Economy

Reuters reported earlier that VW planned a significant investment in a joint venture in the country for software production.Volkswagen (ETR:VOWG_p) said it could not comment on the specifics of the report, saying only that it was making large investments in software in China and was continuously assessing options for partnerships with local businesses.The carmaker, which makes about 40% of sales and half of its profits in China, already carries out research and development for vehicle technology in the country, seen as a more advanced market on digital innovation than Europe or the United States.It operates numerous joint ventures in China, holding a 75% stake in its venture with JAC, a 50% stake with SAIC and 40% with FAW. ($1 = 1.0304 euros) More

WASHINGTON (Reuters) – The International Monetary Fund backs moves by governments to tax companies’ excess profits, but believes such changes must be clearly communicated and cannot apply to already realized profits, the IMF’s top fiscal expert told Reuters.Vitor Gaspar, who heads the IMF’s fiscal affairs department, said taxing excess profits could provide permanent revenue for a country’s budget, but the European Union initiative now being considered was “problematic” because it violated tax certainty.Gaspar, a former Portuguese finance minister, said the IMF believed that the tax system should be clear, predictable and ruled by law, which meant a proposal to tax windfall profits “on profits that have already occurred is a problematic initiative.”He said the European Commission argued such a solution was appropriate at the moment, given the considerable size of the profits and the need to protect vulnerable people.But the IMF believed that an ad hoc windfall profits tax would violate the principle of tax certainty. “It is clear that the rules of the game are being changed,” he said in an interview.European countries are debating whether oil companies making record profits because of the energy crisis triggered by Russia’s invasion of Ukraine should pay additional taxes to help consumers cope with soaring inflation.French energy company TotalEnergies last month said it was likely to face more than 1 billion euros in additional levies if the EU approved plans to impose extra taxes on oil and gas companies.In its new Fiscal Monitor, the IMF said a permanent tax on windfall profits from fossil fuel extraction could be considered if another adequate fiscal mechanism was not in place.Doing so could raise revenues for a government without increasing inflation or reducing investment, and avoided distortions from a temporary tax on windfall profits, it said.Such measures also allowed for better risk-sharing between government and the private sector, Gaspar said. In the case of the pandemic, for instance, governments boosted fiscal spending to protect the vulnerable, in turn also benefiting businesses.”The public sector insures society against the downside, but in order for that to be viable, it should participate in the upside as well,” Gaspar said. “An excessive profit tax can help a lot in that endeavor.”He said the IMF was taking a “detached systemic view” while the European Commission was managing a crisis that threatens to push Europe into recession.”We don’t know the details,” Gaspar said. “What we are basically discussing at this point in time are possibilities (and) exactly how the policy options will be implemented,” he said. More

Governments must place greater weight on keeping their finances in shape, or risk undermining the confidence of the bond market investors that buy their debt, the IMF has cautioned. Rising interest rates and high inflation have increased the importance of countries building resilience into their public finances so they can deal with a more “shock-prone” world, the IMF said on Wednesday in its annual Fiscal Monitor publication. In a reversal of the message of previous years, the IMF ditched its calls for governments to borrow more, saying greater debt levels were no longer appropriate now that interest rates needed to rise to defeat the widespread inflation threat. Vítor Gaspar, head of fiscal policy at the IMF, said: “In a shock-prone world, the trade-offs that face fiscal policymakers are much tougher than before.”Policies that offered broad-brush support to lower energy and food prices for all were, the IMF said, costly and ineffective. Instead, governments should offer only targeted and temporary cost of living support for the most vulnerable. The wider world should also help the poorest countries cope with the higher cost of food. “For poor countries facing concerns over food securities, the trade-offs are literally matters of life and death,” Gaspar added. He acknowledged the recommendations were difficult for politicians to put into practice. But rising interest rates would increase the cost of servicing government debt, while any benefit from inflation in lowering debt burdens would provide only temporary respite. “As people adapt [to rapidly rising prices], inflation premiums are reflected in the interest cost of servicing public debt and . . . [investing] in Treasury bonds becomes less attractive,” he said.

Governments should not fight monetary policymakers, who were trying to defeat inflation. “Fiscal consolidation sends a powerful signal that policymakers are aligned in their fight against inflation,” the report said, adding that the alignment would keep inflation expectations better anchored and leave central bankers in a position where further rate rises were unnecessary. Tax increases and spending cuts were a better alternative than losing investors’ trust. The report stated: “While politically difficult, gradual and steady fiscal tightening is less disruptive than an abrupt fiscal pullback brought on by loss of market confidence.” The words sounded like a barely disguised criticism of the UK’s recent “mini” Budget, which contained unfunded permanent tax cuts equivalent to almost 2 per cent of national income. However, Gaspar preferred to focus on the steps ministers had taken to address market concerns, praising the UK government for engaging with its economic institutions and promising to have a costed fiscal plan in place by the end of the month. He said he had been “reassured” by the UK government’s ambition to restore fiscal credibility. He was also unwilling to directly criticise Germany’s broad-based energy support of up to €200bn, saying the package was too recent with the fund “not on top of the details”. More

Pill said the latest fiscal measures from Chancellor of the Exchequer Kwasi Kwarteng would probably boost the economy. He said it’s too early for the central bank to “declare victory” on holding expectations about future price increases to its 2% target.The remarks are the latest to underscore the likelihood that borrowing costs will keep rising as the UK struggles to contain inflation, which is near its highest level in 40 years. Pill, in a text of a speech, didn’t dwell on market turmoil touched off by the BOE’s determination to end emergency support for bond markets this Friday. Instead, he focused his remarks on the reasons policy makers see pointing to higher rates.“Given the uncertain world and volatile markets we face, November can seem a long time away,” Pill said in the text of a speech released as he spoke in Glasgow on Tuesday. “At present, I am still inclined to believe that a significant monetary policy response will be required to the significant macro and market news of the past few weeks.”On the government’s economic plan, Pill said, “these fiscal announcements will, on balance, provide a further stimulus to demand relative to supply over the medium-term” and that “this will add to the inflationary pressure.”He said it’s crucial for the BOE to stick to its mandate on inflation to maintain the credibility of the UK’s economic framework, noting that the Treasury’s growth program set out in September was the trigger for the latest chaos in markets.“The volatile market dynamics that followed the announcement of the Growth Plan underline the need to bolster the credibility of the wider institutional framework,” Pill said. “Whether reflecting pressures from the fiscal, financial or other domains, it is essential that the credibility, stability and integrity of the institutional framework governing UK macroeconomic policies are maintained.”©2022 Bloomberg L.P. More

A French leader once called the dollar America’s “exorbitant privilege”. Today’s world might go for blunter language. Vector of pain, anyone? Green monster? Whatever we call it, the strong dollar’s victims have one culprit in mind — the Federal Reserve. Even Josep Borrell, the EU’s foreign policy chief, is joining in. This week he warned that the Fed was exporting recession in the same way the euro crisis was imposed by Germany’s post-2008 dictates. Much of the world is now in danger of becoming Greece. Such finger-pointing is mostly unfair to the Fed. The US central bank clung for too long to its “team transitory” dismissal of inflation and is thus tightening at speed to restore its credibility. But it is only following the rules. It is hard enough to achieve full US employment with low inflation. Adding foreigners’ wellbeing to its mandate would make the job paralysingly complex. The Fed is nevertheless the engine of global contraction. Monetary pain is America’s fastest growing export. The big unknown is, who will pick up the pieces. Here, as the world’s leading power, the US has often been prone to neglect. In today’s so-called polycrisis world it also risks missing a chance to restore America’s brand. The Fed has one tool — monetary policy. Higher US interest rates are spreading at pandemic speed. As a whole, the US has many options. One such lever is the Bretton Woods institutions — the IMF and the World Bank, which are holding their annual meetings in Washington this week. The question is whether the US wants to cushion the blow to the developing world as its debt servicing costs go through the roof? History tells President Joe Biden which road not to take. The Fed’s last period of steep tightening started under Paul Volcker in the late 1970s. Higher US rates helped trigger far deeper recessions in the global south. Africa and Latin America both suffered a lost decade of growth that was deepened by the IMF’s punitive bailout conditions. Structural adjustment was a cure worse than the disease. The 1970s had been awash with recycled Opec capital that made dollar borrowing hard to resist. The Fed’s quantitative easing has had the same effect over the past decade. It is little consolation that inflation today looks less rampant than 40 years ago. In some respects emerging markets have it worse this time. Africa was neither responsible for the pandemic nor the war in Ukraine. The first is undoing years of human development gains. The second has unleashed a wave of food and energy inflation. Now the Fed is adding a potential debt-servicing crisis to the cocktail. These upheavals did not originate in the global south but the costs will chiefly be borne there. That is without mentioning climate change, which is also harshest in those parts of the world least responsible for creating it. Biden has so far found little bandwidth to confront these challenges. He had a chance to make US vaccine technology available to the developing world. Indeed, he initially vowed to suspend Covid vaccine patents. That now looks like an empty gesture since his administration did not follow up. As a result, a third of the world’s population has not yet had one vaccine while most westerners have had at least two — some as many as five. Had the US taken a stronger lead, the world’s inflation-inducing supply bottlenecks would not have been as chronic.Biden’s $1.9tn stimulus — the American Rescue Plan — threw fuel on an inflationary fire that is coming back to haunt Democrats. If they lose control of Congress next month, that bill will partly be to blame. The same applies to the roughly half a trillion dollars of student loan forgiveness he announced in August. Again, though, the brunt is felt by the rest of the world through imported austerity. The road to hell is paved with good intentions. Not for the first time, progressive-minded steps to help disadvantaged Americans are regressive for the world’s disadvantaged. The Fed has earned some of the resentment it is getting. It should have reacted earlier to inflation, which would have meant a less punitive response. It is not as if inflation was hard to spot. On that count, Jay Powell, the Fed chair, deserves some blame. But America’s big shortcoming is political not technocratic. The global face of the problem is the mighty dollar but its causes lie deeper. The US can be oblivious at big moments to the spillover effects of what it does at home, which often come back to bite it. Call it exorbitant indifference. [email protected] More

The cabinet asked the finance ministry to draft specific proposals by mid-2023 that could increase transparency by making it easier to identify corporate owners.The move aims “to strengthen the prevention and prosecution of financial crime and thus the integrity and reputation of (Switzerland as a) financial centre and business location”, it said in a statement.Switzerland, whose banks make it the world’s biggest manager of offshore wealth, has long sought to fight its old image as a place for criminals to stash ill-gotten gains. It routinely exchanges bank account information with over 100 countries.But it has faced international pressure to shed more light onto the shadowy world of corporate ownership, where many companies cloak the identity of the real beneficiaries.The goal was to create a central register for identifying owners and updating information about actual beneficiaries. “The register should be accessible to relevant authorities, but not to the public. The aim is to find a solution that is as effective and efficient as possible,” it said in a statement.It asked the finance ministry to also consider steps to tighten anti-money-laundering rules, for example by widening their scope to include the legal professions, it said.Parliament has in the past rejected the idea of subjecting lawyers and financial advisers to the same rules that banks face on reporting suspicious transactions. More

LONDON (Reuters) – British government borrowing costs jumped again on Wednesday after Bank of England Governor Andrew Bailey told pension funds they had three days to fix liquidity problems before the bank ends emergency bond-buying that has provided support.The 20-year gilt yield hit its highest in 14 years at 5.141%, and 30-year yields passed 5% for the first time since the BoE began buying bonds on Sept. 28 to try to calm turmoil triggered by Prime Minister Liz Truss’s tax cut plans.But the pound rose over 1%, recovering from falls sustained late on Tuesday after Bailey delivered his blunt message on the sidelines of the International Monetary Fund meeting in Washington.”We have announced that we will be out by the end of this week. We think the rebalancing must be done,” he said.”My message to the funds involved and all the firms involved managing those funds: You’ve got three days left now. You’ve got to get this done.”British financial markets have been under strain since new finance minister Kwasi Kwarteng announced the string of tax cuts with no details of how they would be paid for on Sept. 23.Kwarteng and Truss say the cuts are needed to get Britain’s economy growing again. Data published on Wednesday suggested it was heading for recession.The surge in borrowing costs has hammered some pension funds, prompting the BoE to launch the bond-buying programme, the maximum daily size of which it doubled on Monday and then expanded to include inflation-linked bonds on Tuesday.Yields rose across maturities on Wednesday with the sharpest increase in 30-year gilts . Yields for index-linked bonds also rose.Investors are nervous that Friday’s deadline for the end of the BoE’s bond-buying might come too soon for some funds. “Bailey has to give the message that the BoE is ready to walk away but fundamentally there has to be a big question mark over that and whether the BoE carries on, or whether financial stability risks continue and the BoE comes back to the market,” Daiwa Capital Markets’ head of economic research Chris Scicluna said.The Financial Times reported that the BoE had privately suggested to bankers that it could carry on buying bonds beyond Friday’s deadline if market conditions demanded it, citing three sources briefed on the discussions.But a BoE spokesperson said it had been made “absolutely clear in contact with the banks at senior levels” that the Friday deadline will hold. “MATERIAL RISK”The central bank said on Tuesday that the situation posed a “material risk” to financial stability.On Wednesday, it said it was “closely monitoring” liability-driven investment (LDI) funds, which are key to pension funds, ahead of Friday’s deadline. Bailey and other BoE officials stress their bond-buying – at time when they were supposed to be selling government bonds to wind down their huge economic stimulus – is temporary.They must also ensure they are not perceived to be bailing out the government by being forced into a more permanent support programme, Luke Bartholomew, senior economist at abrdn, said.  “While the Bank certainly needs to re-assert its independence and the primacy of its price stability mandate, it is far from clear how credible such statements are given the degree of vulnerability exposed in the gilt market,” he said.Doubts over whether the BoE will be able to start selling bonds on its balance sheet were also rising.”Now that selling is probably going to happen, but perhaps not immediately,” said Michel Vernier, head of fixed income strategy at Barclays (LON:BARC) Private Bank. “For the BoE, it’s not about the level of yields but the speeds of the move.”Others said demand for British debt was unlikely to improve until confidence in the government’s growth and fiscal plans was restored.”To a global investor the UK looks a mess and therefore global investors don’t want to step in and buy yields at attractive levels until the UK gets its house in order,” said Craig Inches, head of rates and cash at Royal London Asset Management. More

By Tommy Wilkes and Carolyn CohnLONDON (Reuters) – UK pension schemes are racing to raise hundreds of billions of pounds to shore up derivatives positions before the Bank of England calls time on support aimed at keeping them afloat. Governor Andrew Bailey said on Tuesday that the BoE would stop buying bonds as planned on Oct. 14, which would leave pension schemes scrambling after a surge in yields to meet a collective cash call estimated to be at least 320 billion pounds ($355 billion) without a buyer of last resort. The central bank had on Tuesday made its fifth attempt in just over two weeks to restore order in markets.With pension schemes calling for a deadline extension, the Financial Times on Wednesday reported the BoE had earlier signalled to lenders it might continue the emergency programme beyond Friday if market conditions demanded it, stoking confusion.Pension funds are trying to raise cash by selling off UK government bonds, or gilts, index-linked and corporate bonds but the fundraising task is intensifying, sources say.Compounding the pain, providers of so-called liability-driven investment strategies (LDI) are demanding more cash to support new and older hedging positions.The cash buffers now required are about three times larger than previously requested, according to four consultants advising pension schemes, as market players seek bigger cushions against greater swings in bond prices.”This week with the gilt market not fully calmed, lots (of schemes) are now looking at this and saying we actually need to do a bit more and so there is renewed action to get even more collateral across,” said Steve Hodder, a partner at pension consultants Lane Clark & Peacock.It is not known how much funds have already raised in cash. Some will also be cutting their overall LDI exposure if they cannot meet the collateral demands, consultants say.Tuesday’s BoE intervention targeted the relatively small index-linked bond market, which is dominated by pension funds and suffered another significant selloff this week.The Pensions and Lifetime Savings Association on Tuesday called for the BoE to consider continuing its bond-buying until Oct. 31 “and possibly beyond”. “You’ve got three days left now. You’ve got to get this done,” Bailey warned the funds late on Tuesday. Sterling hit a two-week low in early Asia trade on Wednesday but was last up 0.8% on the day at $1.1045. The 20-year gilt yield GB20YT=RR rose above 5% for the first time since Sept. 28, the day the BoE intervened. It was last at 4.994%, up 9 basis points on the day.DASH FOR CASHLDI helps schemes match their liabilities – what they owe members – with assets. Pension funds had been putting up cash to withstand a move in government bond yields of 100 to 150 basis points – a huge safety net that has been wiped out by some of the most volatile trading on record.Collateral buffer demands increased to 300 basis points last week, consultants and pension industry experts said, with some schemes even asked for 500 basis points this week amid more jumps in bond yields.The scramble for cash in the 1.6 trillion pound LDI industry is forcing pension funds to dump government and corporate bonds and even exit less liquid assets such as property and private equity. Investment manager Columbia Threadneedle said on Tuesday it has suspended dealing in the 453 million-pound CT UK Property Authorised Investment Fund and its feeder fund to restore liquidity. Barclays (LON:BARC) said on Tuesday it would make extra liquidity available to its LDI counterparties as part of the BoE’s Oct. 10 launch of an expanded repo facility. The facility allows schemes to park more assets including low-rated corporate bonds in return for cash. HOW MUCH MORE?Nikesh Patel, head of client solutions at Kempen Capital Management, calculates that pension schemes collectively need to post 160 billion pounds of cash as collateral for every potential 100 basis point move in yields.He estimates the total cash funds now need to post could be 320 billion pounds or higher.”We are definitely not there,” he said, referring to whether funds were close to raising the required cash by selling assets. He described last week as “one of the biggest ever for sell orders. You are seeing more sales this week.” The increased need for collateral was driven by pressure from regulators led by the BoE to prevent further stresses on the system, said Hemal Popat, partner, investments at Mercer.He estimates pension funds could sell assets totalling around 300 billion pounds as they adjust hedging positions, including 100 billion pounds from gilts as well as assets like global credit, global equities and asset-backed securities. It is not clear how much they may have sold already.The BoE declined to comment further.Leading LDI providers Legal & General Investment Management and Insight Investment did not respond to requests for comment.Liquidity in government bond markets remained poor, with yields likely to climb further even if the BoE extends purchases, said Craig Inches, Head of Rates and Cash at Royal London Asset Management.”The bottom line is a lot of schemes need to rebalance their portfolios,” he said. “That is not going to stop and will take time.”($1 = 0.9007 pounds) (This story has been corrected to clarify Sept. 28 was the date BoE announced bond buys in paragraph 14) More