Aurelia Butler

(Reuters) – Overseas investors disposed of a combined net total of $5.08 billion in Indonesian, Thai, Malaysian, South Korean and Indian bonds last month, marking the biggest monthly outflow since March, regulatory data and bond market associations showed.The emerging Asia bonds were hit by a surge in U.S. yields and a jump in the U.S. dollar, making the riskier assets less attractive. As major central banks are looking to hike their interest rates in their efforts to combat soaring inflation levels, further outflows can be expected from the regional markets, analysts said. Graphic: Monthly foreign investment flows: Asian bonds- https://fingfx.thomsonreuters.com/gfx/mkt/zgpomxarqpd/Monthly%20foreign%20investment%20flows%20Asian%20bonds.jpgFears over a global economic recession have accelerated in recent weeks, as economists expect the higher interest rates and inflation levels would lead to slower consumption and sluggish business activity around the world. “From the perspective of Asia bonds, a U.S. recession would be a massive headwind,” said Duncan Tan, a strategist at DBS Bank in a research note last month. The U.S. dollar index jumped 2.88% last month and hit over a 19-year high, boosted by the hawkish Federal Reserve and safe heaven demand amid economic concerns.Graphic: Asian currencies’ performance in the first half of the year-https://fingfx.thomsonreuters.com/gfx/mkt/zjpqkznwapx/Asian%20currencies%20performance%20in%20the%20first%20half%20of%20the%20year.jpgForeigners sold Indonesian bonds worth $2.13 billion, trimming down their cumulative holdings in local currency government bonds to 15.65% at end-June, the lowest since at least 2014. Thai, Malaysian and South Korean debt witnessed outflows of $1.11 billion, $940 million, and $725 million respectively last month, after each attracting inflows a month ago. Meanwhile, cross-border selling in Indian bonds eased to a five-month low of $181 billion as a slide in global oil prices calmed some concerns over its trade deficits, as the country is a major importer of crude oil. The European Central Bank is set to deliver its first interest rate hike since 2011 this week, while the U.S. Federal Reserve is likely to raise its interest rates by 75 basis points at its July policy meeting.Graphic: Foreign investors’ holdings in Asian bonds- https://fingfx.thomsonreuters.com/gfx/mkt/akvezwemgpr/Foreign%20investors%20holdings%20in%20Asian%20bonds.jpg More

The EU’s chief diplomat said he hoped there would be a deal this week to allow Ukrainian grain to be exported from Black Sea ports, amid fresh efforts to avert a global food crisis in the wake of Russia’s invasion of the country.“I have a hope that this week it will be possible to reach an agreement to unblock Odesa and other Ukrainian ports,” said Josep Borrell on Monday ahead of a meeting of EU foreign ministers in Brussels. “The life of thousands, more than thousands, tens of thousands of people depends on this agreement. It is not a diplomatic game. It is an issue of life or death for many.”Russia’s invasion and its attacks on Ukraine’s Black Sea coastline that began in late February have prevented cargo ships from reaching the country’s ports, freezing trade with one of the world’s largest grain producers and leaving millions of tonnes of wheat stranded.The deal between Russia and Ukraine would allow safe passage of cargo ships through the Black Sea with oversight acceptable to both Kyiv and Moscow. The prospect of an agreement to end the blockade comes as the EU prepares legislation to ease its sanctions regime against Moscow to allow trade in Russian food products as it attempts to address anger in Africa and elsewhere, which rely on Russia food supplies.Draft legislation to be considered by EU ambassadors on Monday would provide exemptions to existing bans on transactions with certain Russian state-owned entities when it comes to food products, a tacit acknowledgment that sanctions against Moscow may have inadvertently led to a curb on Russian food exports.Ukraine’s foreign minister Dmytro Kuleba will address Monday’s meeting and provide an update on talks between Ukraine, Russia and Turkey to find a deal to export the grain, a senior EU official told the Financial Times.Diplomatic efforts to unblock grain exports have inched forward in recent weeks. Russia’s president Vladimir Putin will meet his Turkish counterpart Recep Tayyip Erdoğan in Tehran on Tuesday where a deal on Black Sea access could be sealed. UN-brokered talks last week made “very substantive progress”, the organisation’s secretary-general said. At the same time, new draft sanctions drawn up by the European Commission and seen by the FT, declare that the EU is “committed to avoiding all measures which might lead to food insecurity around the globe”, adding that none of the penalties against Russia target “in any way the trade in agricultural and food products, including wheat and fertilisers, between third countries and Russia”.

EU officials have consistently denied that the sanctions have hit exports of Russian grain, amid claims from some countries that rely on Moscow for food supplies that the vast scope of restrictions has affected traders and shipping companies.“We have never imposed sanctions on agricultural production, on food, never ever,” said a senior EU official involved in the sanctions process. “But it is true that in such a complex network, complex framework of sanctions, some issues could affect that,” the official said, adding that “highly technical tweaks” should make clear that food supplies ought not to be hit. The package of measures, which the EU hopes to adopt this week after unanimous approval from member state ambassadors, will contain a ban on the import or purchase of gold if it originates in Russia, following a deal along those lines in the G7 this month. It would also oblige individuals and entities that have been hit by sanctions related to Russia’s invasion of Ukraine to report assets that are inside the EU. Mairead McGuinness, the EU’s financial services commissioner, told the FT this month that she wanted to boost reporting obligations to make it easier for authorities to track down assets owned by individuals under sanctions. More

China is at risk of more frequent lockdowns and mass testing as officials struggle to contain the spread of the highly transmissible BA.5 Omicron subvariant despite the damage pandemic restrictions have already wrought on the world’s second-biggest economy.Forty-one Chinese cities are under full or partial lockdowns or district-based controls, covering 264mn people in regions that account for about 18.7 per cent of the country’s economic activity, according to an analysis released on Monday by Japanese investment bank Nomura. That marked a deterioration from the situation a week ago, when curbs were imposed in 31 cities covering 247.5mn people and representing 17.5 per cent of the economy.China’s zero-Covid policy, which aims to eradicate coronavirus completely, has heaped pressure on officials to stamp out chains of transmission and hampered economic growth. The country narrowly escaped a contraction in the second quarter, expanding 0.4 per cent year on year in the three months to the end of June. That was down from 4.8 per cent in the first quarter, data showed on Friday, reflecting the sweeping costs of the recent Shanghai lockdown, supply chain disruptions and reduced mobility nationwide.

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China recorded 1,090 Covid-19 cases over the weekend. The number is relatively low compared with outbreaks in other countries but was enough to trigger the resumption of restrictions in cities across the country under the zero-Covid regime. Yanzhong Huang, senior fellow for Global Health at the Council on Foreign Relations think-tank, said the spread of BA.5 cases in more Chinese cities indicated a “new wave of Covid outbreaks”.“Under the current zero-Covid strategy, [this] will trigger more frequent and extensive government interventions including mass PCR testing and lockdowns,” he said.Shanghai’s city government has ordered mass testing across more than half of its districts. The announcement sparked fears among the financial hub’s 26mn residents that a return to extensive lockdowns was imminent, just weeks after they emerged from a two-month period consigned to their apartments and compounds. “People joke that so long as you’re in lockdown, you’re free from the fear of being locked down,” said one Shanghai finance professional who asked not to be named. The professional added that locals no longer trusted the local government after its “mismanagement” in March and April. In Tianjin, south-east of Beijing, the city’s 16mn residents were ordered on Monday to undergo testing and mobility was restricted after two cases were detected. A lockdown was imposed over the weekend in the popular southern tourist destination Beihai and another was extended in Lanzhou, a north-western city of 4mn.

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Denis Kinane, professor of immunology and pathology and co-founder of Cignpost Diagnostics, said rapid mutations of the Omicron variant were exacerbating the challenge posed by China’s vast numbers of unvaccinated elderly.“Whilst China’s stringent lockdowns and border controls had delayed an outbreak of this variant . . . I expect BA.5 to become the dominant strain in China over the next few months,” Kinane said.According to Goldman Sachs data, Chinese cities with districts classified as mid- to high-risk covered just under one-quarter of national gross domestic product.

Property transactions, tracked across 30 cities last week, were down 43 per cent from a year ago, while subway ridership, another indicator of economic momentum, remained down 40 per cent in Shanghai and nearly 30 per cent in Beijing.However, China’s daily vaccination rate — which analysts say is critical to hastening a change in its Covid policy — has remained at low levels as resources are diverted to mass testing campaigns.“Zero-Covid is no longer sustainable — the virus has evolved and become more transmissible,” Kinane added. “Countries need to be pragmatic and change measures to reflect this.”Additional reporting by Maiqi Ding in Beijing and William Langley in Hong Kong More

Imran Khan has won a critical victory in by-elections in Pakistan’s most populous province, putting the former prime minister on track to force early parliamentary polls just months after he was ousted from office.Khan’s Pakistan Tehreek-i-Insaf, or Pakistan Justice party, won 15 of the 20 seats contested in Punjab as voters vented their fury over spiralling living costs. The province, home to about 60 per cent of Pakistan’s population of more than 220mn, has long been considered the political stronghold of Prime Minister Shehbaz Sharif and his brother Nawaz Sharif, a former prime minister. Khan’s victory was achieved less than four months after the ex-Pakistan cricket captain lost a vote of no confidence in what he has alleged was a foreign-orchestrated coup.It also came amid warnings from analysts that Pakistan is at risk of following crisis-ridden Sri Lanka as the next emerging market to default on its foreign loan repayments. On Monday, Khan renewed a call for early elections ahead of the summer of 2023, when they are due to take place. “The only way forward from here is to hold free and fair elections under a credible ECP,” Khan wrote on Twitter, referring to the Election Commission of Pakistan.“Any other path will only lead to greater political uncertainty and further economic chaos.” Ali Zaidi, a senior PTI leader, called on Sharif to resign as prime minister. “The question now is, will prime minister Sharif resign first, or will he have to go [be forced out],” he said. Analysts said that the turnround in the by-election was prompted by Sharif’s introduction of painful belt-tightening measures required to resume lending under a proposed $7bn IMF programme. Last week, Pakistan’s government and the IMF announced a staff agreement that will release $1.2bn for the country as it seeks to avert a balance of payments crisis. “This result has demonstrated the political cost of adopting painful measures at such a difficult time,” said Hasan Askari Rizvi, a political commentator. “I think it will be hard for any leader to accept more pain for the people without also fearing the political cost.” 

Pakistan has removed fuel subsidies as part of its negotiations with the IMF, leading to a sharp increase in prices. Sharif and other cabinet members have attributed the costs to the higher global energy and commodity prices driven by the Covid-19 pandemic and Russia’s war in Ukraine. Inflation rose to 21.3 per cent in June, the highest level in nearly 13 years, while the central bank’s US dollar reserves have fallen to as low as $9.8bn, equivalent to five weeks of imports. Krisjanis Krustins, a Fitch analyst, wrote in a research note published on Monday that Pakistan faced “sharply higher external funding needs this year, just as political volatility, a mixed policy response and tighter global conditions limit availability of funding”. Some ordinary Pakistanis welcomed Khan’s victory. “Never before have I been similarly happy over the defeat for a prime minister as I am today. Shehbaz Sharif, go home,” said Ikram Malik, an Islamabad shopkeeper. “We want Imran Khan to return. At least life was not this expensive.” More

The political instability threatening to cut short Mario Draghi’s time as Italian prime minister has laid bare the challenges confronting his former colleagues at the European Central Bank as they prepare to unveil historic policy changes this week.Christine Lagarde, who replaced Draghi at the helm of the ECB in 2019, is on Thursday expected to announce its first interest rate rise for over a decade while also outlining a new scheme it hopes will prevent higher borrowing costs from triggering another eurozone debt crisis. By the time it does the political situation in Rome could become even more volatile. Italian bond yields rose sharply last week after the Five Star Movement, which forms part of Draghi’s national unity government refused to back him in a confidence vote, prompting the prime minister to offer his resignation. Though the president turned him down, Italians are now waiting to see whether Draghi is willing to remain in office, or whether the country will have snap elections. Any sign that the prime minister will step down is likely to trigger a rise in Rome’s borrowing costs. The ECB’s scheme, dubbed the “transmission protection mechanism” by the central bank, is expected to be used to counter what it considers unjustified increases in a country’s financing costs — which it calls fragmentation — by buying its bonds. Lagarde told EU lawmakers last month that the ECB would not let this “fragmentation risk” happen and “hamper” the smooth transmission of its policy decisions. “You have to kill it in the bud,” she said.But economists warn the upheaval in Italy highlights just how difficult it will prove for the ECB to disentangle the impact of unjustified speculation from more justified movements in yields based on a bleaker economic outlook. “It makes the ECB’s life a lot more difficult,” said Spyros Andreopoulos, senior European economist at French bank BNP Paribas and a former ECB staffer. “In some countries, it could be perceived that the ECB is stepping in to pick up the pieces of the politicians’ failures.”The ECB’s plan to tackle unwarranted fragmentation in eurozone bond markets has already met a frosty reception among officials of more frugal northern countries like Germany, Austria and the Netherlands.They worry the ECB is overreacting as bond markets adjust to the prospect of rising interest rates. In trying to keep borrowing costs low for highly indebted countries, they fear the central bank will encourage fiscal lassitude and could stray into “monetary financing” of governments, which is against the EU treaty. “If [the scheme] is going beyond the dividing line between monetary policy and fiscal policy it will be toxic politically in northern Europe,” warned Lars Feld, an economics professor at the Albert-Ludwigs-University of Freiburg who advises the German finance minister.The spread between Italy’s 10-year bond yields and those of Germany rose last week to more than 2.22 percentage points, its highest for a month.Investors are concerned early Italian elections could lead to a government led by Giorgia Meloni’s Brothers of Italy party, which has its roots in post-fascist politics © Alessandro Bremec/NurPhoto/Getty ImagesInvestors are concerned early Italian elections could lead to a government led by Giorgia Meloni’s Brothers of Italy party, which is outside of Draghi’s coalition, has its roots in post-fascist politics and is leading opinion polls.Erik Nielsen, chief economic adviser to Italian bank UniCredit, said: “What if rightwing candidates do well and the bond market sells off — should the ECB intervene then?”Many economists believe this is the kind of fragmentation that the ECB should not try to fight against. Francesco Papadia, a senior fellow at Brussels-based think-tank Bruegel and former head of market operations at the ECB, wrote on Twitter: “The ECB can’t do anything for countries that damage themselves.”Silvia Ardagna, senior European economist at UK bank Barclays, agreed, saying: “Italy will not benefit from the activation of this tool if political uncertainty increases, Draghi resigns and early elections are held.” But she added that the ECB’s new scheme “will be even more important to prevent contagion and spillovers from Italy to other sovereign markets while the ECB increases policy rates”.

Italy’s borrowing costs and the gap with Germany’s both remain far below the levels reached during the 2012 debt crisis, when Italian 10-year yields hit a record high of more than 7 per cent and the Italian-German spread peaked at 5 percentage points. On Friday, Italy’s 10-year yield was 3.26 per cent.Jack-Allen Reynolds, senior Europe economist at research group Capital Economics, said the recent Italian political turmoil could intensify criticism of the ECB’s plan among its rate-setters, “as it is exactly the sort of situation that they don’t want to be dragged into”.However, outright opposition to the new instrument is unlikely because even the most hawkish policymakers, who traditionally dislike buying bonds, know their hopes of raising rates well into positive territory could be frustrated if the eurozone is engulfed by a debt crisis.Earlier this month, German central bank boss Joachim Nagel outlined several constraints he expected to be placed on the scheme, which he said “can be justified only in exceptional circumstances and under narrowly defined conditions”.At an ECB governing council meeting earlier this month, Nagel joined with the heads of the Dutch and Austrian central banks to propose strengthening the scheme by giving the European Stability Mechanism bailout fund a role as an adviser on whether countries have sustainable fiscal plans.This idea would be controversial in Italy and other southern European countries, where the ESM is viewed with suspicion because of the intrusive conditions and monitoring imposed on the countries it bailed out during the last debt crisis, including Greece, Spain and Portugal. More

The writer is chair of Rockefeller InternationalBy late 2020, many economists saw a silver lining in the pandemic. Stuck at home, people were adopting digital technology at an accelerating pace. Productivity was surging. Perhaps the long, debilitating decline in productivity growth was over. Alas, after peaking above 3 per cent the surge collapsed, exposed as a blip typical during the early stages of a recovery, when businesses are slow to hire new workers. This leaves unsolved a great paradox. Since the computer age dawned in the 1970s, we have lived with a sense of accelerating progress and innovation. Yet as the computer age began, the postwar productivity boom ended. Except for a revival around the turn of the century, productivity has trended downward for more than 50 years. Optimists suggest that innovations such as internet search are often free, and so fail to register in productivity measurements, or that the impact of technology comes in waves. The productivity revival that began in the late 1990s was driven by checkout scanners and other digital inventions, applied in retail stores. The impact of newer advances such as artificial intelligence will come, they say, just wait.Pessimists respond that in earlier eras capitalism generated advances such as electricity and gas engines, which lifted productivity across industries. Now it produces distractions — digital games and social media.But a closer look at the timing and location of the productivity slump points to an alternative explanation: the expanding role of government.It is more than coincidence that starting in the 1970s, major capitalist countries began running budget deficits, in good times and bad. Large bank and corporate bailouts have grown more sweeping since the early 1980s. Government stimulus (both monetary and fiscal) has smashed records in the last three major crises, spiking in developed economies to more than 7 per cent of GDP in 2001, 12 per cent in 2008 and 45 per cent in 2020.With increasingly generous rescues, corporate defaults have fallen in each crisis, even as recessions deepened after 2000. This decay was most dramatic in Europe, where the default rate on speculative corporate credit fell from around 20 per cent after the 2001 recession to 10 per cent after 2008 and 5 per cent in 2020.As the cleansing effect of defaults and downturns faded, so too did entrepreneurial dynamism. New business creation plummeted, leaving behind a stock of fewer older, bigger companies. The number of listed US companies fell by half in recent decades. The largest survivors are increasing their share in three out of four US industries and cornering a growing share of the profit.More active government support has undermined creative destruction, the lifeblood of capitalism. Productivity growth fell further following the global financial crisis of 2008, as bailouts and stimulus grew significantly. In developed economies productivity growth plummeted to just 0.7 per cent in the 2010s — less than half the pace of the already declining trend over prior three decades.This decline has, however, not been genuinely global. Over much of the last half century, productivity rose steadily in emerging nations, from below zero in the late 1970s to a peak above 5 per cent in the late 2000s. While developed economies increasingly socialised economic losses during that period, China and later India pivoted to more market-orientated economic systems. Despite backsliding in recent years, new data shows that productivity in emerging countries still grew at 3 per cent in the 2010s — above the trend of the previous decades. Since 2010, nearly all developed countries have seen productivity drop. Big government has advantages as an explanation for the productivity paradox. For one thing, it does not require scepticism of new technology. It can also account for strong productivity growth in emerging countries, where the role of the state has broadly declined since the 1970s. It does not rely on the idea that the productivity boost from digitisation eludes clear measurement, which cannot explain why this boost was easy to measure during the technology revival around 2000, but impossible before and after.It also better fits the timeline. As government interventions grew, the cumulative hit started to overwhelm the boost from technology. Studies tie the decline in recent decades to the beneficiaries of government support, including bloated financial markets, monopolies and zombies — lifeless companies that survive on fresh debt.Zombies barely existed in 2000 but now account for 20 per cent of listed companies in the United States, and higher shares in Europe. The rise of the “zombie economy” has been linked to increasingly easy money pouring out of central banks, amid warnings that zombies lower productivity across industries by sucking resources from more dynamic companies.Now comes a twist. Inflation is back, possibly ending the era of easy money, which may in turn remove some of the deadwood blocking a new productivity wave. But easy money is only one aspect of big government, entrenched as a new governing culture of bailouts, market rescues and constant stimulus. To revive productivity, the government needs to rethink its role in the economy. More

Confidence among US companies with British operations has slipped over the past year because of poor UK-EU relations after Brexit, concerns about labour shortages and rising corporate taxes, according to new research.A survey of 54 US-based companies operating in the UK for BritishAmerican Business, a transatlantic trade association, found 20 per cent said their confidence in the UK was increasing, compared with 25 per cent last year. On a scale of 1 to 10, the average confidence rating among the US companies was 7.3 in 2022, down from 7.8 in 2021.The survey, conducted by Bain & Company in April and May this year, found the failure to build a constructive relationship between London and Brussels since the UK left the EU had a negative impact on sentiment.“What US companies want is clear: to attract future investment, US investors want the UK government to repair its political and trade relationships with the EU,” said the report.The research comes as candidates in the Conservative party leadership contest have expressed support for legislation to unilaterally rip up part of UK prime minister Boris Johnson’s withdrawal agreement with the EU, prompting Brussels to warn of a possible trade war.When asked what would increase the UK’s attractiveness as an investment destination, almost 80 per cent of US companies said improving relations with the EU as among their top three priorities. More than 1.5m people work for US companies operating in the UK, which remains attractive overall because of a common language, adherence to the rule of law and access to finance. Duncan Edwards, chief executive of BritishAmerican Business, said while the overall transatlantic business relationship was strong, US companies operating in the UK “are less confident in it as a place to do business than last year”. “Concerns over the UK’s fractured relationship with the European Union, its future tax competitiveness, and persisting restrictions to labour mobility and access to talent persist, and are the driving force behind this slip in confidence,” he added.

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In March 2021 the then chancellor Rishi Sunak announced plans to increase corporation tax from 19 per cent to 23 per cent in 2023 as part of efforts to repair the UK’s public finances after the coronavirus crisis.The reopening of the British economy following the pandemic, after many workers were furloughed or lost their jobs, has resulted in labour shortages in multiple sectors, including travel and hospitality.The survey said a significant number of US companies were reporting “ongoing labor shortages” in the UK that they cannot fill locally, echoing the concerns of British trade bodies.Addressing those concerns should be top of the list of priorities for Johnson’s successor “if momentum is to swing back in favour of the UK” for transatlantic investors”, said Edwards.The British Chambers of Commerce last week urged the government to relax immigration restrictions after a quarterly recruitment survey found more than 75 per cent of businesses in construction, manufacturing, logistics and hospitality were reporting difficulties in filling vacancies.The Department for International Trade said that US investor confidence remained high in the UK.“Through our ambitious programme of US state-level agreements, our bilateral joint dialogues and drive to break down market barriers, we are boosting UK-US trade and unlocking opportunities for businesses on both sides of the Atlantic,” added the department. More