Aurelia Butler

Since Russia invaded Ukraine, political risk consultants’ phones have not stopped ringing. Many of their clients, mostly multinationals, are asking: how likely is a Chinese attack on Taiwan, and how can we prepare?Consultants and China experts in the US have seen a wave of requests for briefings since the war in Ukraine began, as the Financial Times reported last week. Demand for political risk insurance over potential conflict in the Taiwan Strait is also rising sharply, according to reports.Such jitters force Taiwan to acknowledge the risk of invasion. It is a threat China has explicitly retained ever since 1949 but which until recently did nothing to hinder Taiwan’s meteoric rise into a global technology manufacturer and significant player in the Chinese economy.As Goldman Sachs pointed out in a research report last month, “[…] the broader Taiwan market is responding and becoming more sensitive to cross-strait risks amid reports of significantly greater military activity from mainland China and later the Russia invasion of Ukraine”.Ironically, what foreign investors worry about is less the risk to Taiwan than the risks to China and the global economy.“Yes, all multinationals are doing scenario planning in particular after the Ukraine invasion, which triggered Taiwan assessments,” said Joerg Wuttke, president of the EU Chamber of Commerce in China. But he added: “It is not that headquarters believe that Xi Jinping might consider an invasion anytime soon, but companies want to check what a blockade or war would do to their global set-up.”According to corporate risk managers interviewed by the FT, multinationals across all sectors are allocating probability scores to different scenarios. In those assessments, an all-out Chinese invasion of Taiwan is still viewed as a marginal risk.A person familiar with the risk assessment of one western company with a large manufacturing presence in China says it sees an 80 per cent likelihood that tension between China and Taiwan (as well as between China and the US) will “remain on a high level but not lead to hot conflict”.Some risk managers believe there is an up to 20 per cent chance of some form of escalation, but the likelihood of even limited conflict such as a Chinese blockade of some Taiwanese trade or a move by Beijing to seize one of the outlying islands controlled by Taiwan is seen in the single digits.However, the potential damage would be enormous if things came to a head. “The main lesson from Ukraine is that the west will hit an aggressor with very significant sanctions. Apply what we have seen in Russia to China, and you have Armageddon for the Chinese economy and for the global economy,” said an executive at a western technology company.Analysts warn particularly of the risks to global supply chains. Patrick Chen, head of research at CLSA in Taipei, said the questions he received from investors about Taiwan’s TSMC, the world’s largest contract chipmaker, were now all about geopolitical risk rather than the company’s technology leadership.“If there were full-fledged aggression from China, it would be catastrophic not just for TSMC but for the global stock market, because it would completely disrupt advanced chip supply,” Chen said. “It would also be catastrophic for China because its own chipmakers cannot supply those chips locally.”For individual multinationals, the focus is on how to respond if Chinese aggression against Taiwan triggered Russia-style western sanctions against Beijing. Options that risk managers explore include leaving the Chinese market altogether as well as spinning off operations in China in a way that would give the foreign company “plausible deniability”.Others are accelerating efforts to restructure their supply chains to reduce risks of Chinese espionage or technology theft and vulnerabilities to disruption as seen during the pandemic. But many foreign investors in China balk at the idea of replicating operations in countries that lack the depth of the Chinese market and where industrial clusters cannot be formed as easily. Wuttke said: “The size of the Chinese market is so big, a decision to leave would have massive consequences for EU companies.”Executives on the ground in Taiwan, meanwhile, warn against hyping up the risk of war. Andrew Wylegala, president of the American Chamber of Commerce in Taiwan, said: “Our chamber is comprised of 535 corporate and organisational members, virtually all located in Taiwan. From among them I have heard zero alarm bells ringing.”[email protected] More

Santander, Virgin Money, Visa and Beazley have become the latest financial services companies to offer pay rises or one-off bonuses to staff to help deal with the soaring cost of living.This week, 11,000 UK-based staff at Spanish bank Santander were told they would receive a 4 per cent pay rise to help with fast-rising inflation, which is squeezing incomes across the UK particularly for lower-earning families. Santander will offer the pay rise to staff earning less than £35,000 — covering about 60 per cent of the workforce — and increase its entry level salaries to £19,500.Santander chief executive Mike Regnier said the pay raise would “make a real difference to the majority of our customer-facing and contact centre staff”.Visa has offered a 5 per cent pay increase to staff in the UK from July, according to one person familiar with the situation.Virgin Money also said on Tuesday that it would give £1,000 to almost 80 per cent of its workforce earning less than £50,000 as a one-off “cost of living” payment in August wages.Staff had already received an average increase of 5 per cent in base salary in January. The extra pay bump will not be factored into future pay reviews, it said.Unite, the workers’ union, said it had helped secure the pay rise and would continue to campaign to make sure wages increased in line with inflation.The financial services sector has been at the forefront of offering one-off pay increases or non-recurring bonuses to help lower-paid staff in particular. Barclays and Lloyds Banking Group have promised pay rises in recent months to help many of their staff cope with costs. UK staff at NatWest earning less than £32,000 — about 17,300 employees — will be given an unscheduled pay rise of 4 per cent from September.Lloyd’s of London insurer Beazley also last month made a one-off gross payment of £3,000 for those earning up to £50,000, intended as help with the rising cost of living, according to a person familiar with the details.Economists expect a further rise in the headline inflation rate from 9.1 per cent in May to a fresh 40-year high in June, driven by sharp rises in petrol and diesel prices last month. Some expect inflation to peak at almost 12 per cent in October. On Tuesday, the Office for National Statistics said earnings grew by 4.3 per cent in the three months to May excluding bonuses but failed to match the rate of inflation.The pay squeeze has caused a surge in worker disputes. More than 40,000 British workers at BT Group will hold a two-day national strike at the end of this month.

Other companies are also seeking to help workers deal with inflationary pressure. Housebuilder Barratt Developments awarded all staff below senior management level £1,000 this month, which will be paid between now and December. Barratt chief executive David Thomas said the “rising cost of living is impacting on colleagues across the business but we are committed to supporting our teams”. More

The writer is global head of the official institutions group at BlackRock and a former IMF officialDays after Russian troops invaded Ukraine, the G7 and a host of allies in Europe and Asia declared a freeze on the assets of the Central Bank of Russia. The move, unprecedented in its swiftness and scale, instantly incapacitated roughly half of its $630bn in international reserves. Up to this point, central bank reserves had only been frozen multilaterally after abrupt regime change — think of the Bolshevik and Chinese revolutions, or more recently Hugo Chávez’s Venezuela. Immediately, warnings were uttered about unintended consequences, in particular the stability of the US dollar in the international monetary system. As many have convincingly argued, the Russian reserves freeze alone is unlikely to end the dominant role of the US dollar. But it might, over time, induce major shifts in global monetary relations alongside a broader rewiring of globalisation, making the last 30 years look like a lost golden age. Prudence and deliberation are in central banks’ DNA. They do not make rash decisions. So while many central bankers privately felt shock or dismay at the reserves freeze, they do not appear to have significantly reallocated assets away from the dollar or euro.Yet there is consensus among central bank reserve managers that something fundamental has changed: geopolitical considerations now need to be taken into account when assessing the safety and liquidity of a reserve asset. For most, this is an argument in favour of currency diversification, a trend under way already over the past 20 years at the expense of the US dollar and to the benefit of smaller advanced economy currencies such as the Canadian dollar or the Korean won. This might now accelerate, and possibly extend to additional currencies.Might the renminbi be one of the beneficiaries, as suggested by a recent survey? In fact, when it comes to the attractiveness of Chinese bonds in reserve portfolios after the sanctions on Russia, geopolitics is a clear dividing line. By and large, central bankers I talk to in countries in or close to the sanctioning coalition are reviewing — but not yet retreating from — whatever exposure or planned exposure they had to the renminbi. Others seem more inclined to stick to their holdings and plans to ramp them up further over time. But ultimately, international reserves are held for specific economic reasons, not geopolitical ones: pegging or managing the exchange rate to another currency; paying for imports and international debt service; providing foreign exchange liquidity of last resort to domestic banks. So what will determine the extent of any shift in global reserve allocations is not the portfolio preferences of central bankers or the intrinsic properties of US dollar alternatives. It is whether new currencies come to play an important role in international trade and financial relations. The recent news of China negotiating with Saudi Arabia to pay for oil in renminbi is not, in itself, game-changing. If it finally happens and more of China’s inbound and outbound trade partners follow, it might well be. In the near term there is little practical scope to overhaul trade and financing patterns, even if some countries want to. But other forms of rewiring may develop. Countries that see themselves as politically aligned may try to create a mutual aid system, separate from the sanctioning coalition. China’s recent creation of a renminbi liquidity facility at the Bank for International Settlements can be seen in this light. Discussions could also resurface between large reserve holders from the global south about swap arrangements, like those between the Fed, European Central Bank, Bank of England and a few others in the 2008 financial crisis. Cross-border payment systems to rival Swift will probably continue to grow. There may also be a temptation to resort to much less transparent custody arrangements for reserve assets and much less transparency in their currency composition. It was a remarkable achievement of the past 10 years that the share of global reserves reported to the IMF’s currency composition database went from 55 to 93 per cent. This could now well go into reverse. Those who fear that such a wholesale rewiring of globalisation would do more harm than good to global prosperity have called for new rules of the road. This seems well worth a try, but with eyes wide open to the risks of triggering another round of adverse consequences. Article 16 of the League of Nations covenant, which codified the use of economic sanctions after the first world war, not only failed to prevent the world from dividing itself into rival blocks but may even have accelerated the rift. More

Big investors have cut their allocations to equities to the lowest level since the collapse of Lehman Brothers at the height of the global financial crisis as rising recession fears spark worries about corporate profits. Fund managers this month reduced their net overweight position in stocks to the lowest level since October 2008, while also boosting cash holdings to a 21-year high of 6.1 per cent of assets under management, a survey by Bank of America of 259 investment managers with combined assets of $722bn published on Tuesday showed. The study highlights how even after global markets posted their worst first half of a year in five decades — with the FTSE All-World barometer shedding 21 per cent — many asset managers remain deeply uneasy. Michael Hartnett, chief investment strategist at BofA, said investors had reached a “dire level” of pessimism as they worry that a global tightening of monetary policy could spark a broad growth slowdown. He added that a higher share of fund managers — a net 79 per cent — expected corporate profits to deteriorate than at any point during the coronavirus pandemic or when Lehman Brothers collapsed in September 2008. Larry Fink, chief executive of the world’s largest asset manager BlackRock, offered a similar take last week, when he said anxieties about the impact of high energy prices and rapid increases in interest rates by central banks on economic growth and company profits were hitting both stocks and bonds. A net 58 per cent of BofA’s survey respondents said they were taking lower than normal levels of risk in their portfolios with allocations to US defensive sectors, such as healthcare, utilities and consumer staples, which are seen as less vulnerable in a recession, reaching their highest level since May 2020. Over the past four weeks, fund managers have also been rotating out of eurozone equities as well as banks, energy stocks, materials and commodities and into defensive sectors and bonds.One-third of the investors said that inflation remaining high was their biggest concern, while just under a quarter cited a recession as the biggest risk.

Soaring inflation means that investors on average expect the Federal Reserve, the world’s most influential central bank, to raise its main interest rate another 1.5 percentage points this year, adding to an increase of 1.5 percentage points already in 2022. The US central bank is seen as unlikely to pivot away from tightening monetary policy until its preferred measure of “core” inflation, as measured by the personal consumption expenditures price index, which was running at an annual rate of 4.7 per cent in May, eases back to less than 4 per cent, according to the survey’s respondents. Hartnett said that investor sentiment was now so bearish that a short-term bounce for stocks and credit was possible.“Any rally is likely to be temporary. The catalyst for a sustained recovery will be a change in monetary policy from the Fed when it sees that Main Street is suffering along with Wall Street. We are still some distance from the kinds of levels on the [US S&P 500 stock index] that would cause policymakers to panic and change course,” he said. More