Economy

Brad Setser’s paper on how China has stashed away almost $3tn worth of unofficial currency reserves in local commercial banks and other parastatal entities has naturally generated a lot of attention. After all, these “shadow reserves” are larger than the formal reserves of Japan, the world’s second-largest reserve holder according to IMF data. It’s almost three times larger than the assets of Norway’s sovereign wealth fund.In a recent note, Eurizon SLJ’s Stephen Jen and Joana Freire also observed that Chinese companies have been hoarding dollars lately: increasing their greenback deposits from $758bn at the end of 2019 to $912bn at the moment. But they also reckon this undercounts the accumulation, given the balance of payments over that period. They put China’s overall dollar accumulation at $2tn, and estimate that Chinese corporate dollar deposits are now actually closer to $1.78tn (of which about half is held in accounts with Chinese banks). “Fresh snow continues to build up, raising the risks of an avalanche one day,” they warn.Chinese corporates continue to hoard dollars. The total stock of dollars held by Chinese entities continues to rise. The dollar’s high carry may at present seem enticing to Chinese entities, but this configuration is fundamentally unstable. Prospective rate cuts by the Fed and/or an economic reacceleration in China could lead to a precipitous fall in USDCNY, as corporate treasurers in China scramble to sell the dollars they don’t need to have. We believe this is a major risk for H2 2023.Jen and Freire see three potential triggers for this “too large to be stable” dollar overhang to become an avalanche. Trigger 1. The Fed turning dovish later this year. We believe the Fed remains behind the inflation curve. Core CPI should soon decline with headline CPI, since there is no obvious reason why that should not be the case. The chart on the left below shows headline CPI and core CPI since 1958. Eye-balling this chart, one would struggle to conclude that, at any point during this period, core inflation in the US led headline inflation. The chart on the right below shows the 5-year rolling correlation of headline and core CPI.

Apols for the low res . . .  © Eurizon SLJ

One could see that, whenever US inflation rose due to a shock (in the late-1960 due to strong demand growth arising from tax cuts, in the early-1970s due to the Saudi embargo of crude oil, and in the late-1970s due to the Iranian Revolution), the correlation between these two variables was close to 1, both when inflation surged as well as when inflation normalised. It is, in particular, unclear how big a role such large and sharp interest rate hikes have played in pushing up interest costs of mortgages in the US, and subsequently rents. Housing costs are estimated to account for 61 percent of core CPI’s yoy inflation. Could US core inflation appear sticky ironically because of the Fed’s rate hikes, in turn raising the mortgage interest rates? We believe the Fed is likely to be wrong in being concerned about stickiness in core inflation, just as they were wrong in being concerned about persistent disinflation in 2020-2021. Trigger 2. A recovery in confidence in China. China currently suffers from an acute case of a lack of confidence resulting primarily from the domestic policy shocks since the summer of 2021. Notwithstanding the declarations made by the new Premier Li Qiang on the primacy of economic growth and development, households, businesses, and investors in China remain unsure whether the Xi Administration has pivoted left politically to embrace Maoist ideology of hard-core communism that would, from now on, favour SOEs (state-owned enterprises) at the expense of POEs (privately-owned enterprises) and to strictly constrain the property sector to only play the role of a ‘commodity’ for the populace to use and consume rather than an investment. Since properties accounts for 80 percent of household wealth – a draconian change in the nature and the dynamics of the property market permitted by the Xi Administration would significantly undermine the ability and the willingness of Chinese households to spend, with logical implications for the economy at large and investors’ outlook. On June 16th, the State Council, however, announced that stimulus measures would be deployed to ensure that China reaches its growth target of 5.0 percent for the year. A prospective restoration of general confidence in China would be positive for Chinese equities, Chinese bond yields, and the Chinese RMB. At the same time, a better economic prospect should also entice Chinese producers and exporters to engage in capital expenditures funded out of the hoarded dollar deposits. A large overhang of dollars could then trigger a sharp sell-off in USDCNY, we believe. Trigger 3. A normalisation of US/global services demand. During the Pandemic, the US and the world’s demand for goods surged while demand for services waned because of the lockdowns. However, relative demand for services and goods switched after the re-opening of the economies. This is particularly clear in the US, where relative demand for services is now materially stronger than that for goods. Services inflation, commensurately, has surged relative to goods inflation. This helps explain why services-centric economies like the US, Italy, and Greece are out-performing the goods-intensive economies like China and Germany. This is a good explanation of some of the dichotomies we are seeing in the global economy, but it is not something that will persist, in our view: if one feels the urgent need to go to Disney World because they hadn’t been there in three years, it is unlikely they will visit Disney three years in a row to ‘make up for the lost time’. More likely is a normalistion in demand for goods and services back to the pre-Pandemic norm, permitting Triggers 1 and 2.  More

China and Japan are worried about currency weakness, meaning investors are alert for signs of action from authorities. Australia’s central bank meets and the most closely-watched U.S. economic indicator is out Friday.Here’s a look at the week ahead in markets from Lewis Krauskopf in New York, Kevin Buckland in Tokyo, and Naomi Rovnick, Amanda Cooper and Karin Strohecker in London.1/ TIME FOR SOME NON-FARMInvestors betting on resiliency of the U.S. economy have found solace in the solid labor market. But its strength will be tested by the July 7 monthly jobs report.    Economists polled by Reuters expect 225,000 new jobs were created in June, a slowdown from recent monthly growth.    In May, non-farm payrolls increased 339,000, well above estimates, although a surge in the unemployment rate to a seven-month high of 3.7% suggested that labor market conditions were easing.    The jobs report comes after the Federal Reserve skipped raising rates in June after lifting them at 10 straight meetings. Investors expect the Fed to resume hiking in July. Of course, if the labor market is weakening more than expected, such a move could be thrown into doubt. After all, Fed Chair Jerome Powell says interest rates will move at a “careful pace” from here. 2/ CHINA BLUES Weak China data is deepening speculation that Beijing stands ready to stimulate a flagging economy and prop up a weakening currency.Data on Monday showed China’s Caixin/S&P Global manufacturing purchasing managers’ index eased to 50.5 in June from 50.9 in May.Weak consumer confidence and a lacklustre property market have helped push Chinese equities down about 5% in the last quarter. The yuan has lost around 4.6% against the dollar so far this year. By setting a stronger-than-expected trading band for its currency on June 27, China may have hinted that economic policy is shifting into stimulus mode. To keep 2023 GDP growth above 5%, authorities are likely to continue cutting rates, step up support for home buyers and increase investment in high-tech manufacturing. And if growth deteriorates further, a “more aggressive” response is likely, analysts say. 3/ WHIPLASH? The investors wearing neck braces must be Australian.The Reserve Bank of Australia and economic data have conspired to give markets repeated cases of whiplash ahead of Tuesday’s highly anticipated policy decision.Resilient retail sales data on Thursday suggested some cushion for another rate rise, a day after a shock slide in consumer inflation to a 13-year low saw an aggressive paring of tightening bets.Prior to that, a blockbuster jobs report mid-month had seen hike bets rise, after getting wound down following surprisingly dovish minutes of the June meeting, showing the decision to raise rates was “finely balanced”.The upshot? Market odds are just 1-in-3 for a third consecutive quarter point bump on July 4, and an Aussie dollar languishing at multi-week lows. Considering the May hike was also a line-ball call, neck stretches seem advisable.4/ PUTIN AND THE MUTINEERSThe Wagner mutiny, the gravest threat to Russia’s Vladimir Putin’s rule to date, might have been aborted, but will long reverberate. Any changes to Russia’s standing – or to the momentum behind the war in Ukraine – could be felt near and far.The immediate fallout would be felt in commodity markets from crude oil to grains – most sensitive to domestic changes in Russia. But knock on effects, from inflation pressures to risk aversion in case of a major escalation, could have far reaching consequences for countries and corporates already feeling the heat from rising rates.The domestic fallout from the uprising is also still in flux. Two of Russia’s most senior generals having dropped out of public view while the rouble crashed through the 87 to the dollar level to a 15-month low on political risk concerns.5/ GREEDFLATIONInflation has eased from multi-year peaks. But for anyone that has visited a supermarket, put fuel in their car, or even paid for concert tickets across big economies, the cost of living remains high.IMF researchers calculate that in the first quarter, corporate profits accounted for 45% of the annual rise in euro area inflation, by far the largest contributing factor, and that ratio is similar elsewhere.    It says companies need to relinquish some of their juicy profits if inflation is to get back to target.    No doubt central banks have had some success in quelling inflation with rate rises. Trade flows meanwhile have normalised since Russia’s invasion of Ukraine, while the cost of the likes of wheat, sunflower oil or oil have eased.Still with the inflation fight far from over, expect companies to now face greater scrutiny from policymakers and consumers alike. More

Pakistan’s prime minister Shehbaz Sharif has vowed to turn round the country’s crisis-hit economy as he faces hotly contested elections this year, after the government secured a crucial $3bn IMF rescue financing deal to avert the threat of default.Pakistan and the IMF on Friday reached a preliminary agreement for a nine-month, short-term loan package after months of tense negotiations, helping avert an imminent default after the country’s foreign reserves fell precariously low. The IMF’s board is expected to approve the deal by the middle of this month.Sharif hailed the deal, which came after Islamabad agreed a package of painful economic reforms, calling it “a much-needed breather”.While the agreement “will help the country achieve economic stability, the nations are not built through loans”, he added. “I pray for this new programme to be the last one.”Ishaq Dar, the finance minister, said on Friday: “We have stopped the decline, and now we have to turn to growth.”Pakistan’s stocks surged the most in three years following the deal, with the benchmark KSE 100 index jumping almost 6 per cent on Monday morning, triggering an hourlong trading halt in Karachi.The agreement also delivered a boost to Pakistan’s sovereign bonds, which have rallied sharply over the past week on hopes of a rescue. One dollar bond maturing in April 2024 — which had traded for as little as $0.42 on the dollar this year — climbed half a cent in early trading on Monday to just over $0.72.Sharif said the IMF deal would strengthen his government’s hand against arch-rival Imran Khan, a former cricketer and prime minister who was ousted by parliament last year but is widely seen as the most popular candidate in national polls due by October.Analysts warned that the bailout was only a short-term solution to Pakistan’s economic crisis, one of the worst in its history. Economists estimate the government owes about $25bn in debt repayments in the financial year that starts this month, meaning Sharif’s government must raise billions more from lenders such as China and Saudi Arabia.It also needs to rein in inflation, which hit 29 per cent in June, an improvement from 38 per cent the month before. The shortage of dollars has left businesses struggling to operate and created severe shortages of imports. Pakistan’s foreign reserves of $3.5bn are less than enough for one month’s worth of imports.“The presence of the IMF gives confidence to the private sector that their government will generally pursue a prudent fiscal and monetary policy,” said Abid Hasan, a former World Bank adviser.But he noted that successive governments in Islamabad have consistently failed to implement IMF-backed reforms needed to end boom-and-bust cycles that have plagued the country’s economy. The deal announced last week is the country’s 23rd with the fund.“Pakistan’s future can only be determined by Pakistan,” Hasan said.Pressure to break with the package of IMF-mandated reforms could also mount as elections approach. The commitments include unpopular measures such as cutting subsidies on energy and raising taxes in an effort to create a budget surplus. The government estimates that about half of budget spending for the financial year will go towards debt servicing, leaving comparatively little left.“In the past, Pakistan has often reneged on a deal once the acute phase of the crisis has passed. The danger is that history repeats itself,” analysts at Capital Economics wrote in a note to clients. “Even if Prime Minister Shehbaz Sharif is committed to a deal, he could be out of office before the end of the year.”The IMF programme also provides little immediate reprieve to businesses. Many have been hard hit by austerity measures as well as import and currency controls put in place to try to stem the drop in foreign reserves.The Overseas Investors Chamber of Commerce and Industry said in a statement that the IMF deal would “remove the perpetual uncertainty in the economic landscape” but warned that investor faith in Pakistan had been shaken and the government needed to take “many confidence-building measures to kick start the stalled economic activities”.Shahid Sattar, secretary-general of the All Pakistan Textile Manufacturers Association, said import shortages should ease as IMF dollars flowed back into financial markets. 

But he added that the industry would continue to struggle with cripplingly high costs. About 40 per cent of the textile sector “is currently closed due to non-continuation of competitive energy tariffs and supply constraints”, he said, adding that the sector had already cut about 7mn jobs, or 20 per cent of its workforce.Before the IMF deal, the economic crisis had become so severe that some multinationals announced they were leaving Pakistan altogether. In June, Shell said it would sell its stake in its local unit, while Virgin Atlantic this year announced that it was ceasing operations in the country.Sheikh Ehsan Elahi, who runs football manufacturer Atlas Sports in Sialkot, a city famed for producing sporting goods for top international brands, said “rising cost of electricity and higher taxes” had led to a sharp slowdown. “We are no more competitive in the international market,” he said.Additional reporting by Hudson Lockett in Hong Kong More

Every now and then a “feel good” story pops up on American morning TV that would make most Europeans spit out their tea in horror. Good Morning America, for instance, ran a piece about a “trendy co-worker baby shower gift”: donating some of your limited paid leave to your pregnant colleague, so she can have a little longer with her newborn before returning to work. One woman said she was grateful to have a whole 12 weeks with her baby before returning to her job, thanks to leave donated by her colleagues. Another TV station told the tale of medical staff who donated their paid time off during the pandemic to a colleague who had leukaemia.These aren’t one-offs. Roughly a quarter of US employers have a “paid time off donation programme”, according to a poll by the American Society of Employers. One university, for example, gives its workers “the opportunity to donate accrued vacation . . . to fellow employees who have experienced a catastrophic illness or injury and who have exhausted all accrued time”.People are donating their leave to each other because the US system is so miserly in this regard. America has no statutory entitlement to paid maternity leave or paid sick leave at the national level. It’s hard to overstate how much of an outlier this makes it among rich countries. On average across OECD countries, mothers are entitled to almost 19 weeks of paid maternity leave. I took off about a year when I had a baby in the UK, most of which was paid.I think about disparities like this whenever I hear Europeans fret that their continent is falling behind the US in terms of economic might. It’s not that GDP doesn’t matter, but is it really the only yardstick by which countries should jealously compare their progress against one another?This is hardly a new question. People have argued for decades that GDP is an insufficient measure of national prosperity or living standards, but attempts to come up with something better tend to end up rather mushy. The trouble is, once you start to think about which factors are important, it’s hard to know when to stop. The OECD’s Better Life index has 11 different indicators. Not to be outdone, the UK’s Office for National Statistics has 44 indicators of “national wellbeing”, from participation in sports to levels of trust in government. Before you know it, you’re looking at a dreaded “dashboard” which, while full of perfectly interesting information, makes it hard to tell what’s going on overall, let alone how one country compares with another.

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It would be better to make it simple. For my money, life expectancy is the most important supplementary measure of how a country is doing. It is a solid quantitative metric based on mortality rates, and few things matter more than life and death. It is also influenced by other factors people care deeply about, such as the treatment of babies and mothers, the quality of food, healthcare, education, pollution, jobs and crime. One could argue that “healthy life expectancy”, a measure of the years people live in decent health, would be even better, but the data available right now is too subjective to compare trends robustly across countries.Of course, policymakers do care about life expectancy already. But what might the world look like if politicians compared these statistics as obsessively and anxiously as they do their GDP trends? By this measure, the US would not be envied by the rest of the rich world. Even as its economy grows, the life expectancy of its people falls further behind that of its peers. In 1980, life expectancy was roughly the same in the US as it was in Italy and France, and higher than in the UK and Germany. It had sunk to the bottom of that pack by the 1990s, and now it is being overtaken by much poorer countries in terms of GDP per head. For all the ink spilled about when (or if) Chinese GDP will overtake America’s, Chinese life expectancy has already quietly achieved that feat.

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None of this is to say that GDP doesn’t matter. It represents the size of pie, which helps to determine what a country can do in the world, as well as the kind of life it can provide for its people. Unsurprisingly, then, GDP per head and life expectancy tend to roughly correlate, but there are plenty of exceptions from which lessons can be learnt. Some countries punch above their economic weight when it comes to life expectancy, such as Spain, Italy and Japan with their healthy diets. The US, with its guns, processed foods and poor safety net, punches well below. People who care about health and want to influence policymakers or the public often try to highlight the impact it has on the economy. “Poor health reduces global GDP by 15 per cent each year,” one McKinsey study claims. “Endemic ill-health in England’s “left behind” neighbourhoods costs the country almost £30bn a year because people are often too ill to work and die earlier” another report suggests. But this is to get things precisely backwards. We don’t want to live long and healthy lives so we can generate GDP, we want GDP so we can live long and healthy lives.There’s nothing wrong with a bit of healthy competition between countries. But when it comes to economic growth, let’s not confuse the means with the [email protected] More

The writer is president of Queens’ College, Cambridge, and an adviser to Allianz and GramercyJune was an extraordinary month for the central banking world, one that could potentially be remembered as a defining moment for the credibility of central banking in advanced countries. It is likely to be significant for the political autonomy of individual central banks and the prospects for inflation, growth and inequality.Rarely do we witness such a combination of events within a few days. The Bank of England, a major central bank, surprised markets by increasing its interest rates for the 13th consecutive time by an unexpectedly large 0.50 percentage points.The European Central Bank raised rates and signalled more to come despite the eurozone economy shrinking and cautionary signals from leading indicators. The central banks of Australia and Canada, both closely monitored for their monetary policy insights, resumed rate increases after a pause in their tightening cycles. Smaller central banks in Norway and Switzerland continued on their path of raising rates. And Turkey’s new central bank leader boldly shifted away from the puzzling monetary policy stance advocated by the country’s president, raising rates sharply.In contrast, the US Federal Reserve chose not to raise rates, despite officials increasing their inflation forecasts and guiding markets towards an extended period of higher interest rates.This combination of events is far from ordinary. In the context of a two-year battle against inflation, it presents a confused and confusing situation that casts an uncomfortably bright spotlight on central banks, both individually and as a collective. Many are now drawing the ire of impatient politicians and ordinary citizens pressured by higher prices and mortgage rates.The theme underlying all these developments is the persistence of inflation. That has led to a consensus among central banks that interest rates must remain elevated for a longer duration. Even the Fed’s pause is viewed by most as only a temporary break before a resumption of rate rises.What makes this situation even more unusual is that it comes after one of the most concentrated hiking cycles in decades. Consequently, yield curves in several government bond markets indicate that investors increasingly anticipate a period of stagflation — where an economy is characterised by stagnant growth and still high inflation. For instance, with its recent leg up, the US two-year yield trades at an astonishing 1 percentage point above the 10-year bond benchmark, indicating investors’ willingness to accept substantially lower returns for an additional eight years.This not only amplifies the focus on central banks but fuels a blame game that undermines the political autonomy desperately needed to restore policy effectiveness and public credibility. Moreover, it diverts attention from the fact that central banks, acting alone, cannot address all the challenges of the current policy trilemma: maintaining low and stable inflation, fostering robust and inclusive growth and ensuring financial market stability. As noted in the recent annual report of the Bank for International Settlements, countries may already be “testing the boundaries of what might be called the region of stability”.Unfortunately, central banks bear significant responsibility for this situation, and it could become even more problematic if there is a reignition of what has been steadily moderating goods inflation while services inflation remains unconquered.While the focus on central banks is understandably intensified, resolving the policy trilemma for many countries is no longer solely within their narrow purview. Two additional initiatives are urgently needed:First, a highly co-ordinated policy approach, one that maintains fiscal stability while, critically, significantly enhancing supply responsiveness, productivity, labour market functioning and regional/global policy co-ordination.Second, there should be a comprehensive top-level review of some central banks by independent bodies appointed by governments. That should encompass their policymaking processes as well as looking, in some important cases such as the Fed, at outmoded policy frameworks and target setting, the lack of cognitive diversity and poor accountability. Such a comprehensive, remedial approach is essential if central banks are to do their bit in much-needed multi-agency efforts to deliver long-term economic prosperity, social wellbeing and genuine financial stability. More

Space at the Deep C Two industrial estate in northern Vietnam is in such demand that its developer is already thinking about how to create more — by pushing back the South China Sea.Some of the biggest suppliers to global tech companies such as Apple are clustered at Deep C Two, close to northern Vietnam’s biggest port, Haiphong. Now geopolitical tensions between Beijing and Washington and the risks to business exposed by the Covid-19 pandemic are spurring more manufacturers to shift out of China — and Deep C, a Belgian developer which runs five zones in Vietnam, is getting ready.If there is enough demand, “we will reclaim the land from the sea”, said Dung Bui Thi Thuy, a marketing executive.The accelerating shift to countries such as Vietnam is part of a growing “China plus one” strategy to redraw global supply chains. As rivalries grow between China and the US over technology and security, more companies fear curbs on what and where they can manufacture. As a result, many are supplementing production in China, still the world’s biggest manufacturing hub, with expansion to other countries.“Koreans, Taiwanese, Chinese — there seems to be an unstoppable transfer or at least relocation from mainland China into other countries,” said Koen Soenens, Deep C’s sales and marketing director. “Foreign companies currently in China, ask them what’s next. [They say] ‘For the Chinese market, we stay in China; to serve our overseas clients, we are looking for a new location’.”

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But the trend also exposes the risks and uncertainties of shifting resources to countries such as Vietnam, where the bureaucratic and physical infrastructure, including the electricity grid, is straining under the weight of demand just as the country faces headwinds from a turbulent global economy.Vietnam’s export-led growth has pulled millions of people out of poverty over the past 30 years, and the country has won a big role in the tech supply chain: Apple already produces millions of AirPods there.But one European diplomat there said the country was “at a crossroads” where it had to ease bureaucracy, create a more transparent regulatory framework and get rid of “absurd” red tape.“They received this strong trend of investment . . . up till now it has been easy for them,” the diplomat said, questioning whether Vietnam had the infrastructure for further growth.The Deep C industrial zone in Haiphong, Vietnam, is home to some of the biggest suppliers to global tech companies © Linh Pham/FTVietnam generated $22.4bn from foreign direct investment projects in 2022, an increase of 13.5 per cent over the previous year, according to government data. While FDI is slightly down in the first five months of the year on the same period last year, investors, analysts and officials said interest remained strong. Vietnam attracted 962 new FDI projects in the first five months of the year, up from 578 in the same period last year.

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Ho Duc Phoc, Vietnam’s finance minister, said in an interview that the country’s infrastructure was “improving and becoming more modern” and highlighted a big attraction for investors: cheap labour.“We have an abundant and cheap supply of labour . . . [it] will be cheap for a long time,” he told the Financial Times.Still, some investors are already noticing a tightening labour market. Soenens points to Pegatron, one of the biggest suppliers to Apple, which began production of electronic equipment in Haiphong in 2021. By the end of next year, the Taiwanese company hopes to have 20,000 workers in Deep C.

Koen Soenens © Linh Pham/FT

“How are they going to find those people? Most probably outside the city limits, thanks to their investment in dormitories for workers,” said Soenens. Some 150km away at the Thanh Oai industrial complex in Hanoi, where B. Braun employs about 1,100 people, the medical technology company is considering building dormitories on site as it plans to double investment and its workforce within the next five years.The labour market is taut and “getting more and more difficult . . . highly skilled labour is needed by every company”, said Torben Minko, managing director of B. Braun Vietnam. “The challenge is the human capital. If you have to build a huge factory that needs 10,000 workers, they need to come from somewhere.”Vietnam’s highly qualified young people also expect to earn far more than the monthly minimum wage, which for the biggest cities is 4.68mn dong ($198). “I can tell you now the normal average salary for people my age is 15mn to 18mn a month,” said Tran Khanh Ly, a 24-year-old business developer in Ho Chi Minh City.Construction of a new factory at the Deep C industrial zone in Haiphong, Vietnam © Linh Pham/FTNew investors quickly find the wheels of bureaucracy grind slowly in a consensus-driven and decentralised system in which multiple signatures are required for every approval. Companies already in Vietnam said expansion was tough.A big corruption crackdown has exacerbated delays. “Government has become paralysed by procurement anxiety, a fear of making a mistake and winding up in prison for corruption or misuse of public resources,” one western official said.The finance minister said the impact of the crackdown on business had been minimal. “The aim . . . is to make the economy healthy and transparent, for protecting the rights of the citizens and the enterprises,” he said.“The length of procedure and the complexity is an issue,” said Jean-Jacques Bouflet, vice-president of the European Chamber of Commerce in Vietnam, citing the absence of a centralised investment agency as one reason why approvals for everything from work permits to solar panels move slowly.

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As Vietnam develops, it remains highly dependent on ties to China’s crucible of manufacturing around the Pearl River delta, which — marketing material from Deep C at Haiphong points out — is just “12 trucking hours” away.That proximity allows for easy transfer of materials but leaves Vietnam’s supply chain more vulnerable, according to Brian Lee Shun Rong, an economist at Maybank in Singapore. “What happens if there are any disruptions to the flow of imports from China?” he said.“This is our Achilles heel,” said Michael Kokalari, chief economist at VinaCapital in Ho Chi Minh City. “To the extent there are supply chains, it is [companies such as] Samsung or LG bringing their whole supply chains here.”

One solution is for big anchor investors to play a role in improving the whole supplier ecosystem. Samsung, which has six factories in Vietnam as well as a research and development centre and is the biggest foreign investor, said since 2015, it had worked with about 400 Vietnamese companies to help them improve product quality.Another solution is for companies to move in clusters. Deep C cites the example of Pyeong Hwa Automotive, which moved to the Haiphong zone with three others in 2019.Whatever the doubts about labour, infrastructure or other issues, few expect “China plus one” growth to end soon. “The gates open, they come in,” said Soenens of Deep C, which is considering further sites. “It doesn’t stop.”Additional reporting by Andy Lin in Hong Kong More

(Reuters) – United Malt Group Ltd said on Monday it agreed to a A$1.5 billion ($999 million) takeover offer from Malteries Soufflet, a branch of French agribusiness InVivo, in a deal that will likely create the world’s top malt producer. The takeover would double the size of InVivo’s malt business three years earlier than planned, InVivo Chief Executive Thierry Blandinieres told Reuters when the offer was first announced in March. Shares of United Malt jumped 9.1% to A$4.8 in early trading, 20 cents off the A$5 per share offer price. The stock was the top percentage gainer on the benchmark index.The cash offer represents a 45.3% premium to United Malt’s closing price of A$3.44 on March 24, before the offer was first disclosed. The deal now requires approval from Australia’s Foreign Investment Review Board (FIRB) as well as United Malt’s shareholders to vote in support the transaction, among other regulatory requirements.Australia has seen increased dealmaking this year, largely in contrast to the broader Asian region where the pressure of high interest rates has led to subdued mergers and acquisitions (M&A) activity.United Malt is the world’s fourth-largest commercial maltster, producing bulk malt for brewers, craft brewers, distillers and food companies. The company has processing plants in Australia, Canada, the United States and Britain.Malteries Soufflet – one of the world’s biggest malt producers, operates 28 malt houses across Europe, Latin America, Asia and Africa.United Malt Chairman Graham Bradley said in a statement that the company’s board believed the offer appropriately reflected the value of its asset portfolio and the anticipated improvement in its near-term earnings outlook.The company’s board has unanimously recommended that its shareholders vote in favor of the proposal.For InVivo, the acquisition is part of its aim to become the world’s top malt producer within five years through external growth. It acquired agribusiness peer Soufflet last year and signed an agreement in January to take over Belgian malthouse Castle Malting.It did not respond immediately to a request for comment outside normal business hours. ($1 = 1.5011 Australian dollars)(This story has been corrected to say gainer, instead of loser, in paragraph 3) More

SYDNEY (Reuters) – Asian shares edged higher on Monday as demand for tech stocks buoyed Japan’s market, while a data-packed week promises to be pivotal in the outlook for the Chinese economy and U.S. interest rates.China’s recovery has so far disappointed high expectations and the Caixin manufacturing survey due later on Monday is forecast to dip to 50.2 in June, from 50.9, and may even slip into contraction.The central bank has promised more “forceful” action to support the economy and looks likely to soon get a new boss. Something major is needed given Chinese blue chips shed 5% last quarter while much of the developed world rallied.”As Japan found in the 1990s, it’s hard work stimulating an economy experiencing a significant property slump against a backdrop of high sector debt and a falling population,” cautioned analysts at ANZ in a note.In contrast, Japanese stocks have been going gangbusters as an influx of offshore buying lifted the Nikkei almost 20% last quarter, spurred by a weak yen and hopes of Japanese firms filling any gaps created by Sino-U.S. decoupling. Early Monday, the index was up another 1.2% and close to recent peaks.A survey from the Bank of Japan showed business sentiment improved in the second quarter as easing supply constraints and the removal of pandemic curbs lifted factory output and demand.MSCI’s broadest index of Asia-Pacific shares outside Japan edged up 0.2%, but has been lagging far behind Japan’s market.S&P 500 futures and Nasdaq futures were steady ahead of the July 4 holiday, having both gained more than 6% in June.The high-flying tech sector could get another boost from news Tesla (NASDAQ:TSLA) delivered a record 466,000 vehicles in the second quarter, topping market estimates of around 445,000.That followed Apple (NASDAQ:AAPL)’s crossing above $3 trillion in valuation for the first time on Friday and sealing the Nasdaq’s best quarter in 40 years.Analysts at BofA noted the market value of the seven biggest tech stocks had ballooned by $4.1 trillion so far this year, while Apple, Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL) combined were worth more than the entire emerging market.FED STILL SEEN HIKINGSentiment had been soothed on Friday by a modest downward surprise in U.S. inflation while a flat reading for consumer spending suggested the Federal Reserve’s rate hikes were having an impact, albeit gradually.Debt markets, however, still imply around an 84% chance of the Fed hiking to 5.25-5.5% this month, and a 60% probability of yet a further rise by November.Minutes of the Fed’s last policy meeting are out on Wednesday and will expand on why they decided to pause, though most policy makers also expected to hike at least two more times by year end.Important U.S. data this week includes closely watched surveys on manufacturing and services, job openings and the June payrolls report. Median forecasts are for a steady unemployment rate, while jobs are seen up 225,000 after May’s surprisingly strong 339,000.”We don’t think that would be nearly enough slowing for Chair Powell and the rest of the FOMC to stand down from the recent rhetoric pointing to further tightening,” said Michael Feroli, an economist at JPMorgan (NYSE:JPM). “While we see a strong case for a July hike, we still believe the two subsequent payroll reports prior to the meeting in September will show enough slowing to allow the Fed to more comfortably go on extended hold.” The prospect of at least one more U.S. rate rise continues to underpin the dollar against the yen, given the Bank of Japan shows little sign of abandoning its super-easy policies.The dollar stood at 144.27 yen on Monday, after hitting an eight-month peak of 145.07 last week before the risk of Japanese intervention slowed its ascent. The euro was likewise firm at 157.40 yen, and just off its recent 15-year top of 158.01. The single currency was range-bound on the dollar at $1.0985, having spent the entire year so far trading between $1.0635 and $1.1096.Rising interest rates globally have seen gold struggle recently and the metal was last lying at $1,918 an ounce, near last weeks’ three-month low at $1,892. [GOL/]Oil prices dipped as investors waited to see the impact of another round of output cuts by Saudi Arabia. [O/R]Brent eased 26 cents to $75.15 a barrel, while U.S. crude fell 25 cents to $70.39 per barrel. More