Economy

The Bank of Korea has denied that it will announce a currency swap arrangement with the US Federal Reserve this week, as the Korean won continues its slide against the dollar to the lowest levels since March 2009.The won has fallen 15 per cent against the dollar since the beginning of the year, more than any other major currency in Asia apart from the yen. On Wednesday, the Korean currency was at Won1,394.9 to the dollar.The east Asian country is struggling to defend its currency as the Fed sharply raises interest rates to curb inflation. Despite the denial, expectations for a currency swap deal have grown after Choi Sang-mok, senior presidential secretary for economic affairs, said last week that both sides had taken an interest in reopening a currency swap line.The Bank of Korea and the US Fed signed a $60bn currency swap pact in March 2020 as an emergency measure to stabilise foreign exchange markets, but the deal expired at the end of last year.Analysts see such a deal, which would allow South Korea to borrow US dollars at a preset rate in exchange for won, as a last resort to stabilise the volatile market.Calls for a currency swap deal have intensified in recent weeks as analysts expect the dollar’s rally — near its highest level in more than two decades against major currencies — to continue at least until the end of the year. “Authorities in South Korea and other Asian markets could be preparing for worst-case scenarios as the dollar is likely to continue to rise with the Fed’s rate hikes, but there is not much they can do to reverse the trend other than gradually raising their own interest rates to slow the pace,” said Hwang Se-woon, a researcher at Korea Capital Market Institute. Export-dependent countries such as South Korea are under increasing pressure, with the country’s growing trade deficit and higher oil prices dimming the won’s outlook. South Korea reported a record trade deficit of $9.47bn in August.Korean authorities have stepped up oversight of currency markets, with the Bank of Korea asking currency dealers to provide hourly reports on dollar demand after a series of verbal warnings failed to halt the won’s descent.

A South Korean panel that oversees the country’s massive National Pension Service, the world’s third-largest pension fund, plans to discuss improving its forex management rules on Friday.“The government is trying hard to defend the psychologically important Won1,400 threshold, drawing a red line against it,” said Kim Seung-hyuk, a researcher at NH Futures. “Authorities are not just ramping up their rhetoric but also are actually intervening in the market, to slow the pace.”The won is not the only victim of a surging dollar in Asia. The renminbi has breached the psychological level of Rmb7 against the dollar despite Beijing’s verbal warnings and other attempts to shore up the currency. More

European companies are being forced to “reduce, localise and silo” operations in China as the country loses its attractiveness as an investment destination, executives said in a bleak report on operating conditions in the world’s second-largest economy.The assessment from the European Union Chamber of Commerce in China is by far its most pessimistic since its founding in 2000, executives said, citing President Xi Jinping’s regulatory crackdowns on previously booming industries and his administration’s enforcement of draconian lockdowns and travel restrictions to crush Covid-19 outbreaks.“Ideology trumps the economy,” said Jörg Wuttke, chamber president. “Predictability has been challenged by frequent and erratic policy shifts, particularly when it comes to Covid. [Zero-Covid] is a real burden for the economy.”In what Wuttke described as the chamber’s “most dark [position] paper ever”, the organisation warned that “European firms’ engagement [in China] can no longer be taken for granted”. It added that China was quickly losing “its allure as an investment destination” and that China and the EU were “drifting further and further apart”.The warning was issued as the EU reassesses its economic and political relationship with China. Brussels and Beijing have hit an impasse on a proposed trade agreement after exchanging sanctions over China’s mass detention of Uyghur Muslims in Xinjiang. EU representative Josep Borrell described the sides’ annual summit in April as a “dialogue of the deaf”. Brussels is preparing to adopt a series of tools to retaliate against trade partners that block market access to European companies. These measures are expected to be applied to China.“Discussions once centred primarily on investment opportunities . . . are now focused on building supply-chain resilience, the challenges of doing business, managing the risk of reputational damage and the importance of global compliance,” the European chamber said.Xi’s zero-Covid policy has made it all but impossible to visit the country, halting travel by executives based at headquarters and leading to an exodus of foreign staff frustrated with conditions in China. Since the beginning of the coronavirus pandemic, no new EU businesses have moved into the Chinese market, according to the chamber.Wuttke noted that his last trip out of China was in February 2020, but said he hoped to visit his native Germany at the end of the year. “It is high time,” he said. “I haven’t seen my [older] kids in Germany in two and a half years.”Rapidly changing protocols over importing goods — including the disinfection and sometimes confiscation of parcels — have also disrupted companies’ supply chains, while severe lockdowns imposed across the country have weakened consumer demand.“China is not the stable sourcing destination that it used to be,” Wuttke said. “It was a rock, [but] the Shanghai lockdown [in April and May] was a shock for our companies and for the global economy.”Beyond pandemic-related challenges, the chamber described a growing political gap, with companies coming under “increasing scrutiny” at home for their practices in China.

The Uyghur Forced Labor Prevention Act, passed this year in the US, as well as two forthcoming EU regulations on forced labour and corporate due diligence, “pose a compliance challenge for European businesses operating in China . . . due to the inability to carry out independent third-party audits of supply chains in Xinjiang”, the chamber said.Fears over further Covid supply chain disruptions, and to a lesser extent the prospect of a Chinese invasion of Taiwan, have led companies to diversify their suppliers and redirect investments.Businesses are evaluating “reshoring, nearshoring or ‘friendshoring’”, the chamber said, referring to the practices of bringing production home, closer to consumers or to allied countries.The Russian invasion of Ukraine and subsequent sanctions have also made EU companies in China worry about their investments in the event of a Chinese invasion of Taiwan. In a survey by the European chamber in April, a third of respondents said that the war in Ukraine made China a less attractive investment destination. More

If you’ve recently packed a child off to university, you’ll be hoping you’ve done all you can to prepare them — financially as well as emotionally. The university experience in England comes with a hefty bill. The average undergraduate degree now costs £27,750, and that number can easily double when factoring in the cost of living. However, a comprehensive student loan system means that most decide to go ahead and pay for the pleasure over the course of their professional lives.The loan carries a significant long-term cost. It accrues interest from the day funds are received in the account, and graduates will repay 9 per cent of everything they earn over £27,295. The interest rate used is based on the retail prices index on September 1 each year. There have been interventions to ease this burden, including an announcement in August that the interest rate on student loans will be capped at 6.3 per cent, instead of the 12 per cent figure implied by RPI inflation.However, if parents are fortunate enough to have the funds available, they may want to avoid these added charges by paying the university tuition fees themselves. Only a few currently do: of more than 1mn students eligible for tuition fee loans in 2019-20, only 5 per cent did not take one up, according to government data. As well as reducing the extra interest accumulated over the years of repaying a student loan, paying university fees directly through regular gifting out of surplus income would help reduce the value of a family’s estate, which may be effective for inheritance tax (IHT) purposes.Paying the fee directly also beefs up the take-home income for a graduate once they start earning, which could be used for investment purposes. Graduates could also direct the money that otherwise would have gone to paying off a student loan into a personal pension, further solidifying their long-term financial future and allowing them to benefit from a generous tax uplift equal to their marginal income tax rate, at 20, 40 or 45 per cent in other words. Avoiding the student loan system will benefit graduates when it comes to buying property. Mortgage affordability calculators factor in any student loans, so if a student still has a large amount to repay when they are ready to buy a home this may marginally reduce the amount they are able to borrow. Families with the means and the interest to look at an investment-oriented alternative may look to a third option: take out the student loan to fund the costs, and invest the money parents would have spent on university fees to try and get the best returns. However, this is a high-risk strategy and not an approach I would recommend. In a high-inflation environment, cash held on deposit rapidly loses its value in real terms. Normally this would present an investment opportunity, as investing the money provides the potential to generate above-inflation returns over the medium to longer term. However, in this case, the time horizon on investments is very short, since you will need to use the funds to generate a better return before any repayment is due.

Student loans become repayable as soon as the graduate starts earning an income, so potentially three years after they are received. The best current fixed term Isa account on the market over a three-year period is offering an interest rate of around 3.2 per cent. Comparing this with a student loan that potentially gathers interest at 6.3 per cent, the funds are therefore being eroded by 3.1 per cent a year in real terms. To beat the current interest rate being charged, families would need to look at higher-risk investments, but I would counsel against this. In another climate the picture might be different, but in 2022 the investment options to support children through university are more limited and parents need to consider whether they are willing to gamble with their children’s future in an already volatile macroeconomic environment. This brings us back to the student loan. It is well known and well understood, with many benefits in the short term. But the long-term interest and tax could add to the financial burdens on a young adult as they look to strike their own path through life. If parents have the capital available, paying the fees directly can save significant costs in the long term. For those without it — and if you expect your child to become a middling-to-high earner — the best option is likely to be the student loan, with parents providing regular help after graduation to pay it off. This method will allow families to reap potential IHT benefits and maximise the children’s future disposable income in a way that puts them firmly on the road to financial independence. James Hymers is a wealth manager at Raymond James, Spinningfields More

US real yields, the returns investors can expect to earn from long-term government bonds after accounting for inflation, have soared to the highest level since 2011, further eroding the appeal of stocks on Wall Street. The yield on 10-year Treasury inflation-protected securities (Tips) hit 1.2 per cent on Tuesday, up from roughly minus 1 per cent at the start of the year, as traders bet the Federal Reserve will aggressively raise interest rates and keep them elevated for years to come as it attempts to cool inflation. The sharply higher returns safe-haven government debt now offer have weighed heavily on the $42tn US stock market, given investors can find enticing investment opportunities with far less risk. Strategists with Goldman Sachs on Tuesday said that “after a long stretch”, investors buying Treasuries or holding cash would soon earn returns that have been “impossible” to come by for the past 15 years.Real yields are closely followed on Wall Street and by policymakers at the Fed, offering a gauge of borrowing costs for companies and households as well as a scale to judge the relative value of any number of investments.Those real yields fell deeply into negative territory at the height of the coronavirus pandemic as the Fed cut interest rates to stimulate the economy, sending investors racing into stocks and other risky assets in search of returns. That has reversed as the US central bank has rapidly tightened policy.“What you see in the higher real rates is the clear expectation that the Fed is going to drain a tremendous amount of cash and liquidity out of the market,” said Steven Abrahams, head of investment strategy at Amherst Pierpont. The Fed has already lifted its main interest rate from near zero at the start of the year to a range of 2.25 to 2.5 per cent. It is expected to boost it by another 0.75 percentage points later on Wednesday, with further increases bringing the federal funds rate to around 4.5 per cent by early 2023. The Fed’s quantitative tightening programme, in which it is reducing its $9tn balance sheet, is putting additional upward pressure on yields.The jump in so-called real yields has been driven in part by expectations that the Fed will be able to bring inflation closer to its long-term target of 2 per cent in the years to come.A measure of inflation expectations known as the 10-year break-even rate, which is based on the difference in yield on traditional Treasuries and Tips, has eased from a high of 3 per cent in April to 2.4 per cent this week. That would mark a dramatic decline from the August inflation rate of 8.3 per cent. “What is important for growth equities is not whether the peak has happened in interest rates, but the fact that the discounting rate will remain higher for a longer time,” said Gargi Chaudhuri, head of iShares investment strategy for the Americas at BlackRock. “For the next 18 to 24 months, all of these companies’ valuations will continue to get discounted at that higher level.” Fast-growing companies that led the rally on Wall Street from the depths of the coronavirus crisis in 2020 are under the most pressure from rising real yields. That is because higher real yields reduce — or “discount” — the value of the earning these companies are expected to generate years from now in models investors use to gauge how expensive stocks look. Since the start of the year, the tech-heavy Nasdaq Composite has tumbled 27 per cent. A recovery in the latter half of the summer has been all but obliterated as expectations of further aggressive Fed action have been cemented. The fall in unprofitable tech stocks, which had posted spectacular gains as investors chased high yields, has been particularly notable — with a Goldman Sachs index tracking such companies losing half its value in 2022.“Very expensive and very unprofitable technology companies have been accustomed to discounting their cash flows at a negative rate and now have to readjust to positive rates,” Chaudhuri said. “Because your discounting rate is higher, the valuations of those companies will look less attractive, because they’re discounting at a higher level.”Rising real yields may also put greater pressure on companies that took out leveraged loans, which are made to borrowers that already have significant debt loads. Interest rates on these loans are usually floating, meaning they adjust in line with the broader market as opposed to being fixed at a particular level.

“This is particularly bad news for leveraged borrowers,” said Abrahams.Ian Lyngen, head of US rates strategy at BMO Capital Markets, added that “sentiment across the economy, in terms of risk asset performance and the perception of the impact on consumers, is closer to real yields than it has been to nominal yields”. He said: “The logic there being that when adjusted for inflation, real yields represents the clear impact of effective borrowing costs on end users.” More

The Federal Reserve is set to raise its benchmark policy rate by 0.75 percentage points for the third time in a row on Wednesday as it looks to hit the brakes on the overheating US economy.The Federal Open Market Committee is expected to lift the federal funds rate to a new target range of 3 per cent to 3.25 per cent following its two-day policy meeting, advancing its most aggressive monetary tightening campaign since the early 1980s.Some economists have speculated the Fed will opt for a full percentage point rate rise, but the odds overwhelmingly favour a move of 0.75 percentage points.Alongside the rate decision, which is due at 2pm Eastern time, the US central bank will also publish a compilation of Fed officials’ interest rate projections — the so-called “dot plot” — for the period through to the end of 2025.This is expected to show officials committing to a “higher for longer” policy approach, involving additional large rate rises this year that will bring the fed funds rate to roughly 4 per cent, as they look to back up their recent hawkishness on fighting inflation.Economists expect further rate rises to be projected into 2023, pushing the peak of the fed funds rate closer to 4.5 per cent. Officials are unlikely to project cutting the policy rate before 2024, Fed watchers say.In June, the last time the projections were updated, officials predicted the fed funds rate would reach just 3.4 per cent by the end of the year and 3.8 per cent in 2023, before declining in 2024. At that time, the median estimate for the unemployment rate was 3.9 per cent in 2023 and 4.1 per cent in 2024.On Wednesday, that unemployment figure is expected to rise higher and faster, as officials more directly acknowledge the impact of their efforts to tackle inflation. The median estimate for the unemployment rate is now likely to top 4 per cent in 2023.Fed chair Jay Powell has also indicated the US central bank needs to see a “sustained period of below-trend growth” if it is to be successful in containing price pressures, suggesting officials’ gross domestic product forecasts will also be revised lower.In June, policymakers projected inflation would moderate closer to the Fed’s target of 2 per cent, with growth falling only to 1.7 per cent. Most economists now expect the US economy to tip into a recession next year, although they do not expect officials to yet forecast that.

The September meeting marks an important juncture for the central bank, which faced questions this summer over its resolve to restore price stability after Powell suggested the Fed was discussing easing up on its aggressive monetary tightening and beginning to worry about overtightening.At the annual symposium of central bankers in Jackson Hole, Wyoming, last month, the chair sought to counter that narrative by declaring that the Fed “must keep at it until the job is done”.Financial markets have repriced to the Fed’s new path forward, and US government bond yields have surged as rate expectations have risen.The two-year Treasury, which is most sensitive to changes in the policy outlook, is trading around 4 per cent, having hovered at roughly 3 per cent at the start of August. The yield on the benchmark 10-year note also recently rose above 3.5 per cent for the first time since 2011.US stocks, meanwhile, recorded their biggest weekly loss in months last week. More

Top US lawmakers are urging the Biden administration to put Chinese semiconductor company Yangtze Memory Technologies Co on a blacklist for allegedly violating export controls by supplying Huawei. Democratic Senate majority leader Chuck Schumer told the Financial Times that he was concerned about a report, obtained by the FT, that showed YMTC has provided Nand memory chips for the Mate Xs 2, the new flagship foldable phone from Huawei, the Chinese telecoms equipment giant.“This report is extremely troubling and further underscores the need for the administration to act swiftly to add YMTC to the entity list,” Schumer said, in a reference to the commerce department blacklist that effectively bars US companies from selling technology to groups on the list.YMTC is one of many Chinese technology companies to have come under scrutiny in the US over security concerns. Washington is also implementing a range of measures to boost the US chip industry while making it harder for China to gain access to technology, particularly for cutting-edge chips. According to the report from IP Research Group, a consultancy that analyses electronic devices, YMTC is providing Huawei with chips for the phone, suggesting a possible violation of the US Foreign Direct Product Rule.The rule, introduced by the Trump administration in 2020, bars companies from supplying Huawei with technology that is made in America.Senator Mark Warner and Senator Marco Rubio — the Democratic chair and Republican vice-chair of the Senate intelligence committee, respectively — also supported adding YMTC to the entity list. Their call for action was joined by Michael McCaul, the top Republican on the House foreign affairs committee.“It has been clear for some time now that YMTC is a bad actor — and a key part of the Chinese Communist party’s goal of shifting control of global microelectronics to the PRC [People’s Republic of China]” Warner said. “It’s long past time to act.”The White House has described YMTC as a Chinese “national champion”. US lawmakers and officials are also concerned that as YMTC produces more advanced chips, it will dump them at below-market prices, putting pressure on US, European and other Asian manufacturers.“Make no mistake: when it comes to enriching the Chinese Communist party, what Huawei does for phones, YMTC does for memory chips,” Rubio told the FT. “It’s no surprise the two Chinese companies continue to break US law by partnering together.”Rubio added: “The longer that President Biden drags his feet in recognising this, the more it signals to greedy corporations that it’s OK to do business with them and other Beijing-directed firms.”The FT reported in April that the commerce department was examining claims that YMTC had supplied memory chips to Huawei for another phone.“This report closes down any question that YMTC is not violating US export controls,” McCaul said on Tuesday. “This is a problem that could be solved with the stroke of a pen. Why is [commerce secretary Gina] Raimondo ignoring this problem?”

A commerce department official declined to comment on YMTC, but said the Bureau of Industry and Security was “conducting a review of existing policies related to China and will potentially seek to employ a variety of legal, regulatory, and, when relevant, enforcement tools to keep advanced technologies out of the wrong hands”.US lawmakers have also put pressure on Apple over YMTC, after the iPhone maker told the FT it was considering procuring memory chips from the Wuhan-based company.To prove that YMTC has violated the FDPR, the US would have to show that it knew its chips were destined for Huawei, which might not be the case if they were sold through an intermediary.But one person familiar with an analysis of the Mate Xs 2 said it contained Huawei-produced components that would require the phone manufacturer to deal directly with YMTC in order to tailor the chips for the foldable smartphone.Huawei declined to comment. YMTC did not immediately respond to a request for comment. Follow Demetri Sevastopulo on Twitter More

MANILA (Reuters) – The Asian Development Bank (ADB) on Wednesday cut its growth forecasts for developing Asia for 2022 and 2023 amid mounting risks from increased central bank monetary tightening, the fallout from the war in Ukraine and COVID-19 lockdowns in China.The ADB now expects the area’s combined economy, which includes China and India, to grow 4.3% this year, after previously trimming the forecast to 4.6% in July from 5.2% in April.For 2023, the ADB expects the region’s economy to expand 4.9%, slower than the April and July forecasts of 5.3% and 5.2%, respectively, it said in the September edition of its flagship Asian Development Outlook report. “Since the April Asian Development Outlook, various headwinds have strengthened,” said ADB Chief Economist Albert Park.”More aggressive tightening by the U.S. Federal Reserve and other central banks is denting global demand and rattling financial markets.”A significant global economic downturn would severely undermine demand for the region’s exports, he warned.China’s economy will likely expand 3.3% this year, a further step down after previously trimming the forecast to 4.0% from 5.0% in April. The ADB expects the world’s second-largest economy to grow 4.5% next year, slower than a previous estimate of 4.8%.The outlook for the sub-regions this year remained mixed, with Southeast Asia and Central Asia expected to grow faster than previously projected at 5.1% and 3.9%, respectively. The ADB, however, kept its growth forecast for South Asia at 6.5%, despite a lower growth estimate for India and an economic crisis in Sri Lanka.The Manila-based lender has at the same time raised its inflation forecasts in the region, as supply disruptions continue to boost food and fuel prices.Average inflation in developing Asia this year is now expected to hit 4.5%, up from April and July forecasts of 3.7% and 4.2%, respectively. For 2023, inflation is seen hitting 4.0%, compared with projections of 3.1% in April and 3.5% in July.GDP GROWTH 2021 2022 2022 2022 2023 2023 2023 APR JULY SEPT APR JULY SEPT Central Asia 5.7 3.6 3.8 3.9 4.0 4.1 4.2 East Asia 7.7 4.7 3.8 3.2 4.5 4.5 4.2 China 8.1 5.0 4.0 3.3 4.8 4.8 4.5 South Asia 8.1 7.0 6.5 6.5 7.4 7.1 6.5 India 8.7 7.5 7.2 7.0 8.0 7.8 7.2 South East Asia 3.3 4.9 5.0 5.1 5.2 5.2 5.0 Indonesia 3.7 5.0 5.2 5.4 5.2 5.3 5.0 Malaysia 3.1 6.0 5.8 6.0 5.4 5.1 4.7 Myanmar -5.9 -0.3 n/a 2.0 2.6 n/a 2.6 Philippines 5.7 6.0 6.5 6.5 6.3 6.3 6.3 Singapore 7.6 4.3 3.9 3.7 3.2 3.2 3.0 Thailand 1.5 3.0 2.9 2.9 4.5 4.2 4.2 Vietnam 2.6 6.5 6.5 6.5 6.7 6.7 6.7 The Pacific -1.5 3.9 4.7 4.7 5.4 5.4 5.5 Developing Asia 7.0 5.2 4.6 4.3 5.3 5.2 4.9 INFLATION APR JULY SEPT APR JULY SEPT Central Asia 8.9 8.8 11.3 11.5 7.1 8.1 8.5 East Asia 1.1 2.4 2.3 2.5 2.0 2.1 2.5 China 0.9 2.3 2.1 2.3 2.0 2.0 2.5 South Asia 5.8 6.5 7.8 8.1 5.5 6.6 7.4 India 5.5 5.8 6.7 6.7 5.0 5.8 5.8 South East Asia 2.0 3.7 4.7 5.2 3.1 3.4 4.1 Indonesia 1.6 3.6 4.0 4.6 3.0 3.3 5.1 Malaysia 2.5 3.0 2.7 2.7 2.5 2.5 2.5 Myanmar 3.6 8.0 n/a 16.0 8.5 n/a 8.5 Philippines 3.9 4.2 4.9 5.3 3.5 4.3 4.3 Singapore 2.3 3.0 4.7 5.5 2.3 2.3 2.3 Thailand 1.2 3.3 6.3 6.3 2.2 2.7 2.7 Vietnam 1.8 3.8 3.8 3.8 4.0 4.0 4.0 The Pacific 3.1 5.9 5.9 6.2 4.7 4.7 4.8 Developing Asia 2.5 3.7 4.2 4.5 3.1 3.5 4.0 More

Speaking virtually at an event hosted by the Brazilian Association of Supermarkets (Abras), Guedes highlighted efficiency gains with the digitization of public services, and noted that the current administration has not replaced many retired public servants. “We will be able to give moderate salary increases and based on prospective inflation from now on. From now on, we will maintain purchasing power or even increase the purchasing power of salaries,” he said.The government of President Jair Bolsonaro, who seeks reelection in October but trails former leftist President Luiz Inacio Lula da Silva in opinion polls, set aside 14.2 billion reais ($2.76 billion) to finance higher wages for public servants in the 2023 budget bill sent to Congress.The proposal did not specify the adjustment percentage or which public servants and professions were being considered for wage increases. The government has been under intense pressure by public servants for a wage increase as inflation eroded their purchasing power in Latin America’s largest economy.The budget bill projected no gains on minimum wages beyond inflation. During the event, Guedes also said Bolsonaro’s government this year intends to privatize Santos Port – the largest in Latin America – after setting the minimum price of 3.015 billion reais ($586.32 million) for the privatization auction on Tuesday.($1 = 5.1425 reais) More