Economy

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.China has banned exports of technologies for processing rare earths, the latest sign President Xi Jinping’s administration is hitting back against US-led curbs on advanced computer chip sales to Chinese companies.The new controls risk further straining geopolitical tensions between China and the US and its allies over control of global resource and technology supply chains. For many in the west, they will also underline China’s dominance over large swaths of the world’s important resources.China controls the lion’s share of the supply chain for rare earths, key materials used in clean energy and defence products.The commerce ministry in Beijing said on Thursday it was banning the export of technologies used in rare earth extraction and separation and in some rare earth magnets. It gave no immediate explanation for the move.The ban comes after Chinese officials this year started requiring additional export permits for gallium, germanium and graphite, materials whose supply is largely controlled by Beijing and which are key to technology manufacturing.Chinese officials have in recent months stressed national security as the main reason for the controls. However, many experts see them as evidence Beijing is leveraging its dominance over global clean technology supply chains to fight back at trade restrictions that have been expanded by the administration of US President Joe Biden.Under Biden, Washington’s controls have widened from sales of cutting-edge chip technology to China to increasingly blocking Chinese battery and electric vehicle producers from accessing generous US government subsidies. According to the International Energy Agency, China accounts for about 60 per cent of the world’s rare earth mining production, but close to 90 per cent of processing and refining.Policymakers in Washington and Brussels have long been concerned about over-dependence on China for rare earths and many of the other materials and resources used in clean technologies.With heavy government support, non-Chinese production of rare earth oxides jumped almost fourfold to 90,000 tonnes over the seven years to 2022, according to US data. But China has maintained its dominance, doubling its own production to 200,000 tonnes.The IEA also forecast global demand would increase by as much as seven-fold over the two decades to 2040, underpinned by the world’s transition from carbon-intensive energy production and transport towards cleaner electricity generation and electric vehicles.The agency noted that countries typically took more than 15 years to develop mining projects from discovery to first production, raising doubts about how fast the west might be able to disentangle itself from Chinese critical minerals supplies. Additional reporting by Nian Liu in Beijing More

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In its quarterly inflation report, the central bank said that inflation in the quarter ending in November came 40 basis points lower than policymakers had estimated in September. This was primarily attributed to lower-than-expected prices in regulated sectors, especially fuels, and industrial goods.While acknowledging that this movement led the market to project a “significant decline” in inflation for this year, the central bank emphasized that “there was no significant change in the median expectations for the coming years, which remain unanchored.”In the report, the central bank raised its own inflation projection for 2026, which had not yet been disclosed, to 3.2%, up from the 3.1% seen in September. Last week, the central bank released its inflation estimates of 3.5% for 2024 and 3.2% for 2025, with the target for all these years set at 3%.Private economists surveyed weekly by the central bank anticipate inflation at 3.93% next year and at 3.5% in 2025 and 2026.Against this backdrop, policymakers reiterated their plan for additional 50 basis point interest rate cuts in the upcoming rate-setting meetings, asserting that this pace is appropriate to keep the necessary contractionary monetary policy for the disinflationary process.The maintenance of a steady outlook for its next steps, signaled since last week, disappointed some economists who saw room for larger rate cuts in the future amid a slowdown in local inflation and improvements in the global scenario. GDPThe central bank slightly raised its economic growth forecast for this year to 3.0% from the previously projected 2.9% in September, while worsening the outlook for a 1.7% increase next year from 1.8% before.Policymakers wrote they see “moderation in household consumption, a resurgence of investments, and the maintenance of a favorable balance in external accounts” in 2024.Brazil’s current account deficit is set to increase to $35 billion next year from $26 billion this year, the central bank projected, influenced by a smaller trade surplus. Policymakers expect the trade balance to remain positive at $73 billion next year, down from $79 billion this year.Regarding bank lending, the central bank forecasts a rise of 8.8% in 2024, accelerating from the 6.8% expansion estimated for this year. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Normally, import bans and tariffs between China and Taiwan would not warrant global attention. But this week, the power play over trade is notable. It underlines Beijing’s attempts to influence approaching elections in Taiwan. On Thursday, Beijing announced the end of tariff cuts for certain chemical imports from the island. The affected list of 12 products includes acrylic and p-xylene. This follows China’s complaint last week that Taiwan had adopted discriminatory measures on importing mainland products. It wants Taiwan to take measures to remove trade restrictions. The latest moves could have an impact on Taiwan’s biggest petrochemical companies, including Formosa Plastics, which has a market value of $16.2bn, and state-owned CPC Corporation. China is the world’s largest importer of chemicals such as p-xylene, accounting for three-quarters of the world’s total.The affected list has a relatively narrow focus. China’s imports of p-xylene, for example, stand at about $11bn. The impact from changes to tariff cuts is unlikely to be severe. But the timing is telling. Taiwan’s hotly contested presidential election is looming in the second week of January. Beijing has put pressure on Taiwan’s independence-leaning ruling party by sending military aircraft and warships near the island almost daily this month. Since 2000, Taiwan’s presidents have served two terms, or eight years, which highlights the importance of this election for Beijing. But this tension goes well beyond trade politics over chemicals. The rise of AI and the importance of Taiwan-made chips have raised the stakes. Chipmaker Taiwan Semiconductor Manufacturing Company makes more than 90 per cent of the world’s advanced chips. Meanwhile, the US has cut China off from advanced chips and chipmaking equipment. For now, investors have ignored any geopolitical risks for TSMC. Its local share price has climbed 23 per cent over the past year. TSMC has faced growing US pressure to manufacture its products in America. It has been investing and building a new plant in Arizona, threatening to widen any technological gap with China. As Beijing runs out of options, influencing Taiwanese elections has become that much more important. Lex is the FT’s concise daily investment column. Expert writers in four global financial centres provide informed, timely opinions on capital trends and big businesses. Click to explore More

BEIJING (Reuters) -China, the world’s top processor of rare earths, on Thursday banned the export of technology to extract and separate the strategic metals, in a further step towards protecting its dominance in several strategic metals.The commerce ministry sought public opinion last December on the potential move to add the technology to its “Catalogue of Technologies Prohibited and Restricted from Export”. It also banned the export of production technology for rare earth metals and alloy materials as well as technology to prepare some rare earth magnets.The catalogue’s stated aims include protecting national security and public interest.China has significantly tightened rules guiding exports of several metals this year, in an escalating battle with the West over control of critical minerals. It introduced export permits for chipmaking materials gallium and germanium in August, followed by similar requirements for several types of graphite since Dec. 1.The move to protect its rare earth technology comes as Europe and the United States scramble to wean themselves off rare earths from China, which accounts for 90% of global refined output.Rare earths are a group of 17 metals used to make magnets for use in electric vehicles, wind turbines and electronics. China has mastered the solvent extraction process to refine the strategic minerals, which Western rare earth companies have struggled to deploy due to technical complexities and pollution concerns.It is not clear to what extent the technology is actually being exported. China has discouraged its export since 2007, said a rare earths analyst, who declined to be named because of the sensitivity of the topic.”Other countries like the U.S., Japan and France all have the separation technology but China has the top efficiency and cost advantage,” he said. More

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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.This article is an on-site version of Martin Sandbu’s Free Lunch newsletter. Sign up here to get the newsletter sent straight to your inbox every ThursdayGreetings. This is my last newsletter before Christmas, but fear not — my colleague Valentina Romei will step in for uninterrupted Free Lunch service next week. I will be back in the new year. As we prepare for the festive season, can I ask you to read our deputy editor’s missive about the FT’s charity work on financial literacy and inclusion? If you are moved to contribute to the cause — or just need to find a unique present for someone (or yourself) — please consider bidding for lunch with one of our columnists, including yours truly. With that, let me wish you peaceful holidays and a happy new year.White smoke at last! EU finance ministers last night agreed how to reform the bloc’s fiscal rules, which have been in suspension since 2020 and have been maligned for much longer than that. To master the details, even EU economics nerds will need to spend some time going through the legislative texts. But here is how I would describe the new rules in a nutshell.There is one overarching conceptual change. The previous rules applied the “reference values” in the EU Treaty rather literally, with too little consideration of the economic context. This obliged all countries to get public debt below 60 per cent of gross domestic product and the budget deficit below 3 per cent of GDP, requiring tougher consolidation the further they fell short, to the point of counterproductive and unrealistic policy advice.The new rules differentiate countries by their starting point, growth prospects and content of public spending, requiring them principally to put debt on a downward trajectory after an adjustment period. This requirement is formulated through a single indicator rather than the previous multiplicity of constraints: an agreed path for annual government expenditures net of interest and cyclical and one-off measures.Out go the blind numerical rules, in other words, in come forward-looking debt sustainability analyses, country differentiation, and an option to extend the adjustment (from four to seven years) if a country adopts reforms and investments expected to boost growth. However (there is always a “however”), at the insistence of Germany and some other “frugal” countries, elements of the old system were added back in, in the form of “safeguards” to prevent the agreed expenditure paths from being too soft. The result is a hybrid system, where the new approach has old-style numerical constraints bolted on, and whichever is more binding applies. High-debt countries will need to reduce their debt ratio by an average of 1 per cent of GDP per year throughout the adjustment period (less for medium-debt ones). And beyond the adjustment period, deficits should get within 1.5 per cent of GDP to keep a “safety margin” to the old 3 per cent limit. The “excessive deficit procedure”, the EU’s naughty corner for fiscal violators, remains, requiring annual structural deficit cuts of 0.5 per cent of GDP. Again “however”: countries worried about being caught out as the rules snap into force have negotiated transitional arrangements whereby rising interest costs and EU-funded post-pandemic recovery plan investments will be exempt from the calculations until 2027.Taking it all together, how should we judge the reform? The original motivation, remember, was that the old rules were ineffective, too complex and often encouraged bad economic policy like procyclical budgets and skimping public investments.On the surface, one could argue all the effort has not come to much. The blind numerical rules remain. And some are very strict indeed: according to the last figures I have seen, a 0.6 per cent of GDP cumulative deviation from the agreed expenditure path over the adjustment programme (which, remember, can last seven years, so less than 0.1 per cent per year) is enough to trigger a reaction.In addition, the higher-debt countries failed to get acceptance for either a “golden rule” or a carve-out for investment spending, as many of them had wanted. And they traded stricter discipline in the long term for short-term flexibilities — which is really not the way one should approach a system of rules that should have some staying power.So if the outcome is austerity 1-investment 0, we have ended up in a bad place. But that would be unfair. While blindly numerical rules remain, they are on the whole looser than before, is the argument heard in some high-debt government circles. And that is true. The notorious 1/20 rule is gone (it demanded debt ratio reductions of 1/20 of the excess above 60 per cent every year — which implied 5 per cent of GDP debt reduction per year for Greece, 4 for Italy, and 3 for France, Spain, Portugal and Belgium). A 1.5 per cent deficit “safeguard” replaces a medium-term requirement for structural near-balance. So there is more room for deficit spending, which one must hope will be used for investment.There is some beauty in the eye of the beholder, of course. Note how our coverage leads on Germany getting its way on tough numerical constraints, while Reuters describes the agreement as a “deal for more lenient fiscal rules”. The focus naturally varies with how each government can sell the deal as a victory at home.But this distracts from what I see as the more profound improvements. The long haggling over precise numerical parameters has distracted from the fact that the biggest changes are institutional:First of all, countries will now have to prepare multiyear fiscal, reform and investment plans and the EU-level discussion will focus on these, not year-by-year budgets. National fiscal councils will have a role in assessing them. Second, when a government changes, it may update the fiscal plan it inherits. Third, both new and revised plans must be justified to the commission and the EU Council. Fourth, in the excessive deficit procedure a number of “relevant factors” can be invoked, including green, digital and defence priorities. Fifth, there is now a country-specific escape clause that would suspend the rules in the case of a serious downturn afflicting only some countries.Put all of this together, and a very different process emerges for how capitals engage with their peers and with the EU over national budgets from the previous “computer says no” system. The new set-up should encourage a more open back-and-forth, based on economic arguments, about how best to achieve the common goals of sustainable budgets and growth. There will be both more national ownership and more European politics, in other words. The essence of the problem with the previous rules was precisely that they aimed to substitute algorithmic decisions for both ownership and politics. That was never going to be democratically sustainable — and therefore not ultimately conducive to either economic or fiscal sustainability either.If the reform welcomes back sound democratic politics in budgeting, that will be a much greater achievement than the months-long quibbling over decimal points would make you think. It may even — fingers crossed — draw citizens’ interest back to what their economic policymakers do.Other readablesNumbers newsRecommended newsletters for youChris Giles on Central Banks — Your essential guide to money, interest rates, inflation and what central banks are thinking. Sign up hereUnhedged — Robert Armstrong dissects the most important market trends and discusses how Wall Street’s best minds respond to them. Sign up here More

NEW YORK (Reuters) – As 2024 comes into view, investors, economists, business leaders and everyday consumers from London to Lyons to Los Angeles share a common hope: Let the interest rate cuts begin!Central banks from most major developed economies closed out 2023 with a blitz of policy meetings in December that effectively shut the books on the aggressive rate hikes that have dominated the economic and financial landscape since 2022. The lone outlier, the Bank of Japan (BOJ), never managed to kill off its negative rates policy and signaled this week at the year’s final meeting of a Group of Seven central banks that a shift away from that stance was not imminent.Allowing the rest of the big central banks to call time on rate hikes was the favorable turn inflation took over the course of 2023. After starting the year with annual inflation rates that were on average 3.7 times the 2% target shared by the U.S. Federal Reserve, European Central Bank (ECB), Bank of England, Bank of Canada and BOJ, the pace of price increases is now down to 1.5 times that target.Of course that means more work to do to complete the “last mile” in the inflation fight. Central bankers are loathe to declare victory prematurely and are battling with over-eager financial markets to retain maximum optionality, prompting the drum beat of pledges to hold rates high for a longer period or raise them again if necessary – the latter in particular being seen increasingly as an empty threat.Inflation, however, does not need to drop all the way to 2% in order for rate cuts to begin, and 2-handle inflation rates could soon be the norm. WHY IT MATTERSHolding rates steady as inflation rates slow further is another form of policy tightening that may not be appropriate for much longer.That is something some Fed officials have begun openly bandying about as a reason for the rate cuts they flagged last week as being in the cards next year, especially if they hope to deliver a “soft landing” for the U.S. economy. Keeping rates restrictive for longer than necessary risks a harsher outcome, one featuring a rapid slowdown in economic activity, a painful rise in unemployment and a recession that much of the world has managed to dodge so far despite that scenario being the more traditional end to rate-hike cycles.Rate-sensitive economic sectors everywhere – such as housing and manufacturing – have felt the pinch of higher rates for more than a year. While services activity generally has continued to expand, S&P Global’s measure of manufacturing activity in developed economies has been in contraction since October 2022, although there are indications the worst may be over with the latest reading at the highest level since the spring. Emerging market factory output, which has been at stall speed for much of 2023, also edged higher.WHAT IT MEANS FOR 2024A major game of chicken is underway as market actors have set expectations for far more policy easing than central bankers are likely to be willing to provide. For instance, while last week’s projections from Fed officials themselves indicated they expect 75 basis points of rate reductions over the course of 2024, bond and rate futures markets are now positioned for twice that amount. That led at least one U.S. central bank official, Chicago Fed President Austan Goolsbee, to confess that he was “confused” by the market’s behavior.Across the Atlantic, meanwhile, sources familiar with the matter told Reuters it is unlikely that the ECB will be in position to cut rates before June, three months later than market pricing there now reflects.The key to it all, of course, rests with inflation since policymakers have said they are willing to stomach some level of economic pain, if necessary, to finally return price pressures to their target levels.Politics may play a hand as well, with general elections scheduled for later in the year, in the U.S and UK in particular. Central bankers who prize their political independence may not want to be seen taking major action too close to elections lest they be accused of trying to tip the outcome.And as the year closed, a potential new spoiler was emerging that could complicate the rate-cut thesis: Attacks by Iran-backed Houthi rebels on cargo vessels in the Red Sea forced shippers to halt or reroute traffic, a supply chain hiccup that could impede further swift progress on inflation. More