Aurelia Butler

LONDON (Reuters) -British fashion retailer Next raised its full-year profit outlook for a fifth time in 10 months after beating guidance for sales in the run-up to Christmas, boosted by an unexpected revival in demand for adult formal and occasionwear. As the first major UK retailer to update on Christmas trading, Next set a high bar on Thursday for rivals as it reported a 20% rise in full-price sales in the eight weeks to Dec. 25 versus the same period in 2019 before the pandemic began.Guidance had been for a rise of 10.2%.Next did, however, caution that pressures on consumers’ finances, such as higher food prices, energy costs, mortgage rates and taxes, pointed to a tougher trading environment in 2022.It also flagged that its own prices would rise 3.7% in the first half of 2022 and 6% in the second half due to higher freight rates and increased manufacturing costs.Shares in the group were down 1.4% at 1018 GMT, paring year-on-year gains to 5%.Next, which trades from about 500 stores and online, had expected sales growth in its fourth quarter to be weaker than the third.However, it said a strong revival in NEXT branded adult formal and occasionwear significantly improved sales throughout the period.That was despite lower than planned stock levels due to supply chain issues and some degradation in delivery service levels due to labour shortfalls in warehousing and distribution.It forecast a full-year 2021-22 pre-tax profit of 822 million pounds ($1.1 billion) up from the 800 million pounds previously guided and up 9.8% versus 2019-20.Next has proved a resilient performer during the pandemic, benefiting from its long-established online operations.Rivals with weaker or no online business, notably Primark, have seen large falls in sales. Others, such as Topshop-owner Arcadia, and Debenhams went bust.Next’s total online sales rose 45% in the eight week period, more than offsetting a 5.4% fall in UK and Ireland store sales.For the year ending January 2023, Next forecast full price sales growth of 7% versus the current year ending January 2022, with pre-tax profit up 4.6% at 860 million pounds.Next also declared a further special dividend of 160 pence per share, worth 205 million pounds, to be paid at the end of January and said it intends to return to its pre-pandemic dividend cycle in the 2022-23 year.($1 = 0.7400 pounds) More

Happy new year to all readers!It may not be quite waiting for Godot. But more than two years after the UK government was elected on the flagship promise (next to Brexit) of “levelling up” the country’s unconscionable regional inequality, there is not much flagship policymaking to show for it.Prime Minister Boris Johnson has belatedly put some of his party’s most competent politicians on the dossier, and the Labour opposition did the same ahead of the expected publication of a levelling-up white paper. Yet that paper was delayed into the new year — for the ins and outs, read a new blog post by the Institute for Government’s (and former FT colleague) Gemma Tetlow. Maybe the paper will surface by the halfway mark of this parliament’s maximum five-year lifetime.While we wait, however, regular readers will remember that regional inequality is one of Free Lunch’s favourite interests. So let us start the year by suggesting some ideas I would contribute to the government if I were asked.It is surely fundamental to be clear about what it is that should be levelled up: it is productivity. Territorial inequality of productivity is the core problem; it is what causes an inequality of incomes that can only partly be remedied by redistribution. It also suggests an enormous amount of waste — if lagging regions could close at least some of their productivity shortfall, a lot of prosperity would be gained.Productivity depends on many things, including slow-to-acquire resources such as infrastructure and skilled labour. But it also depends here and now on productive businesses choosing to expand, and on businesses generally to shift into higher-productivity production practices. That is most likely in a “high-pressure economy”, where confidence about demand growth makes businesses compete for workers and capital — a competition those who can use it most productively are primed to win. Levelling up will happen, if at all, in a high-pressure economy, so here are three measures to ensure one:Run the macroeconomy hot: let fiscal and monetary policy remain stimulative for as long as it takes to create booms in left-behind parts of the economy and not just at the centre. Smooth the reallocation of labour from unproductive to more productive activities by making it easier for people to leave bad jobs and look or prepare themselves for better ones. That requires an immediate support system for job seekers and job switchers with little or no savings to carry them through the time it takes to retrain or search for better jobs, so that tight household budgets do not trap people in bad ones.Boost investment incentives. Allow full expensing of investment costs for businesses, or even make the “superdeduction” — where you can deduct more than 100 per cent of investment expenditure from taxable income — permanent.Admittedly, these policies affect the entire national economy — albeit hopefully with more strongly positive effects for places that are lagging behind. They need to be complemented by place-targeted policies to address regional productivity shortfalls directly. Here are two: Jump on the remote-work revolution to make high-paying, high-skilled service jobs more geographically dispersed. The Irish government has made a policy ambition of such a “new normal”, with a plan to make it happen.Boost spending in left-behind places — not just infrastructure and connectivity investments, but money in the hands of households, to sustain the kind of local economic activities that double as community spaces. That means more aggressive minimum wages and rejigging the tax and benefit system to leave more money in poorer regions. If you resist the case for a universal basic income, then boost universal credit, on which lagging areas are more dependent. Finally, productivity depends on capital being invested in higher-yielding, risky business ventures. Indeed, while lagging-productivity areas could potentially be rewarding to investors — since the catch-up growth potential is big — they are also risky. Their success depends on a lot going right at the same time, from policy, to capital being attracted, to local entrepreneurship not being frustrated. How can we ensurethat capital does not flee left-behind areas but flows to them? Two ideas:Cure the tax system of its bias towards credit financing and make it treat equity just as favourably as debt. In addition, build institutions to channel equity capital towards lagging regions — perhaps local “intangibles investment trusts” as 21st-century versions of local community banks. Shift the taxation of capital towards a net wealth tax, which rewards more productive investments better than profit taxation. And if great fortunes are disproportionately held by people who live in rich areas, a progressive net wealth tax should over time ensure a wider geographical dispersion of private wealth. That would build up deeper local pools of capital. We will no doubt return to this when the white paper finally comes out, so stay tuned.Other readables“Learning to live with the virus” does not mean acting as if the pandemic does not exist, I argue in my FT column this week. Instead, it means preparing for this virus — or other viruses — to stay around permanently, and planning ahead to be able to introduce emergency regimes quickly but for a shorter duration.The European Commission has proposed that both nuclear energy and natural gas can be labelled “green” in its new taxonomy for green finance, under strict conditions to ensure nuclear waste is handled responsibly and gas is merely a transition to zero-emissions power. German and Austrian Greens are up in arms against including nuclear; the FT leader column welcomes the proposal with some reservations.Do not forget that Russian president Vladimir Putin has already invaded Ukraine.Numbers newsA total of 4.5m US workers quit or changed jobs in November, a record. A high-pressure economy in action!The New York Fed has created a new quantitative index for pressures in global supply chains. More

BERLIN (Reuters) – Higher demand from abroad drove a bigger-than-expected rebound in German industrial orders in November, in rare good news for manufacturers suffering from supply bottlenecks and labour shortages in Europe’s largest economy.Goods orders rose 3.7% on the month in seasonally adjusted terms after a revised drop of 5.8% in October, figures from the Federal Statistics Office showed on Thursday. A Reuters poll of analysts had pointed to a 2.1% rise.The rise was driven by a surge in foreign demand for capital and intermediate goods, with orders from other euro zone countries jumping 13.1% and bookings from clients outside the single currency bloc up 5%.”This provides a positive impetus for the economic outlook, although economic activity continues to be burdened by existing delivery bottlenecks,” the economy ministry said.In contrast to previous months, orders for large-ticket items such as planes did not have a big impact on the headline figure in November. Excluding this special factor, industrial orders rose 3.8% on the month, the ministry said.”The upturn in foreign business is particularly encouraging, especially since delivery bottlenecks seem to be easing,” said Alexander Krueger, an analyst with private bank Hauck Aufhaeuser Lampe.But Krueger cautioned that supply chain problems would likely persist well into spring, until delivery logistics functioned more smoothly again.Economic institutes expect the German economy to have shrunk in the final three months of 2021 and to stagnate in the first three months of 2022, delaying the recovery from the COVID-19 pandemic.In the medium term, business prospects for companies manufacturing industrial machinery look bright in light of the shift towards a greener and more digitalised economy.”The ecological restructuring of industry and the wave of digitisation are good news for German manufacturing,” VP Bank economist Thomas Gitzel said.The government’s plans to hike public spending and support private investments in the expansion of renewable energy sources and the reduction of carbon emissions through green hydrogen will give engineering companies a push, Gitzel said.”Despite short-term setbacks, the order books will remain well filled for the coming years,” he said. More

NEW YORK (Reuters) – Cryptocurrency-linked crime surged to a record high last year in terms of value, with illegal addresses receiving $14 billion in digital currencies, up 79% from $7.8 billion in 2020, according to a blog from blockchain analysis firm Chainalysis released on Thursday.As of early 2022, Chainalysis said illicit addresses already hold over $10 billion worth of cryptocurrencies, with the majority of this held by wallets associated with crypto theft.Illicit addresses are defined as wallets tied to criminal activities such as ransomware, Ponzi schemes and scams.That said, illicit activities’ share of total crypto transaction volume remained low at just 0.15% in 2021. Total transaction volume surged to $15.8 trillion last year, up more than 550% from 2020 levels.Chainalysis, however, said the 0.15% figure could still rise as the firm identifies more addresses tied to illegal transactions and incorporates that into the total volume.In its last crypto crime report, Chainalysis had said that 0.34% of 2020’s crypto transactions was associated with illegal activity. That number has now been raised to 0.62%.”Criminal abuse of cryptocurrency creates huge impediments for continued adoption, heightens the likelihood of restrictions being imposed by governments, and worst of all victimizes innocent people around the world,” said Chainalysis.Still, the underlying trend suggested that with the exception of 2019 – an extreme outlier year for crypto crime largely due to the multibillion-dollar PlusToken Ponzi scheme – crime has become a small part of the cryptocurrency world.The report also said the rise in decentralized finance, or DeFi, which facilitates crypto-denominated lending outside traditional banking, has been a big factor in the increase in stolen funds and scams.In 2020, less than $162 million worth of cryptocurrency was stolen from DeFi platforms, which was 31% of the year’s total amount stolen. That represented a 335% increase over the total stolen from DeFi platforms in 2019. In 2021, that figure rose another 1,330% to $2.3 billion, Chainalysis said.DeFi transaction volume surged 912% in 2021, and Chainalysis said outsized gains on decentralized tokens like Shiba Inu have pushed investors to speculate on DeFi tokens.”The increase in DeFi-related crime is an example of how criminals often exploit new technologies,” Kim Grauer, head of research at Chainalysis, said in an email to Reuters.”When DeFi started to grow this year, we saw large increases in DeFi protocols being used to launder money as well as DeFi protocols being the actual victims of crimes such as hacking.” More

Last month, China’s State Council, the government’s most powerful organ, unleashed its wrath on an unusually small target, accusing officials in a county of just 660,000 people of effectively extorting private sector businesses.In a long and detailed statement issued on December 17, the State Council said the local government in Bazhou, situated just 90km south of Beijing in Hebei province, had seriously violated both government and Chinese Communist party orders by embarking on a fee-collection spree from small and medium-sized enterprises in order to offset its own declining land-sale and tax revenues.Like many jurisdictions across the country, Bazhou had been hit hard by the party’s year-long crackdown on highly leveraged real estate developers such as China Evergrande Group, a colossus that teetered for months before it finally defaulted on bond payments on December 6 and entered into a formal restructuring process.According to China’s cabinet, in October the Bazhou government ordered officials to drum up Rmb300m ($47m) in new revenues, mainly through the imposition of arbitrary fees and fines. Over the course of nine weeks more than 2,500 local businesses were hit with penalties totalling Rmb67m, compared with the just Rmb6m in penalties collected over the first nine months of the year.“Every government department has a way to make up for lost revenues,” says Martin Li, who runs a chemical factory in Bazhou and was forced by the local meteorological bureau to buy an expensive lightning rod from a government-designated supplier. The rod cost Rmb1,100, far more than comparable units he could have purchased online for just Rmb200.In targeting entrepreneurs such as Li, the State Council said Bazhou had “seriously hurt the interest of small businesses, severely damaged the local business environment and undermined the credibility of the party and [central] government”.The local government in Bazhou has been hit hard by the Communist party’s year-long crackdown on highly leveraged real estate developers © Quehure Costfoto/SIPA USA/PA ImagesChina’s cabinet, however, said nothing about the central government policies that had caused the county’s desperate scramble for revenues in the first place. Over the past two years, President Xi Jinping’s administration has launched a series of campaigns that target different areas of business — from the country’s largest private-sector technology platforms in late 2020 to education providers and ride-hailing giant Didi last summer. And all that was before it became apparent in September that government-imposed debt limits might bring down Evergrande.China’s second-largest developer is now on the cusp of becoming the country’s biggest ever bankruptcy case, and its downfall has sparked a broader crisis in the real estate sector. It has accumulated liabilities of about Rmb2tn, equivalent to 2 per cent of gross domestic product, which are owed to creditors ranging from individuals who bought high-yielding investment products from the group to the country’s largest construction companies and banks.The collective impact of all these crackdowns has been to pile unprecedented levels of pressure on some of the country’s largest employers, local governments and corporate contributors to economic growth.

A Beijing housing complex built by Evergrande, which defaulted on bond payments on December 6 © Noel Celis/AFP via Getty Images

Outwardly, officials insist that all is going to plan. In April, the party’s politburo said China’s strong rebound from the pandemic had presented a “window of opportunity” to tackle critical structural challenges. They also note that the Chinese economy is on track to exceed the government’s full-year growth target of more than 6 per cent. Xi’s various crackdowns are justified by officials as necessary elements of a larger party campaign to eliminate financial risks that could implode if not addressed, eradicate chronic income inequality and realise “common prosperity”.Yet more and more warning indicators are blinking, from the financial stresses appearing in places such as Bazhou to key economic indicators. China’s third-quarter economic output expanded 4.9 per cent year-on-year and just 0.2 per cent on a quarter-on-quarter basis, down from 7.9 per cent and 1.3 respectively in the second quarter.This raises the question of whether, as Xi seeks an unprecedented third term as head of the party, military and government later this year, the economic consequences of his common prosperity campaign are beginning to spiral out of control. “Beijing is discovering the huge costs of rectifying imbalances in a sector that it had long relied upon to prop up growth, boost local government revenues and contribute to household wealth accumulation,” says Eswar Prasad, a former head of the IMF’s China division now at Cornell University. “The [real estate] sector’s influence over practically every aspect of the economy, financial markets and society makes it a hugely thorny issue to fix.”China’s property sector is estimated to account for about 30 per cent of total economic output. In 2020 local governments raised Rmb8.4tn from land sales, accounting for about a third of their total revenues.

One Chinese government policy adviser said officials’ public reassurances about the economy were belied by increasing nervousness behind closed doors.“They appear more relaxed than they really are,” says the adviser. “In private, they are asking about the housing downturn, higher debt levels and slower growth.“The major problems are all interconnected: debt, local government finances, housing prices and consumption. Which one do you solve first? The pressure is coming from many directions.”So far Xi’s economic advisers, led by vice-premier Liu He, have been relatively restrained in their policy response to the real estate slump and the larger economic slowdown it has exacerbated. Last month the central bank cut its benchmark one-year loan prime rate for the first time since early 2020, but only by five basis points while leaving the five-year rate, used to price mortgages, unchanged.The party’s year-end economic planning conference reiterated that the government would continue to refrain from “flood-like stimulus” and also continue its battles against “the disorderly expansion of capital” — party-speak for its various crackdowns on private-sector businesses — as well as speculation and high leverage in the real estate industry.That all promises little respite for regional and local officials who must bear the brunt of Xi’s policy onslaught. In private, and occasionally in public, they argue that they are dealing with a crisis that was not of their own making and doing the best they can under increasingly difficult circumstances.“The real estate downturn has taken a huge toll on the local economy,” says a municipal official in Shijiazhuang, Hebei’s provincial capital, who asked not to be identified. “Beijing says we need to keep the government up and running. But if land sales continue to weaken, we will have real trouble making ends meet.” Over the first 11 months of last year, Shijiazhuang’s land sale revenues were down almost 30 per cent compared with the same period in 2020.The official added that he and his civil servant colleagues, who generally make about Rmb5,000 a month, were paying a personal price. “For the first time ever we have cancelled our annual bonus of Rmb10,000,” the official says. “It is a big deal for us. Our salaries are not high.”

President Xi Jinping’s economic advisers, led by vice-premier Liu He, left, have been restrained in their policy response to the real estate slump © Jason Lee/Pool/AFP via Getty Images

Assessing the damageThe impact from the Evergrande crisis is being felt across the country: the developer has almost 800 projects in more than 230 cities.In Bazhou, the effects of Xi’s crackdown on the property sector were being felt months before it became apparent in September that Evergrande’s debt crisis might prove terminal.Over the first six months of last year, the county’s land sale revenues plunged 90 per cent compared with the same period in 2020. “The land market has been consistently weak,” Meng Xianguo, director of Bazhou’s finance bureau, said in a speech in mid-August. “Developers are taking a wait-and-see attitude and are reluctant to buy land. There have also been more land auction failures because of developers’ funding shortages.”Local party and government officials also complain that they, not their bosses in Beijing, have to foot the increasingly expensive bill for Evergrande’s collapse. Wei He, an analyst at Gavekal Dragonomics in Beijing, notes that when central government officials say that all pre-paid homes must be delivered to their nervous buyers, “this responsibility ultimately falls on local governments who may have to pay for construction themselves if developers cannot”.In Huaihua, a small city in Hunan province, the municipal finance bureau recently loaned Evergrande’s local subsidiary Rmb50m to help it complete projects, according to one person familiar with the developer’s operations there.The situation had been complicated by widely divergent valuations of the group’s local assets, according to a transcript of an internal government meeting seen by the Financial Times. Lu Anzhi, a senior official in Huaihua’s housing bureau, said Evergrande valued its local assets at Rmb850m while third-party appraisals estimated them to be worth less than half that amount.

In Changsha, Hunan’s provincial capital, officials recently said they could pay contractors to complete a dozen unfinished Evergrande projects © Alex Plaveski/EPA-EFE

In Changsha, Hunan’s provincial capital, officials recently said they could pay contractors to complete a dozen unfinished Evergrande projects — but lacked the funds to pay off the debts the developer still owes them for previous work. “We hope you will have faith in Evergrande and the government,” Huang Ge, a senior Changsha housing official, told a group of suppliers at a meeting in November, according to minutes reviewed by the FT. “We will get through these difficulties together and you will make a smaller loss or even a small profit.”An executive at a construction firm contracted to do work by Evergrande in Suzhou, a wealthy city in the Yangtze river delta near Shanghai, says his firm is refusing similar entreaties from local governments to resume work unless it is paid in advance. The contractor, Suzhou Gold Mantis Construction Decoration Co, is suing Evergrande for missed payments totalling Rmb645m.“We are also requesting higher prices for our services because of inflation,” the executive adds. “There hasn’t been much progress because Evergrande and local authorities are facing funding shortages. But we are not going to bankroll Evergrande projects further because we are under significant financial stress ourselves.”In Shaoyang, another city in Hunan, local officials are trying to auction their Evergrande problems away. On December 24 they announced that they would sell off the developer’s four projects in their jurisdiction. “Neither the government nor Evergrande has money,” one local official told the FT. “Someone else needs to fill the vacuum.”Ripple effectThe debt crisis in China’s property sector is also reverberating through the economy via special off-balance sheet financial instruments used by developers to evade the industry debt caps imposed by regulators in the summer of 2020. It is a classic example of how, for every central government regulatory action in China, there is often a market-driven reaction that helps the companies targeted to work around it. In response to the “red line” limits on developer leverage, the country’s 20 largest real estate firms issued “commercial paper” totalling Rmb336bn in 2020, almost 40 per cent more than in 2019, according to the Shanghai Commercial Paper Exchange.

In Shaoyang, a city in Hunan, local officials are trying to auction their Evergrande problems away © Zhenliang Lei/Barcroft Media via Getty Images

In China developers often force their suppliers to accept commercial paper in lieu of cash payments, which they promise to make good on by a future date. The supplier can also use the commercial paper for its own payments, provided it endorses it by stamping a company chop on the back of the document. But if Evergrande fails to pay the eventual holder of the paper when it comes due, the holder can sue Evergrande and every other company that endorsed it — potentially freezing assets worth many times more than the original debt. In an open letter to Evergrande, the owner of an architecture firm in eastern Shandong province described the “devastating blow” the developer’s default was dealing to companies like his that had endorsed its commercial paper.“An Rmb10m commercial paper will often be endorsed ten times before it ends up with the final holder,” Li Menghe wrote. “The holder can then freeze Rmb10m at each of the ten endorsers, [or] Rmb100m in total . . . Most of the endorsers are construction firms and, because of Covid, need liquidity more than ever. Evergrande’s failure to repay commercial paper is pushing countless companies to the edge of bankruptcy.” Li and his firm, Qingdao Wanhe Construction and Decoration Group, did not respond to requests for further comment.

Unfinished apartment buildings at the construction site of an Evergrande development in Wuhan, China © Andrea Verdelli/Bloomberg

In 2020 the total amount of commercial paper issued by Chinese companies reached Rmb3.6tn — equivalent to 3.5 per cent of GDP. Evergrande alone accounted for more than 60 per cent of issuance by top-20 real estate developers.Wang Qiang, the owner of an Evergrande contractor in Zhengzhou, capital of central Henan province, said small companies like his had no choice but to accept commercial paper from large developers. His company’s future now hinges on whether he can collect the Rmb7.5m Evergrande owes him, but he is just one of many creditors in a very long queue. All creditor suits against Evergrande must be processed by a court in the southern city of Guangzhou, where there is already a backlog of 367 cases with claims totalling Rmb84bn.“As small suppliers, we either accepted [developers’] commercial paper or we didn’t get contracts,” Wang says. “Evergrande set off a chain reaction. We can hold on for a few more months, but not much longer than that.”Additional reporting by Xinning Liu in Beijing

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