Economy

Good morning. It is nice to see the electric car price wars continue, with Ford cutting the price of its Lightning pick-up (which I want) 10 per cent or so to $50,000. If only we could get New York bars to roll back martini prices, I could forget the last few years of inflation entirely. Email me: [email protected]. Potemkin rate increases A Potemkin village is a facade designed to impress, but without any real substance. A rapid fall in inflation without an accompanying decline in demand has raised the question of whether the Fed has just done 500 basis points of Potemkin rate increases. Rate hikes control inflation by cooling demand, bringing it back into balance with supply. If inflation has fallen sharply without a parallel drop in demand, then perhaps the rate increases were fundamentally performative.Paul Krugman summed up the case for a Potemkin Fed on Twitter last Friday:A lot of people saying that disinflation was caused by Fed rate hikes. And even though I supported those hikes — I don’t think there was any alternative — I’m puzzled by these claims. How is this supposed to have worked? The textbook story is that it works like this: Higher rates → economic slack → disinflation. But where’s the rise in economic slack? Do people have a theory of immaculate transmission of monetary policy to prices, without any real-economy weakness along the way? If so, what is that theory? . . . “It was the Fed wot did it” takes look a lot less justified than many are claiming. It’s not totally clear to me what Krugman means by “I don’t think there was any alternative.” If inflation was going to fall without the rate increases, then the alternative was not doing the rate increases. My guess is he means something like this: if the Fed didn’t raise rates in the face of inflation, everyone might have panicked, risking a sharp increase in inflation expectations and an inflationary spiral. This risk had to be avoided even if, absent such a panic, inflation would have fallen on its own. My colleague Martin Sandbu, I should note, was banging the drum on this point long before Krugman got in on the act. Back on June 1, for example, he wrote the following, discussing a paper by Ben Bernanke and Olivier Blanchard: [I’ve argued that] our maximally unfortunate series of inflationary shocks will soon go away by themselves . . . Bernanke and Blanchard find, essentially, that labour markets were the dog that didn’t bark. Labour market tightness only accounts for a sliver (the red segment of their column chart, reproduced below) of inflation above the Federal Reserve’s target of 2 per cent since the end of 2019 . . . take this research, then, to support the view that our current inflationary episode is mostly down to a series of negative supply-side or demand-composition shocks — it is not the consequence of outsize aggregate demand.James Athey of Abrdn argued in an email that the supply-driven character of the inflation spike was obscured by incessant talk of “sticky” inflation: It is prices and wages which are sticky, not inflation and wage growth. And so even if prices remain elevated (ie, the price level has moved up) that is unequivocally not the same as inflation remaining elevated . . . Prices are levels, inflation is changes; a key distinction often lost it seems.What has happened is a series of global supply shocks pushed key input price levels up. Then, with a lag, the wider economy responded to this by raising the prices of other keys goods and services. Those rising prices then led to higher wage demands which, largely because of the pandemic’s effect on global labour markets, were met. Then you get into some of the second-round effects we have seen.There is, however, a straightforward counterargument to the view that the rate rises were basically for show. It is that the economy has cooled since rate increases began, even if gradually. Consider one most obvious indicator, job creation:In an email, Bob Michele, chief investment officer at JPMorgan Asset Management, made the case for the importance of the rate increases:The rise in interest rates has had a material impact on consumer spending which has had an impact on housing and auto sales/prices. Both markets have softened quite a bit as consumers face a significant increase in funding costs to purchase homes or autos. The recently released Manheim used vehicle value index decreased 4.2 per cent . . . the largest drop since April 2020, and it’s at the lowest level since mid-2021. Case-Shiller home prices are also down on a year-over-year basis . . . Real spending (month-over-month) has been negative or flat 5 out of the last 7 months. The Redbook same-store sales index turned negative in the first week of July for the first time since the pandemic . . . and before that, the Great Financial Crisis. This is hardly an environment where retailers would push up prices.Paul Ashworth of Capital Economics adds another point. When supplies were constrained, small increases in demand pushed prices up quickly. Now, on the other hand, small decreases in demand kill inflation more or less instantly:[W]hen the economy is operating close to potential the aggregate supply function is close to vertical — whereas in the environment we were in for the decade before COVID it was close to horizontal, explaining why the Fed couldn’t get inflation up to 2 per cent . . . but in the COVID world . . . small changes in demand suddenly started having massive impacts on prices. But that works in reverse too. If we were/are still at the near-vertical point of the aggregate supply curve, even a small drop back in demand could be expected to generate a big disinflation . . . So this is not an immaculate disinflation — it’s a lot of disinflation for not much demand destructionI find these counterarguments pretty sensible and compelling, so I think it is wrong to say that the rate increases have been all for show. Adam Shapiro of the San Francisco Fed divides personal consumption expenditures inflation into demand- and supply-driven components by distinguishing prices that change in the same direction as volumes (demand) and in the opposite direction (supply). On this method, supply has been the bigger contributor to inflation during the Covid-19 episode, but now the balance is roughly even. His chart:

The Fed’s rate increases, as far as I can tell, are only part Potemkin. But I still think I significantly overestimated the importance of demand for inflation, and demand destruction for bringing it down. As a result, I probably overestimated the risk of recession. Just a week or two ago, I put the odds of recession before mid-2024 at 60 per cent. After several days of hard reflection, I would now put the odds somewhere between 40 per cent and 50 per cent. Why keep my odds of recession even that high, given the current combination of strong demand and falling inflation? Two things. One, the smaller, demand-driven component of inflation may take longer to bring down than the larger supply-driven component, forcing the Fed to keep rates high until the economy sustains real damage. Matt Klein recently argued that, as consumer spending tracks wages closely and nominal wages are running at about 5 per cent,real volumes of goods and services would have to rise about 3-4 per cent a year for the current pace of wage increases to be consistent with 2 per cent inflation. That would certainly be my preference, and there are good reasons to think that productivity might accelerate, but the likelier outcome is that underlying inflation is closer to 4 per cent than 2 per cent . . . At this point, the hope is that the current bout of disinflation buys time for wage growth to (somehow) slow down on its own without the need for any active measures to hurt the economySecond, there is the worry that the rate increases already completed are enough to damage the economy, but are just taking their time doing it. As Athey puts it:The data right now is really suggestive of a soft landing, but therein lies the problem. Today’s data tells us more about fed policy 12 months ago than it does today. Roll the clock forwards and things don’t look so rosy!One good readGood marriages and joint checking accounts. More

Good morning. Leaders from Latin America and the EU have so far failed to agree a joint communiqué, with Nicaragua refusing to accept any text condemning the war in Ukraine.Today, Colombia’s president explains why Chinese money is better than EU solutions and our Moscow bureau chief ponders how serious Vladimir Putin is about destroying the Ukraine grain deal.Good planColombia’s president Gustavo Petro has said that when it comes to climate change, the EU’s market-based approach is far and away outplayed by China’s state-subsidised central planning, writes Ian Johnston.Context: Latin American and Caribbean leaders are in town for a summit with the EU, which wraps up today. Europe wants to rekindle relations with the region but faces competition from the world’s second-largest economy, China.The EU has not held a summit with the continent’s Celac body for eight years, but Latin American countries have certainly not been lonely on the international stage.Over the past 20 years, China has increased trade with Latin American and Caribbean countries 26-fold, from $12bn to $310bn, surpassing trade between the region and the EU and making China its second largest trading partner behind the US.Comparing Europe, China and the United States on climate policy, Petro told the FT: “There’s a greater social conscience in the European Union compared to North American society, which also has a denialist tendency in the climate crisis.” But China’s vast funding makes it a more attractive partner because “China has a greater planning power than the European Union.” Petro said the EU, on the other hand, “has delegated to the market, and to market forces, the possibility of overcoming the climate crisis”.“This leads to two models on which humanity depends at this moment,” Petro said. “Can instruments like carbon taxes, insurance policies and profitability criteria efficiently lead to a decarbonisation of the economy in the short term? Until now, the answer is negative.” Petro, Colombia’s first leftist president and a former guerrilla member, said that responding to climate change requires revisiting “planned” economic solutions once reviled in Europe. “Where there is no profitability, there needs to be public investment,” he said. “When it comes to revitalising the Amazon forest, the word ‘planning’ reappears as a new value that had been destroyed decades ago in public policy.” Chart du jour: Circumvention

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Exports of cars and other goods from Armenia to Russia have surged, with trade between the two countries almost doubling in 2022 as Russian consumers seek conduits to avoid western sanctions.Grain drainRussia’s withdrawal from a deal to ship Ukraine’s grain on to world markets threatens a vital economic lifeline for Kyiv — and gives Moscow another cudgel to aid its invasion of the country, writes Max Seddon.Context: Vladimir Putin’s decision on Monday isn’t the first time Russia has sought to exit the Black Sea grain initiative, a pact brokered by the UN and Turkey a year ago to ensure Ukraine’s plentiful agriculture exports reach global markets.When Russia did the same last autumn, Turkey pushed Russia back into compliance within days. But people close to the talks say Moscow looks more serious this time.Moscow cancelled a planned trip earlier this month by Rebeca Grynspan, the UN diplomat in charge of the talks, to discuss renewing the deal, and has previously pushed an alternative plan to sell its own grain instead of Ukraine’s.Ostensibly, the dispute is over what Putin claims is the west’s failure to uphold its end of the bargain by allowing Russia’s own exports back on to the market. The Kremlin has said it will rejoin if the sticking points are resolved, but that would go further than several EU member states — who have the power of veto — are prepared to go. Those include readmitting a big state-run bank to the Swift payment system, releasing frozen Russian funds in the west, allowing Russia to import agricultural components with potential military use, and reopening a mothballed ammonia pipeline across Ukraine.The geopolitical ramifications imply that Putin also has broader goals in mind. Russia has used the grain deal to rally countries in the global south — particularly in Africa, where food shortages could risk hunger for millions — against western sanctions and win sympathy for its stance on the war.That could indicate, as one person close to the talks says, that Russia’s withdrawal is macho brinkmanship “just to show they can”. African leaders plan to descend en masse on St Petersburg next week for a summit with Putin, giving him additional impetus to win them over. Putin is also expected to make a rare foreign visit to Turkey next month, possibly using the grain deal to re-establish a dominant role in his turbulent relationship with President Recep Tayyip Erdoğan.Western countries aren’t panicking just yet: One EU official refers to “suspension”, not “termination”, and eyes “a window of opportunity to continue negotiations”.What to watch today Second day of EU-Celac summit.Portugal hosts Eurafrican forum in Cascais.Now read theseDangerous gas: The EU, Japan and others want to create a database to monitor methane emissions, after they rose despite a global pledge to curb them.Hot line: The west should continue talking to Russia through secret back-channels, writes Alec Russell. Typo problems: Millions of sensitive US military emails have been misdirected to Mali because of a random similarity between domains. More

What can young people do with their finances to cope with the rising cost of living? What could encourage more people to invest in the stock market? Is the end in sight for cash?These are some of the questions tackled by more than 120 school students who entered this year’s FT competition to find the best young financial journalists in the UK.Organised with the London Institute of Banking and Finance (LIBF), the contest produced three winners, whose entries are published, in edited form, below.Winner 18-19 age groupRohan Noble, 18, Queen Mary’s Grammar School, Walsall, West MidlandsHow can we encourage more consumers to invest in the stock market? 

Rohan Noble

The advent of online and app-based platforms, such as IG and Freetrade, has democratised stock trading enabling a wider range of people than in the past to invest in the stock market.However, currently, just one in three Brits own shares and women are 16 per cent less likely than men to make investments. Evidence also shows higher-income households are more likely to own equities than the less well-off.So promoting stock market investing to women and to lower-income households would be a good way to encourage investment overall.Young investors often follow financial influencers, or “finfluencers” in social media, however, most are male. While prominent female finfluencers exist, such as This Girl Talks Money, there is too little financial advice for women. This disparity needs addressing.Cultivating investing among lower-income households may prove challenging as they have less disposable income than higher-income earners.Improving grassroots financial literacy is vital. The government could promote stocks and shares in disadvantaged regions, put the message out on social media and make personal finance lessons compulsory in schools.Winner 16-17 age groupMoradeke Akisanya, 17, Cheltenham Ladies’ College, CheltenhamWhat financial tactics can young people use to cope with increases in the cost of living?

Moradeke Akisanya

During the Covid-19 pandemic, a large number of young people lived with their parents, postponing their “freedom day” and prolonging their “financial virginity”. Now, in the midst of the cost of living crisis, young people must foot ever-increasing bills.How should you manage your money? Here are some ideas:First, track your expenses. There are hundreds of apps that can help. Personal finance apps, such as Mint, allow users to connect their bank accounts, allowing transactions to be categorised and monitored, including direct debits and standing orders. Next, create a budget. Money Helper’s Budget Planner offers a place to manage your finances. So does Goodbudget, which allows people to sync their budgets with a family member or friend.Also, prioritise what is essential before you splurge. Under the basic 50/30/20 rule, 50 per cent of your income should be set aside for needs, 30 per cent for wants and 20 per cent for savings. As an advantage of youth is low costs, you can try to save a third of your salary, so you are better prepared for any future financial difficulties.Next, use loyalty cards. The consumer group Which? estimates that shoppers can save between 50p and £10 for each £100 spent. My personal favourite is the Boots card. Collecting 4 points for every £1 spent, I have accumulated so many points that I often pay at Boots with my advantage card, so my bank account breathes a sigh of relief. Finally, shop at discounters such as Aldi and Lidl. Although the prospects may seem bleak, good money management can be key to navigating the cost of living crisis.Winner 14-15 age groupTife Yoloye, 14, The Leys School, CambridgeCash — can it stand up and be counted or is the end of physical money in sight?

Tife Yoloye

While digital finance is advancing rapidly, physical money will not be eliminated in the foreseeable future.In the past, illicit transactions were highly dependent on cash. But research by We Fight Fraud, a crime prevention group, reveals that far from stopping illegal proceedings, cashless payments actually encourage them. Until we find good solutions to cyber crime, we would only be enabling online illegality by going totally cashless. Gambling is also an issue. Lockdowns popularised gambling from home, making it easier to bet using a credit card. Even those who didn’t gamble previously felt encouraged to try.They risk falling prey to the social problems associated with gambling, such as losing a job and the breakdown of personal relationships. Many people lack money management skills. Bad spending habits have been fuelled by the use of credit cards because people are more likely to overspend. If society goes cashless, consumer debt could increase, placing millions more people in financial difficulty.Finally, if we go entirely cashless, economic inequality could worsen. When payments rely entirely on technology, everybody must be fully equipped with the right tools. But in the UK almost 2 per cent of the population is unbanked.Currently, more than 8mn people in the UK make cash payments daily: disabling their way of life would be a mighty price to pay for digital advancement. An array of challenges has yet to be solved. More

Colombia’s president has rejected accusations that his country’s economy is stalling because of his controversial reform agenda, including a pledge to end investment in fossil fuels.Gustavo Petro, the Latin American nation’s first leftist leader, said Colombia had “recovered the value of the peso”, which has risen this year by 19 per cent against the dollar. But the peso’s strength, and lower yields on the country’s bonds, reflects optimism among investors that Petro lacks enough congressional support to implement radical reforms, analysts say.“The Colombian economy has got potential aside from just oil: the development of a productive agriculture industry . . . tourism, taking advantage of the country’s beauty, and the possible export of clean energies,” he said.His remarks come at a crucial time for Latin America’s fourth-largest economy as it tries to attract foreign investment to support a rapid and risky transition away from fossil fuel extraction. Brazil, Mexico and Argentina, Latin America’s three biggest economies, are all seeking to increase oil and gas production. Petro, a former guerrilla group member who took office in August after winning the presidential election by a narrow margin, is also trying to push through social reforms that have already split his broad coalition.Despite a bill to reduce working hours failing to pass through Colombia’s congress last month, Petro told the Financial Times he was “confident” that legislation to expand the state’s role in healthcare and pensions would be approved.Demonstrators protest against Gustavo Petro’s reforms in the health, retirement, employment and prison sectors, in Bogotá, in June © Luisa Gonzalez/ReutersThe Autonomous Fiscal Rule Committee, an independent expert group, said last week that Colombia risked falling foul of its own fiscal rules if it implemented the spending increases needed to finance the reforms. The fiscal deficit is forecast to close the year at 4.3 per cent of gross domestic product. Petro, who has called on the masses to rally in support of his plans, countered that there would be no breach as the changes would be funded by “a substitution of costs”. “We spend a lot of time caring for patients because there is no prevention. By increasing prevention of illness, we reduce the [cost of] care. When a country increases its health spending it’s an investment that increases [its] economic power.” Analysts say Petro — who has a reputation for impulsive decision-making — will struggle to reassemble a coalition to shepherd his reforms through congress, which returns from recess on Thursday. His approval rating is 33 per cent according to polling by Bogotá-based Invamer, down from around 50 per cent at the start of the year. His tenure as mayor of Bogotá from 2012-15 saw him double down on divisive policies following spats with coalition partners.“Any time Petro sees a fork in the road where there’s moderation or entrenchment, he never chooses moderation,” said Sergio Guzmán, the director of Colombia Risk Analysis, a Bogotá-based consultancy. “Markets have renewed faith that Colombian institutions will be an obstacle for Petro’s radical agenda, and that’s making markets more confident in Colombian bonds,” Guzmán added.Investors have baulked at the cost of Petro’s reform agenda and at his pledge to end new spending on fossil fuel exploration, despite oil and coal production making up around half the value of the country’s exports.Colombia was the fastest-growing major Latin America economy in 2022, expanding GDP by 7.5 per cent, but growth is forecast to be just 1 per cent in 2023, according to the IMF. Last year the economy was boosted by an increase in coal and oil export prices, as global energy markets were squeezed after Russia’s invasion of Ukraine. But inflation is running at around 13 per cent and Petro’s administration has not yet outlined a clear plan to replace the revenues that the country gains from fossil fuels.Finance minister Ricardo Bonilla said Colombia would boost its agricultural and manufacturing sectors to supplant fossil fuel revenues, though analysts are sceptical as to how these industries can be made internationally competitive.Petro aims to address the worst effects of climate change. Colombia is highly exposed to extreme weather patterns, particularly heavy rainfall, and is home to around 8 per cent of the Amazon rainforest.Bogotá has committed to reach net zero emissions by 2050 and Petro claimed that deforestation in Colombia fell in the first three months of 2023 compared with the same period last year. Spain’s PM Pedro Sánchez, left, president of the European Council, Charles Michel, second right, and president of the European Commission, Ursula von der Leyen, right, welcome Gustavo Petro during the EU-CELAC Summit of Heads of State and Government in Brussels © Olivier Matthys/EPA-EFE/ShutterstockPetro is in Brussels for a two-day summit of EU and Latin American and Caribbean leaders, the first top-level meeting between the regions for eight years. Expectations for the summit are low owing to rifts over the Ukraine war and environmental provisions holding up an EU-Mercosur trade deal.Petro said Europe should see trade with Latin America as an opportunity to “build a future linked to decarbonisation and diversification of production”. “Europe has a higher carbon footprint compared with Latin America . . . If world trade turns to an exchange for goods made with a low carbon footprint, this [region] would have a high level of competitiveness,” he said. More

The writer is president of Queens’ College, Cambridge, and an adviser to Allianz and GramercyExcessive wage increases are increasingly being framed as the sole cause of a UK inflation problem that is causing mortgage difficulties and forcing families to make tough choices with their shrinking purchasing power.While this message gained traction recently due to the latest wage data and inflation warnings from the UK chancellor and the Bank of England, it is partial and can easily mislead. It oversimplifies the inflation challenge and the appropriate policy response. It also increases the risk of economic stagnation, further exacerbating the current inflation and interest rate predicament.The current phase of high UK inflation is similar to advanced countries’ experience in the 1970s and 1980s. Initially driven by a few factors (energy and food in this case), it leads to broader price increases across the entire goods sector before impacting on services. Consequently, inflation does not fall rapidly even after the initial shock has subsided. Meanwhile, the process itself fuels and is fuelled by wage growth which is less sensitive to interest rate rises.According to the latest data, annualised wage growth for the three-month period ending in May was 7.3 per cent, surpassing the consensus forecast of 7 per cent. Private sector pay rose by 7.7 per cent, outpacing the public sector’s 5.8 per cent. The data release pushed market interest rates higher, while mortgage providers, reacting to previous rate increases, raised the average two-year mortgage rate to over 6.6 per cent, a level not seen in 15 years.The data followed the calls for wage restraints from both the chancellor Jeremy Hunt and BoE governor Andrew Bailey at the Mansion House gathering of high-level representatives from the finance industry and elsewhere. Bailey also kept the door open for a second consecutive 0.5 percentage point interest rate hike at the upcoming meeting of the Bank’s Monetary Policy Committee.The UK inflation debate now focuses excessively on wage-push inflation, where providers of goods and services pass on higher wage costs to consumers. This is unfortunate for three reasons.First, it comes at a time when real wages have already been significantly eroded by an inflation that peaked above 10 per cent. Even the latest wage gain, although high in nominal terms, falls short of the May consumer price inflation of 8.7 per cent.Second, the drivers of inflation are more complex and diverse than just wages. They include the initial timid policy response to what was mischaracterised as “transitory” inflation by most central banks; disrupted international supply chains; a tight labour market; and the prioritisation of profit margin maintenance by some companies.Third, focusing excessively on wage restraint as the main tool for reducing inflation increases the probability of a recession. It would undermine household demand at a time when high mortgage costs are already placing a significant burden on households. Economic activity, as well as the provision of essential public services, is also vulnerable to strike action.It may be tempting to perceive these problems as uniquely British given that inflation is running at more than twice the US level and above that in the eurozone, and wages are increasing at a faster pace. This inclination is amplified by the country’s historical tendency towards industrial action and more stubborn resistance to real wage erosion, albeit dating back decades. However, given the strength of the services sector in all three economic regions, there is a substantial risk that the US and the eurozone may eventually adopt a similar framing of the challenge and solution to inflation. This would further impede global growth, which is already hindered by a disappointing economic recovery in China.The UK should lead others in implementing a more comprehensive policy response. This approach should complement interest rate hikes and wage restraints with meaningful measures to invigorate the supply side. It should take advantage of the necessary energy transition, embrace exciting technological innovations and reassess the best path to taking inflation to a low and stable level.Such an approach would not only reduce the risk of stagflation but also enhance prospects for sustainable productivity growth and expand the country’s growth potential. It would provide a better chance of tackling the long-term challenges posed by climate change, high debt, low growth, and the excessive inequality of income, wealth and opportunity. More

The World Bank has unveiled new measures to boost its lending to the world’s poorest countries as it pivots towards tackling climate change and pandemics alongside its traditional mandate to alleviate poverty. The lender said it would launch a new $5bn guarantee programme allowing shareholder countries to pledge to repay loans for countries in the event of a default. Officials estimated the measure would increase available funds by $30bn over the next decade by allowing the lender to issue more loans to developing countries while maintaining a AAA credit rating. In a factsheet outlining the new initiatives, the Bank said it was working to “drive impactful development and take more risk — helping create a world that is inclusive of everyone, including women and young people, resilient to shocks, and sustainable.”It said it was working with shareholders and rating agencies to allow it to expand lending against its callable capital — money governments have pledged to give to the bank if it is in financial distress.Ajay Banga, the new World Bank president nominated by US president Joe Biden, will say at a speech at the G20 on Tuesday that officials are working to “stretch every dollar” while preserving the Bank’s AAA credit rating, according to prepared remarks. “We cannot endure another period of emission-intensive growth,” Banga will say. “We must find a way to finance a different world, one where climate [is] resilient, pandemics are manageable, food is abundant, and poverty is defeated.”The World Bank has for decades maintained that holding an AAA credit rating from all three main rating agencies was essential for it to access low-cost funding from bond markets. But a G20-commissioned report, released last summer, found multilateral development banks, including the World Bank, could potentially take on more financial risk while maintaining their top-tier ratings. Banga will say the Bank was “responding” to calls for reform. “A new vision is required that is worthy of our shared aspirations. In my view, the vision for the World Bank is simple: To create a world free of poverty — on a liveable planet.”On Tuesday, the Bank said it had begun fundraising for a new crisis facility to offer concessional funds — either grants or extremely low-interest loans — to the world’s lowest income countries, with a fundraising target of $6bn.Last month, the World Bank said it would allow countries hit by disasters to pause repayments on loans and allow countries to “quickly redirect” a portion of their funds to responding to a crisis.The World Bank has come under fire for failing to adequately address the scale of the global climate crisis while maintaining its mission to reduce poverty. In February, former World Bank president David Malpass resigned from his post almost a year early after facing intense pressure over his refusal at a conference to say whether he believed humans caused climate change. He later said his comments had been misinterpreted. More

While the central bank has consistently rolled out liquidity measures this year to support a sluggish economic recovery, it still retains enough space to further cut its benchmark interest rates and reserve requirement ratio (RRR) for local banks.The PBOC had cut its medium-term lending facility (MLF) and its loan prime rate (LPR)- two benchmarks used to determine borrowing costs in the country- in June, while local banks had also begun trimming interest rates on yuan deposits.While the chances of further reductions in the two benchmark rates are slim, with the PBOC keeping the MLF steady this week, a need to stabilize growth later in the year could attract more cuts, analysts told the CSJ.Instead, the PBOC is more likely to cut the RRR- which is a mandate that sets the minimum level of reserves a bank must maintain in relation to its deposits. Reductions to the figure unlock more permanent stimulus for the economy as compared to the PBOC’s open market operations.An RRR cut appears likely in the third quarter, and will be the PBOC’s first such reduction since March, when it had trimmed the ratio to stimulate a post-COVID economic recovery in the country. But that recovery now appears to be running out of steam, with data on Monday showing that growth in China’s gross domestic product slowed substantially in the second quarter from the first.Weak economic readings from the country have drummed up speculation over Beijing unlocking more stimulus for the economy, with PBOC officials recently affirming that they will take more measures to support growth.But the PBOC disappointed some investors hoping for a further reduction in its MLF on Monday. The bank is now widely expected to keep its LPR steady later in the week. Analysts also told the CSJ that changes in the U.S. Federal Reserve’s monetary policy- particularly a potential pause in the bank’s rate hike cycle- would have limited impact on China, beyond easing some depreciationary pressure on the yuan. More

The writer, a senior fellow at the Yale Law School and former chair of Morgan Stanley Asia, is author of ‘Accidental Conflict: America, China, and the Clash of False Narratives’US Treasury secretary Janet Yellen’s recent trip to Beijing was the economic policymaker’s carbon copy of Antony Blinken’s earlier diplomatic mission — plenty of talk but no meaningful conflict resolution. The same can be expected from climate envoy John Kerry’s trip to China. Both sides are aiming low, more intent on re-establishing connections than rethinking a deeply troubled US-China relationship.The problem is not with the messengers. The diplomats are just following orders, consistent with the leader-to-leader commitment Presidents Joe Biden and Xi Jinping made at the November 2022 G20 meeting in Bali to put “a floor” on the relationship. Yes, a floor is an improvement from a downward spiral, but it runs the very real risk of setting the stage for a new phase of conflict escalation. Current efforts are a replay of an old, tired formula of US-China engagement. This featured periodic summits between 2006 and 2017, notably the twice yearly Strategic Economic Dialogues of the George W Bush administration followed by the broader annual Strategic and Economic Dialogues of the Obama era. These were grand and glorious exercises in event planning, but they failed to prevent the trade war, the tech war and the early skirmishes of a new cold war. Now it seems that both Yellen and Blinken would like nothing better than to return to this failed approach. The same is the case with China. Li Qiang, the new Chinese premier, borrowed an elliptical page from one of his predecessors, Wen Jiabao, and spoke wistfully after meeting Yellen of seeing “rainbows” after a round of “wind and rain”. This deeply troubled relationship needs far more than just a “floor” to prevent a new round of conflict escalation. That is the minimum that Biden and Xi expect from each other as responsible stewards of a fragile world. But without reinforcement, it could turn out to be surprisingly shaky. The great February balloon fiasco is an example of how quickly matters can veer out of control in the face of the slightest glitch. This precarious state of affairs is an unavoidable consequence of an important shift in the priorities of US-China relationship management — a longstanding emphasis on economics and trade has now been supplanted by concerns over defence and security.Unlike economics and trade, in which relationship conflicts are evaluated through the lens of hard data, security concerns are judged more on the basis of unsubstantiated presumptions of adversarial behaviour. China’s dual use of advanced technologies, blurring the distinction between commercial and military purposes, is a case in point. The US assumes that China will weaponise artificial intelligence just as it takes for granted that Huawei poses a backdoor threat to 5G infrastructure or TikTok will use proprietary data gathered from young US users for nefarious purposes. China operates under the same paranoid mindset, presuming that Washington’s trade and technology sanctions are aimed at “all-around containment, encirclement and suppression”, to quote Xi’s words at this year’s Chinese People’s Political Consultative Conference. With both nations operating on the basis of presumption without evidence, the dangers of further escalation, especially in the face of looming risks for tech investment and strategic materials exports, cannot be ignored.Old-style engagement is ill equipped to deal with these risks. In the end, that rests on leader-to-leader chemistry, which is always vulnerable to the tenuous interplay between domestic politics and the need for fragile human egos to save face. Today’s US-China conflict has outlived that approach. For this reason, I am in favour of the establishment of a US-China secretariat as the centrepiece of a new architecture of Sino-American engagement — a permanent organisation, staffed by equal complements of US and Chinese professionals, located in a neutral jurisdiction with a broad remit for policy development, troubleshooting and conflict resolution. Its focus would be on a forward-looking, full-time approach to relationship management and dispute screening. A secretariat would shift the relationship framework away from the personalisation of endless diplomacy towards a more resilient institutionalisation of collaborative problem solving.Stuck in the past, diplomats are now celebrating the thaw after a big freeze. While, for the time being, the escalation of tensions is on a tenuous hold, it is urgent that both superpowers seize the moment and push for an entirely new approach to conflict resolution — before it is too late. More