Economy

SHANGHAI (Reuters) – China’s surprise cut in key policy rates this week highlights a dilemma facing Beijing as authorities try to revive an economy awash with cash in the financial system but still lacking in consumer demand.Monday’s 10 basis point cuts in the People’s Bank of China’s (PBOC) 7-day and one-year lending rates isn’t much of a spur for banks to boost lending – they already lend to each other at much lower rates – and analysts say more fundamental measures are needed to revive confidence in an economy ravaged by a property crisis and ongoing COVID lockdowns.The PBOC is facing the challenge of a “partial liquidity trap”, says Alicia García Herrero, chief economist for Asia Pacific at Natixis, as interest rates are not low enough to be defined as a Japan-style liquidity trap, but “cash remains trapped in the largest banks” due to growing systemic risks.Beijing needs more “heterodox measures” to lift growth, for example, injecting liquidity into smaller banks that lend to small businesses, albeit creating a moral hazard, García Herrero said.Other analysts say China requires measures beyond monetary easing to revive its economy, such as less severe COVID policies, and government bailout of failing companies.Rocky Fan, economist at Guolian Securities, said the property market downturn is affecting confidence, as people dare not buy houses amid a debt crisis and boycotts to pay mortgages for unfinished homes.”You need to address the property woes to revive the economy, but it’s a thorny issue,” Fan said. “I don’t see a solution unless the government bails out all the troubled developers, at the risk of moral hazards.”TRAPPED CASH Official data on Monday showed China’s economy slowed across the board in July, dashing hopes for a post-lockdown economic boom. Bucking a global trend of rate hikes to combat red-hot inflation, China has been easing monetary policies, and repeatedly prodding banks to lend more. Still, new bank lending in China tumbled in July while broad credit growth slowed, reflecting anaemic demand.The banking system, however, is bursting with cash. China’s broadest measure of money supply M2, that includes cash and deposits, jumped 12% last month, the fastest pace in six years. Chinese households added 10.3 trillion yuan ($1.52 trillion) in deposits in the first half.”Chinese banks are amassing deposits at an alarming rate as both corporates and households over-save,” Jefferies analysts said in a note. Monday’s rate cuts are “a response to a dearth of spending, which has resulted in a flood of deposits,” the brokerage said, adding the move is “unlikely to move the economic needle”.David Chao, global market strategist, Asia Pacific ex-Japan at Invesco says cutting rates “is a good start, though more policy support is needed, especially to put a floor in the property market and to boost household and corporate sentiment”.Concrete measures could include cutting mortgage rates, relaxing payment requirements, reducing bureaucratic red tape, and easing leverage limits for developers, he suggests. BALANCE SHEET RECESSIONKaiwen Wang, China strategist at Clocktower Group, said that, with short-term interbank rates already near record low, “it is unclear whether PBOC will feel comfortable with a much lower rate environment given its concern over financial bubbles.”Even before Monday’s rate cuts, China’s interbank market rates were already much lower than policy rates, making PBOC’s move look superfluous.Balances at money market funds (MMF) ballooned to a record 11 trillion yuan in May, overtaking Europe as the world’s second-biggest MMF market, after only the United States, according to Fitch.There are already signs of froth in some corners of the financial markets, as some investors seek higher yields.Trading in the domestic money market jumped 44% from a year earlier in June, according to latest official data, while average daily turnover of exchange-traded bonds more than doubled from a year earlier, amid signs of more leveraged trading.In the stock market, outstanding margin loans have climbed to a four-month high of 1.64 trillion yuan, while the small-cap CSI1000 index – more vulnerable to speculative trading – has jumped more than 40% from an April low, to a five-month high. “The rate cuts can only trigger a carnival in the bond market,” said Xia Chun, chief economist at wealth manager Yintech Investment Holdings, referring to a jump in bonds after the policy move that saw China’s 10-year treasury futures hitting two-year highs.”The problem is there’s not a shortage of liquidity, but households and companies have gloomy expectations and weak confidence. It’s a typical balance sheet recession.” ($1 = 6.7928 Chinese yuan renminbi) More

Real levels of UK wages fell at the fastest rate for at least 20 years in the second quarter of this year, but the labour market remains too tight for the Bank of England to feel comfortable about inflationary pressures. Data from the Office for National Statistics showed that in the three months to June underlying real wages fell 3 per cent, the steepest decline since comparable records began in 2001, as regular pay growth of 4.7 per cent was dwarfed by prices rising even faster. The figures highlight the difficult financial position of households even before energy bills rise sharply in October. They also show the cost of living crisis to be much tougher for those working in the public sector, with regular pay levels rising at an annual rate of only 1.8 per cent, compared with 5.4 per cent in the private sector. Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said that despite the sharp squeeze in real wages, pay was still growing faster than the levels at which the BoE’s Monetary Policy Committee thought would bring inflation back to its 2 per cent target. It is currently at 9.4 per cent and is projected to rise to over 13 per cent early next year. “Wage growth has more momentum than the MPC can tolerate,” Tombs said. The wage data from the ONS came alongside broader labour market figures showing only the early signs of cooling. Unemployment was still close to 50-year lows, with historically high levels of vacancies and employment levels fairly stable. In the second quarter, the unemployment rate crept up 0.1 percentage point to 3.8 per cent, while the employment rate fell by the same amount to 75.5 per cent. That rate was 1 percentage point below the pre-pandemic level and left 281,000 fewer people in work than before Covid-19 struck.The unemployment rate was only marginally higher than its 3.7 per cent level in the first quarter of the year, which was the lowest rate since the early 1970s. With unemployment low, vacancies were still very high, showing that most people who wanted work could find it. After a small decline from a record level, there were still 1.27mn job vacancies on offer in the three months to July for the 1.29mn people who were registered as unemployed and seeking to start work immediately. Ruth Gregory, senior UK economist at Capital Economics, said that “by any metric the labour market is still exceptionally tight” and would put pressure on the BoE to raise interest rates by another 0.5 percentage points in September.Nye Cominetti, senior economist at the Resolution Foundation, said the real pay decline was probably worse than at any point since 1977. “This squeeze has come about despite robust pay growth and a lively jobs market, with pay settlements strengthening slightly,” he said. Chancellor Nadhim Zahawi said the labour market data showed there were “no easy solutions” to the cost of living pressures that the country faced.

“Whilst we cannot completely shield everyone from these global economic shocks, we are targeting this support on millions of the most vulnerable people in our society: those on the lowest incomes, pensioners and disabled people,” he said in a statement. But in a sign that pensioners are feeling increasingly vulnerable about their financial position as energy prices bite, the data showed a surge in the number of over-65s going back to work or staying in employment. Although the state pension age rose to 66 in October 2020, there was a sudden surge of 180,000 in the number of people aged over 65 working or available to work in the second quarter alone. That was an increase of 13.6 per cent on the figures for the first quarter. More

KILINOCHCHI/COLOMBO, Sri Lanka (Reuters) – Nallathambi Mahendran walked through his four acres of emerald green paddy fields in northern Sri Lanka’s Kilinochchi district, indicating the height the plants should have reached by now. They were several feet short.The standing paddy crop across most of this major rice growing belt is stunted for the second successive season because of the lack of fertiliser, according to farmers, a union leader and local government officials.In 10,900 hectares of land under cultivation in Kilinochchi, the average yield is likely to hit 2.3 metric tonnes per hectare, according to government estimates seen by Reuters.In previous years, paddy fields in the area delivered around 4.5 tonnes per hectare, according to a local government official who asked not to be named because he was not authorised to speak to media.    Across rice farms in this Indian Ocean island, the bleak picture is emerging that the summer harvest could be as low as half that of previous years, according to experts. As Sri Lanka’s staple food, it points to further pressure on a country already struggling with its worst economic crisis in modern times, including runaway inflation and growing levels of malnutrition.    The shortage of fertiliser is not the only problem for farmers. The country has hardly any currency reserves to import adequate fuel, so farm machinery and trucks to transport rice to markets are in short supply. Some farmers say their crops are not worth harvesting. Compounding the economic misery, the stunted crop means the island will have to use precious currency reserves, a credit line from India as well as foreign aid to import hundreds of thousands of tonnes of rice.Across the country, paddy production during the ongoing “Yala” or summer farming season could be half the average 2 million tonnes in previous years, said Buddhi Marambe, a professor of crop science at Sri Lanka’s Peradeniya University.”This is mainly because of the absence of fertiliser during the vegetative growth stages of the crops,” Marambe said. “Urea was made available with lots of effort but was too late for many areas.”Sri Lanka has been self-suficient in rice for decades, but went to international markets last year to buy 149,000 tonnes of the grain after the fertiliser shortage first hit production. In 2022, the country has already contracted to import 424,000 tonnes. More imports may be needed to stave off food shortages in the first two months of 2023, or until the “Maha” crop that is planted in September is harvested, Marambe said.A committee appointed by the Ministry of Agriculture is currently evaluating the need for additional imports, a ministry official said, speaking on condition of anonymity.Government spokespersons did not respond to requests for comment on the food situation and likely imports. Rice is the staple food of the country’s 22 million people and its biggest crop. According to government data, 2 million people in the country are rice farmers out of 8.1 million people engaged in fishing and agriculture in the largely rural economy. WORSE TO COMEFood inflation is already at more than 90% year-on-year, according to July data, and the World Food Programme (WFP) estimates that about 6.7 million Sri Lankans out of a population of 22 million are not eating enough.There may be more pain to come.Hammered by the potential halving of the “Yala” crop, the shortage of fertiliser and soaring costs for inputs, some farmers in Kilinochchi, a fertile region served by a intricate system of irrigation ponds and canals, are considering sitting out the “Maha” farming season.”Even though we worked in the paddy fields, we won’t make any money,” said Mahendran, a tall 67-year-old with a streak of silver in his hair. “If there is no urea or fertiliser available, I won’t farm in the Maha season.”The Iranaimadu Farmers’ Federation, which represents about 7,500 farming families in the Kilinochchi area, gave the same message to local government officials at a recent meeting.”Fuel is our biggest problem,” said the federation’s secretary Mutthu Sivamohan, speaking near a petrol and diesel filling station outside which a queue of vehicles stretched for 3 km (2 miles) along the main road running through Kilinochchi town. “We can’t harvest and we can’t sow the next crop,” Sivamohan said. He said most of Kilinochchi district’s paddy crop must be harvested within weeks but “no lorries are coming from outside to buy and transport our crop”.Diesel for combine harvesters is being rationed, and fewer trucks are available to transport the rice because of the fuel crunch.Some critics trace Sri Lanka’s unfolding food catastrophe to former President Gotabaya Rajapaksa’s decision in April, 2021, to ban chemical fertilisers overnight, part of a drive to make the country’s produce more organic.Faced with widespread protests from the farming community, the ban was lifted last November, but not before disrupting supplies and leaving most Sri Lankan farmers without essential fertilisers for last year’s “Maha” season.By April, Sri Lanka’s financial crisis had strangled the economy and, with foreign exchange reserves at record lows, Rajapaksa’s government failed to procure enough fertiliser.The lack of hard currency at a time of spiralling prices sparked by Russia’s invasion of Ukraine also squeezed imports of essentials including fuel, cooking gas, medicines and food.’DYING EVERY DAY’ Resulting shortages led to an outburst of public anger against the government and once-powerful president, and sometimes violent mass protests eventually forced Rajapaksa to flee the country and quit the presidency.In Kilinochchi, where the Sri Lankan military maintains an outsized presence – a vestige of a decades-long bloody civil war that ended in 2009 – there were no major anti-government demonstrations.But the impact of the crumbling economy has rippled through the hinterland, leaving some farmers who survived the war that killed an estimated 80,000-100,000 people struggling.To farm 75 acres of land, Chinnathambi Lankeshwaran said he would typically spend around 70,000 Sri Lankan rupees ($197) per acre and recover about 40 bags of rice from each acre.A combination of shortages and inflation has led to his expenses more than doubling to 200,000 rupees per acre, which now yield only 18-20 bags per because of the lack of fertiliser and pesticides, Lankeshwaran said.The rising cost of farm inputs is striking, according to estimates provided by several farmers.A bag of urea, previously costing 1,500 rupees, is now 40,000 rupees. A litre of Loyant, a popular rice herbicide, goes for more than 10 times its usual price at 100,000 rupees – when available. The price of an empty sack into which farmers put their harvest has trebled to 160 rupees each, and the thread that they used to tie the sacks is sold for more than five times what it used to be at around 1,200 rupees per kilogram.The black market rate for diesel is hovering around 1,200 rupees ($3.38) per litre, much higher than the authorised pump price of 430 rupees. But supplies are scarce, and Lankeshwaran said he has 300 bags of wheat stored at home because traders don’t have fuel to pick it up. “In those days, we feared where the bombs would come from,” said the 49-year-old farmer, referring to the civil war that displaced his family of four. “Now, we are dying every day.”($1 = 355.0000 Sri Lankan rupees) More

BEIJING/TAIPEI (Reuters) -China on Tuesday imposed sanctions including an entry ban on seven Taiwanese officials and lawmakers it accused of being “independence diehards”, drawing condemnation from the democratically governed island.The sanctions come after U.S. House Speaker Nancy Pelosi visited Taiwan this month, a trip that China said had sent a wrong signal to what it views as pro-independence forces.China considers Taiwan its own territory and not a separate country. Taiwan’s government disputes China’s claim.China’s Taiwan Affairs Office said among those sanctioned were Taiwan’s de facto ambassador to the United States, Hsiao Bi-khim, Secretary-General of Taiwan’s National Security Council Wellington Koo, and politicians from Taiwan’s ruling Democratic Progressive Party.A Taiwan Affairs Office spokesperson said those sanctioned would not be able to visit China, Hong Kong and Macau. Firms and investors related to them would also not be allowed to profit in China.”For some time, a few diehard separatist elements, out of their own interests, have gone to lengths to collude with external forces in provocations advocating Taiwan independence,” Chinese state news agency Xinhua cited the spokesperson as saying.”Their activities became all the more egregious during the visit by Speaker of the U.S. House of Representatives Nancy Pelosi to China’s Taiwan region, further exposing their obstinate nature in seeking Taiwan independence.”Taiwan’s foreign ministry said the island was a democracy that “could not be interfered with by China”, while Taiwan’s China-policy making Mainland Affairs Council said Beijing was trying to “create antagonism and anxiety”. DPP deputy secretary general Lin Fei-fan said it was an honour to be added to the sanctions list.”I think that in this era, being sanctioned by an authoritarian regime should be a decoration for members of the free world, and it is very glorious,” he wrote on his Facebook (NASDAQ:META) page.The sanctions will have little practical impact as senior Taiwanese officials do not visit China. The seven are in addition to Taiwan Premier Su Tseng-chang, Foreign Minister Joseph Wu and parliament Speaker You Si-kun who were previously sanctioned https://www.reuters.com/world/china/china-says-it-will-hold-supporters-taiwans-independence-criminally-responsible-2021-11-05 by China.Taiwan’s government says only the island’s 23 million people have the right to decide their own future. More

Good morning. It’s Katie here again, demob happy for my third and final time filling in for Rob before I take a break of my own, woohoo. It’s been a pleasure, truly. I don’t know why Rob whinges about it all the time. (He doesn’t really.)Do feel free to continue saying hi at [email protected], but don’t necessarily expect an answer if I’m sipping sangria in the daytime on my hols, and remember the real brains behind this whole operation belong to [email protected], who routinely asks bracingly probing questions of his elders and betters. OK just elders, but regular readers of this newsletter know that anyway. UK: this is fineOne of the real oddities of UK markets in the past few weeks is that they are not responding to pronouncements on economic or even monetary policy from the two contenders to take over from Boris Johnson as the next prime minister. On July 7 Johnson announced he would quit. Since then, sterling and gilt yields have been flat. Snore. Several potential explanations spring to mind. One is that the candidates’ policies, particularly those of frontrunner Liz Truss, would make no difference anyway. The other is that market participants think this is all campaign bluster and the policies will not be implemented. This bluff-calling could be a mistake.If investors are worried at all, they are hiding it well. The only real market movement is the FTSE 100, up by 4 per cent since Johnson’s announcement. This remains the only notable national stocks index to put in a positive performance so far in 2022, which sounds great until you consider that companies in the index generate about 75 per cent of their revenues overseas. So this is not a bet on the UK or its political direction. It is, however, a bet on relatively unsexy companies that dig or pump stuff out of the ground. Yes, they’re part of the green revolution too, but when one wealth manager described the UK stock market to me as a “corporate old people’s home”, he was on to something.Anyway, on to Truss, who is not certain to win the leadership race but, ya know.Among her more market-sensitive and eye-catching policies, she has pledged to review the Bank of England’s mandate if she were to snag the top job in September. In private, many investors and analysts are aghast at this, while hedge funds are rubbing their hands in anticipation. In public, banks have generally been a little cautious to address this elephant in the room, stung by the experience of opining on the relative merits and demerits of Brexit back in 2016, which got several of them tangled up in accusations of participating in Project Fear.But Deutsche Bank has had a good and balanced swing at it.It reckons Truss would launch a strategic review on the BoE around September 21 — a potential date for an emergency Budget. This consultation would likely wrap up quickly to avoid the BoE “losing credibility during a pivotal period in the economic outlook”, analysts Sanjay Raja and Shreyas Gopal wrote. Possibly the simplest outcome would be to shift the 2 per cent inflation target to a new level, which the chancellor of the exchequer could do unilaterally.A stricter, ie lower, inflation target could boost sterling a bit, Deutsche believes, but it would likely be a little academic while the BoE expects inflation to hit more than 13 per cent (yes, one three) by the end of this year. But something more juicy like a Fed-style dual mandate with a jobs target or, seemingly more likely, a nominal gross domestic product target (a notion described by UBS Wealth Management’s Paul Donovan as a “wacky idea”) would likely require new legislation, among other things, and be much more impactful.The analysis from Deutsche (abridged by me) is:We think a shift to a nominal GDP target of 4.5 per cent would be taken dovishly by the market, and would be negative for sterling. The consensus view is that potential (real) growth in the UK is low, (c. 1-1.5 per cent), partly as a result of weaker demographics and the UK’s longstanding productivity malaise. As a result, the market will likely see inflation doing the heavy lifting to get nominal GDP to target — in other words the implicit inflation target could be higher than the current one. In turn this would imply lower real rates, with sterling likely to fall as a result.A nominal GDP target also implicitly assumes that monetary policy can adjust flexibly and speedily to meet its target. However, monetary policy works with a sizeable lag of around 12-18 months. The BoE would also be taking a step into the relative unknown, with no other major central bank currently targeting nominal GDP.A positive outcome for sterling would be if the inflation target is lowered without any other changes to the bank’s independence or flexibility in implementation. By contrast, we would expect sterling to weaken on any firming of the suggestion that the bank could be asked to switch to targeting nominal GDP, or if they are forced to increase and then adhere to forward guidance on account of perceived political influence.One overriding question here is what the point of this whole exercise would be. “No mandate would likely have achieved meaningfully different outcomes as monetary policy only impacts demand in the short term,” said Paul Hollingsworth, chief European economist at BNP Paribas. “The alternative would have been to squeeze demand to such an extent that a recession would likely already have happened.” Great! Sign us up!Rabobank’s Jane Foley sums up the situation quite neatly:Liz Truss continues her charm offensive aimed at Tory party members. Her policies, however, are not necessarily in line with investors’ needs.Delicately put. Foley says sterling could drop as low as $1.14 in the next one to three months. It’s now at $1.21 and a bit. Read more of her views on the subject in a Markets Insight column today.If you are watching from the sidelines thinking “right but surely British politicians wouldn’t take any non-urgent risks with economic and monetary stability at a delicate time”, then I would gently suggest you have not been paying attention for the past few years.If you are quietly worried about all this, or noisily worried, or indeed if you think this is exactly what the country needs, our inboxes are open.Catching Katie’s eyeCliff Asness of AQR is not a man who minces his words, and his latest number-crunching on value stocks has led him to ask out loud: “Is everyone out there cray-cray?” Parts of the market have gone “temporarily (I hope) insane”, he says, undervaluing value stocks to the point where it’s reminiscent of the great tech bubble from the turn of the century. He notes:The past couple months serve as a cruel reminder that a massive valuation dislocation says very little about the timing of when it falls back to earth.In a crowded field, this is the funniest “sorry but you can’t have your money back” announcement from the crypto space of all time. Somehow the tweet is even better. It has anime.As my excellent colleague Bryce Elder pointed out last week, Baillie Gifford has put forward some, er, interesting thoughts on what can cause poor fund performance. Do read the annual report. It’s quite something. Also, always read Bryce.The pointyheads at Bank Underground (the BoE blog) have gone where few serious people have gone before: to the metaverse. Readers, you will be shocked to learn that “widespread adoption of crypto in the metaverse, or any other setting, would require compliance with robust consumer protection and financial stability regulatory frameworks”. Also, “if an open and decentralised metaverse grows, existing risks from cryptoassets may scale to have systemic financial stability consequences”. Big “if” there. Huge. Still, a thoughtful piece worth a read. Technical analysis is definitely a serious thing.“Unbecoming, cynical and just weird.” You OK, Australia?Apparently Larry Fink doesn’t think bitcoin is an “index of money laundering” any more. Hard to say when the change of heart happened, but it must have been recent, since in October he was saying he’s “not a student” of the digital asset “so I can’t tell you whether it’s going to $80K or 0”. Buyers of BlackRock’s new bitcoin trust may have a clearer view. (On a related note, if you missed it, abrdn hs gt int crpto.)So maybe past performance is an indication of future returns after all? In certain bits of private equity anyway, according to this bite-size but quite satisfying analysis from Schroders. Tl;dr:The past performance of private equity funds may provide some useful information to help think about how they might perform in future. This is a very different picture to what we see with public equity funds.C’mon, everyone loves surfing dogs, who cares if there’s no markets relevance?One good readWood pellets. So hot right now. More

The Global Business Travel Association (GBTA) said business travel spending rebounded by 5.5% to $697 billion in 2021 with North America leading the recovery, but remained well short of 2019 levels of $1.4 trillion.The recovery outlook is more pessimistic than GBTA’s last forecast issued a year ago, when it expected a full rebound to 2019 levels by 2024. Environmental sustainability considerations and the regional impact of the war in Ukraine are also weighing on travel demand, the forecast said.”The factors impacting many industries around the world are also anticipated to impact global business travel recovery into 2025,” GBTA CEO Suzanne Neufang said in a statement. “The forecasted result is we’ll get close, but we won’t reach and exceed 2019’s pre-pandemic levels until 2026.”Global Business Travel Group Inc, owner of the world’s largest corporate travel agency American Express (NYSE:AXP) Global Business Travel, said last week that revenues this year were expected to average around 65% of 2019 levels, though that did not include the impact of a possible recession.Airlines and hotels have been relying on strong leisure demand to help fill the gap left by the decline in corporate travel during the pandemic. More

Inflation in June caused worry when it topped double digits after nine months under that threshold, prompting President Nicolas Maduro’s administration to implement policies to curb rising prices.The government’s strategy has depended on exchange rate stabilization by increasing foreign currency supply in local banks, while also limiting credit growth, cutting public spending and upping taxes, analysts say.Annual inflation in the year through July hit 137%, according to Reuters calculations using central bank data, the highest rate in the region. High prices and the country’s de facto dollarization have widened the wage gap between workers in the public and private sectors.  Venezuela’s minimum salary is equivalent to about $22 a month.The South American country’s inflation year-to-date was 48.4% in July, according to the central bank.Prices in education services jumped 12% while leisure and culture rose 10.8% in July compared with June. More

The company, which told its employees of the new plan on Monday, will require employees to work from the office on Tuesdays, Thursdays and a regular third day that will be determined by individual teams, the report said. The iPhone maker did not immediately respond to Reuters request for comment.Apple (NASDAQ:AAPL) joins several technology and finance companies that have begun mandating a return to office as COVID cases ease.Earlier in June, Tesla (NASDAQ:TSLA) Inc Chief Executive Elon Musk has asked employees to return to the office or leave the company, according to an email sent to employees and seen by Reuters. More