Economy

BIRMINGHAM, England (Reuters) – British Prime Minister Liz Truss tried to reassure her party and the public on Sunday by saying she should have done more to “lay the ground” for an economic plan that saw the pound fall to record lows and government borrowing costs soar.On the first day of her governing Conservative Party’s annual conference, Truss, in office for less than a month, adopted a softer tone by saying she would support the public during a difficult winter and beyond. She defended her “growth plan”, a package of tax-cutting measures that investors and many economists have criticised for setting out billions of pounds of spending while offering few details on how it would be paid for in the short term.Truss said it was the right direction, suggesting critics did not realise the depth of Britain’s problems and that she should have done more to explain them — an argument that market traders and investors have dismissed as a reason for the falls in the pound and the increase in borrowing costs last week.But in what some Conservative lawmakers worry will hurt their prospects at an election due in 2024, she did not deny that the plan would require spending cuts for public services and refused to commit to increasing welfare benefits in line with inflation while endorsing a tax cut for the wealthiest.”I understand their worries about what has happened this week,” she told the BBC in the central English city of Birmingham.”I do stand by the package we announced, and I stand by the fact that we announced it quickly because we had to act, but I do accept that we should have laid the ground better.”Jake Berry, chairman of the Conservative Party, suggested the markets may have overreacted, while admitting he was not an economist. “So let’s see where the markets are in six months time,” he told Sky News.TROUBLE AHEAD?Truss took office on Sept. 6, but Queen Elizabeth died two days later and so the first days of the new prime minister’s term were largely taken up with the national mourning period, when politics was all but paused.She launched her plan two weeks after taking office, with her team feeling she had signalled her plans during a leadership campaign against rival Rishi Sunak, who had argued against immediate tax cuts.But the scale of the unfunded cuts spooked markets. After a large sell-off, the pound has since recovered after Britain’s central bank, the Bank of England, stepped in, but government borrowing costs remain markedly higher. Investors say the government will have to work hard to restore confidence, and the BoE emergency round of bond-buying is due to run only until Oct. 14, leaving Truss with little time.Beyond the market reaction, Truss’s economic plan also raised alarm in the Conservative Party, particularly over the scrapping of the highest 45% level of income tax.Some in the party fear they are at risk of being seen as “the nasty party”, cutting taxes for the wealthiest while doing little to improve the lives of the most vulnerable.In what could be a sign of things to come, business minister Jacob Rees-Mogg was heckled by a dozen protesters shouting “Not welcome here” when he was arriving at the conference centre. He had to be escorted by police.One former minister, Michael Gove, who was long at the heart of government, also rubbished the party’s plans to abolish the top tax rate, hinting he might vote against it, and Andy Street, the Conservative mayor of Birmingham, said he would not have made that policy.”It is going to be very, very difficult to argue it’s okay to reduce welfare payments when we are cutting taxes for the richest,” Gove told an event at the conference.Truss argued the move was part of the simplification of the tax system, but added the decision on the top tax was taken by her finance minister, Kwasi Kwarteng.When asked whether all of her cabinet of top ministers had been told in advance, Truss said: “No, we didn’t, this was a decision that the chancellor made.” She also suggested that politicians spent too much time worrying about how their policies were received by the public, saying she was focused on driving growth. Truss has often said she is not scared of making unpopular decisions.But she struggled when pressed to answer whether scrapping some taxes would have to be paid for with cuts to public services. Rather than denying this, she said she wanted the best possible services, which offer taxpayers value for money.”I am going to make sure we get value for money for the taxpayer, but I am very, very committed to making sure we have excellent frontline public services.”Further reading:How the Bank of England threw markets a lifeline More

Liz Truss has been weighed in the balance and found wanting. So, too, has Kwasi Kwarteng. A week of unnecessary and damaging turmoil has proved this. But behind it is an even bigger danger. The only sort of leader more dangerous than the rogue the UK used to have is the zealot it has now. The dominant characteristic of zealots is their conviction that reality must adapt to their desires, rather than the other way around. If this attitude to life is adopted by an individual, it can do great damage to those close to them. In political leaders, the result may be a disaster for the country.The irony is that for these people “the market” is god and economics 101 their religion. Yet actual markets have rebuffed them, as investors fled sterling and gilts, causing such mayhem that the Bank of England’s Financial Policy Committee was driven to intervene, in an attempt to rescue the government and an ill-regulated pensions industry from their follies. The reality is that Truss does not have a growth plan. She has a “growth plan” — a magical potion into which she sprinkles the reversal of recent tax increases, freedom for bankers’ bonuses and lower taxes for the prosperous, says “abracadabra” and suddenly trend productivity growth quadruples, conjuring 2.5 per cent annual growth.Such dreams might be amusing if they were not so perilous for the country.First, they come on top of a long line of fibs — fibs that justified excessive fiscal austerity after the financial crisis, fibs that Brexit would bring prosperity, fibs that the Northern Ireland protocol had solved the Brexit conundrum and the fibs that the government would do something serious about levelling up lagging regions of the country. Now those in charge promise a huge jump in productivity growth. In its analysis for the Tony Blair Institute, Oxford Economics concludes that aggregate output might be cumulatively 0.4 per cent higher five years hence. The mountain labours and brings forth a mouse. Second, while this is not a growth plan, it is a plan for inequality and insecurity. The recent mayhem will surely reinforce the government’s desire to go in the direction of slashing welfare and public services. They would then be shifting incomes from the bottom to the top of the distribution in the midst of a cost of living crisis, in a country with the highest inequality of disposable incomes in the high-income democracies, after the US. They will justify this with the old canard that countries are like companies and so cannot afford high public spending. Eliminating foreign aid would add some of the poorest people on the planet to the unnecessary victims. This parliament was not elected on any such programme. The party has been captured by zealots indifferent to reality or simple decency. As John Burn-Murdoch notes, “The Tories have become unmoored from the British people”. Finally, the government has savaged the credibility of public institutions and UK policymaking: they have assaulted the Treasury, repudiated fiscal transparency, caused mayhem in the gilt and foreign currency markets and forced the Bank into an ill-timed return to quantitative easing. Populist movements always despise constraining institutions run by “elites”. But institutions are the bulwark of a civilisation. The Conservative party used to understand just this. No longer. Investors now know this. It is self-evident.The UK’s longer-term economic performance must indeed improve if the desires of its people for a better life are to be realised. If the government wants to do something useful about this, it might dust off the report of the London School of Economics’ Growth Commission of 2017. Better incentives are indeed a part of the answer, but only a part. This is why systematic tax reform would be desirable. There must also be difficult deregulation, notably of land use. The state must supply first-class public goods, in the understanding that these are a social benefit, not a cost. There must be fiscal and monetary stability. There must be far higher investment in physical and human capital, both public and private. There must be higher savings. There must be a pro-growth regional policy. There must be an internationally open economy. There must, not least, be stable and credible policies, not the constant risk of another trade war with our closest neighbours.Truss and Kwarteng will not deliver this. Unfunded tax cuts and investment zones will certainly not deliver this. Another big jump in inequality will not deliver this. These people are mad, bad and dangerous. They have to [email protected] Follow Martin Wolf with myFT and on Twitter More

The writer is a former British diplomat who specialised in China. He is now a fellow of the Council on Geostrategy, the Royal United Services Institute and the Mercator Institute for China StudiesThe question most commonly asked by businesses about China is whether Beijing will invade Taiwan. It remains extremely unlikely. But if it did, it would be a global economic and political disaster.There are plenty of good military reasons why the People’s Liberation Army will not invade. The 100 nautical miles of rough seas, only 14 beaches on which to land men and materials and Taiwan’s mountainous topography all favour the defence. After a slow start, Taipei is moving towards a “porcupine” defence, which acknowledges Chinese superiority in conventional arms and relies on small, mobile platforms. These are difficult to knock out and would inflict considerable casualties. Then there is the fear of American intervention.Xi Jinping appears to be a rational leader, neither deluded nor desperate like Vladimir Putin. To risk invasion would be to imperil his entire “China dream”, his ambition that China should replace the US as the pre-eminent global power and redraw the world in line with its interests and values. It is an unnecessary risk, if he is indeed convinced by his own slogan that “the east is rising, the west is declining.” Better to wait.Nevertheless, ever since the Delphic oracle warned Croesus that, if he invaded Persia, an empire would fall, leaders have succumbed to the blindness of hubris. It therefore makes sense to advocate for military deterrence, as William Hague did in May and to entertain a willingness to supply Taiwan with the sorts of nimble weapon systems that would help rebuff Beijing’s advances.It also makes sense for the US to remind China that, in the event of an invasion, it could block the Malacca and Sunda straits through which China’s oil arrives from the Middle East. Even the threat of interdiction would be sufficient to discourage ship owners.But military deterrence is the smaller part of the story. There are good economic reasons why the Chinese Communist party will not invade. The Taiwan Semiconductor Manufacturing Company produces the majority of the world’s advanced semiconductors. Its CEO has declared that it would not be allowed to fall into Chinese hands. This could be achieved with a well-aimed US missile, but that might not be necessary: banning the sale of the materials, machinery and parts needed to keep TSMC’s plants going would be sufficient. Chinese dependency on foreign semiconductors looks to continue for a decade, perhaps longer.If that were not enough, most of Taiwan’s nearly $200bn exports to China are components in China’s own exports. Their disappearance would reduce Beijing’s exports by trillions. Other countries’ trade and investment would dry up. Shipping and insurance costs would rise enormously.Deterrence means magnifying existing restraints. The governments of free and open countries need to make it clear to the CCP that invasion or an extended blockade would trigger sanctions. This threat needs to be believable (it is worth noting that even Switzerland has said that it would follow whatever sanctions the EU imposed on China if it invaded). Governments need to convey this message to the CCP quietly and now.The CCP is not good at reading foreigners. But sanctions would happen — and not just in the form of spontaneous boycotts of Chinese goods led by civil society. The clamour from ordinary people, the press, parliamentarians and others, many of whom may not understand the consequences of sanctions, will be irresistible for western governments. The US will lead and expect its allies to follow.This is MAD — mutually assured destruction, the basis of cold war deterrence. The global economy would crash. The consequences for all would be horrible, but especially for China and the CCP. Resources, supply chains and components would dry up. Unemployment, already at around 20 per cent among young people in China, would boom. And in the absence of a meaningful social security system, the resulting poverty and desperation would lead to protests and riots.“The party leads everything”, as Xi says. It claims credit for all good things. The corollary is that it cannot avoid blame when things go wrong. Protests and riots would be aimed at the CCP. These are not uncommon, but hitherto the party has been able to corral them at the local level. Economic collapse would bring suffering on an unprecedented scale. The likelihood is that protests would coalesce, crossing county, city and even provincial borders. This would present the CCP with challenges of a different order.The party has been here before, in 1989. That look into the abyss was scarring. Xi knows all this — but there is no harm in reminding him. More

MOSCOW (Reuters) – Russia has restricted access to music-streaming app SoundCloud citing “false information” about what Moscow calls a “special military operation” in Ukraine, Interfax news agency reported on Sunday, quoting communications watchdog Roskomnadzor (RKN). Russia has battled big tech companies to control the flow of information after it sent troops to Ukraine on Feb. 24, slowing Twitter (NYSE:TWTR)’s service and banning Meta’s Facebook (NASDAQ:META) and Instagram.”Roskomnadzor restricted access to the SoundCloud service in connection with placement of materials containing false information regarding the nature of the special military operation on the territory of Ukraine,” Interfax said citing RKN.It said access to the service was blocked at the behest of the Russian Prosecutor General’s Office, adding that the information in question related to the special operation’s form and methods of warfare including “attacks on civilians, strikes on civilian infrastructure, about numerous civilian casualties at the hands of Russian soldiers”. More

LONDON/NEW YORK (Reuters) – Calls to the Bank of England saying some British pension funds were struggling to meet margin calls began on Monday. By Wednesday they were getting more urgent and coordinated.Wild gyrations in financial markets in response to a government “mini-budget” on Sept. 23 meant that swathes of Britain’s pension system were at risk, raising widespread concerns about the country’s financial stability. British Finance Minister Kwasi Kwarteng’s statement had included dramatic plans to slash taxes and pay for it with borrowing which sent government bond yields soaring. In the following days, Britain’s borrowing costs surged the most in decades, while the pound plunged to a record low.But while these reactions were plain for all to see, behind the financial market screens there was a hidden impact.At risk of blowing up were obscure financial instruments meant to match long-term pension liabilities with assets, which had never been tested by bond yields moving so far or so fast. Among those urgently calling the BoE were funds managing so-called liability-driven investments (LDI), a seemingly simple hedging strategy at the heart of the blow-up. The LDI market has boomed in the past decade and assets total nearly 1.6 trillion pounds ($1.79 trillion) – more than two-thirds the size of the British economy.Pension schemes were forced to sell government bonds known as gilts after they found it hard to meet emergency demands from the LDI funds for collateral on ‘under-water’ derivatives positions, where the value is less than on a fund’s books.LDI funds were calling for the urgent cash to shore up loss-making positions. The funds were themselves facing margin calls from their relationship-banks and other key financial players.”We laid our cards on the table. You don’t expect them (the BoE) to give you much back because they’re not going to show you their hand, right?” said James Brundrett of pension consultant and fiduciary manager Mercer, which held a meeting with the BoE on Sept. 26.”Thank God they listened because this morning (Sept. 28), the gilt market wasn’t operating,” he added.Facing a market meltdown, the BoE stepped in with a 65 billion pound ($72.3 billion) package to buy long-dated gilts.And echoing former European Central Bank boss Mario Draghi at the height of the euro zone debt crisis, the central bank pledged to do whatever it took to bring financial stability.While this may have eased the immediate pressure on pension funds, it is far from clear how much time the BoE has bought as shockwaves reverberate through global markets from recently-apppointed Prime Minister Liz Truss’ plan, which as well as spooking investors drew a rare IMF rebuke.Chris Philp, chief secretary to the UK Treasury, said on Thursday he disagreed with the IMF’s concerns about the government’s tax-cutting budget, saying it would lead to long-term economic growth. GRAPHIC: Gilts, Sterling and FTSE250 https://fingfx.thomsonreuters.com/gfx/mkt/jnvweqwzlvw/One.PNG By the end of a turbulent week, many pension funds were still liquidating positions to meet collateral requests and some were asking the companies they manage money for to bail them out with cash, sources told Reuters on Friday. “The question is what happens when the Bank of England pulls out of this market?” said Mercer’s Brundrett, adding that there is a window of opportunity for pension funds to get enough money together to shore up collateral positions.”By the end of the day (Monday) we were saying if this continues we are in serious trouble,” one fund manager at a large British corporate pension scheme told Reuters. “By Wednesday morning, we were saying this is a systemic problem. We were on the brink. It was like 2008 but on steroids because it happened so fast,” the fund manager added.BlackRock (NYSE:BLK), another big LDI manager, told clients on Wednesday that it would not allow them to replenish the collateral needed to keep a position open, a note from BlackRock seen by Reuters shows.BlackRock said in an emailed statement on Friday that it was cutting leverage in the funds and that it did not halt trading in them.NOT OUT OF THE WOODSThe potential for the stress to cascade beyond pension funds and throughout Britain’s financial industry was real. If the LDI funds defaulted on their positions, banks which had arranged the derivatives would be sucked in too.The massive stress on a major economy’s financial system made global waves, with even safe-haven U.S. Treasuries and top-rated German bonds hit. Atlanta Fed President Raphael Bostic on Monday warned events in Britain could lead to greater economic stress in Europe and the United States. GRAPHIC: The dollar vs other currencies https://fingfx.thomsonreuters.com/gfx/mkt/zjpqkxwxopx/pound%20dollar.PNG While the BoE intervention sent yields plummeting, pushing the 30-year bond yield back to Sept. 23 levels and easing fears of an immediate crisis, fund managers, pensions experts and analysts say Britain is far from out of the woods.No one knows how much the schemes will need to sell, and what will happen once the BoE stops buying bonds on Oct. 14. Britain’s central bank is now in the unenviable position of having postponed its plan to sell bonds, resulting in monetary loosening, and at the same time tightening with interest rates.In November, it is expected to raise rates further and it has said it will stick to a plan to sell its bonds.”The concern would be that the market sees this as something to be tested and I don’t believe the Bank will want to set this precedent. This continues to leave long gilts vulnerable,” said Orla Garvey, a fixed income manager at Federated Hermes (NYSE:FHI). GRAPHIC: UK government bond spread https://fingfx.thomsonreuters.com/gfx/mkt/xmpjozrzqvr/gilt%20spread.PNG Investor confidence has been shaken, not just in Britain. “The situation in England is quite serious because 30% of mortgages are heading toward variable rates,” said billionaire investor Stanley Druckenmiller. “What you don’t do is go and take taxpayer money and buy bonds at 4%,” said Druckenmiller. “This is creating long-term problems down the road.” Standard & Poor’s cut the outlook for its AA credit rating for British sovereign debt on Friday to “negative” from “stable”, saying Truss’s tax cut plans would cause debt to keep rising.Meanwhile, demand for U.S. dollars in currency derivative markets surged to its highest level since the height of the COVID-19 crisis in March 2020 on Friday, as the market turmoil sent investors in search of cash.Ken Griffin, billionaire founder of Citadel Securities, one of the world’s biggest market-making firms, is concerned.”It represents the first time we’ve seen a major developed market, in a very long time, lose confidence from investors,” Griffin told an investor conference in New York on Wednesday.($1 = 0.8994 pounds) More

Investors have withdrawn a record $70bn from emerging market bond funds this year, in a sign that soaring interest rates in advanced economies and the strong dollar are heaping pressure on developing countries.Investors took $4.2bn out of EM bond funds in the past week alone, according to an analysis by JPMorgan of data from EPFR Global, a fund flow monitor — bringing the annual outflows to the highest level since the US bank began recording the data in 2005.The investor flight underscores how emerging markets are facing mounting risks from surging interest rates in developed markets, which make the typically high yields on EM debt look less attractive. Powerful gains in the greenback also make it more expensive for EM countries to service dollar denominated debt and increase the cost of importing commodities, which are often priced in the US currency. JPMorgan in September raised its forecast for EM bond outflows in 2022 to $80bn, having previously forecast $55bn. Milo Gunasinghe, emerging market strategist at JPMorgan, described the outflows as relentless, with just seven weeks of net inflows in the year to date. They have also been broad, with investors pulling money from funds holding both local and foreign currency bonds. Rather than weighing the relative risks of currency exposure, investors are simply getting out. It marks a sharp turnround: flows were positive into both types of bond funds for each of the previous six years, at a combined average of more than $50bn a year.Gunasinghe said rate rises and bond sales by central banks, which have markedly reduced liquidity pulsing through global markets, “will keep a high bar for inflows for the foreseeable future”.Shilan Shah, a senior economist at Capital Economics, said cross-border flows by non-resident investors to the limited group of emerging markets that provide timely data tell a similar story: bond flows have been consistently negative this year, while equity flows have gyrated, turning steeply negative for the past few weeks. Many analysts saw an improvement in the outlook for EM assets earlier this year as economies began to emerge from the pandemic. Russia’s war in Ukraine derailed that, even though some commodity exporters were beneficiaries of sharply rising prices — until global inflation and the rising dollar turned against them. Some analysts, again, see an opportunity in today’s deeply discounted valuations. But Shah, like Gunasinghe, expects outflows to persist for the rest of the year. Slowing global growth and global trade, with an associated decline in investors’ appetite for risk, will keep the headwinds coming, he said. More

Sirika said the new airline would have a mixture of Airbus and Boeing (NYSE:BA) planes, but added the carrier is also willing to look at the Chinese narrowbody jet, which Chinese regulators certified on Friday.”We haven’t looked at that C919. But if it’s as good as the others then why not,” he told Reuters on the sidelines of the United Nation’s aviation agency’s triennial assembly in Montreal, Canada. On Friday, China hailed the development of its first medium-haul passenger jet as the embodiment of the country’s drive towards self-sufficiency, with safety approval awarded to a plane that aims to challenge Western aircraft giants for orders.The first C919 aircraft, designed to compete with popular single-aisle models made by Airbus and Boeing, will be delivered by the end of the year, state Xinhua News Agency said. It remains unclear when the plane might be certified by the United States or Europe, opening the way to sales in most foreign markets, but industry analysts say it will be up to a decade before China can seriously tackle the existing Boeing-Airbus duopoly.”China and Nigeria (have a) very cordial and friendly relationship with mutual benefits,” Sirika said.For decades, China has loaned billions of dollars to Africa to build railroads, power plants and highways as it deepened ties with the continent while extracting minerals and oil.Nigeria, Africa’s most populous nation, is the top importer of Chinese goods, hoovering up $23 billion worth in 2021.Nigeria’s poor transport and power networks have stymied economic growth for decades, holding back the distribution of wealth in Africa’s biggest economy where 40% of people live below the national poverty line.However, the country is growing its aviation sector, where traffic is now above pre-COVID-19 pandemic levels, Sirika said. The airline is one of President Muhammadu Buhari’s 2015 election campaign promises. More

The baht has fallen 11.7% against the dollar this year, which the central bank said had been driven by dollar strength.However, the weighted baht index against other currencies has been stable, while the country’s external position and banking system remained strong, Deputy Bank of Thailand Governor Mathee Supapongse told reporters.”We’ve entered the market sometimes to slow down volatility (in the baht),” he said, adding the BOT had no target for baht levels.A fall in Thailand’s international reserves was not because of currency intervention but rather asset valuations, he said.Despite wide Thai-U.S. rate differentials, Thailand has attracted capital inflows, Mathee said. Foreign investors have bought 150 billion baht ($3.97 billion) of Thai shares so far this year but sold 33 billion baht of bonds. Governor Sethaput Suthiwartnarueput said gradual and measured policy tightening was suitable to support Thailand’s still slow economic recovery, but he was ready to adjust if needed.On Wednesday, the BOT raised its key interest rate by a quarter point to 1.00% to tame 14-year high inflation.($1 = 37.77 baht) More