Economy

Global stock markets kicked off September on a downbeat note, extending their declines into a fifth day as weak Chinese data and new Covid-19 lockdowns in the world’s second-largest economy weighed on sentiment.A FTSE gauge of worldwide shares lost 0.7 per cent on Thursday, having closed the previous session down 0.6 per cent. Europe’s regional Stoxx 600 gauge fell 1.7 per cent, while futures contracts tracking Wall Street’s broad S&P 500 slipped 0.8 per cent.In Asian markets, Hong Kong’s Hang Seng lost 1.8 per cent and mainland China’s CSI 300 fell 0.9 per cent after Chinese authorities moved to lock down the south-western megacity of Chengdu as they stuck to the country’s zero-Covid policy. A survey of manufacturers in China also came in worse than expected, with the Caixin manufacturing purchasing managers’ index registering a reading of 49.5 for August — down from 50.4 in July and below expectations of 50.2. Any figure below 50 signals contraction.Grace Ng, a JPMorgan economist, said the report raised “concerns of slowing external demand”.Hours later, a separate S&P Global manufacturing index hinted at a worsening picture in the eurozone, giving a reading of 49.6 from 49.7 in July.Thursday’s equity market declines came after hawkish rhetoric from the US Federal Reserve put the brakes on this year’s summer rally. Fed chair Jay Powell said last week at the Jackson Hole Economic Symposium that the central bank would “keep at it until the job is done” on inflation.Rate-setters in major economies around the world are pushing ahead with monetary policy tightening in an effort to curb rapid price growth, even as higher borrowing costs threaten to exacerbate a protracted slowdown.German and UK bond prices fell further after dropping on Wednesday on expectations of such tightening, compounded by data that showed eurozone inflation hit 9.1 per cent in August — up from 8.9 per cent in July and higher than economists’ forecasts of 9 per cent. The European Central Bank is due to announce an interest rate decision next week; it raised borrowing costs earlier in the summer for the first time in more than a decade by an unexpectedly large 0.5 percentage points to zero.Markets are now pricing in the possibility of an even bigger 0.75 percentage point increase at the ECB’s September meeting.Investors have also lifted their estimates of how far the Fed will increase borrowing costs, with pricing pointing to a rate of almost 3.9 per cent by February 2023 — up from expectations at the start of August of less than 3.3 per cent. The central bank’s current target range stands at 2.25 to 2.50 per cent, after it raised rates by 0.75 percentage points in July for the second time in a row.US government debt came under pressure on Thursday in a sign of persistent worries over rate rises, with the yield on the 10-year Treasury note adding 0.07 percentage points to 3.21 per cent. The yield on the two-year note, which closely tracks interest rate expectations, added as much as 0.05 percentage points to 3.5 per cent, hitting a new 15-year high. Bond yields rise as their prices fall.Anticipation of tighter monetary policy and a drawn-out recession has already fuelled angst about companies’ financial health, with the gap in yield between high-yield US corporate debt and government bonds widening in recent weeks. The respective spread, reflecting the premium investors demand for taking on more risk, has climbed from just over 4.2 percentage points in mid-August to 5 percentage points at Wednesday’s close, according to an Ice Data Services index. More

The energy price shock is all everyone can think about and is absorbing almost the entire political bandwidth in most countries. That, of course, is part and parcel of Russian president Vladimir Putin’s plan: to cause enough political trouble domestically in the west to distract or discourage Ukraine’s friends from supporting the country against his invasion. As I warned in my column this week, western and in particular European leaders must not allow that divide-and-rule strategy to work. I noted last week that when energy production is at full capacity the “marginal dog wags the aggregate tail” in energy pricing. (This has happened as Putin has artificially curtailed the capacity available to Europe, which in any case is rightly working to reduce Russian energy sales because of his war). Put simply, prices have shot up far above the cost of extraction, production and generation. The result is a massive redistribution of the economic value of energy from consumers to producers.Most of the politics has focused on how that redistribution plays out within countries: how to support consumers, tax producers and reform pricing processes. But we should also pay attention to the redistribution across countries. The transfer of money from energy importers to exporters is astounding. Consider Saudi Arabia: in the previous five years, its exports typically hovered around $20bn a month. Since Putin’s full-scale invasion of Ukraine, the value of its monthly exports has shot up to $40bn.The chart below displays the percentage changes in export and import values, and the difference between the two, for a number of other countries. The changes are measured between the last four available months (so after Putin attacked Ukraine) compared with the same four months last year. The chart orders the countries by the size of the difference between export and import growth. At the top sits Norway, whose exports earnings have nearly doubled with imports barely changed. At the bottom is India, whose import bill has increased 50 per cent but whose export earnings only grew 15 per cent. For most countries, their position clearly reflects their degree of energy import dependence.Apart from the enormous scale of these numbers, they show that economic interests are not completely aligned with the diplomatic faultlines of the war itself. These set a united liberal democratic world of advanced economies in support of Ukraine against Russia and its few close allies. Most of the emerging economies are staying on the sidelines at a greater or lesser distance from the two clear sides. But within each group, the energy crisis hits countries differently.On the liberal democratic side, most but not everyone suffers from record energy prices. It is fair to describe Norway, in particular, as a war profiteer, raking it in from high prices for its exports of oil, gas and electric power — to the point that some have called for it to supply its friends at below-market prices. Other traditional commodity exporters such as Canada and Australia are also doing more than fine.Note that the US has not seen a big deterioration in its trade balance in the past year of energy price rises. That stands to reason: the country has in this millennium gone from net energy importer to largely self-sufficient. (Instead, the US trade balance took a hit in the first year or so of the pandemic, when consumers in America shifted their spending from services to goods at a unique scale. As I have argued before, this, and not overall excessive demand, was the main driver of global inflation before the past year’s energy games by Putin.)There are also significant differences among the G20 economies outside the rich liberal democracies. Saudi Arabia and other petrostates are obviously beneficiaries. But Indonesia, too, has seen a big jump in export earnings. (So has China, but that probably has more to do with the global recovery from the pandemic than with energy trade.) Meanwhile, other big emerging economies in addition to India, such as Brazil, Turkey and South Africa, are facing import bill increases that far exceed any export growth they may have had.To get a handle on the magnitude of these shifts, consider this: the total import bill for energy-poor EU and Japan put together is more than $100bn a month higher since Putin started his war than it was one year ago. On an annual basis, that is more than $1tn that largely reflects more money paid from energy importers to exporters.And then there is Russia which, of course, has racked up enormous surpluses. This is not just a function of high energy prices but also the collapse in its imports. But still, it has made enormous amounts on selling oil and gas to its enemies this year. If numbers out of Russia can be trusted these days, its trade surplus has more than tripled since last year. That profit is highly vulnerable, though. In the first seven months of the year, gas export volumes have fallen 12 per cent since the same period in 2021; the continued squeezes on the gas supply to Europe mean that drop is now a lot bigger. And Europe is clearly determined to make itself independent of Russian gas before Putin closes the taps for good. A few days ago, news came that Germany’s gas storage was filling up faster than planned. France responded to Putin’s halting of gas deliveries to its main utility Engie this week by emphasising that its reservoirs were 90 per cent full. That the frantic quest to fill reservoirs before the winter is proving successful may be part of the abrupt fall in gas prices at the start of this week (see chart).Indeed some observers say that once these reserves go from being filled up to being drawn down, the market could turn significantly. In any case, the view early in the war that it would be better to wean ourselves off Russian gas voluntarily before Putin cuts it off at a time of his choosing seems ever more like the right call.Other readablesAbout the link between marginal energy prices and production costs — my colleagues have put together a list of options for the EU as the bloc discusses how to reform electricity pricing.In a few days Liz Truss is expected to become the next UK prime minister. Two new reports out today offer suggestions for how to think about reviving UK economic growth and investment. One is from the BCG’s Centre for Growth; the other from the Institute for Government. Both suggest that policies have to be a lot more complex than simply pushing for tax cuts.The UN’s report on the Chinese government’s mistreatment of the Uyghur population has now been published. The FT has an explainer.Reasons for the Federal Reserve to take a pause in its tightening.Britain ignores striking dockworkers at its peril.Edward Lucas sensibly proposes to make corporations’ access to the legal system conditional on ownership transparency.Numbers newsEurozone inflation hits another record high. More

China has condemned a US move to end its access to high-end processors made by chipmaker Nvidia, after Washington stepped up its efforts to restrict exports of cutting-edge technology to its trade and military rival.US officials have told Nvidia to stop selling to Chinese companies two of its chips designed for artificial intelligence work, the company said in a filing on Wednesday. The government is imposing a licence requirement on any products containing its A100 and forthcoming H100 integrated circuits used in the machine learning processes that enhance AI systems.The order comes into effect immediately for chips destined for China and Russia, extending to any future products that can match the A100 in performance.The move marks the latest salvo from the US to restrict tech exports to China over fears they could be used for military purposes. Washington has imposed restrictions on exporting technology to a number of Chinese companies and has taken aim at the country’s push for self-sufficiency in semiconductors.Chinese foreign ministry official Wang Wenbin said on Thursday that the US was attempting to impose a “technological blockade” on China. He said the ban showed the US was trying to maintain its “technological hegemony”.Nvidia said Washington had indicated that the new licence requirement would address the risk that products might be used or diverted to military users in China and Russia. It added that it did not sell to customers in Russia.Chinese commerce ministry representative Shu Jueting said the move undermined the legitimate rights and interests of Chinese companies and the stability of global industrial and supply chains.Nvidia said in a filing that it was “engaging with customers in China” and “seeking to satisfy their planned or future purchases of our data centre products with products not subject to the new licence requirement”.Analysts at investment bank Jefferies said the biggest users of the chipsets in China were cloud service providers and large internet companies. There were no direct local substitutes, they said, and one alternative would be to use multiple lower-end processors from Nvidia that were not banned. This attempt to replicate the processing power would not achieve the same speeds and come at a much higher cost, they added.Nvidia said about $400mn in potential sales to China this quarter might be affected by the new licence requirement.The chipmaker’s shares fell 6 per cent in pre-market trading on Thursday on the news, which also hit other semiconductor companies’ shares. Nvidia rival Advanced Micro Devices told the Reuters news agency it had received new licence requirements that would stop its MI250 AI chips from being exported to China. More

The IMF says it has reached a preliminary agreement with Sri Lanka on a four-year, $2.9bn bailout package aimed at restoring economic stability and debt sustainability for the crisis-ridden south Asian nation. The announcement on Thursday, at the end of a week-long IMF mission, offered the first indication of a path out of insolvency for the country of 22mn, which has run out of cash and suffered crippling shortages of fuel and essentials this year. Its former president, Gotabaya Rajapaksa, was driven out of office in July by a popular revolt over rising prices and shortages of fuel and food. However, the multilateral lender said the staff-level agreement was subject to approval by its management and executive board and contingent on Sri Lanka securing debt relief from creditors and financing from multilateral lenders, as well as undertaking steps to reform its economy and improve governance. “Because Sri Lanka’s debt is assessed to be unsustainable, debt relief from Sri Lanka’s creditors will be required to assure debt sustainability,” said Peter Breuer, the IMF’s senior mission chief for the country. “Having a path to restore debt sustainability — so-called financing assurances — is necessary for approval by the IMF executive board, and additional financing from multilateral partners will be needed to close financing gaps.”Sri Lanka this year became the first Asian nation in decades to default on its external debt of $51bn, about half of which is held by private bondholders.Years of populist economic policies and unsustainable borrowing by Rajapaksa and other government officials left the country unable to pay its loans or import basics including food and medicine. Its currency, the rupee, has depreciated more than 44 per cent against the US dollar since January. Ranil Wickremesinghe, the new president, had urged the IMF to act quickly. In addition to the top job, he also holds the post of finance minister in a government that took power after Rajapaksa was ousted.Sri Lanka was scheduled to pay about $8bn in debt and interest this year, according to its finance ministry.

Breuer said the country needed to undertake several “prior actions” before securing the bailout, including setting out a 2023 budget consistent with the IMF programme and gaining financing assurances, including from private creditors. Masahiro Nozaki, another IMF official, said the government also needed to take measures to fight corruption, including improving fiscal transparency and financial management and introducing a stronger anti-corruption legal framework. It must also improve tax collection and impose higher rates for high-income earners, he added. “There needs to be a government that has the mandate to carry out the reforms, and there needs to be buy-in by society to support the reforms and to move forward with them,” said Breuer. More

Portugal has no coal mines, oil wells or gas fields. Its impressive hydropower production has been crippled this year by drought. And its long-running disconnect from the rest of Europe’s energy network has earned the country its status as an “energy island.”Yet with Russia withholding natural gas from countries opposed to its invasion of Ukraine, the tiny coastal nation of Portugal is suddenly poised to play a critical role in managing Europe’s looming energy crisis.For years, the Iberian Peninsula was cut off from the web of pipelines and huge supply of cheap Russian gas that power much of Europe. And so Portugal and Spain were compelled to invest heavily in renewable sources of energy like wind, solar and hydropower, and to establish an elaborate system for importing gas from North and West Africa, the United States, and elsewhere.Now, access to these alternate energy sources has taken on new significance. The changed circumstances are shifting the power balances among the 27 members of the European Union, creating opportunities as well as political tensions as the bloc seeks to counter Russia’s energy blackmail, manage the transition to renewables and determine infrastructure investments.The Alto Tamega dam, part of a hydropower facility in northern Portugal that will be operational in 2024.Matilde Viegas for The New York TimesThe urgency of Europe’s task is on display this week. On Wednesday, Russia’s energy monopoly, Gazprom, again suspended already reduced gas deliveries to Germany through its Nord Stream 1 pipeline. With natural gas costing about 10 times what it did a year ago, the European Union has called for an emergency meeting of its energy ministers next week.As Brussels tries to figure out how to manage the crisis, the possibility of funneling more gas to Europe through Portugal and Spain is gaining attention.Portugal and Spain were among the first European nations to build the kind of processing terminals needed to accept boatloads of natural gas in liquefied form and to convert it back into the vapor that could be piped into homes and businesses.This imported liquefied natural gas, or L.N.G., was more expensive than the type much of Europe piped in from Russia. But now that Germany, Italy, Finland and other European nations are frantically seeking to replace Russian gas with substitutes shipped by sea from the United States, North Africa and the Middle East, this disadvantage is an advantage.Solar panels in Sintra. Connecting such panels to Europe’s electricity grid could help ease energy shortages on the continent.Matilde Viegas for The New York TimesTogether, Spain and Portugal account for one-third of Europe’s capacity to process L.N.G. Spain has the most terminals and the biggest, though Portugal has the most strategically located.Its terminal in Sines is the closest of any in Europe to the United States and the Panama Canal; it was the first port in Europe to receive L.N.G. from the United States, in 2016. Even before the war in Ukraine, Washington identified it as a strategically important gateway for energy imports to the rest of Europe.Spain also has an extensive network of pipelines that carry natural gas from Algeria and Nigeria, as well as large storage facilities.Understand the Decline in U.S. Gas PricesCard 1 of 5Understand the Decline in U.S. Gas PricesGas prices are falling. More

Zambia has secured a $1.3bn IMF bailout package, enabling the African nation to advance talks with creditors on exiting a default that will test how Beijing handles the souring of its loans to developing nations.The three-year bailout “will help reestablish sustainability through fiscal adjustment and debt restructuring” through a “homegrown economic reform plan” formulated by President Hakainde Hichilema’s government, the Washington-based multilateral lender said.The deal is a landmark for how the IMF will respond to a wave of debt distress in countries that have borrowed heavily from China. The bailout was unlocked after Beijing agreed in principle in July to restructure loans under a G20 framework to co-ordinate debt relief.This week, the IMF also announced an agreement with Sri Lanka on a draft $2.9bn bailout that will head to the fund’s board for sign-off, and approved a $1.1bn disbursement to Pakistan. Both South Asian countries took significant loans from Beijing in recent years before becoming mired in debt crises.In 2020, Zambia became the first African borrower to default since the start of the pandemic when it stopped making payments on $17bn of external debt under Edgar Lungu, who lost the presidency to Hichilema in an election the following year.Before the default, China became Zambia’s biggest creditor with $6bn in loans to build airports, roads and other infrastructure, many of which became white elephants as the economy slowed and corruption mounted.Zambia will now have to negotiate the exact terms of relief with bilateral lenders and secure a similar deal with private creditors, such as holders of $3bn in US dollar-denominated eurobonds.Both tasks will be difficult as the Chinese debt is split between several creditors and Beijing has historically been reluctant to take outright losses. Some bondholders have complained that they have been left in the dark over calculations about how much relief is needed.“Together with the fiscal adjustment, Zambia needs a deep and comprehensive debt treatment under the G20 Common Framework to restore debt sustainability,” said Kristalina Georgieva, IMF managing director.Zambia’s defaulted eurobonds bonds have traded at about two-thirds of their face value, an indication of investors’ expectations of losses.The IMF bailout is anchored by a plan from Hichilema’s government to cut the fiscal deficit to less than 7 per cent of gross domestic product this year, from double digits in 2021, and to revive growth.The debt crisis pushed what was one of Africa’s fastest-growing economies into a long torpor, but optimism about debt relief and strong copper prices have aided a rebound this year.

The Zambian kwacha has been the world’s second best-performing currency against the US dollar this year, after being the worst-performing last year. Inflation has fallen from double digits in recent months, bucking a trend in a region that has been hit hard by the global surge in food and fuel prices unleashed by Russia’s war in Ukraine.The IMF has argued that the Zambia programme will protect social spending, which is projected to rise from 0.7 per cent of GDP in 2020 to 1.6 per cent in 2025. But Hichilema’s government will be expected to eliminate a fuel subsidy and cut costs in farm subsidies and avoid a repeat of bad investments fuelled by debt.Zambia’s finance ministry has already cut back sharply on infrastructure projects in the pipeline, cancelling $2bn in yet-to-be disbursed loans — largely from Chinese banks. More

At a briefing in May, Japan’s agriculture minister quantified the illicit Chinese farming of Shine Muscat grapes — a preposterously expensive fruit engineered by Japanese breeders over 18 years. The rights holders, he said, were losing more than $70mn a year to grape bootlegging; China, as the prime villain of viticulture, had 30 times more of the fruit under illicit cultivation than Japan’s legally grown acreage.Tokyo’s immediate chances of redress are slim. The greater question is how assertive Beijing will be in treating these grapes as a bigger long-term strategic crisis for China than for Japan. President Xi Jinping has deliberately conflated food security with national security and his government has pointedly labelled seeds the “chips of agriculture”.China’s issue, framed in the rhetoric of self-reliance, is its increasing need for a food revolution. The seed industry will be central: the potential for efficiency gains is vast but the incentives for innovators are weak. China has a history of offering questionable protection on intellectual property — living it down is urgent. Now that the Swiss seed giant Syngenta is Chinese owned, Beijing must convince both its own industry and the outside world that it now supports the interests of the innovator alongside those of the farmer. Climate change, extreme weather, urbanisation, demographics and shifting diets have long cast a shadow over China’s food system: food security has been a stated policy priority for years. But the focus, along with the recognition of the role that corporations will have to play in this revolution, has intensified since 2020. Trade war with the US, Russia’s invasion of Ukraine, the narrative of economic nationalism and other factors remind China how much it relies on imports and how much more efficient its food production — from grain fields to pig farms — needs to be. China, said Xi in March, must rely on itself to feed its people. “We will fall under others’ control if we don’t hold our rice bowl steady,” he said, echoing the thinking that is propelling the country’s broader “Made in China” push for industrial self-sufficiency.The obstacles are significant. Corn output per hectare in China, according to a new Goldman Sachs report, is 40 per cent lower than in the US, and it takes Chinese farmers between 6 and 26 per cent more grain to produce a kilo of pork or chicken than it does their American counterparts. Low yields, rising land prices and high use of pesticides and herbicides now put China’s grain production costs about twice as high as America’s, though roughly similar in 2007.The offset, in the face of China’s rising demand for meat and other foods, has been a structural increase in imports of grains, soyabeans and animal proteins. Goldman Sachs estimates that if current imports are translated into arable Chinese land equivalent, they represent 71mn hectares, or 68 per cent of the country’s total arable land. The involvement of state-owned and private Chinese companies has been substantial. Overseas purchases — of farmland, food production, agritech and other parts of the supply chain — have targeted the expected long-term profitability of food production and security of available supply to China. But Xi’s language suggests that acquired supply lines are being excluded from Beijing’s evolving definition of self-sufficiency.If so, the corporate role envisaged for both domestic and foreign companies in realising China’s food revolution becomes even more critical. Much of the necessary boosts to efficiency — consolidated farms, precision farming methods, greater use of autonomous drones, planters and harvesters, animal vaccination programmes and more — are known but still some way off. But the “seeds as chips” rhetoric has a more urgent ring.In March, a revised Seeds Law came into effect. It aims to toughen protections for crop and plant-related intellectual property. Expanding the commercial claims of the plant breeders — and extending rights to harvested material as well as the original propagating material — is designed to incentivise anyone breeding higher yield, climate-change-proof varieties for a Chinese market that has frustrated both foreign and domestic players for decades.The value of the law lies in the deeply tricky issue of enforcement. On the face of it, the law implies a higher seed price for Chinese farmers; the offset comes when the seeds deliver the much higher productivity or market value their engineers promise. The test of Xi’s stridency on food security will be in the fields and the IP [email protected]

Video: China’s unseen war for strategic influence More

SINGAPORE/TOKYO (Reuters) – The dollar rose broadly on Thursday, particularly against the yen, as investors braced for higher U.S. interest rates while expecting anchored Japanese rates to go nowhere anytime soon.The greenback hit a 24-year high of 139.59 against the yen in early Asia trade, a gain of about 0.5% on the previous day’s close.Expectations for a 75-basis-point U.S. rate hike at next month’s Federal Reserve meeting are rising on the back of solid economic data, with Fed funds futures last pointing to a 73% chance of such an increase. “Dollar/yen should break 140 before the September (Fed meeting). Looks like we won’t have to wait much longer,” said Sean Callow, a currency strategist at Westpac in Sydney.”So long as expectations for the peak in the Fed funds rate keep ratcheting higher while the Bank of Japan remains on hold, dollar/yen will be a buy on dips. Anywhere in the low 140s now looks plausible.”Sterling fell about 0.4% to a new 2-1/2 year low of $1.1576, as clouds gather over the British economy. The euro fell 0.3% but was clinging on above parity at $1.0022 as red-hot inflation stokes hike bets in Europe.Euro zone inflation rose to a record high at 9.1% in August, data released on Wednesday showed, solidifying the case for further big European Central Bank (ECB) rate hikes to tame inflation.Markets have priced in about a 40% chance the ECB will increase rates by 75 basis points next week, even as risks of a painful recession rise along with gas prices.”The high inflation and gas supply are still major issues in both the eurozone and the UK, and I think it’s going to keep downward pressure on both those currencies,” said Joseph Capurso, head of international economics at Commonwealth Bank of Australia (OTC:CMWAY).”I can see the euro going back below parity again quite soon.”The U.S. dollar index, which measures the greenback against a basket of currencies, was up 0.12% to 108.99 in early Asia trade, not far off its two-decade high of 109.48 hit on Monday.”The U.S. dollar has a bit more upside, partly because we think the market is underestimating how high the Federal Reserve could take the funds rate,” said CBA’s Capurso.Yields on U.S. Treasuries rose accordingly. The two-year Treasury yields were up at 3.516%, the highest since late 2007, while expectations for the peak in the Fed funds rate crept closer to 4%.The risk-sensitive Australian and New Zealand dollars were under pressure, with the Aussie down 0.3% at $0.6821, while the kiwi fell 0.3% to $0.6102. More