Dimon, speaking an interview with Fox Business, said the economy is strong and can cope with interest rates rising 1%.”Loan growth on the business side will probably return to normal,” Dimon said. “On the consumer side, it will return to normal it just may take another six to nine months.” More
TOKYO (Reuters) – Japanese supermarket chain Ito-Yokado will undertake a government-backed trial to offer variable discounts on more than a dozen products including bread and desserts as their expiry dates approach in an effort to cut waste.Some analysts warn that such a dynamic pricing approach in which the same goods are priced differently depending on the length of their shelf-life could be bad news for Japan’s efforts to stimulate consumer price growth in the long-term.Nearly nine years of ultra-easy monetary policy have failed to take inflation up to the Bank of Japan’s 2% target as weak wage growth and a persistent deflationary mindset among the public weighed on consumption and firms’ appetite for raising prices.Reducing prices on goods that are nearing their expiry dates could emerge as a trend in the world’s third-largest economy, given the backing of the Ministry of Economy, Trade and Industry, as the government seeks to cut food waste costs.In the trial, Ito-Yokado will gradually discount prices on 16 goods at one Tokyo store to give shoppers more incentive to buy products with approaching expiry dates with the aim of cutting back on the amount of food thrown away, a company spokesperson said.”Their prices will change depending on the day,” said the spokesperson, who declined to be identified by name.The trial will run until the end of next month.Dynamic pricing based on expiry dates could mean consumers are more likely to put off their shopping as they wait for better deals, which won’t help lift prices, said Toru Suehiro, senior economist at Daiwa Securities.”It may have a negative impact on inflation,” Suehiro said, adding that much would depend on how dynamic pricing habits are reflected in the government’s consumer price index survey.Other analysts, however, were more optimistic saying the savings people make could help increase their disposable incomes, which could then be spent on other things.”On top of that, businesses will make more money if they sell something at a lower price instead of disposing of it,” said Toshihiro Nagahama, an economist at Dai-ichi Life Research Institute. More
WASHINGTON (Reuters) – High inflation and a strong recovery will require the Federal Reserve to raise interest rates at least three times this year, beginning as soon as March, and warrant a rapid rundown of Fed asset holdings to draw excess cash out of the financial system, Atlanta Fed President Raphael Bostic said.”There is a risk inflation is likely to be elevated for an extended period of time and we need to respond directly, clearly and aggressively,” Bostic told Reuters in an interview on Monday. “If things continue the way they are March would be a reasonable possibility,” for the first of what would be a series of interest rate increases to offset inflation running far above the Fed’s 2% target.He added he does not feel the explosion in new coronavirus infections will derail the recovery, but to the contrary feels it more likely inflation will intensify further and require a fourth quarter-point rate increase in 2022 than that it slows and allows the Fed to relax.His remarks reflected the Fed’s turn towards inflation fighting, a shift cemented at a December meeting where officials accelerated plans to raise interest rates and begin to pull back on their holdings of U.S. Treasury bonds and mortgage-backed securities accumulated during the pandemic.Bostic, in detailed remarks about the management of the Fed’s balance sheet, said the central bank should be aggressive there as well – allowing its holdings to decline by at lease $100 billion a month, and with plans to quickly pull at least $1.5 trillion out of financial markets that he considers pure “excess liquidity.” From 2017 to 2019, when the Fed was shrinking its balance sheet years after the end of the 2007 to 2009 recession, it phased the pace of decline in slowly, capped it at $50 billion per month, and ultimately decreased its balance by only $600 billion before financial markets signaled the system did not have enough cash reserves at hand.The process promises to be much different this time, and Bostic for example said he felt there was no need to phase in any balance sheet “runoff” because markets know what to expect.”I would hope we would move pretty quickly and get out of this emergency stance,” Bostic said. “The tool is pretty well understood and the motivation is pretty well understood.””It should go faster for sure,” Bostic said, and at a quick enough pace to complete the process in “a couple of years.”The debate over how to treat the Fed’s asset holdings got underway in full at the Fed’s December meeting with staff presentations on the issue and initial discussion among policymakers.The Fed has bought more than $4 trillion of Treasury bonds and mortgage-backed securities since the onset of the pandemic in early 2020, more than doubling the overall size of its balance sheet from $4.1 trillion to more than $8.7 trillion.Initially a way to keep financial markets stable, the holdings are now thought to be holding down long-term interest rates that the Fed may want to move higher to curb demand – and prices – for a variety of goods. Bostic, who does not have a vote on monetary policy this year, was among the first Fed officials to expect that the pace of the recovery would be stronger than anticipated, and a year ago, with the economy slowing, was one of the few expecting higher interest rates in 2022. His concern now is that some of the things driving inflation may be here to stay.In particular Bostic said he takes seriously comments he gets from local business leaders that they are planning for more resilient supply chains that will almost by definition be more expensive to maintain, and that they feel they currently have pricing power in the market and plan to use it.”So the question really is how forcefully or fulsomely do we have to respond to make sure that it stays in a boundary,” Bostic said. “I think we need to be acting pretty forcefully.” More
Powell appears before the Senate Banking Committee at 10 a.m ET for consideration for a second four-year term as head of the Fed. Lael Brainard, currently a Fed governor, will be questioned by the same panel on Thursday for promotion to a four-year term as Fed vice chair. The positions require majority approval by the full Senate, which is narrowly controlled by President Joe Biden’s Democrats.In prepared remarks for delivery at the hearing, Powell noted the economy’s fast-paced recovery “despite the ongoing pandemic, giving rise to persistent supply and demand imbalances and bottlenecks, and thus to elevated inflation.” “We know that high inflation exacts a toll,” he added, pledging to use the central bank’s full suite of policy tools “to prevent higher inflation from becoming entrenched.”In December, the Fed decided to end its purchases of Treasuries and mortgage-backed securities – a legacy of its nearly two-year battle with the economic fallout of the pandemic – by March, and signaled it could raise rates three times this year.Since then COVID-19 infections have surged to daily records, with hospitalizations rising and quarantining employees sapping an already stretched labor supply, and some observers expect the mismatch between supply and demand that is putting upward pressure on prices to intensify further.Tuesday’s hearing will be Powell’s first chance to say how he sees those disruptions influencing his outlook for both the economy and monetary policy. Investors and traders will be listening for new clues on when the Fed may begin raising interest rates https://www.reuters.com/markets/us/feds-bullard-says-first-interest-rate-hike-could-be-march-2022-01-06 and possibly reduce its more than $8 trillion in bond holdings to bring down inflation, now running more than twice the Fed’s 2% target. Financial markets are pricing in an aggressive response, with interest rate futures traders betting on four interest rate hikes this year.Powell may face tough questions both from some Democrats, including Senator Elizabeth Warren who has said she opposes his renomination because she sees him as too easy on Wall Street, and from some Republicans who have publicly worried the Fed is responding too late to rising prices. More
Good morning. The Nasdaq index rallied furiously to the close yesterday, just squeaking into positive territory, after several days of getting slapped around. Someone is buying the dip! The spirit of 2021 lives on! In that optimistic spirit, we recommend the FT’s Road to Recovery newsletter, which covers how business and the economy have been transformed by the pandemic. Sign up here. Email us: [email protected] and [email protected]’s inflation freakout guideIt will be very disappointing if this week’s December CPI report doesn’t give Wall Street and its associated punditocracy an excuse for some level of panic. Inflation is the monster that ate financial commentary, and in the absence of some sort of surprise tomorrow, it’s not clear what all of us will do to keep busy until the weekend.With that in mind, a brief guide to what you should and should not hyperventilate about. Everyone expects the numbers to be big — a headline year-over-year number of 7 per cent, according to a Reuters poll, up from 6.8 per cent in November. But it will be the ex-food and energy core number, expected to come in at 5.4 per cent, up from 4.9 per cent last month, that matters (the month-over-month change in the core measure is expected to come in at .49 per cent). Breaching the 5 per cent threshold for the first time since 1991 is one of those big round numbers that may not actually represent much of a change, but seems momentous all the same.Do not panic if prices of goods continue to rise at a fast pace, or even accelerate here and there. Take deep breaths, in particular, about cars, which make up more than 8 per cent of the index. UBS, for example, estimates new and used car prices will have risen 1.3 and 2.8 per cent, respectively, just since November. But as any member of Team Transitory will tell you, the pandemic has brought both a massive shift in demand from services to goods, and some goods have experienced supply chain problems, autos most acutely. There is reason to hope high goods prices will not stick around for long. Ugly-looking numbers on the goods side, accordingly, seem unlikely to push the Fed into an even more hawkish position. Panic moderately about shelter prices. Rent and owner’s equivalent rent have been going higher at a strong clip — above .4 per cent month-over-month in five of the last six months. These prices tend to be sticky and Covid-related supply problems (the price of lumber, say) have had minimal influence. Here is what Bob Michele, head of fixed income at JPMorgan Asset Management, said to me yesterday:It has amazed us how much of the conversation has been about the supply bottlenecks and how they are a cause of a lot of inflation. We are looking at something else: shelter. We look at November, the third consecutive month primary and owners equivalent rent rose more than .4 per cent, so above five per cent annually. If that goes on, it changes the conversation . . . it will validate the newfound hawkishness coming out of the FedWhy then only moderate panic? Because the CPI measures of shelter costs are lagging indicators. More timely survey measures, such as the rent indices kept by real estate websites, show that the spike in rents, especially for new leases, may have already passed. We have looked at the Apartment List rent index before, but the December numbers came out recently, and the index has turned negative on a month-over-month basis, falling back into its seasonal pattern:
The same message comes through in the Zillow national rent index, which is available through November. This is a UBS chart of that index, showing how it is reverting towards normal levels:
Shelter prices are sticky, but there is reason to doubt that they are spiralling upwards.High levels of panic will be appropriate if we see sharp acceleration in services prices, especially outside healthcare and transport (which are idiosyncratic). Much higher prices in there “other services” — everything from haircuts to lawn care to legal work — would “take people aback,” UBS economist Alan Detmeister suggested to me yesterday. This would indicate that the strong wage gains we have seen recently are spreading pervasively though the economy, in ways that could (in theory) scare everyone into thinking inflation is here to say, and trigger the dreaded wage-price spiral.Want permission to panic about everything, regardless? Here is how you can talk yourself into that. Consider that the market is now anticipating that the Fed will raise rates four times in 2022. That gets us to a 1 per cent Fed funds rate. That is still a very negative short-term real interest rate. If the Fed gets to its target two per cent rate in 2023 — that still means negative short-term rates. And, as Michele put it to me, “that is not going to constrain the cost of financing anything”. While he acknowledged that inflation will come down as we move through 2022, he is betting it won’t come down to much less than 3 or 4 per cent, well above the official target. Why is he confident in this? From his team’s conversations with companies:They are pushing through the cost increases they are seeing . . . in both the supplies and the labour costs. Whereas a year ago they were willing to absorb the increases, now they are not willing to. They say aggregate demand is strong enough and they can push prices up, and they willOn this view, the Fed might have to get much more hawkish than it is now, with heavy consequences for markets. Unhedged is not there yet, because we’re just not convinced demand will be strong for long, and the bond market supports our doubts. But Michele’s argument frightens us all the same. Just how useless is bitcoin?Bitcoin brushed below $40,000 on Monday. Bears think the cryptocurrency is losing its vim. Conversely, one bull we spoke with, Joel Kruger of LMAX Group, noted bitcoin rallied back to $42,000 even as stocks kept falling. Unhedged has no clue either way.If bitcoin is indeed heading toward an extended, or permanent, period of sluggish prices, the popular idea that it is a store of value, akin to digital gold, could lose credibility. Nagging questions about what the cryptocurrency is good for will grow louder. The FT’s resident monetary historian Brendan Greeley amplified these questions in an excellent column over the weekend. He noted that BTCS, a Nasdaq-listed crypto firm, is offering investors a “bividend” — a terrible portmanteau for “bitcoin dividend.” Greeley thinks there is an important point here about bitcoin versus other cryptocurrencies: Behind the bividend is a bet that, if correct, could have much larger consequences. [BTCS CEO Charles] Allen is offering to pay investors in bitcoin in part because BTCS has 90 bitcoins sitting on its balance sheet that have value, but no productive purpose. Bitcoin, according to Allen, is an unproductive asset, “just literally sitting there”. It might appreciate. But it doesn’t generate revenue, which has historically been the purpose of a publicly listed company . . . [BTCS’s $8.8m in] ethereum has a job. [Its $3.2m in] bitcoin does not. BTCS has begun staking — placing ethereum and some other cryptocurrencies in a kind of digital escrow, vying for a chance to verify a ledger of transactions. The more coins you have staked, the higher the likelihood you’ll get to verify the ledger. The reward is a fee of more coins.BTCS makes money on ethereum staking, but can’t find anything better to do with bitcoin than return it to investors. In principle, this distinction isn’t so binary. If BTCS was so inclined, it could transform its $3.2m in bitcoin into “wrapped” bitcoin — a kind of synthetic stand-in asset — on the ethereum blockchain, stake it there, earn a yield and convert the proceeds back to regular bitcoin. In practice, this would likely incur steep fees and, worse, miff regulators. But even if earning yield on bitcoin is tricky now, it may get easier as technologists such as Square CEO Jack Dorsey pour resources into bitcoin-native decentralised finance. Bitcoin, in other words, need not be useless.But even at its best, bitcoin is likely to fall short of ethereum or its newer rivals. Bitcoin is not really built to be useful. It is built to be trustless, decentralised, censorship-resistant and so on. Bitcoin’s years-long block-size war showed its community places decentralisation over usefulness. Attempting to compete with other cryptocurrencies on usability is likely a losing battle.That is part of the reason why the currency-of-the-future story of bitcoin’s value has given way to the digital-gold story. The latter just needs the price to go up to appear true. It is far less ambitious.The newer cryptocurrencies have the benefit of learning from bitcoin’s travails, and as such have chosen different design trade-offs. Many, like solana, have opted for usefulness over pure decentralisation. Bitcoiners complain such coins are DINOs: decentralised in name only. If that is the price of mass adoption, it strikes us as mighty cheap. (Ethan Wu)One good readIf business news has seemed especially dour lately, The Economist has a lively piece on the wave of consumer-tech innovation under way in healthcare. More
Edward Price, a former British economic official and current teacher of political economy at New York University’s Center for Global Affairs, looks at the perilous road ahead for a Federal Reserve trying to deflate the US economy without crashing markets.Not so long ago, the Fed was worried. Why couldn’t it produce inflation at a measly 2 per cent?Indeed in the summer of 2020, the world’s most important central bank was so worried that it unveiled a framework aimed at stirring price pressures and spurring job creation. The centrepiece was the Flexible Average Inflation Target, or FAIT. FAIT would give officials the wriggle room to run the economy hot, with inflation surging past its 2 per cent goal for an unspecified, but limited, period of time. Thus the US labour market would tighten. All while the Fed’s inflation-fighting credentials remained firmly intact.The theory was that the past decade had shown that the US economy could tolerate far higher rates of employment without the risk of a debilitating spiral in wages and prices. So, as the pandemic shuttered firms, and jobs were lost, the Fed did the obvious thing. It embarked on a quest for inflation that consisted of rate cuts and unprecedented injections of liquidity into financial markets. Whoops.Now inflation is here. Throughout the first half of 2021, Fed officials promised it would be transitory. But October’s Consumer Price Index (CPI) came in at 6.2 per cent. This inflation, it seems, is sticky and far higher than the Fed might like. And so, it’s changing course. After indicating earlier in the pandemic that rates would remain on hold until the end of 2023, minutes of the Federal Open Market Committee’s December vote published last week signal it’s mulling hikes during the first half of this year.All this means the US central bank is turning a corner. But what kind of manoeuvre will bury price pressures?What everyone wants to see is a U-turn, a smooth and controlled change of bearing. In this scenario, the Fed will roll up to the lights, signal carefully and then seamlessly swing its bonnet around. Everyone will be happy. The FOMC will say it gave plenty of notice, beginning with the December minutes. Investors can adjust their portfolios in an orderly way. The punchbowl will go. But nobody’s drinks will spill.Doubtful. The minutes have already sparked a sell-off in tech stocks. Actual rate rises will assuredly spook markets, hooked on a tiny federal funds rate and abundant liquidity as they are.So, the Fed is in a tight spot. Three fates beckon. If it gets lucky, inflation is transitory and prices stabilise at 2 per cent. If it’s unlucky, inflation becomes entrenched at levels far above 2 per cent. And if it’s super unlucky, prices fall and this about-turn becomes an epic mistake. Quite the bind. What happens, however, is somewhat dependent on what the Fed will do. Small rate hikes to fight non-transitory inflation may mute that inflation, resulting in transitory inflation. At which point the rationale for FAIT would look reasonable once more. But this is too tight, and too uncertain, for a sweeping U-turn.So, we may see a K-turn, a clunky three-point manoeuvre. There will be stops and there will be starts. Things won’t be smooth. Wheels will judder. And all the drinks will slosh. Some investors will get caught out, but we will avoid a major panic.Unfortunately, there’s a problem here too. A foggy windshield. The US’s expansionary fiscal policy will have unknown ramifications. And who knows what supply chains will do in 2022? Some expect the snags to remain throughout the year. Others expect pressures to ease. Either way, the FOMC would have to act aggressively to offset the impact of stubborn bottlenecks. Plus, many investors are ignoring the fact that rates are at levels far lower than the last time inflation lingered around 5 per cent. The scale and pace of cuts priced in by markets may, therefore, be too meagre to fight truly obstinate price pressures. Here’s the point. If the Fed can’t see the future, and really can’t help but hike, it may well lose control of how far and fast these hikes must go.Which brings us to a third option: a speedy J-turn. This kind of manoeuvre is rare. Ordinarily the preserve of the military, it spins the vehicle around sharply in reverse. The result is skull-rocking force. Yes, it’s quick. Yes, it’s effective. But for passengers, fun it ain’t. Everyone’s drinks will spill. And we, of course, are those passengers.Tackling inflation like this would pose deep questions about the viability of FAIT. Indeed, it would throw a question mark over the 2 per cent targets that have been the hallmark of central bank frameworks everywhere for decades. The concepts behind independent central banking look far from robust. Indeed, they look quite unwell.And a J-turn would be pretty scary too. Lurking ahead is the hobgoblin of financial crises. Central banks cannot reconcile tightening, to serve the needs of the economy, with ongoing accommodation, for wider financial stability. Super low rates risk financial bubbles and eventual turmoil. But super high rates risk popping those bubbles in calamitous ways. After years of quantitative easing, the incongruity between the monetary needs of the economy and the monetary needs of markets is inescapable.All told, the spurt in US prices has revealed the flaw inherent in the open-ended FAIT. Now, the Fed will have a hard time driving out of Inflationsville without experiencing a crash. Backing out of years of accommodation will create conditions that require new accommodation. Normalisation will be anything but.Seat belts please. And be sure to hold onto those drinks. More
October 28 was a bad day for Ugandan finance minister Matia Kasaija. Hauled into parliament and grilled over the terms of a $200m Chinese loan for the expansion of Entebbe airport, which serves the capital Kampala, he apologised to the assembled lawmakers. “We shouldn’t have accepted some of the clauses,” he said. “But they told you . . . either you take it or leave it.” At issue was a contract signed six years earlier with China Eximbank, one that some Ugandan lawmakers, officials and lawyers say undermines national sovereignty. A report by Ugandan newspaper Daily Monitor even suggested that Beijing could seize Entebbe airport, the country’s main international gateway — a claim that echoed accusations of Chinese “debt traps” and one forcefully denied by both governments.The controversy highlights the challenges that African governments and Chinese banks face following a 20-year lending spree that has made Beijing the continent’s largest source of development finance. From almost nothing, Chinese banks now make up about one-fifth of all lending to Africa, concentrated in a few strategic or resource-rich countries including Angola, Djibouti, Ethiopia, Kenya and Zambia. Annual lending peaked at a whopping $29.5bn in 2016, according to figures from the China-Africa Research Initiative at Johns Hopkins University, though it fell back in 2019 to a more modest, if still substantial, $7.6bn. Having dived headlong into the world’s poorest continent, Chinese lenders have grown more cautious as some nations have reached the limit of their borrowing capacity and the prospect of default looms. The IMF lists more than 20 African countries as being in, or at high risk of, debt distress.In response, lenders, including China Eximbank and China Development Bank, the country’s two main policy banks, have adopted increasingly hardline lending terms. Those conditions, some of which differ markedly from other official creditors, are starting to be tested as pandemic-related economic hardship puts a strain on more indebted African countries.Xi Jinping reinforced that caution in a video speech to the triennial Forum of China-Africa Cooperation held in Senegal in November 2021. Over the next three years, China’s president said, the country would cut the headline amount of money it supplies to Africa by a third to $40bn and, he implied, redirect lending away from large infrastructure towards a new emphasis on SMEs, green projects and private investment flows. “China is moving away from this high-volume, high-risk paradigm into one where deals are struck on their own merit, at a smaller and more manageable scale than before,” a forthcoming analysis of China’s lending to Africa by Chatham House, a UK think-tank, will say.
Construction of the $4bn railway linking Kenya’s port of Mombasa with Nairobi was funded by Chinese agencies © Patrick Meinhardt/Bloomberg
Despite such signs of caution from Beijing, the controversy over the Entebbe airport loan reflects a growing conviction in much of the west and among some academics and campaigners in Africa that Chinese lending is essentially predatory. They point to Chinese control of Sri Lanka’s Hambantota deepwater port through a 99-year lease as evidence of Beijing’s presumed designs on strategic assets in Africa. They also suggest that Chinese lending, including to prestige projects such as the $4bn railway linking Kenya’s port of Mombasa with Nairobi, benefit corrupt elites more than citizens. “The volume of credit that some [African governments] have binged on makes them dependent beyond any sensible notion of sovereignty,” says Chidi Odinkalu of the Fletcher School of Law and Diplomacy at Tufts University, expressing common misgivings about the sheer volume of Chinese lending and the implied quid pro quos. “You can’t blame China for looking to secure repayments from dissolute regimes who think money can be free,” he adds. “Africans are running from western conditionality. Now they are locked in a manner of speaking in a Chinese ‘financing wall’.”
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‘Toxic’ contract clauses At the heart of the Entebbe airport controversy are what have been called, by some analysts, “toxic clauses” in the loan contract that require Uganda’s Civil Aviation Authority to channel all revenues into special escrow accounts and submit budgets to China Eximbank for approval — arrangements that are meant to secure the loan. The entire contract is governed by Chinese law and disputes, if they arise, must be settled by arbitration in Beijing. A detailed waiver of sovereign immunity led some commentators to worry that China could seize the airport if Uganda were to default on the loan. Those concerns echo similar controversies in Kenya and Zambia. Although Chinese loan critics have raised the prospect of strategic assets being seized due to default, in no case has this happened. Still, writing about the Entebbe airport agreement on Facebook on November 30, Joel Ssenyonyi, head of Uganda’s parliamentary public accounts committee, said: “Given the experience of Zambia with their airport and national broadcaster after a Chinese loan, and recently Kenya with their port, it’s no wonder that Ugandans are concerned.”
Xi Jinping reinforced increased lending caution in a speech to the Forum of China-Africa Cooperation in November 2021 © Seyllou/AFP/Getty
Those comments reflect sentiment in much of the continent that China will eventually exert a price for what has, until now at least, been seen as easy lending. The $200m Entebbe airport loan, which carries just a 2 per cent interest rate repayable over 27 years, is cheap by most standards. Some draw a parallel with western financial institutions, including the IMF and World Bank, which lent generously to African governments in the post-independence period only to impose harsh structural adjustment programmes on them from the 1980s after governments struggled to repay.“The Chinese will dispense loans fairly quickly and will not ask pesky questions if you mow down protesters in the street, but they need to make sure you pay back their money,” says Daniel Kalinaki, Uganda’s head of editorial at the Nation Media Group, whose Daily Monitor newspaper first revealed the details of the Entebbe contract. Kalinaki says the “problematic clauses” in the Entebbe contract allow China Eximbank in effect to put the airport under administration, though he also criticises western lenders for what he sees as equally dubious practices including funnelling loans back to their own companies and consultancies. “Africa is being caught in the middle,” he adds, “it has to decide which is the least worst path to take.” Experts say that some of the concerns over clauses in Chinese contracts are overblown. An immunity waiver, for example, is a standard component of comparable loans made by western governments and agencies. Most experts also dismiss as a myth accusations about China’s supposed intention to entrap borrowers in order to gain control of ports or airports. “We did not find much evidence of physical infrastructure assets being put up as collateral,” says Bradley Parks, executive director of AidData, a research unit at William & Mary University and co-author of two recent studies on Chinese lending. However, some of the other legal conditions that rang alarm bells in Kampala — trademark clauses employed by Chinese lenders — may be cause for legitimate concern, experts say. A study published last year found that Chinese state-owned banks use liens, escrow and special accounts to collect revenue from the borrower as a repayment security far more extensively than their international counterparts. While almost 30 per cent of the 100 Chinese loan contracts examined by the study featured such clauses, only 7 per cent of bilateral creditors from OECD countries in a comparison sample employed them. Moreover, nearly three-quarters of Chinese loan contracts that use special accounts require the borrower to deposit all revenues from the associated project, a particularly draconian requirement.Although details of the Entebbe airport contract have not been made public, two other China Eximbank loan agreements for infrastructure projects signed with the Ugandan government just months before the airport deal contained escrow account provisions. In both cases, all project revenue was to be funnelled into a debt repayment reserve account, in effect giving Chinese lenders first dibs on revenue if a borrower becomes distressed. Such debt service reserve accounts, known as DSRAs, are not unusual, bankers and legal experts say. “We do DSRAs all the time,” says a senior official at a European development finance agency. However, while such arrangements are common in limited-recourse project finance, where the lender has only a partial claim on the underlying asset, they are very rare in agreements such as a state-owned international airport, where the borrower is backed by a sovereign state.
The controversy over the Entebbe airport loan reflects a growing conviction in much of the west and among some academics in Africa that Chinese lending is essentially predatory © Katumba Sultan/AFP/Getty
‘The Chinese go straight to the president’ As well as escrow accounts, Chinese lenders often include clauses that explicitly exclude the debt owed to them from being included in restructuring arrangements by officials in the Paris Club of bilateral creditors.Not everyone agrees that escrow accounts and greater monitoring are a bad thing. Chinese banks used to be criticised for lending too easily to governments, allowing them to divert a portion of loans to election campaign coffers or to personal accounts.Viewed through this lens, management scrutiny and the use of escrow accounts in the Entebbe airport contract could be regarded as positive. “Some African governments feel it is quite useful,” says Hannah Ryder, chief executive of Development Reimagined, an Africa-focused consultancy with its headquarters in China. “It creates some accountability.”However, lawyers familiar with China Eximbank and China Development Bank say such oversight can be taken too far. “When the amounts to be held in these [escrow] accounts are on the high side, the borrower is right to be complaining,” says one lawyer who has advised China Eximbank on loan documentation. “The same applies when the contract gives the bank wide-ranging powers.”
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Legal experts also caution that the use of Chinese law to govern cross-border loans could become a problem if disputes arise. “The absence of case precedent in Chinese law means there would be a wide degree of discretion for courts to rule in a dispute,” says a lawyer with extensive experience of working with the country’s policy banks. “You also have to consider that English law, New York law or even Hong Kong law, which are more commonly used in cross-border finance, [have been] developed in jurisdictions that are international financial hubs, Chinese law lacks that.” Chinese lenders have occasionally shown flexibility on loan terms for projects seen as politically important for Beijing, including loans to Djibouti, a small but highly strategic nation on the Red Sea coast that has borrowed heavily from Chinese banks. But most African governments have been given little leeway to alter terms.Tom Ogwang, a researcher at Mbarara University of Science & Technology who has written about Chinese-financed infrastructure projects in Uganda, says that the technocrats negotiating loans are often not empowered to push back against onerous clauses. “Technically, we have very good people who have the knowledge. The challenge is there’s a lot of politics in all these agreements,” he says. “The Chinese go straight to the president. What they discuss there we don’t know.”Although Uganda’s parliament has to sign off on loans, Ogwang says, lawmakers are often shown only a preliminary agreement. “Some clauses will be smuggled in by the Chinese, and then, once the loan approaches the repayment schedule, officials want to renegotiate.”
Farmers take part in a march in Maseru, Lesotho, in 2019 to protest against regulations forcing them to sell their wool and mohair to a Chinese broker © Samson Motikoe/AFP/Getty
Rising African debt That is what happened with the Entebbe loan, he says. In March 2019, the Ugandan government sent a delegation to Beijing to renegotiate terms it deemed “very unsuitable”, according to a letter, written by Kasaija, the finance minister and seen by the Financial Times. China Eximbank had already suspended loan disbursements after Kampala failed to implement parts of the contract — delaying construction for a year. Although China Eximbank refused to amend the agreement, it did try to assuage the concerns of the Ugandan delegation. The bank promised to “make flexible” the condition that all airport revenues be deposited into the escrow account and resumed disbursements after the borrower proved that the repayment reserve account had the required minimum balance. It further “clarified” that its demand to see Ugandan Civil Aviation Authority budgets was for the purpose of review rather than approval, according to the Kasaija letter.China Eximbank did not respond to a request for comment.Analysts say the Chinese response reflects a focus on relationships rather than the letter of the contract. “What gets put on paper and what happens in practice can be very different,” says Yunnan Chen, an expert on Chinese overseas development finance at ODI, a UK-based think-tank. “It is a very bad thing to default on a Chinese lender, but it lies in the nature of Chinese finance to help the borrower to not default,” she says. Chinese banks have learnt many lessons over two decades of lending to African governments. In the 2000s, they experimented with financing infrastructure in resource-rich countries, such as Angola and Republic of the Congo, by securing loans against oil or mineral shipments or future resource-derived revenues. Chinese policy banks’ penchant for revenue collection accounts is a version of the same model in countries such as Uganda, Kenya and Ethiopia that do not have the natural resources to back loan repayments, experts say. For Tang Xiaoyang, a professor at Tsinghua University in Beijing, the distinct lending models of Chinese banks are related to the country’s specific circumstances. “Western lenders can get profits from elsewhere, but for Chinese lenders to compete in advanced economies is difficult. So they have to establish new, riskier markets,” he says.
“They also see more similarities with China itself in African countries,” Tang says. “China grew out of poverty very quickly in the last 40 years, and infrastructure played a key role. We combined infrastructure with industrialisation, urbanisation and general growth, so we have experience and confidence in commercialising infrastructure.” Rising African debt and the economic fallout from the pandemic may force China’s banks to adjust their lending practices yet again. Bankers and lawyers caution that a systemic crisis could overwhelm Chinese banks’ attempts to protect their interests through escrow accounts and exemption from global debt restructuring deals. “China’s practice of collateralising their loans to sovereigns makes sense if you are thinking in terms of maximising your repayment prospects,” says Parks of AidData. But if debt stress deepens, he adds, this may not be enough. After issuing 15- to 20-year loans with seven-year grace periods, it is only now that many loans are approaching their critical phase and borrowers are being put to the test. “They have dealt with problems with individual borrowers, but they haven’t undergone a global sovereign debt crisis,” says Parks. “So they will learn; they will adapt again.” More
As inflation threatens living standards across the developed world, governments are stepping in to lessen the blow for some of the lowest-paid workers — but their actions will only partially protect those most in need.Several European countries plan inflation-busting increases in their minimum wage in the year ahead. In Germany, successive increases will lift the minimum wage almost 10 per cent to €10.45 over the year to July and the new ruling coalition has pledged to raise it further to €12. In Portugal, Poland, the Czech Republic and Romania, the statutory wage floor rose 6 per cent or more from January. France, whose hourly minimum is already one of the highest among rich economies, will continue to uprate it in line with prices (inflation in December was at 3.4 per cent). In the UK, the statutory wage floor will rise 6.6 per cent in April. Meanwhile, the EU is planning draft legislation meant to ensure that minimum wages — where they apply — are high enough to be “adequate”, or at least 60 per cent of national median earnings. It is a striking reversal of the policies pursued on the eve of the 2008 financial crisis, when EU leaders issued an ill-timed call for wage restraint to prevent price pressures mounting.“This wouldn’t have happened a few years ago,” said Stefano Scarpetta, director of the OECD’s Employment, Labour and Social Affairs directorate. “This time, we are putting a lot of money into the economy and there is a concern it should go to those at the bottom end.”The trouble is, governments are relying too much on a single tool — minimum wages — which will protect only some of those who are vulnerable. Market forces are providing a tailwind, with labour shortages in some low-paying sectors forcing employers to compete for workers fiercely for the first time in years. In the US, although Joe Biden has not won support for his ambition to nearly double the federal minimum wage, salaries have risen fastest for those on the bottom rungs of the labour market — outpacing inflation over the past six months for the third of workers with the lowest earnings. But economists warn that action is needed on a much broader front to protect households from a painful cost of living crunch.A minimum wage was a good way to set a social norm, but “not a very targeted measure to fight poverty”, Scarpetta argued. Many of those receiving it live with a higher-earning partner and when the pay floor rises workers can often lose benefits or pay higher taxes as a result.A higher wage floor can also lead employers to hire people on shorter hours or less secure terms — for example, the liberal use of zero-hours contracts in the UK’s hospitality sector — and only affects those close to the bottom of the earnings distribution.“It only helps those who have the lowest pay. It’s not going to help create a middle class,” said Patrick Belser, senior economist at the International Labour Organization. Workers’ share of income would only rise in countries that also had effective collective bargaining arrangements, he said.Laurence Boone, chief economist at the OECD, argued that “traditionally, policies to address inequality have focused on skills and on wage-setting — minimum wages, collective bargaining”. But now, governments needed to look more closely at other issues, in particular competition policy, she said.New OECD research has found that as much as a third of overall wage inequality is due to gaps in the wages different companies pay for workers with similar skills. Workers are often unable to move even when better pay is on offer elsewhere because of restrictions imposed by their employers, such as non-compete contractual clauses. To remedy this would mean a legislative clampdown — as the US and UK governments have pledged to do — and requiring competition authorities to look at the effects of mergers on workers, as well as consumers.Stagnating living standards were “not the fault of the minimum wage”, Belser said. “It’s the absence of other policies.” More
