Economy

Chinese businesses are retreating from the US as relations between the world’s two largest economies deteriorate.Chinese investment plunged to $2.5bn in the US last year — the lowest in more than a decade and down from a record $48bn in 2016, according to an analysis by Rhodium Group, a think-tank. Business activity, including revenue and local employment, at Chinese companies that were already present in the US market has also declined.“The environment in the US has become more challenging for Chinese investors,” says Adam Smith, a partner at law firm Gibson Dunn and a former US Treasury adviser. “Being concerned about China has become a real bipartisan issue upon which almost everybody can agree, rightly or wrongly.”More than 80 per cent of Chinese companies cited the stalemate in bilateral relations as the leading challenge for business, according to the latest survey conducted by the China General Chamber of Commerce, which represents Chinese investors in the US. More than one-third reported unstable US policies towards foreign investment as a concern.“We used to be a panda . . . We were liked by everybody but, then, we became the skunk, and people are afraid of getting close to you,” says Pin Ni, president of Wanxiang America, a subsidiary of China’s largest auto components manufacturer.Ni adds that, while the company is a US legal entity and has operated in the country for nearly 30 years, potential business partners have become wary of its Chinese connections. “People still say, ‘Oh, as long as you carry the name, it looks like you’re Chinese. If you’re Chinese, then we’re concerned.’”After former president Donald Trump imposed tariffs on billions’ worth of Chinese goods, his successor Joe Biden has banned outbound investment in strategic sectors and created historic subsidies for domestic semiconductor and clean tech manufacturing. These include provisions that exclude Chinese companies or sourcing.While other East Asian countries have announced dozens of large-scale cleantech and chips projects in the past year, Chinese companies that have attempted to make large US investments have faced backlashes and divided local towns that need jobs and new business.Last month, Republican presidential candidate Vivek Ramaswamy criticised Chinese battery company Gotion’s planned factory in Big Rapids, Michigan, arguing “we will not let our children become Chinese serfs”.“It’s tearing us apart . . . The community is divided really in a bad way, and I have friends on both sides of the issue,” says Fred Guenther, mayor of Big Rapids, who has received death threats for his support of Gotion’s factory, which promises to create more than 2,000 jobs in the community.The Committee on Foreign Investment in the United States — the federal agency responsible for screening — reviewed a record number of transactions in 2022, with Singapore and China among the top investing countries. China filed 36 notices last year, down from 44 in 2021 but more than double the number in 2020.State governments are also moving to crack down on foreign investment. About three dozen states have proposed bills that would restrict foreign ownership of land this year, up from 12 proposals last year. Some 24 states have enacted bans, primarily targeting agricultural land and foreign adversaries such as China, according to the National Agricultural Law Center.Micah Brown, a senior attorney at the NALC, says the majority of laws enacted in 2023 are targeted at “foreign adversaries” and have become “political flashpoints” for national security.“This is about where your loyalties lie,” Arkansas Republican governor Sarah Huckabee Sanders said last month when she announced an agricultural land ban directed at nine foreign entities, including China, and forced Swiss seed company Syngenta to sell 160 acres of its land because of its Chinese ownership. ChemChina, a Chinese state-owned enterprise, purchased Syngenta in 2017.Saswato Das, a spokesperson for Syngenta, calls the announcement a “shortsighted action” that “hurts Arkansas farmers more than anyone else”. All of Syngenta’s land holdings have been examined by the US government, and no one from China has ever directed the company to “buy, lease, or otherwise engage in land acquisition in the United States”, says Das.Syngenta has had to sell land More

Deep in rural Minnesota, surrounded by fields of corn and soyabeans, Joe Biden tried to explain the phrase he hopes will kick start his bid for re-election next year.“Folks, ‘Bidenomics’ is just another way of saying the American dream,” he said last week at a farm in Northfield. One year out from an election that many analysts believe could be a defining moment in the country’s history, Biden is persistently behind in the polls and under growing pressure within his party. Over the weekend David Axelrod, who was chief strategist for Barack Obama’s presidential campaigns, suggested it might not be “wise” for Biden to even run in 2024, in part because of his age. Yet Biden is still pressing ahead with a re-election bid and is betting everything on his personal economic blueprint. In recent months, he has embraced the term Bidenomics to promote his ambitious agenda, which is rooted in trillions of dollars’ worth of public investments, a focus on middle-income workers and an aggressive approach to competition policy. Biden insists his policies represent a decisive break from 40 years of “trickle-down economics [which] limited the dream to those at the top”. A new $25mn advertising blitz in key battleground states tries to drive home the point. “Today, inflation is down. Unemployment the lowest in decades. There is more to do, but President Biden is getting results that matter,” the narrator says.But worryingly for Biden and his Democratic party, voters remain overwhelmingly downbeat on the US economy — and place the blame squarely on him. Even if the US is doing better than most of its peer economies, ordinary Americans do not feel that way about their living standards. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.That leaves Biden vulnerable to attacks from Republicans, who relentlessly accuse him of leaving Americans worse off. For them, Bidenomics is synonymous with acute sticker shock on food and other everyday necessities as inflation remains historically high post-pandemic. “Bidenomics has made everything more expensive for Minnesota farmers, workers, and families,” the Republican National Committee said ahead of the president’s trip to the Midwestern state. “As the cost of farmland and diesel continues to surge, Biden’s policies are crushing those who feed America.” Opinion polling suggests the attacks are working — putting the president on shaky political ground heading into an election year. “The economy perhaps matters less than it used to in determining the outcome of national elections, but for many people, the kitchen table issues, the bread and butter issues, those are still extremely important,” says Maxwell Shulman, a non-partisan policy analyst at Beacon Policy Advisors.A poll from the Associated Press and NORC at the University of Chicago last month showed that nearly three in four American adults describe the national economy as poor. About two-thirds said their household expenses had risen over the past year, and only a quarter said their incomes had increased during the same period.Most worryingly for Biden, a New York Times/Siena poll, published this week, found that just 19 per cent of voters in the battleground states that are likely to determine the outcome of next year’s presidential election — Arizona, Georgia, Michigan, Nevada, Pennsylvania and Wisconsin — said economic conditions were “good” or “excellent”. Joe Biden is welcomed by Minnesota governor Tim Walz in Northfield. where the president told voters: ‘Folks, “Bidenomics” is just another way of saying the American dream’ More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.California’s largest cities plunged in popularity with foreign direct investors last year as an uncertain global economic outlook, high taxes, and Chinese restrictions on outbound deals squeezed capital flows into the Golden State.Los Angeles slumped 10 places in the annual FT-Nikkei ranking of the best cities for foreign businesses, coming 37th out of the 91 largest US cities in this year’s ranking. The largest city in California attracted 51 investment projects by foreign-owned enterprises last year, the lowest figure in five years. In the first seven months of 2023, only 20 such projects were announced, according to fDi Markets data.The state, if it were a country, would be the world’s fifth-largest economy. Yet no major Californian city was ranked among the top 20 US hubs for luring foreign businesses in our listing. A handful of notable deals, such as by Beijing-based TikTok owner ByteDance, which leased premises for its new headquarters in San Jose, and an announcement by Italian electric vehicle battery maker Italvolt that it would build a gigafactory in southern California’s Imperial Valley, failed to energise dealmaking by foreign investors in some of the bigger cities.The state has been criticised for its high cost of living and tax rates, as well as its more demanding regulatory environment and social policies that, in some cases, have pushed businesses elsewhere, notably Texas and Florida. On a statewide basis, however, California recovered some of the pandemic hit to foreign direct investment (FDI) inflows in 2022, gaining 271 foreign-owned enterprises, compared with a drop of 500 the year before. The bulk of investment into the state has come from Japan, the UK, France and Canada, as well as an in­creasing sum from Germany. In August, German auto parts maker Bosch acquired the chipmaking facilities of TSI Semiconductors in Roseville, a suburb of Sacramento, and said it planned to invest $1.5bn in the site.The FT-Nikkei ranking showed that investor sentiment had soured for some Californian cities. San Francisco was ranked the 31st most attractive city in the US for foreign investment, down three spots on the previous year. FDI in the wider Bay Area fell sharply in the wake of the Covid-19 pandemic, plunging from 98 deals in 2019 to around 47 in 2021, according to fDi Markets.Meanwhile, San Diego, in southern California, fell four places to 29th in the ranking. Other Californian cities, such as Sacramento (the state capital), Irvine and Anaheim, improved their scores last year, but all still lingered in the bottom half of the ranking overall.This ranking is a compilation of data on the economic, regulatory and social characteristics of US cities with more than 250,000 citizens, using more than four dozen metrics, including business environment, workforce and talent, and quality of life. Los Angeles suffered a sharp drop after a decade-long boom in its economy during which Asian and European capital flooded into its entertainment, aerospace and tourism industries. Chinese companies were some of the biggest investors in LA hotels, office buildings and other commercial real estate in the past decade. However, China has limited outflows of investor cash in recent years and growing geopolitical tensions between Washington and Beijing have halted even more deals.The number of Chinese foreign-owned-enterprises in California has fallen 14 per cent since 2021, according to the World Trade Center Los Angeles, a body that supports business between LA and foreign companies.“After 2008, LA became a primary destination for multibillion-dollar investments from China,” says Stephen Cheung, chief executive of the LA Economic Development Corporation. “Now, we’re definitely seeing the fluctuation. When the Chinese government switched its policy to capital flow restriction, we saw a sharp decline.” Investment from Chinese businesses is still happening, Cheung adds, but at far lower values.A string of Chinese property developers, which had invested heavily in the city, defaulted on loans in the past two years, forcing them to halt developments and put land up for sale. China Oceanwide spent $1.1bn on a project downtown LA where it planned to build a Park Hyatt hotel and 500 condos, but ran out of cash and needed to stop construction in 2019.A view of the unfinished Oceanwide Plaza in Los Angeles in 2019 More

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Routine month-end demand for cash in China’s banking system snowballed into a scramble on Oct. 31 that pushed short-term funding rates as high as 50% in some cases, an incident that authorities are now investigating. Six participants in the market say a confluence of factors drove fear and confusion across trading rooms in Shanghai and Beijing by late afternoon on that day. Eventually, the People’s Bank of China (PBOC), its affiliated China Foreign Exchange Trade System (CFETS) and bond clearing houses stepped in, directing lenders, extending trading hours and holding meetings with institutions to calm markets.The contributing factors were the usual month-end demand for liquidity, cash hoarding in the lead up to a big government bond sale and a market where the biggest banks were already reticent to lend because of a mandate to counter pressure on the yuan.”It was an accident,” said Xia Chun, chief economist at wealth manager Yintech Investment Holdings, calling it an unforeseen consequence of the government’s heavy hand in financial markets.”Banks were grudging in lending, leaving non-banks asking each other for money in afternoon trade,” he said. “Borrowing rates surged as a result, with some willing to take any price.”The reasons for the spike in interest rates and the ensuing market chaos are detailed here for the first time. Participants say that the vulnerability exposed will stay as long as capital outflows keep the system under pressure.Most of them requested anonymity as they were not authorised to discuss a sensitive topic publicly. The PBOC told Reuters that CFETS was probing “abnormal” trades on Oct. 31 involving some accounts repeatedly borrowing and lending money at “extremely high interest rates” near the end of trading hours. ‘COMBAT MOOD’Short-term financing markets, such as overnight repurchase agreements, or repos, are crucial to the daily business of banks, insurers and other financial institutions.They affect foreign exchange movements since the markets are the major avenue for the supply of money.Funds and non-banks borrow and roll over loans that finance their investments and trades in the repo market. The month-end is also when banks and other finance-sector participants have to square their books and comply with rules on capital buffers. Disruptions, therefore, can threaten financial stability.Seeds of trouble were sown in October when China approved one trillion yuan ($137.32 billion) in sovereign debt sales, to be rolled out – according to sources familiar with the plans – by sticking to the issuance schedule for the fourth quarter but increasing the size of each tranche.Typically, said one fund manager in Shanghai, in such situations the PBOC would offset the cash drain from the extra bond issuance with extra funding support – for example by relaxing bank reserve requirements.But putting extra cash into the system would risk adding downward pressure on the yuan – which has lost over 5% against the dollar this year – and undercut months of efforts to stabilise the currency. “The inaction by the central bank is mainly due to its concern over yuan depreciation,” said the fund manager, who declined to be identified as he was not authorised to talk to media.On trading floors that Tuesday, the scramble for short-term funds became a stampede.Even repo rates between banks, normally stable and the main gauge of short-term funding costs, flew from an overnight rate of 2% a day earlier to as high as 8% on Oct. 31.DESPERATE BORROWERSAt 4 p.m. (0800 GMT) the state banks that normally lend to desperate last-minute borrowers were missing, according to three market participants.The absence left a couple of desperate borrowers paying 30%-50% – rates not seen since defaults at China Everbright (OTC:CHFFF) Bank and Industrial bank Co Ltd a decade ago – to secure the loans they needed.At 5 p.m. markets closed with positions unfunded and trades incomplete.”No one left the trading desk, as you don’t know how things will go … the whole trading room was in combat mood,” said one fund manager in Beijing. “If you need to square your positions in such an environment, and want to avoid default, you need to borrow at high rates,” the fund manager said. “For each individual, it’s rational behaviour.”The PBOC stepped into the breach, asking state banks to supply funds while the China Central Depository & Clearing Co (CCDC) and Shanghai Clearing House both reopened settlements at 6 p.m in an emergency response. By 8.30 p.m., crisis was averted and the market cleared and closed again.DO NOT ‘BE EMOTIONAL’At a follow-up meeting with banks and brokers the next day, sources said the PBOC told institutions their behaviour was “disturbing the market” and that they should not “be emotional.”The money market operator CFETS told traders to keep a 5% ceiling on repo transactions and said anyone involved in high-rate deals closed on Oct. 31 would need to explain themselves to regulators, according to sources who received the notice. Fear subsided with overnight rates falling back below 3%. To be sure, most see the danger as having passed.But analysts have turned to the backdrop – intensifying control over China’s currency – as an underlying source of tension.China’s economic rebound from the COVID-19 pandemic has been a disappointment. Together with rate rises around the world, it has fanned capital outflows and the yuan has suffered.And yet, after dropping 5% on the dollar over the year to mid-August, the exchange rate has been conspicuously steady since as efforts from state-bank buying to new rules discouraging short selling have been deployed to support it.Tighter liquidity is another method.”If the pattern of money supply and liquidity provision remains unchanged, the whole system remains fragile. Another liquidity shock is always possible,” said the Beijing-based fund manager.Others see less risk, but expect tightness will stay as long as there is pressure on the currency. Broad dollar weakness has helped the yuan lately, but at 7.28 to the dollar it is not far from September’s 16-year low of 7.351.($1 = 7.2822 Chinese yuan) More

Financial markets worldwide pay close attention to the wage trends in the world’s third-largest economy. The Bank of Japan regards sustainable pay increases as important for unwinding its ultra-loose monetary stimulus.Inflation-adjusted real wages, a barometer of consumer purchasing power, dropped in September by 2.4% from a year earlier after a revised 2.8% fall the month before, data from the Ministry of Health, Labour and Welfare showed.The consumer inflation rate officials use to calculate real wages, which includes fresh food prices but excludes owners’ equivalent rent, slowed to 3.6%, the lowest since September last year.Still, nominal pay growth in September was 1.2%, after a downward revision of 0.8% in August and only slightly better than in July. Japan’s largest labour organisation Rengo is expected to demand pay increases of 5% or more, while the largest industrial union, UA Zensen, will seek a 6% wage increase in negotiations early next year.Prime Minister Fumio Kishida’s government last week drew up a 17 trillion yen ($113.72 billion) economic stimulus package that includes slashing annual income tax and other taxes by 40,000 yen ($267.58) per person and paying 70,000 yen to low-income households.Special payments fell 6% year-on-year in September after a revised 6.3% decline in August. The indicator tends to be volatile in months outside the twice-a-year bonus seasons of November and January and June to August.Base salary growth in September advanced by 1.4% year-on-year, from a revised 1.2% increase the previous month, the data showed.Overtime pay, a gauge of business activity, went up in September by 0.7% year-on-year, after a revised 0.2% gain in August.SLUGGISH SPENDING Household spending decreased 2.8% in September from a year earlier, falling for seven months in a row, separate data on Tuesday showed, roughly in line with the median market forecast for a 2.7% decline.On a seasonally adjusted, month-on-month basis, household spending climbed 0.3%, versus an estimated 0.4% fall.Expenses in eating out, transportation and automobile-related spending went up due to an increase in outings, while spending on food, housing, furniture and household goods decreased partly due to rising prices, a government official said. Major companies agreed to average pay hikes of 3.58% this year, the highest increase in 30 years. Average Japanese workers’ wages had remained virtually flat since the asset-bubble burst in the early 1990s until this year. More

NEW YORK (Reuters) – Federal Reserve Bank of Minneapolis President Neel Kashkari said on Monday that the U.S. central bank likely has more work ahead of it to control inflation. “The economy has proved to be really resilient even though we’ve raised interest rates a lot over the past couple of years. That’s good news,” Kashkari said in an interview on the Fox News television channel. But he added: “We haven’t completely solved the inflation problem. We still have more work ahead of us to get it done.” Kashkari’s comments suggested he is still leaning toward raising interest rates again. The Fed met last week in a gathering that kept its overnight short-term interest rate target unchanged at between 5.25% and 5.5% and preserved the option to raise rates again as inflation is still well above its 2% target.But with price pressures falling, many in markets believe the Fed is done with raising rates.Kashkari said recent inflation data has been good and moving lower, which he welcomed. But he added: “I’m a little nervous about declaring victory too soon,” noting he wants to see more data before deciding what he thinks the Fed should do next. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The writer is a senior fellow at Carnegie ChinaWhile Chinese policymakers debate over whether or not debt levels will limit their country’s ability to maintain many more years of high, investment-driven economic growth, it’s not just internal constraints that matter. External ones will count just as much, even if they are less discussed both inside and outside China and less well understood.Some simple arithmetic is useful here. Investment accounts for roughly 24 per cent of global gross domestic product, and consumption the remaining 76 per cent. Even in the highest investing economies, the actual investment share of GDP rarely exceeds 32-34 per cent, except for short periods of time.China, however, is an extreme outlier. Investment last year accounted for around 43 per cent of its GDP, and has averaged well over 40 per cent for the past 30 years. Consumption, on the other hand, accounts for roughly 54 per cent of China’s GDP (with its trade surplus making up the balance).Put another way, while China accounts for 18 per cent of global GDP, it accounts for only 13 per cent of global consumption and an astonishing 32 per cent of global investment. Every dollar of investment in the global economy is balanced by $3.2 dollars of consumption and by $4.1 in the world excluding China. In China, however, it is offset by only $1.3 of consumption.What is more, if China were to grow by 4-5 per cent a year on average for the next decade, while maintaining its current reliance on investment to drive that growth, its share of global GDP would rise to 21 per cent over the decade, but its share of global investment would rise much more — to 37 per cent. Alternatively, if we assume that every dollar of investment globally should continue to be balanced by roughly $3.2 dollars of consumption, the rest of the world would have to reduce the investment share of its own GDP by a full percentage point a year to accommodate China.Is that likely? Probably not, given that the US, India, the EU and several other major economies have made very explicit their intentions to expand the role of investment in their own economies. But without this kind of accommodation from the rest of the world, any major expansion in China’s share of global investment risks generating much more global supply than demand. That will be especially painful for low-consuming economies, that will be competing producers, even perhaps for China itself.The imbalance may be an even bigger problem when we consider that since 2021 China has been shifting investment away from the bloated property sector towards manufacturing. In the past two years, while investment in China’s property sector has declined — and is expected to decline further — total investment hasn’t. This is in part because of an increase in the amount of investment directed by Beijing into industry and manufacturing. The result has been — after a decade of decline — a rising manufacturing share of China’s GDP.But if China’s share of global GDP rises over the next decade, driven by a continued reliance on manufacturing, how easily can the rest of the world absorb the country’s expansion? Currently, the manufacturing sector globally comprises roughly 16 per cent of the world’s GDP, and as little as 11 per cent of the US economy. China is once again an outlier, with a manufacturing share of GDP at 27 per cent, higher than that of any other major country.If its economy were to grow over the next decade at 4-5 per cent a year even without a further increase in the manufacturing share of the country’s GDP, China’s share of global manufacturing would rise from its current 30 per cent to 37 per cent. Can the rest of the world absorb such an increase? Only if it is willing to accommodate the rise in Chinese manufacturing by allowing its own manufacturing share of GDP to decline by half a percentage point or more.The point is that without a major, and politically difficult, restructuring of its sources of growth — away from investment and manufacturing and towards an increasing reliance on consumption — China cannot raise its share of global GDP without an accommodation from an increasingly reluctant rest of the world. Without that contentious accommodation, the global economy would find it extremely difficult to absorb further Chinese growth.Many more years of high growth in China are only possible if the country were to implement a major restructuring of its economy in which a much greater role for domestic consumption replaces its over-reliance on investment and manufacturing.   More