Economy

The budget deficit for the first five months of the year was 263.6 billion lira ($10.12 billion), compared to 124.6 billion lira a year ago due to increased spending ahead of May elections and the impact of February’s earthquakes in southern Turkey.”We will not allow permanent deterioration in public finance indicators by reestablishing fiscal discipline and taking budget deficit under control,” Simsek said on Twitter.Turkey hiked value added tax (VAT), fees and consumer loan taxes on Friday.A draft law being discussed in the parliament seeks to increase corporate tax to fund rebuilding efforts after February’s earthquakes killed more than 50,000 people and left millions homeless in the south.Simsek said more than 319,000 units of housing will be built and delivered within one year to people who lost their homes.”The package, which is being discussed in the parliament, aims to reduce the impact of the additional costs caused by the earthquake on the budget. These regulations will also indirectly support taking the current account deficit under control.”($1 = 26.0552 liras) More

BEIJING (Reuters) – The United States has repeatedly referred to a senior Chinese central banker as the head or acting head of the People’s Bank of China (PBOC) in recent days, appearing to confirm his expected elevation to the top post.Treasury Secretary Janet Yellen referred to PBOC Deputy Governor Pan Gongsheng, whom she meet during a series of meetings with top Chinese officials, as the head of the central bank during a press conference ending her visit to Beijing on Sunday. The ruling Communist Party named Pan the PBOC party chief on July 1, a move that two policy sources said put him in position to succeed Yi Gang as central bank governor for the world’s second-biggest economy, a position nominated by the government.The Treasury Department was already referring to Pan as central bank head after Yellen met him on Friday. She also met Yi and other officials including Premier Li Qiang, during her four-day visit.Asked to clarify her remarks on Sunday, Yellen said: “It’s up to the Chinese side to decide and to announce their decision, but I did meet with the acting governor of the PBOC at this point, and we had very good discussions.” The PBOC and China’s State Council Information Office, which handles media queries on behalf of the government, did not immediately respond to requests for comment on Sunday.Pan, 60, has been deputy governor since 2012 and is China’s top foreign exchange regulator. The expected elevation of the financial technocrat, who has done research at Cambridge and Harvard universities, points to growing concerns within the country’s leadership over systemic risks in its sprawling financial sector, policy insiders and analysts say.Governor Yi has been widely expected to retire since being left off the ruling Communist Party’s Central Committee during the party’s once-in-five-years congress in October. The apparent leadership shift comes as expectations rise for the authorities to take steps to boost the flagging economy. A slowdown is deepening and spreading with the waning of a burst of activity that followed the lifting of strict COVID-19 controls.Yellen emphasized the importance of the U.S. and China cooperating on global challenges in her meeting with Pan, during a trip aimed at improving communications between two sides at odds over issues including trade and security. More

US controls on investment into China would only target sensitive national security sectors, Janet Yellen has told her counterparts in Beijing during a four-day visit aimed at putting a “floor” under their turbulent relationship.Speaking at a news conference on the final day of her visit, which included meetings with Premier Li Qiang and her counterpart He Lifeng, the US Treasury secretary said she wanted to allay concerns about harm to China’s economy from the possible national security action.Throughout her visit Yellen has talked up the potential for ongoing trade and economic co-operation between the US and China, highlighting Washington’s desire to stabilise the relationship, even as it makes it harder for China to obtain American technology.The Biden administration is now considering a mechanism to reduce the risk of US investment helping China’s military. “I emphasised that [investment screening] would be highly targeted and clearly directed narrowly at a few sectors where we have specific national security concerns,” Yellen said.Over the course of her visit, Yellen reiterated that it was important to have high-level engagement between Washington and Beijing despite security-related concerns.“Even where we don’t see eye-to-eye, I believe there is clear value in the frank and in-depth discussions,” Yellen said.Yellen said she had voiced concern with her counterparts over everything from security and human rights to an “uptick in coercive actions against American firms”.“I also raised the importance of ending Russia’s brutal and illegal war against Ukraine,” she added in remarks shortly before departing Beijing. “I communicated that it is essential that Chinese firms avoid providing Russia with material support or assistance with sanctions evasion.”Her visit came as China grapples with an underwhelming economic recovery after the lifting of Covid controls. While China is targeting growth of five per cent this year, economists fear some underlying growth engines, such as the property sector, are entering a prolonged slump.This has led the government to seek more foreign investment. But tensions with the US have hurt sentiment, with business concerned about getting caught up in tit-for-tat trade sanctions and increasingly tough national security measures. China’s state media generally gave muted coverage of the Yellen visit. The Xinhua news agency described the talks as “constructive” and “pragmatic” but said Beijing believes that “generalising” national security issues was “not conducive to normal economic and trade exchanges”.The nationalist Global Times was more effusive, quoting China’s second-ranked official, Premier Li Qiang, as telling Yellen that “China-US ties can see ‘rainbows’ after a round of ‘wind and rain’”.Dennis Wilder, a former top CIA China expert now at Georgetown University, said Chinese leaders “clearly see Secretary Yellen as one of the more pragmatic, and less political, senior officials in the Biden administration”.“They also assess that historically economic and trade relations have been the ballast in US-China relations, stabilising ties even when issues such as Taiwan or the Tiananmen crackdown roiled the relationship,” Wilder added. “After all, overall US-China bilateral trade continues to reach new heights even as the overall relationship has hit new lows.” More

German chemical groups are investing in modern plants and green technologies — but largely outside Europe, the industry’s largest union has warned.“Investments in new plants and new technologies [ . . .] are flooding out of Germany,” said Michael Vassiliadis, chair of Germany’s union for the chemical and energy industries IG BCE, adding that the trend had been accelerated “since the problem with energy”.The main benefactors, Vassiliadis said, were China and the US, which were offering companies “full packages” that on top of tax incentives include access to green energy and regulatory fast-tracking. Competition for foreign direct investment is increasing for European countries. Germany last year suffered a record deficit in corporate investments as companies looked overseas, according to the German Economic Institute, which called the situation “alarming”.Washington last year unveiled large subsidies available for investments in various green technologies under its Inflation Reduction Act, which seeks to attract foreign direct investment in key sectors. China has likewise delved into state coffers to bolster certain industries — one of which remains chemicals, Vassiliadis said.Beijing, which is struggling with a protracted economic slowdown, is especially welcoming of foreign direct investment in areas involving high technology, such as advanced manufacturing, information technology and scientific research as it seeks to move its industry up the value chain.Vassiliadis, who in his role as union leader sits on the supervisory board of BASF, said the German chemical group is a striking example of a company investing in state-of-art technology in China. The world’s largest chemical company is currently building a €10bn petrochemicals complex in Zhanjiang. Modelled on the German group’s headquarters in Ludwigshafen, it will be equipped with “cutting-edge technologies” and the “highest . . . sustainability standards”. The company has meanwhile warned that it will “permanently” downsize its operations in Europe.Vassiliadis said the investment was possible through the support of Chinese authorities, which met the company’s request for large amounts of cheap, green energy by building a wind farm next to the site.Christian Faitz, co-head of chemical sector research at Kepler Cheuvreux, said he did not believe any new plants producing ammonia — which plays a role in a net zero economy through its role as a hydrogen vehicle — would be built in Europe. Meanwhile, BASF has closed one of its two ammonia plants in Ludwigshafen, citing high energy costs.“I would hope that [European] politicians are aware of these trends,” Faitz said, adding the trend could threaten industrial growth on the continent.Germany’s chemical industry trade group VCI said companies in the sector could not afford not to invest in China, which makes up roughly 43 per cent of the global market.Investments by German chemical groups in China had “expanded” in recent years, the VCI added, stating that a fifth of foreign investments by the industry ended up in the country.Additional reporting by Joe Leahy in Beijing More

European aluminium producers are warning that a loophole in the EU’s carbon border tax will lead heavily polluting exporters such as China to circumvent the rules and flood the bloc with low cost, emissions heavy metal.Under the EU’s proposed carbon border tax, a levy on the amount of CO₂ emissions produced during the manufacture of goods imported into the bloc, offcuts of aluminium which are remelted can be sold as a zero carbon product even if the virgin material was produced with coal or other fossil fuel power.Aluminium companies including Norsk Hydro and Speira told the Financial Times that the so called carbon border adjustment mechanism (CBAM) incentivised producers outside the EU to generate as much scrap as possible which would be then be remelted and exported to Europe. “This loophole enables the widespread greenwashing of imported aluminium products and undermines the effectiveness of CBAM in preventing carbon leakage,” said Hilde Merete Aasheim, chief executive of Norway’s Norsk Hydro.Lightweight and durable, aluminium is vital for building aircraft and cars and is used in solar power components. However, it is the most energy-intensive metal known in the industry and is sometimes referred to as “solid electricity”.Aluminium production accounts for around 3 per cent of the world’s industrial emissions, according to the International Energy Agency. This is slightly more than the emissions from aviation.The CBAM will initially be introduced without charges during a trial phase that starts in October this year; producers will have to pay the levy from 2026. In the initial phase, it will cover seven different sectors including aluminium, iron, steel, fertiliser and hydrogen.The aim is to prevent products made with lower cost but dirtier production processes from undercutting companies within the EU that have to comply with the bloc’s stricter climate laws and pay for pollution under the EU’s emissions trading system. EU officials hope that it will promote more rapid decarbonisation in industrial sectors around the world. In the EU, smelters emit around 6.8kg of CO₂ for every kilogramme of aluminium, compared to a global average of 16.1kg of Co2 per kg, according to the trade body European Aluminium. But the loophole risks undercutting its purpose, say its critics.Ana Šerdoner, senior manager in industry and energy systems at the environmental NGO Bellona, said that some manufacturers “might use [this loophole] to reshuffle their exports a bit and make sure those scraps are remelted and sold to Europe as carbon neutral”.Europe’s aluminium producers’ claims come on top of concerns about a lack of rebates for exports containing imported aluminium that had been taxed, finished products such as cars or cans containing highly polluting aluminium being allowed in without paying for emissions generated in metal production and the loss of the sector’s free emission allowances. “The details and current design raise more concerns than opportunities,” said Volker Backs, head of public affairs at Speira, a large German aluminium rolling and recycling company, who warned of CBAM’s impact on Europe’s broader manufacturing competitiveness.Paul Voss, head of European Aluminium, said that if the measures were poorly designed the sector “will be undercut so badly there will be nothing left to decarbonise and it won’t help the planet”.Europe’s aluminium industry has been ravaged by higher energy costs after Russia invaded Ukraine, leading to approximately half of the EU’s smelting capacity to shut.For some, opposition to CBAM is more fundamental. Nick Keramidas, executive director of EU Affairs at Greek aluminium producer Mytilineos Energy & Metals, said that the domestic producers facing soaring costs needed a level playing field.“CBAM threatens to cripple European production out of serving the European and global market. It would actually cause the problem it seeks to address by causing more carbon leakage,” he said.The CBAM has been heavily contested by countries outside the EU, which argues that it punishes producers in less developed nations that are economically reliant on exports to the bloc.The European Commission, which is consulting on the final details of CBAM until July 11, declined to comment. More

Eurozone rate-setters are becoming increasingly concerned about an apparent disconnect between a seemingly buoyant jobs market and mounting signs of economic stagnation. Unemployment in the region is at a record low and companies are struggling to fill vacancies. But the eurozone economy has suffered a mild contraction over the past two quarters. The disconnect between the strength of the jobs market and the weakness of growth lies in a fall in workers’ productivity, which is contributing to a 5.5 per cent inflation rate that remains far too high for rate-setters’ liking.The European Central Bank’s hawks are intent on avoiding the fate of the UK, where the tight labour market is exacerbating even higher inflation than in the eurozone. They want more increases in borrowing costs, despite already raising their benchmark deposit rate by 4 percentage points to 3.5 per cent.Christine Lagarde, ECB president, has warned that unless companies are willing to “absorb” the cost of the drop in productivity, monetary policy will have to become even more restrictive.But some economists believe more rate rises could kill jobs without having much impact on prices. So what conclusions on the labour market should the ECB draw ahead of its next monetary policy meeting later this month? People are working fewer hoursOn the face of it, the eurozone’s jobs recovery has been almost as impressive as in the US.Figures published last week showed eurozone unemployment stayed at a historic low of 6.5 per cent in May, even as the economy flatlined. Business surveys suggest labour shortages are still widespread and companies keen to hire, even if the vacancy rate has come down slightly from a post-pandemic high.

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However, although there are more jobs, and a higher proportion are full-time, people are working fewer hours on average.This could reflect a growing preference for leisure time after the dislocation of the Covid pandemic led people to rethink their priorities. Peter Schaffrik of RBC Capital Markets said shorter working hours reflected “durable behavioural changes . . . that are unlikely to be reversed”. The ECB suspects it has more to do with labour hoarding, where companies hang on to workers even as business tails off because they are worried they will be unable to hire again easily when the economy picks up.Either way, companies will have to take on more staff just to keep output constant. This could in turn mean interest rates need to rise and stay high for longer, to keep wage pressures in check.Most of the jobs growth is in less productive sectorsThe ECB has drawn attention to another factor that could explain the disconnect between employment and growth: a lot of the job creation has been in the public sector, where working hours tend to be shorter, and in services, where productivity tends to be lower than in industry. This is especially so in Germany and Spain, where a surge in hiring in health and education has offset sluggish private sector demand.

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If there is a permanent shift to public from private sector jobs, then that would imply productivity would be lower in the longer run. Some economists share the view that the weaker trend in productivity will endure.Alexandre Stott, an economist at Goldman Sachs, said the recent fall will be “at least somewhat permanent in nature and only slowly reflected in wage agreements”. The recovery may be more fragile than it looksOther economists have argued that, if it raises rates too high, the ECB risks needlessly destroying jobs that the bloc’s poorer economies desperately need. In many southern European job markets employment has still not fully recovered from the 2008 financial crisis.Nicolas Goetzmann, head of research at the Paris-based asset manager Financière de la Cité, said record high employment gave an illusion of strength, but masked huge variation between the bloc’s big economies. Outside the public sector, employment in Germany had fallen, he said. Private sector jobs growth was being driven by France, largely owing to a surge in apprenticeships backed by government subsidies.

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“There is no fairytale concerning the euro area and employment,” said Goetzmann, adding that companies hoarding labour could swiftly turn to job cuts if the economic situation worsened. “It is frightening now that the ECB is fighting so hard against domestic demand . . . to break a labour market that for the first time in 40 years is starting to be a bit better.”Erik Nielsen, chief economics adviser at UniCredit bank, said the ECB’s own projections showed wages would barely keep pace with prices if measured from the onset of the inflation shock. “We are still way underwater,” he said. Since pay gains had mainly been in northern Europe, he added, there had also been a much-needed rebalancing within the eurozone, which would help southern Europe compete. The wrong indicator?Others say that, even if the ECB’s intuition on productivity and inflation is correct, the central bank is watching the wrong indicator.The ECB is focusing on unit labour costs, with Lagarde pointing to a rise in this measure as evidence that productivity had weakened in the face of wage pressures.This rise in unit labour costs was, the ECB president said, “a key reason why we recently revised up our projections for core inflation”.But economists such as Claus Vistesen of consultancy Pantheon Macroeconomics say the measure is “hugely lagging”. Unit labour costs are, he said, “the last thing to turn just before recession hits”.“If you set policy relative to unit labour costs . . . there’s a 90 per cent chance you’re going to get it wrong.” More

Yellen, who departs Beijing on Sunday after a four day visit, told a press conference that the United States and China have significant disagreements and they must be communicated “clearly and directly.” “No one visit will solve our challenges overnight. But I expect that this trip will help build a resilient and productive channel of communication with China’s new economic team,” Yellen said in remarks prepared for the news conference.Yellen said the objective of the visit was to establish and deepen ties to China’s new economic team, reduce the risk of misunderstanding and pave the way for cooperation in areas such as climate change and debt distress.She reiterated that Washington was not seeking to decouple from China’s economy, adding doing so would be “disastrous for both countries and destabilizing for the world.”But she said the United States wanted to see an “open, free and fair economy,” not one that forces countries to take sides.She said she used the discussions to raise “serious concerns” about what she called China’s “unfair economic practices” and recent uptick in coercive actions against U.S. firms. Yellen also discussed Russia’s war in Ukraine with her Chinese interlocutors, and said it was “essential” that Chinese firms avoid providing Russia with material support for the war, or in evading sanctions. More

South Korean exports to Russia of motor lubricants that can be used in tanks, armoured cars and other military vehicles more than doubled last year, as Korean companies took advantage of their western competitors’ retreat from the market following Vladimir Putin’s invasion of Ukraine.Motor lubricant exports from South Korea to Russia increased 116.7 per cent in 2022 to $229mn, according to Korean government statistics. The surge came after western oil majors including Total, Shell and BP voluntarily scaled back their Russian operations, including sales of lubrication oils used in vehicle transmissions and engines, following the outset of the war.Russian import data shows that SK Enmove, a subsidiary of South Korean conglomerate SK Group, and GS Caltex, a joint venture between South Korea’s GS Group and US energy giant Chevron, were the two main Korean beneficiaries of the western companies’ exits.Both companies denied that their products were being used by Russia’s military, claiming strong compliance standards among their local partners. There are no South Korean restrictions on exports of motor lubricants or engine oils to Russia. Neither company has been accused of violating sanctions.Experts said it was all but impossible to verify that motor lubricants, which can be used for civilian or combat vehicles, were not filtering through to military uses.“Any POL [petrol, oil and lubricant] product can have dual use — civilian or military,” said Patrick Donahoe, a retired US major general and former commander of the US Army’s Maneuver Center of Excellence. “Anyone selling POL to Russia is helping their aggression in Ukraine.”Russian import records examined by the Financial Times show that SK Enmove and GS Caltex shipped about $2.8mn of engine oil to Russia in January 2022, prior to the full-scale invasion of Ukraine. Their volumes have since soared, reaching a peak of about $28mn in March 2023.The data shows that SK Enmove now accounts for 6.5 per cent of Russian motor oil lubricant imports, with GS Caltex supplying just over 5 per cent.“Korean firms can enter niche markets in Russia left by bigger international companies,” said Jeong Min-hyeon, head of the Russia and Eurasia team at the Korea Institute for International Economic Policy. “But realistically, I don’t think that Korean companies can control who can be the end users of their exports to Russia.”GS Caltex, which makes the Kixx brand of engine oils, and SK Enmove acknowledged they had benefited from their competitors’ withdrawal from the Russian market but insisted they took precautions to ensure their products were not diverted for military use.GS Caltex said there was “no chance” its products could be diverted to military use in Russia, adding that its “contract with a Russian private company contains clear rules on reselling of our products”.“Due to the US and EU sanctions, they can’t sell our products to the military and our Russian subsidiary is well aware of the importance of this matter,” the company said.Chevron, which withdrew its own lubricant and chemical products from the Russian market following the invasion of Ukraine, said it “does not comment on the business matters of our non-operated joint ventures, including GS Caltex”.SK Enmove, which also acknowledged that its Russian sales had profited from its competitors’ exits, said most countries relied on local production of motor oils for military use to ensure a stable supply.“Lubricants produced by Russian refiners are so low-priced that they command a large market share,” it said. “Our engine oil products are relatively high-priced that they are sold mostly for premium car users.”

A South Korean car parts trader who has exported lubricants globally said it was “ridiculous” for the companies to suggest they could track the end users of their Russian exports.“A lubricant exporter claiming they know where their products end up is like a ramen exporter claiming they know who is going to eat their noodles,” said the trader.A trade ministry official in Seoul said the country had export controls on “items that can be diverted for military use or weapons of mass destruction, but lubricants are like a commodity”. Imposing restrictions on motor oil could “take considerable time”, the official said. More