Economy

If American companies can’t trade goods with China in sensitive sectors like semiconductors, why should American investment houses be able to funnel capital to China in ways that may support the development of those industries, which the Biden administration feels may be used in war efforts? It’s a looming question, as the US government is poised in the coming months to roll out new financial restrictions between the US and China.As far back as 2018 it seemed clear — as it does now — that trade decoupling and financial decoupling will go hand in hand. According to the research provider Rhodium Group, US investors are carrying out about 3,000 transactions a year in China, everything from foreign direct investment into companies to venture capital deals in Chinese start-ups. While such deals have in the past been opaque, there are a new crop of companies tracking supply chains and investment flows. This is a sector that will undoubtedly grow in the wake of Biden’s executive order that puts more emphasis on national security-related capital screening. Bottom line — it’s going to get a lot harder for companies like Blackstone, KKR, Bain and so on to hide their exposure to China. One can argue about whether capital decoupling is a good idea, but I think it’s only fair that investment houses should have to live by the same principles that non-financial firms do when it comes to national security. The spy balloon issue has put all this front and centre. While there are definitely major risks if investment decoupling becomes a larger currency and T-bill decoupling between the US and China (something I explore in my column today, which looks at the relationship between the two superpowers through the lens of psychology), there are also upsides. A weaker dollar would make it easier for US exporters to sell abroad, something that would fit the Biden administration plan for the re-industrialisation of the US.For the last few decades, increased foreign capital flows into the US, particularly from China, have made it all too easy for the American economy to be highly financialised, which allows the US to spend more than it should, and save far less. Restricting investment flows isn’t necessarily a way to a new age of American austerity (though I think we may be heading there in any case. But it’s yet another line in the sand that tells the public, and investors, that the world isn’t going to reset to the 1990s. The way global businesses must behave in a decoupling world is fundamentally changing. And that will have major ramifications for portfolio flows. While I think it’s a good thing for any investment house that is concerned about ESG issues and national security considerations to look carefully at China exposure, I’m also wondering what it will mean for American pensioners to be cut off from the Chinese market. Richard, I’m curious your thoughts on that question, as well as how players in Silicon Valley see the coming age of investment decoupling between the US and China? Recommended readingMy colleague Martin Wolf is quite right to advocate for a land value tax. All value these days seems to live in real estate/land, intellectual property and brands. We need some way to capture tax value from them fairly.And FT guest columnist Ruchir Sharma is also correct to say that investors are not ready for the “long grind to come,” meaning a long period of slower growth, higher inflation and diminished returns. Gerald Seib, one of my favourite conservative thinkers, penned a thoughtful long form piece about the existential struggle within the Republican party about whether to move away from the Reagan-Thatcher legacy, and towards a new worker-centric economics.And finally, Jamie Metzl (a former National Security Council staffer during the Clinton administration) and Matt Pottinger (a deputy national security adviser during the Trump administration) have penned an important bipartisan op-ed in the WSJ, calling for a full investigation into the origins of Covid. Their feeling is that the Wuhan lab theory cannot be dismissed without access to lab samples, personnel and official records (which the Chinese have yet to give), and they present some powerful evidence about why vested interests in the west may be trying to prevent that. Richard Waters responds Yes, I agree, the capital decoupling feels like it’s been coming for a while. There’s been a sickening sense of inevitability over here in Silicon Valley about the deepening schism with China.I keep talking to business leaders who argue that the US can limit the impact of its tech sanctions and target China’s military without undermining tech trade more broadly. But they don’t say it with much conviction.Cutting off American investors’ chance to profit from the rise of Chinese tech would be devastating for some of the Valley’s most successful investors. Venture capital is all about the big wins, and there haven’t been many bigger than those in China’s consumer tech sector. Alibaba’s rise made a fortune for Silver Lake and its investors. The bet that Yahoo co-founder Jerry Yang made on Alibaba ended up being worth an awful lot more for his shareholders than Yahoo’s own business.Likewise, TikTok’s parent, ByteDance, got its first big injection of capital form Sequoia, and private equity firms like General Atlantic and KKR have ploughed in billions. The US hasn’t produced a consumer hit like this for years.It’s hard to see how investment restrictions won’t end up hitting the tech sector broadly. The dual-use nature of much of today’s technology, and fears that Beijing will co-opt any tech company it needs to extend its surveillance, make it almost impossible to draw a line.It feels like Silicon Valley has been preparing for this for a while. Sequoia recently created a cleaner division between the management of its Chinese and US arms, which in part looked like laying the ground for a complete split, should it ever come to that.This issue probably seems remote to most people, who will wonder why they should worry if a handful of billionaire investors lose out. But profits from venture capital and private equity have juiced the overall returns for a lot of endowment, pension and sovereign wealth funds. Inevitably, if one of the world’s great growth opportunities is cut off, we’ll all lose out in the long run.Rana, I’m sorry to end on a gloomy note! It’s always fun talking to you, but my time’s up: Ed will be back later this week.Your feedback And now a word from our Swampians . . . In response to “The intention of algorithms”: “Section 230 needs to be revised back to its original intent of protecting bulletin board services, possibly today’s Reddit and non-commercial Facebook groups, from defamation lawsuits as it does with letters to the editor. Product reviews, performance reviews and restaurants reviews on Yelp, Amazon or other retailer sites could also be protected as they would be for letters to the editor. To protect the entire commercial enterprise is silly and stupid. If that means their business models blow up, so be it. Let the litigation start as they have more than enough money to cover a decade’s set of court cases.” — Dennis Gerson, Colleyville, Texas“I just wonder if the US Supreme Court is the appropriate venue for deciding something like this that affects such a large proportion of the world’s population. I realise it follows from the companies (and indeed the internet) being US-driven but, whatever the decision, it makes me (as non-US) feel a bit uncomfortable.” — Reader Unimpressed“Even if the pending cases were about fostering the emergence of new platforms, I doubt more platform competition is going to improve the quality of speech. It may just result in more shouting. Platform competitors like Twitter will want to compete by minimising content moderation. That will chase away the thoughtful users, attract the trolls and speakers of evil, and trap the innocent. There is a risk that other platforms compete by emulating that, leading to a race to the bottom. I hope I am wrong here.” — Reader Old travellerComments may be lightly edited for brevity and clarity. More

TOKYO (Reuters) – Prices of academic books written by the surprise pick for the Bank of Japan’s new governor have shot up in recent days and the publisher of one of his volumes on monetary policy said it was considering new runs to meet demand.The news late on Friday that 71-year-old Kazuo Ueda is likely to helm the BOJ, left investors scrambling to work out what lies ahead for the world’s third-largest economy under a man not even considered to have been in the race.Ueda served on the central bank’s board between 1998 and 2005 but has since been out of the limelight, working in academia and at think tanks – making it hard to assess his views on Japan’s decade-long ultra-easy policy experiment. Some are turning to his scholarly titles for clues, but they are proving hard, and expensive, to come by.A copy of his 2005 book “The Fight Against Zero Interest Rates”, which has a recommended retail price of 1,700 yen ($13), was listed as having sold at 29,800 yen ($225) on e-commerce platform Mercari on Monday. Other copies were being offered at prices as high as 35,288 yen ($266). The book’s publisher, Nikkei BP (NYSE:BP), told Reuters it was considering plans to reprint as well as to make the text available as an e-book. Only 8,500 copies were printed in the previous run and had all sold out, the publisher said. Another Japanese-language title he wrote in 2017 was ranked as the best-selling e-book in the finance section on Amazon (NASDAQ:AMZN)’s Japan site on Monday. Hard copies of some of his other publications were sold out on the site.Prime Minister Fumio Kishida is due to confirm his pick to succeed outgoing Governor Haruhiko Kuroda on Tuesday.Ueda is something of an unknown quantity for many in the markets, economists and analysts said. The yen initially jumped on Friday on expectations that he could phase out ultra-loose policy earlier than expected, but quickly trimmed gains after he said in a television broadcast that current BOJ policy was “appropriate”.Ueda likely would not rush to overhaul loose policy and would instead let economic data guide the exit timing, said Tetsuya Inoue, Ueda’s staff secretary when he was a central bank board member, told Reuters in an interview on Monday.($1 = 132.4500 yen) More

Welcome to Trade Secrets. The EU leaders’ green summit that I and others had written about in advance took place last week. It ended much as you’d imagine: the French (and the European Commission) made their pitch for more centralised funding, there was pushback from fiscal conservatives such as the Netherlands, governments agreed to use unspent money first, before finding new sources. These debates will run and run. One interesting thing was that the messaging from the commission emphasised Chinese subsidies as well as American, which isn’t always the case. In related news, today’s newsletter looks at the EU’s disenchantment with an investment treaty it says slows down member states from pursuing the green transition. Charted waters is on the remarkable resilience of US-China trade.A deal running out of energyIf you could turn irony into electrical power, that surrounding the Energy Charter Treaty would be enough to run Europe’s fleet of electric cars for a decade. The pact, with 53 members, dates from 1994. It was originally designed to protect western European investments in the fossil fuel free-for-all of Russia and other former Soviet states after the cold war.These days, following Russia’s invasion of Ukraine, the EU is actively trying to deter investment in Russia via sanctions and moral dissuasion, and it’s the rich western European countries that are getting clobbered under the ECT. Companies have brought a string of investment claims saying they have been affected by changes in taxes and regulations on renewables. Spain has been particularly targeted — perversely because of green incentives the government introduced and then retreated from.After a few years chuntering and proposing amendments to tilt the treaty against complainants, the EU has got bored with the idea of incremental reform and said it was inevitable that all member states would junk it. A bunch already have, including Germany, the Netherlands and Italy, the last of which was well ahead of the game, quitting in 2014. The European Court of Justice had also punched a hole in the ECT by saying it doesn’t apply to intra-EU arbitration. Naturally the provisional wing of the investment protection community is out of the traps complaining. Jay Newman, the heroic defender of property rights/malign genius (delete one), formerly of Elliott Management, which famously pursued the likes of Argentina over defaulted sovereign bonds, wrote in the FT’s Alphaville recently that Spain was now second only to Argentina in the number of arbitration awards defaulted on. Newman sagely warned/concern-trolled (delete one) that the European Commission’s big green spending splurge might founder if companies lost confidence in the protection of their investments.This seems a bit unlikely, frankly. If there’s enough public money sloshing about, there will always be companies trying to scoop it up, and a sunset clause means ECT provisions continue to apply for 20 years after a country leaves. But it’s true there’s an issue of principle here, and one that might take some explaining by the EU.Environmentalists have long complained that trade law gives far too little leeway for green regulations or subsidies. There’s a long history of World Trade Organization litigation on the subject, including the seminal shrimp-turtle case which began in 1996 and first brought the WTO under widespread scrutiny by green campaigners. The Biden administration and its outriders have now embraced this view with enthusiasm, using the environmental imperative to defend the Inflation Reduction Act and its electric vehicle tax credits, and basically to ignore what WTO rulings say. (One day there will be a Trade Secrets that doesn’t mention the electrical vehicle tax credits, but not today).To a casual observer, it looks a bit odd that the EU is recommending abrogating a treaty because of the restrictions it places on environmentally-friendly subsidies — while complaining the US is doing the same. Now, the EU can argue (with justification) that there are bad trade laws and good trade laws, that the ECT was a treaty of its time with overbroad protections that applied in a different context, that investor-state arbitration is not the same as government-to-government WTO litigation and that there’s plenty of room to do environmental policy within WTO rules. All reasonable enough, but the ECT story supports a popular framing that the environment needs saving, that progressive countries are hurling money at the problem, and that pettifogging objections about outdated trade rules should not be allowed to get in the way. I’ll write more about the detail of green subsidies in a future newsletter, or column. This is just to note that the shift to renewables and other carbon-light technologies is here putting a global trading power on opposing sides of the same issue in different contexts. The law is complex, and so is the narrative.As well as this newsletter, I write a weekly Trade Secrets column for FT.com. Click here to read the latest, and visit ft.com/trade-secrets to see all my columns and previous newsletters too.Charted watersA regular reminder that political rhetoric is one thing but actual trade another. Over the past decade, US-Chinese trade has been under continual political pressure, first from former president Donald Trump’s blunderbuss protectionism and now from Joe Biden’s precision-guided industrial policy. And yet goods trade at least sails on unperturbed. Data released last week showed it’s ridden the Covid-19 shock and bounced back just fine.Of course, some of Biden’s actions are very recent and won’t have had time to come through. And the US tech war and export controls might affect China’s economy in ways not picked up by these overall data. But it is quite impressive how much flak the trading relationship has taken without much sign of damage.Trade linksIn a post timed for Valentine’s Day, Ed Gresser at the Progressive Policy Institute shows how women’s underwear has higher US tariffs than men’s. With regard to the effect on the consumer, I’d note that whether those constraints pinch will depend on — WAIT FOR IT — the elasticity. I’ll be here all week.Former US Treasury international finance guru Mark Sobel says the IMF should take the lead in persuading China fully to participate as a creditor in sovereign debt writedowns.Check how fast prices are rising in your region via the FT’s international inflation tracker.In the indispensable Britain After Brexit newsletter, my FT colleague Peter Foster explains how UK companies are struggling with the new British “Reach” chemicals regulations, which is costing them business in the EU. If only someone had warned about this before. More

CARACAS (Reuters) – Credit cards are becoming increasingly useless in Venezuela because of high inflation and government restrictions, hurting people already struggling to meet daily needs on low salaries, banking industry sources, analysts and consumers said.The country’s government imposed strict lending requirements during Venezuela’s economic collapse – allowing banks to lend a maximum of 27% of their cash flow – sending local business owners abroad to seek loans.And though the government of President Nicolas Maduro loosened currency controls in 2019 and let local banks open dollar-denominated accounts, many credit restrictions remain.”They are useless,” administrator Lina Pereira, from the central city of Valencia, said of her two credit cards, which both have low limits. “My parents bought appliances and computers with their credit cards, but that’s a memory for Venezuelans.”As incomes have fallen and living costs have grown, credit cards have become vital for many people to make everyday purchases in supermarkets and pharmacies, even as credit limits stagnate and some banks eliminate the cards altogether.”The banks don’t have a way to lend and we need these credits,” 36-year-old Pereira said, adding the total limit on her cards is now $2 a month, so low she can no longer use them to buy food like she did a year ago.Cards accounted for just 2% – equivalent to some $16 million – of the credit portfolio of Venezuelan banks at the end of December 2022, according to the country’s banking superintendency. In 2012 that figure was 12% in Venezuela, while in countries like the Dominican Republic and Bolivia credit cards currently account for 5% of banks’ credit portfolios, according to those country’s regulators.”Hyperinflation and the regulations have ended consumer credit,” said one Venezuelan banking executive, who asked to remain anonymous for security reasons. “This kind of financing has stopped being a business for banks. The bolivars that they can put toward credit are going to other sectors” like businesses.Although some local credit cards have higher limits of between $30 and $100 they still fall short – the average monthly cost of feeding a family was some $370 in December, according to the independent Venezuelan Finance Observatory.”Consumer credit is what gets punished. It’s the least likely to be given out,” said economist Luis Arturo Barcenas, of analyst firm Ecoanalitica. “Often these credits weren’t just for buying appliances, but also for day-to-day expenses.”Maduro’s government has taken multiple steps to lower inflation by increasing the supply of foreign cash, limiting credit, reducing public spending and raising taxes. As part of those efforts, the central bank ordered financial institutions to freeze 73% of deposits at the bank.”If there aren’t sufficient resources you can’t give that much credit,” said another bank executive.Despite the measures, prices ticked up at the end of 2022, taking annual inflation to 234%.In January Maduro urged banks to give businesses loans indexed to the exchange rate so they can “produce goods, riches” but he did not mention other loans or consumer credit.Neither the central bank nor the banking regulator responded to requests for comment.”With the limit on cards you can’t even pay for lunch,” said Gregorio Afonso, a 53-year-old university professor who has two local credit cards and an income of $20 monthly. “We’ve been in free fall since 2013 without credit, without social protection and working multiple jobs.” More

IMF Managing Director Kristalina Georgieva, speaking at the World Government Summit, described the IMF’s outlook for 2023 as “less bad, not good” given that the Fund has forecast a slowdown in economic growth this year and inflation remained a concern.Positive factors were resilient U.S. and EU labour markets, China’s reopening and “surprisingly good results of central banks tightening up financial conditions and inflation finally trimming down, although the fight is not yet won”, she added.Asked whether there would be more doses of monetary tightening, Georgieva said the Fund expected monetary tightening this year but did not project it would continue “way into” 2024.”The markets have good reason to be more upbeat because what they are finally seeing is the U.S. economy likely to avoid recession…they are also seeing China re-opening and Chinese consumers rushing to spend the money they saved during the pandemic, the lockdown,” she said.The IMF chief was speaking in an onstage interview at the annual summit hosted by Dubai in the United Arab Emirates (UAE).Georgieva lauded Gulf Arab oil and gas producers for “relentlessly” pursuing fiscal reforms, including diversifying revenue sources by introducing new taxes.The UAE will host the COP28 climate conference in November.The designation as COP28 president of the country’s climate envoy, who is also head of the state oil firm, has fuelled activists’ worries that big industry was hijacking the global response to the warming crisis.Asked about the criticism, Georgieva said: “Our focus is on what needs to be done and how we can do it together”.”We talk about inclusive approach to fighting the climate crisis. Inclusive is exactly that: all hands on deck,” she said. “If we miss, yet again, a chance to deliver on our own promises, we are all cooked.” More

ANKARA (Reuters) – Turkey’s worst earthquake in almost a century has left a trail of destruction that could cost Ankara up to $84.1 billion, a business group said, while a government official put the figure at more than $50 billion.The combined death toll in Turkey and Syria from last Monday’s 7.8 magnitude quake approached 36,000 and looked set to rise, as the focus of the response switched from rescuing survivors trapped under the rubble to providing shelter, food and psychosocial care.A report published at the weekend by the Turkish Enterprise and Business Confederation put the cost of the damage at $84.1 billion – $70.8 billion from the repair of thousands of homes, $10.4 billion from loss of national income and $2.9 billion from loss of working days.It said the main costs would be rebuilding housing, transmission lines and infrastructure, and meeting the short, medium and long-term shelter needs of the hundreds of thousands left homeless.President Tayyip Erdogan has said the state will complete housing reconstruction within a year and the government was preparing a programme to “make the country stand up again”.Some 13.4 million people live in the 10 provinces by hit by the quake, or 15% of Turkey’s population, and it produces close to 10% of GDP.The earthquake’s impact on gross domestic product is unlikely to be as pronounced as after the 1999 earthquake in northwest Turkey, which struck the industrial heartland, IMF Executive Director Mahmoud Mohieldin said on the sidelines of the Arab Fiscal Forum on Sunday.Mohieldin added that, after the initial impact over the next few months, public and private sector investments in rebuilding could boost GDP growth going forward.Nonetheless, economists and officials estimated the quake would cut economic growth by up two percentage points this year.The government forecast growth at 5% in 2022 and had estimated growth at 5.5% in 2023 before the quake.Turkey is due to hold presidential and parliamentary elections this summer – the biggest challenge to Erdogan during his two decades in power.A three-month state of emergency has been declared in the 10 provinces affected and the central bank has postponed payments on some loans. The Treasury declared force majeure until the end of July and postponed tax payments for the region. More

Investing.com — The U.S. Air Force continues to shoot down unexplained flying objects over North America, while beleaguered Indian conglomerate Adani plans to reduce capital expenditure. Wall Street is set for a cautious open ahead of Tuesday’s key inflation data, while crude falls after last week’s strong gains. The European Commission published its latest forecasts and predicts the European Union will avoid recession this year. Here’s what you need to know in financial markets on Monday, 13th February.1. Spy balloons or aliens?The U.S. military confirmed that it shot down another flying object on Sunday, the fourth such entity to be downed over North America by a U.S. missile in a little more than a week.While Washington was quick to describe the first object as a suspected Chinese surveillance balloon, there appears to be more mystery around the latest items.U.S. Air Force General Glen VanHerck, head of North American Aerospace Defense Command, said the military had been unable to date to identify the three latest objects, even refusing to rule out aliens as an explanation.Despite these muddied waters, it’s pretty clear the initial incident has raised tensions between Washington and Beijing.China responded on Monday by claiming that U.S. high-altitude balloons had flown over its airspace without permission more than 10 times since the beginning of 2022, widening a diplomatic row.2. Adani plans to reduce capital expenditureAdani Group remains in the spotlight Monday after Bloomberg reported over the weekend that the Indian conglomerate plans to cut its revenue growth target as well as capital expenditure.The group has suffered a drastic selloff since U.S. short-seller Hindenburg Research accused it of stock manipulation in late January.Bloomberg said, citing sources, the group will now aim for revenue growth of 15% to 20% for at least the next financial year, down from the original target of 40%.Adani has denied any wrongdoing, adding the balance sheet of each of its portfolio companies was “very healthy” and that it has strong corporate governance and secure assets.Still, it faces investigations from India’s market regulator.3. U.S. stocks to open flat; CPI data in focusU.S. stock markets are set to open largely unchanged Monday in cautious trading as investors await crucial inflation data later in the week, seeking more clarity over the Federal Reserve’s rate hike intentions.By 6:30 ET (11:30 GMT), Dow Jones futures were down 10 points or 0.1%, while S&P 500 futures were up 0.1%, and Nasdaq 100 futures were up 0.4%.There’s little U.S. economic data due for release Monday, but Tuesday’s CPI number could well provide further clues as to how high the Fed may need to raise rates this year.Economists expect the data to show monthly rates ticked up in January, but the annual measures declined.Several Fed officials are due to make appearances during the week, including Michelle Bowman later Monday.The earnings season is now starting to wind down, but there are still a number of important companies still to report, including Coca-Cola (NYSE:KO) on Tuesday, Biogen (NASDAQ:BIIB) and Deere (NYSE:DE) before Friday’s market open.4. European Union to avoid recession – ECThe European Commission lifted its economic forecasts for the EU earlier Monday, adding the bloc will likely dodge a recession, thanks in part to a dip in gas prices.In its interim winter projections, the EU’s executive arm said it now expects its 27 member states to expand by a combined 0.8% in 2023, up by 0.5 percentage points compared to its autumn forecast. The Eurozone, which is made up of countries using the euro currency, is seen growing by 0.9%, an increase of 0.6 percentage points versus its prior estimate.Good news, for sure, but the Commission was at pains to point out that the EU economy is still beset with challenges – including rising core inflation, continuing monetary tightening, and weakness in consumption.5. Crude hands back some of last week’s gainsCrude oil prices fell Monday, handing back some of last week’s gains, on concerns stubbornly high inflation in the U.S. will result in an economic slowdown in the world’s largest consumer of crude, prompting short-term demand weakness.Also weighing was the resumption of Azerbaijani oil exports at Turkey’s Ceyhan terminal over the weekend after the earthquake earlier this month in the region had disrupted supply.By 06:30 ET, U.S. crude futures were down 0.5% at $79.32 a barrel, while Brent crude was down 0.5% at $86.00 a barrel.Oil prices had climbed over 8% last week, helped by Russia stating it will cut its output by 500,000 barrels a day from March, in response to western price caps on its exports. More

PARIS (Reuters) -France’s finance minister urged food retailers on Monday to do more to help consumers cope with high prices, as the government leans on them to agree to sell an anti-inflation basket of everyday essential goods at knockdown prices.”The rise in food prices is a major concern and everyone must take its share, including retailers,” Bruno Le Maire told RTL radio. “The state must do its share but retailers must also do more,” he added.The government wants big retail chains such as Carrefour (EPA:CARR), Casino and the family-owned grocery dynasties Auchan and E. Leclerc, to sell a basket of about 50 everyday items at purchasing price from next month.However, only smaller chains such as discounter Lidl and Systeme U, which launched its own action plan covering 150 private label products earlier this month, have agreed to the government initiative, which is not mandatory.Some retailers such as Carrefour say they have already taken action by blocking prices on a set number of goods.Others, including Auchan, have since responded by launching their own initiatives, saying there was a need to focus the basket more on fresh products such as meat, fish, fruits and vegetables.The INSEE official statistics agency forecast last week that food price inflation would remain at 13% through the first half of the year.Food prices were expected to become a bigger driver in the coming months of overall inflation, which was forecast nonetheless to ease from 6.0% in January to 5.0% by June.The finance ministry conducted an investigation into food retailers’ margins last year, but did not find evidence of price gouging. More