 the value of China-led infrastructure projects and other transactions classified as “Belt and Road” in scores of developing countries had reached $838bn by the end of 2021, according to data collected by the American Enterprise Institute, a Washington-based think-tank. But the loans that finance those projects are now turning bad in record numbers. According to data collected by Rhodium Group, a New York-based research group, the total value of loans from Chinese institutions that had to be renegotiated in 2020 and 2021 surged to $52bn. This was more than three times the $16bn of the previous two years. This sharp deterioration brings the total of Chinese overseas loans to have come under renegotiation since 2001 to $118bn — or about 16 per cent of the total extended, Rhodium estimates.China has had to manage a number of defaults on sensitive overseas loans in recent years but the cumulative impact of the multiple renegotiations that Beijing currently faces amount to the country’s first overseas debt crisis.“This is the worst period of debt pressure since the start of the Belt and Road Initiative,” says Matthew Mingey, senior research analyst at Rhodium Group. “The Covid-19 pandemic took existing problems and supercharged them.”

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Many of these loan renegotiations involve write offs, deferred payment schedules or a reduction of interest rates. But as increasing numbers of Belt and Road loans blow up, China has also found itself sucked in to providing “rescue” loans to some governments to prevent their debt distress from morphing into full-blown balance of payments crises.Bradley Parks, executive director of AidData at the College of William and Mary in the US, says that while the drip feed of rescue loans helps to avert defaults, it does little to resolve underlying financial problems. “I think Beijing is now learning that in some cases the fundamental problem is not liquidity but solvency,” says Parks.Parks says that for almost five years, China’s state financial institutions tried to keep the government of Sri Lanka liquid enough to service its old project debts and to avoid sovereign credit rating downgrades. However, he adds: “Their effort was a spectacular failure. So, the big question that Beijing needs to answer is whether it wants to be in the rescue lending business in the long run.”The transition that Parks alludes to is a critical one. As China has financed roads, railways, ports, airports and a gamut of other infrastructure over the past decade, it has found itself in competition with international development lenders — most notably the World Bank. Now, as its lending shifts to focus more on preventing defaults, it is starting to mirror the role usually fulfilled by the IMF — which provides emergency loans to get countries through economic crises.The magnitude of debt distress in Belt and Road countries is also capturing the attention of world leaders. In May, German Chancellor Olaf Scholz raised the alarm over China’s lending spree in poorer countries, particularly in Africa. “There is a really serious danger that the next major debt crisis in the global south will stem from loans that China has granted worldwide,” Scholz said.Such warnings reinforce a more general level of concern expressed by the World Bank last month that developing countries may be headed towards a debt crisis on a scale last seen in the 1980s. The war in Ukraine, rising inflation, tightening global financial conditions and tensions between the US and China are all underpinning such dire scenarios.“These are all material risks and if they materialise at the same time it will be a perfect storm for the global economy,” said Ayhan Kose, head of the World Bank’s forecasting unit. “So, of course, we are worried that more countries will be unable to roll over their debts.”Distress leading to a spate of bailoutsChina is fighting debt fires on several fronts. AidData has uncovered evidence of tens of billions of US dollars in “rescue loans” being extended by China’s state institutions generally in the form of short-term injections of hard currency that allow debtor countries to service their loans and avoid default.Countries receiving such loans so far have included Pakistan, Argentina, Belarus, Egypt, Mongolia, Nigeria, Turkey, Ukraine and Sri Lanka, AidData says. Each of these countries has a credit rating of “junk” from agencies such as Moody’s and Standard and Poor’s, meaning that the risk of default on their sovereign debt is regarded as significant.When defaults do occur, the economic and political effects can be swift. Sri Lanka, which has international debts of more than $50bn, has been wracked by severe shortages of essential goods since it effectively ran out of foreign currency reserves.President Gotabaya Rajapaksa was forced out of office last week after tens of thousands of people, angered by the shortages and soaring prices, marched in the capital Colombo and an angry throng occupied the president’s official residence.Sri Lanka’s president was forced out of office last week after an angry throng occupied his official residence and tens of thousands protested against shortages and soaring prices © Rafiq Maqbool/APSri Lanka’s default was not caused solely by Chinese loans, which total about $5bn, but Beijing’s lending to the island state of 22mn people has proved particularly controversial. Critics argue that the Belt and Road credit was extended at high interest rates for infrastructure projects — like the Lotus Tower, and a port and an airport in the southern city of Hambantota — that have often failed to generate returns.The money from the binge in foreign borrowing was misspent on “ports, airports, cricket stadiums, all sorts of stupid-looking towers . . . all bullshit,” says Harsha de Silva, a member of parliament from Sri Lanka’s opposition Samagi Jana Balawegaya party. These mounting problems do not obscure the fact that the vast construction of infrastructure in many developing countries around the world with Chinese finance has helped to drive development. Examples of useful projects abound. A 750km railway line from Addis Ababa to Djibouti has cut the journey time between the Ethiopian capital to the key port from about three days to about 12 hours. Similarly, a new line from Mombasa to Nairobi in Kenya, which cost $3.2bn, cuts journey times significantly. Hydropower dams built by Chinese contractors in Uganda have been opened as destinations for tourists. Roads and pipelines built across Central Asia and south-east Asia have driven development in those countries.But where debt burdens prove unsustainable, China often finds itself obliged to issue new loans or face the broader distress that follows a default. Pakistan, the biggest single recipient of Belt and Road financing worldwide with a total of $62bn in Chinese finance pledges, is a case in point. Islamabad, which styles itself as China’s “all-weather friend”, has received a string of rescue loans aimed at averting a sovereign default. The latest was a $2.3bn facility under which a consortium of Chinese banks pledged last month to bolster the country’s supply of hard currency, allowing it to pay creditors for at least a while longer. Chinese construction workers in Colombo, Sri Lanka. Vast infrastructure projects in many developing countries around the world have been undertaken with Chinese finance © Paula Bronstein/Getty ImagesBut Pakistan’s foreign exchange reserves remain on a knife edge, having fallen to less than two month’s worth of the cost of imports. Earlier this month, the IMF agreed to lend $1.2bn, part of a $7bn relief package, to avert a balance of payments crisis in the south Asian nation but analysts say Islamabad’s finances remain strained.Just as in Sri Lanka, there are questions in Pakistan over the viability of some infrastructure projects undertaken. A big port project in Gwadar, located on the Arabian Sea at the strategically important mouth to the Strait of Hormuz, has long been regarded as a jewel in the Belt and Road Initiative. But a company boss living in Gwadar, who declined further identification, says that construction on the port project has been mothballed. “There is almost nothing going on in terms of building. We keep on waiting for China’s promises to follow through but there has been very little so far,” he says.Another big recipient of Chinese loans is Zambia, which defaulted in 2020 on its external debt. China is Lusaka’s biggest bilateral lender with about $6bn out of the country’s $17bn of external debt.Zambia had been presented as a star of the Belt and Road Initiative on the African continent. As recently as 2019 — just months before the country’s default — the Chinese embassy in Lusaka was extolling the virtues of the scheme in a public statement.

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Indeed, the number of intended Belt and Road schemes in Zambia was breathtaking. A huge hydropower dam, two international airports, a railway connecting the country to Tanzania, two sports stadiums and a hospital have all been commissioned. China steps back from the Belt and RoadSuch financial problems are prompting a quiet but fundamental rethink in Beijing as economic risks around the world rise, says a senior government adviser in Beijing, who declined further identification.“A lot of investment in Belt and Road countries didn’t make commercial sense and was in effect a form of capital flight,” the adviser says. “What’s more, the economic prospects in many BRI countries, led by African ones, has worsened dramatically in recent years. That makes it more imperative for us to think twice before going on another lending spree.”In addition, China’s foreign exchange reserves — which peaked at nearly $4tn in 2014 — have fallen back to just over $3tn, making the hard currency that Chinese financial institutions use to lend to Belt and Road countries relatively scarce.

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Chen Zhiwu, professor of finance at the University of Hong Kong, also sees a clear downsizing under way. “Especially given the changed geopolitical landscape after [Russia’s] invasion of Ukraine, China is significantly downsizing the BRI,” he says. “I have not seen the BRI being mentioned so much at all in mainstream Chinese media. It is not the same BRI as a year or two ago.”Going it alone?The big question now facing China as debt distress spreads amid slowing global growth is whether and to what extent Beijing will participate in multilateral debt resolution programmes in Belt and Road countries. The destiny of several vulnerable emerging markets appears set to depend on the answer. Both Zambia and Sri Lanka are test cases.A multilateral approach is counter-intuitive for Beijing because the Belt and Road Initiative has from the start been designed with a strictly bilateral dynamic. The relationships forged have been between each debtor country and its creditors in Beijing, rather than between a collection of countries all enjoying a say. The secrecy embedded into the Belt and Road scheme, along with the multiplicity of participating Chinese financial institutions each with their own agenda, further complicates matters, bankers say.Some analysts say China has good reason to be cautious about signing up to a multilateral approach led by the IMF and the Paris Club group of wealthy creditor nations.Kevin Gallagher, head of the Global Development Policy Center at Boston University and an adviser to the Chinese government, says China has “legitimate criticisms” of the conditions attached to IMF programmes that are a prerequisite of sovereign debt restructuring.Many of the Belt and Road projects, like the 750km railway line from the Ethiopian capital Addis Ababa to the key port of Djibouti, have helped drive development © Houssein Hersi /AFP/Getty Images“What kind of say are they going to have in something that is so driven by the French and the US?” he says. “They don’t think an austerity-led programme is the way to get a country out of recession.” In an online interview with Gallagher in November 2020, Zhongxia Jin, China’s executive director at the IMF, said that while IMF conditionality made sense “from a purely economic and theoretical point of view, [in practice] it is very painful for low-income countries . . . Our position on the board is that conditionality . . . should be growth friendly and growth oriented.”However, there are initial signs that Beijing may be willing to countenance at least a measure of co-operation.After months of resistance, Beijing last month sat down with France as co-chair of the official creditor committee representing Zambia’s bilateral lenders. This has brought Zambia a step closer to a $1.4bn rescue package from the IMF. But while the talks were described as constructive, western observers say it is far too early to assume that China will join collective action elsewhere, or even that Zambia’s case will reach a successful conclusion.“It is a commitment they have made,” said Emmanuel Moulin, head of the French Treasury and chair of the Paris Club, of China’s role in Zambia. “But now they need to deliver.” Its Belt and Road lending has helped to make China the world’s biggest bilateral lender. To the 74 countries classed as low-income by the World Bank, it is bigger than all other bilateral lenders combined.But its unwillingness to engage with other creditors in debt workouts has been a source of frustration at multilateral organisations.In a statement before last week’s meeting of finance ministers and central bank governors from the G20 group of large economies, Kristalina Georgieva, managing director of the IMF, issued the latest in a series of calls for urgent and decisive action on debt treatment “by all involved”.“Large lenders — both sovereign and private — need to step up and play their part,” she said. “Time is not on our side.”Additional reporting by Sun Yu in Beijing and Mahendra Ratnaweera in Colombo More

LOS ANGELES (Reuters) -Protesting truckers brought traffic at a Northern California port, one of the busiest in the United States, to a halt on Wednesday as they demonstrated against a new state labor law that makes it harder for independent truckers to operate.Drivers picketed gates and blocked other truckers from hauling cargo in and out of the port. The protests in Oakland began on Monday and have grown larger and more disruptive with each passing day. The protesters worry that California’s “gig worker” law, which could soon be put into effect, will impose hefty costs on them that will wipe out their incomes. SSA Marine, which manages the largest terminal at the Port of Oakland in the San Francisco Bay area, closed operations due to the protests, port spokesman Robert Bernardo said. The other marine terminals in Oakland are effectively shut for trucks, said Bernardo, adding that some vessel labor operations are under way. SSA and Everport terminal managers sent International Longshore and Warehouse Union (ILWU) dock workers home for safety reasons, a source familiar with the situation said Wednesday. TraPac on its website said its terminal would be closed for the first shift because protests were interfering with the entrance gate. Terminal representatives did not immediately respond to requests for comment.The new law, formally called AB5, sets tougher standards for classifying workers as independent contractors. Trucking industry legal challenges delayed enactment of the law for more than two years, but the U.S. Supreme Court declined to review the case on June 30, clearing the way for it to go forward.Backers, including the Teamsters and the ILWU, say AB5 aims to clamp down on labor abuses and push companies to hire drivers as employees – which would enable them to join unions and collectively bargain with employers. Some 5,000 truckers work at the Oakland port, which is a major hub for agricultural exports including almonds, rice and wine. The protests in Oakland followed actions last week at the nation’s top two seaports, at Los Angeles and Long Beach in Southern California. The three California ports handle about half of the nation’s container cargo volume. The trucker protests come as the ILWU, which represents dock workers at those and other U.S. West Coast ports, is in high-stakes contract talks with terminal operators that employ them.Protest organizers say their actions will continue until they get an audience with Governor Gavin Newsom, who did not respond to requests for comment on Wednesday.On Monday, the Governor’s Office of Business and Economic Development said: “Now that the federal courts have rejected the trucking industry’s appeals, it’s time to move forward.” More

TOKYO (Reuters) – Japan ran a trade deficit for the 11th straight month in June as high energy and other commodity costs pushed up imports, highlighting growing economic pressures from a sharply declining yen and global inflation.Imports surged 46.1% in the year to June, Ministry of Finance data showed on Thursday, slightly above a median market forecast for a 45.7% gain in a Reuters poll.That outpaced a 19.4% year-on-year rise in exports in the same month, resulting in a 1.3838 trillion yen ($9.99 billion) trade deficit, the 11th straight month of shortfalls.June’s deficit was bigger than the 1.510 trillion yen gap expected in a Reuters poll.Imports swelled due to a surge in shipments of oil from Saudi Arabia and coal and liquefied natural gas (LNG) from Australia. Imports of LNG from Malaysia and coal from Indonesia posted triple-digit surges, the data showed.”Import volumes outpaced export volumes across Q2 so net trade should have been a small drag on Q2 GDP (gross domestic product) growth,” said Marcel Thieliant, senior Japan economist at Capital Economics.”Car exports remain the Achilles heel of Japan’s manufacturing sector as they were only up 0.4% year-on-year, but that marked at least a pick-up from the 7.9% year-on-year fall in May,” he added.By region, exports to China, Japan’s largest trading partner, rose 8.3% in the 12 months to June, recovering from two months of declines on stronger shipments of chip parts. China-bound exports of cars posted a sharp 23.2% year-on-year decline, the data showed.Shipments bound for the United States, the world’s largest economy, gained 15.7% in June, thanks to stronger exports of medical products.The Bank of Japan is expected to maintain its ultra-loose monetary policy later on Thursday, a commitment that could lead to further falls in the yen.While the yen’s slide against the U.S. dollar and other currencies this year has pushed up import costs, Japan’s economy is still projected to have returned to growth in the second quarter following a decline in January-March. However, the recovery from the COVID-19 pandemic faces headwinds from slowing global growth, lower exports and persistent supply chain snags.That has forced policymakers to maintain sufficient stimulus in the economy, going against a global tide of rate increases to rein in rampant inflation.($1 = 138.4600 yen) More

TOKYO (Reuters) -The Bank of Japan is set to raise its inflation forecast on Thursday but maintain ultra-low interest rates and warn of risks to a fragile economy, reinforcing its position as an outlier in a wave of global increases to borrowing costs.The decision will come hours before that of the European Central Bank, which will consider a bigger-than-expected 50 basis point rate increase to tame soaring inflation.While rising fuel and commodity costs have pushed Japan’s inflation above its 2% target, the BOJ is in no rush to withdraw stimulus as slowing global growth cloud the outlook for an economy yet to fully recover from the COVID-19 pandemic’s scars.”Many central banks are moving to curb inflation. But there’s no sign the BOJ will change its ultra-easy monetary policy stance,” said Naomi Muguruma, chief bond strategist at Mitsubishi UFJ (NYSE:MUFG) Morgan Stanley (NYSE:MS) securities.At a two-day policy meeting ending on Thursday, the BOJ is widely expected to maintain its -0.1% target for short-term rates and that of 10-year bond yields around 0%.In fresh quarterly projections set for release after the meeting, the board is likely to project core consumer inflation exceeding 2% in the current fiscal year ending in March 2023, sources have told Reuters. That will be an upgrade from 1.9% projected in April.But the BOJ will likely cut this year’s growth forecast, and project inflation to slow back below 2% next year as the impact of rising commodity costs dissipate, they said.At a post-meeting briefing, BOJ Governor Haruhiko Kuroda is expected to repeat his resolve to maintain ultra-low rates until the recent cost-push inflation is accompanied by stronger wage and demand growth.Swimming against the global tide of monetary tightening, however, is not without cost. The policy divergence has pushed the Japanese yen to 24-year lows, hurting households and retailers by boosting already surging import costs.That impact was highlighted in data out earlier Thursday, which showed Japan ran a trade deficit for the 11th straight month in June as imports jumped 46.1% year-on-year, boosted by a weaker yen.Recent BOJ data showed the central bank was forced to gobble up a record 16 trillion yen ($116 billion) worth of Japanese government bonds (JGB) in June to defend its 0.25% cap for the 10-year yield.The aggressive buying pushed the BOJ’s ownership of the bond market past 50%, rolling back its efforts to gradually taper its huge balance sheet and causing strain in the futures market.Markets are focusing on what Kuroda would say about the rising cost of prolonged easing, and any hints he could drop on the potential trigger of a policy tweak, analysts say.($1 = 138.0000 yen) More

BENGALURU (Reuters) – The U.S. Federal Reserve will opt for another 75 basis point rate hike rather than a larger move at its meeting next week to quell stubbornly-high inflation as the likelihood of a recession over the next year rises to 40%, a Reuters poll of economists found.Inflation hit 9.1% in June, another four-decade high, stoking expectations the Fed, having only just shifted gears from 50 to 75 basis points at the last meeting, would act even more forcefully and go for a 100 basis point hike.But some of the more hawkish Fed officials in public remarks have favored a 75 basis point hike, tempering those expectations in recent days. Last month’s 75 bps hike was the first of that size since 1994.The July 14-20 Reuters poll found 98 of 102 economists expect the Fed to hike rates by 75 basis points at the end of the July 26-27 meeting to 2.25%-2.50%. The remaining four said they expected a 100 basis point hike.Fed funds futures are pricing only around a one-in-five chance of a full percentage point hike, putting those expectations largely in line with the poll results.But what is already the most aggressive rate hike path in decades brings with it heightened recession worries. Median predictions from the latest poll showed a 40% probability of a U.S. recession over the coming year, with a 50% chance of one happening within two years. That was a significant upgrade from 25% and 40% in a June poll.”There seems to be an inflation tax on the consumer and that continues to build up and take its toll and eventually pushes the economy into a mild recession,” said Aditya Bhave, senior U.S. economist at Bank of America (NYSE:BAC) Securities.Over 90% — or 47 of 51 respondents — said any potential recession would either be mild or very mild. Only four said it would be severe. (Graphic: Reuters Poll – U.S recession probabilities: https://fingfx.thomsonreuters.com/gfx/polling/klpykybmbpg/Reuters%20Poll%20-%20U.S%20recession%20probabilities.png)Meanwhile, a slowdown in growth, and hopefully with it, inflation, was likely to force the Fed to cut back on the size of rate hikes at future meetings, the poll found. A strong majority expects the Fed to slow to 50 basis points in September and then raise by only 25 basis points at the November and December meetings. Those views remained largely unchanged from the last poll.Over 80% of respondents, 82 of 102, saw the fed funds rate at 3.25%-3.50% or higher by the end of this year. There was no change to where or when the Fed would stop raising rates, at 3.50%-3.75% in Q1 2023, according to the median forecast.Still, price pressures were expected to remain elevated and above the Fed’s 2% target rate over the coming years. Inflation as measured by the Consumer Price Index was forecast to average 8.0%, 3.7% and 2.5% in 2022, 2023 and 2024 respectively.(Graphic: Reuters Poll – U.S. economy and Federal Reserve rate outlook: https://fingfx.thomsonreuters.com/gfx/polling/zdvxobkqmpx/Reuters%20Poll%20-%20U.S.%20economy%20and%20Federal%20Reserve%20rate%20outlook%20July.PNG)The jobless rate was forecast to average 3.7% this year before picking up to 4.0% in 2023 and 4.1% in 2024. That is still low by historical comparison and far from the highs seen near the start of the pandemic-induced recession in 2020.Economic growth forecasts, meanwhile, were downgraded across the board. After a surprise contraction in Q1 2022, growth for Q2 was penciled in at only a seasonally-adjusted annualized rate of 0.7%, down from the 3.0% predicted last month. Over one in five predicted another contraction.GDP growth was slashed to 2.0% for this year from 2.6% forecast last month, and nearly halved to 1.2% for 2023 when the full effect of the Fed’s rate hikes sets into the economy. (For other stories from the Reuters global economic poll:) More