Economy

In a document on fiscal reform below the provincial level, the State Council laid out steps to divide fiscal revenues and spending obligations among local governments, and transfer payments allocations.China has in recent years taken measures to shore up finances of debt-laden local governments, partly via increased transfer payments from the central government.But local governments still faced problems such as “unreasonable division” of fiscal revenues and spending responsibilities, the cabinet said.The cabinet has pledged to increase annual tax cuts to 2.64 trillion yuan ($392.09 billion), from an initial 2.5 trillion yuan, in a bid to support the slowing economy.The central government would boost its transfer payments to local governments to nearly 9.8 trillion yuan this year to help offset any hit on local revenues, the finance ministry has said.City and county-level authorities would have more stable sources of tax revenue, including those from finance, electric power, petroleum, railway, highways, the cabinet said.China would establish a reasonable mechanism for transfer payments, and gradually increase the scale of general transfer payments, prioritising underdeveloped areas, the cabinet said.Local governments would increase spending on education, scientific and technology research, social security, food security, as well as construction of major infrastructure projects, it said.Local governments needed to step up the management of their debts through increasing revenues, cutting costs and selling assets, the cabinet said.China would also improve the debt quota mechanism for local governments, under which their special debt quota should match revenues and project income, it added. ($1 = 6.7331 Chinese yuan renminbi) More

“The summer is not the end of anything, just the beginning,” Kazimir said in emailed comments. “In the autumn, concretely in September, we will continue with raising rates and here I clearly see the need to accelerate the pace and deliver an increase by 0.50%,” he said.The ECB flagged a 25 basis point interest rate hike in July and said a bigger increase may be needed in September as inflationary pressures were increasing and broadening, raising the risk that high price growth will become entrenched.”From my point of view, it is more reasonable to act preventively than scratch our heads afterward why we lingered,” Kazimir, the governor of the Slovak central bank, said. “Incoming data just reassure me that there is no reason to hesitate. Negative interest rates must be the past in September.”The ECB now sees inflation at 6.8% this year, more than three times its target, and price growth could hold above 2% through 2024, raising the risk that businesses and households lose trust in the bank’s commitment to price stability.Kazimir said inflation would remain high for some time, including in double-digits in Slovakia next year.He said the ECB’s tightening was coming as the economy was slowing down.”Regardless of the current setting of monetary policy there are quarters of weak growth ahead of us, possibly even a temporary period of a slight decline in some euro zone countries,” Kazimir said. More

(Reuters) -U.S. two-year Treasury yields rose above 10-year borrowing costs on Monday – the so-called curve inversion that often heralds economic recession – on expectations interest rates may rise faster and further than anticipated.Fears the U.S. Federal Reserve could opt for an even larger rate hike than anticipated this week to contain inflation sent two-year yields to their highest levels since 2007.But a view is also playing out that aggressive rate hikes may tip the economy into recession.The gap between two and 10-year Treasury yields fell to as low as minus 2 basis points (bps), before rising back to around five bps, Tradeweb prices showed.The curve had inverted two months ago for the first time since 2019 before normalising.An inversion of this part of the yield curve is viewed by many analysts as a reliable signal that recession could come in the next year or two. The move follows inversions on Friday in the three-year/10-year and five-year/30-year portions of the Treasury curve, after data showed U.S. inflation continued to accelerate in May.Two-year Treasury yields rose to a 15-year high around 3.25% before easing to 3.19%, while 10-year yields touched the same level, the highest since 2018. Friday’s data showed the largest annual U.S. inflation increase in nearly 40-1/2 years, dashing hopes the Federal Reserve might pause its interest rate hike campaign in September. Many reckon the central bank may actually need to up the pace of tightening. Barclays (LON:BARC) analysts said they now expected a 75 bps move from the Fed on Wednesday rather than the 50 bps which has been baked in. Money markets are now pricing a cumulative 175 bps in hikes by September and also see a 20% chance of a 75 bps move this week, which if implemented would be the biggest single-meeting hike since 1994. UBS strategist Rohan Khanna said hawkish European Central Bank communication alongside the inflation print “have completely shattered this idea that the Fed may not deliver 75 bps or that other central banks will move in a gradual pace”. “The whole idea went out the drain … that’s when you get turbo-charged flattening of yield curves. It is just a realisation that peak inflation in the U.S. is not behind us, and unless we are told so, maybe peak hawkishness from the Fed is also not behind us,” Khanna added.Meanwhile bets on the U.S. terminal rate – where the Fed funds rate may peak this cycle – are shifting. On Monday, they priced rates to approach 4% in mid-2023, up almost one percentage point since end-May. Deutsche Bank (ETR:DBKGn) said it now saw rates peaking at 4.125% in mid-2023. Some Fedwatchers are sceptical the Fed will move faster with rate hikes. Pictet Wealth Management’s senior economist Thomas Costerg noted, for instance, that most inflation drivers such as food and fuel remain outside central bankers’ control.”Over the summer, they will be aware of growth data and housing which is starting to look more wobbly,” Costerg said. “I doubt they will do 75 bps … 50 bps is already a big step for them.”The sell-off in Treasuries has set other markets on edge, sending German 10-year yields to the highest since 2014 and knocking S&P 500 futures 2.5% lower. More

(Reuters) – U.S. Federal Reserve officials, beset by ongoing high inflation and a weakening growth picture, will lay out on Wednesday how they think their increasingly difficult goal of cooling the economy without sending it into a tailspin may play out in the months ahead.That thorny predicament will be on display as Fed policymakers are expected to deliver their second half-percentage-point interest rate hike in a row and issue their latest projections through 2024 and beyond for economic growth, unemployment and inflation. As critically, they will signal the speed and scale of rate rises policymakers believe are needed to quash inflation at a 40-year-high.What is certain is their forecasts are likely to bear little resemblance to those issued in March, which showed inflation going down without a rise in unemployment or policy being particularly restrictive.The meeting comes two weeks after Fed Chair Jerome Powell and U.S. President Joe Biden met amid rising anxiety at the White House that a plentiful jobs picture is being drowned out by soaring costs for everything from rent and food to gasoline and airline tickets.Powell has previously said the central bank, which in March lifted interest rates for the first time in three years, will keep raising them until price increases ease in a “clear and convincing” way. Policymakers already signaled they plan to match this week’s expected rate increase with another half-point hike at their next meeting in July, bringing borrowing costs up to between 1.75% and 2.0% – right where just three months ago they thought they would be at year-end.A hotter-than-expected inflation reading last Friday has even thrown some doubt on those expectations with economists at Barclays (LON:BARC) calling for a three-quarter-point move either this week or in July and Fed funds futures contracts now reflect better-than-even odds of a 75-basis-point rate hike by July, with a one-in-four chance of that occurring next week.”It’s going to be a tricky meeting messaging-wise,” said Julia Coronado, a former Fed economist and president of MacroPolicy Perspectives. “It’s not a rosy outlook. They don’t have any easy choices to make.”Graphic: There and back again: Fed views of 2022 – https://graphics.reuters.com/USA-FED/SEPS/gdpzyexqmvw/chart.pngNEW FORECASTS, NEW QUESTIONSU.S. consumer price growth accelerated in May to 1.0% as gasoline prices hit a record high and the cost of services rose further, while core prices climbed 0.6% after advancing by the same margin in April, the Labor Department reported on Friday, underscoring the need for the Fed to keep its foot on the brakes. In the 12 months through May, headline inflation rose to 8.6%.The new set of policymaker projections is set to reflect a faster pace of hikes, slower growth, higher inflation and a higher unemployment rate. The key will be how much for each.All policymakers are now agreed the Fed needs to get its policy rate up to neutral – the level that neither stimulates nor constrains economic growth – by the end of this year. That rate is seen roughly between 2.4% and 3%.The median dot for the end of 2022 could easily rise enough to signal at least another half-point increase in September given Friday’s worse-than-expected inflation reading. How far the Fed will have to raise rates overall will also move up, with most economists seeing them topping out between 3% and 3.5%. For the unemployment rate over the next two years, the key is whether policymakers raise it by just a notch or two or show a material rise in layoffs, which would be at odds with their contention that inflation can be tamed without excessive joblessness. Fed Governor Christopher Waller recently said if the Fed could bring down inflation to near its 2% goal while keeping the unemployment rate, currently at 3.6%, from rising above 4.25%, it would be a “masterful” performance.”I don’t think it will change a lot but if it does … that’s a sign they’re worried about the possibility of a serious slowdown or recession,” said Roberto Perli, also a former Fed economist and head of global policy at Piper Sandler.HOW MUCH PAIN THE FED’S WILLING TO SWALLOWSome of the factors keeping inflation so elevated, in particular supply shocks outside the Fed’s control due to Russia’s invasion of Ukraine that have caused a jump in food and oil prices, show no sign of abating. Overall the central bank still faces tremendous uncertainty on the outlook from that and other supply-chain disruptions caused by the COVID-19 pandemic.Nor are officials getting much help yet on the demand side with the healthy finances of U.S. banks, companies and households a possible obstacle to curbing inflation as they raise rates in an economy able so far to pay the price.The longer the Fed struggles to stifle demand and the longer inflation persists, the more likely the rate of price increases becomes embedded and the Fed needs to ramp up its action, reducing the chances of Powell’s hope for what he calls a “softish” landing.Newly sworn-in Fed governors Philip Jefferson and Lisa Cook, who take their place among the 18-strong policymaking body for the first time, are unlikely to diverge from their colleagues’ resolve to lower inflation.”While Cook and Jefferson are expected to be dovish additions to the Fed, that won’t matter much while inflation is 8%, and we doubt they will push back on the Fed’s tightening plans any time soon,” said Andrew Hunter, senior U.S. economist at Capital Economics.If the committee consensus does not align with Powell’s view of what is needed, he has shown by his recent inter-meeting guidance that he is prepared to lead from the front to make sure inflation is decisively dented. David Wilcox, a former Fed research director now director of U.S. economic research at Bloomberg Economics and a senior fellow at the Peterson Institute for International Economics, expects Powell to maintain a razor-sharp focus on the inflation side of the Fed’s mandate like Paul Volcker, the towering Fed chief who tamed inflation in the 1980s.”Powell has every intention of going down in history, if necessary, as Paul Volcker version 2.0,” said Wilcox. More

The writer is a fellow at the American Enterprise Institute, a think-tankOn June 8 Sergei Lavrov and his Turkish counterpart Mevlüt Çavuşoğlu met in Ankara, where they discussed a deal that would allow ships to bring grain out of Ukraine. Such an agreement would be welcome news for global food security. But what governments agree on matters less than how shipping companies and insurers assess the risk. The deal discussed by Lavrov and Çavuşoğlu would allow Russian forces to inspect inbound ships for weapons. Turkish ships would escort the merchant vessels, and the deal would also require Ukraine to demine its coast (which has been mined to keep Russian amphibious forces at bay). Kyiv said in response that it would demine a naval corridor only if it received guarantees that Russia wouldn’t attack its ports. If the deal comes to pass, it will achieve what weeks of talks in many other capitals have not: free passage for desperately needed Ukrainian grain. Some 20mn tonnes is stuck in the country.But governments don’t ship grain — companies do. And if the looming global food crisis is to be averted, shipping companies, insurers and reinsurers need to be convinced that any deal agreed by governments does make the Black Sea’s waters safe enough for their ships, crews and cargo. “The shipping industry is extraordinarily risk-tolerant,” Cormac Mc Garry, a maritime analyst at Control Risks, points out. “The average seafarer deals with more risk on an average day than most people do in a lifetime, and that risk tolerance feeds up to the corporate level.” That means that some shipping companies would risk sailing to ports such as Odesa, retrieving the grain and bringing it out of the Black Sea aided by a naval corridor and naval escort. “It doesn’t mean that most companies will go in,” Mc Garry cautions. “But you’d be surprised at how many are willing to take such risks.” So risk-tolerant are shipping companies that they kept sailing through the Strait of Hormuz during the Iran-Iraq war, even though both sides attacked merchant vessels there.Shipping companies, though, can’t sail without insurance — and insurers are more risk-averse. In the Black Sea, they’re likely to be cautious even if Turkey, Russia and possibly other countries promise safe passage. That’s because they’ve already lost an estimated $5bn as a result of the Ukraine war, and even with little maritime traffic currently taking place, the losses keep piling up. Those losses include 84 ships that have been trapped in Ukrainian ports since the beginning of the war. Insurers also have to worry about massive volumes of sea-bound cargo trapped on land. And the 450 seafarers trapped on the 84 ships will most likely demand compensation. Insurers are wary of even more financial loss.According to Neil Roberts, the secretary of maritime insurers’ conflict-assessment body the Joint War Committee, “there . . . needs to be clarity regarding sanctions for all ship owners, ship operators and insurers.” That’s because the US Office of Foreign Assets Control, which monitors sanctions compliance, imposes hefty fines on violators (including unwitting ones) and sometimes even jails executives.Once an intergovernmental agreement is signed, insurers will first look for assurance that the grain-export corridor is cleared of mines and sanctions exposure. Companies will assess the risk and the commercial benefit — and the humanitarian relief.Either way, if governments create a maritime corridor, a small group of shipping companies and maritime insurers are likely to take on the challenge. They will, of course, do so for a price, which will be passed on to consumers. But before assuming that a diplomatic deal will release the trapped grain, Turkey would do well to consult the maritime industry. It would be an anticlimax if Ankara thought it was solving a looming food crisis and no ships turned up to transport the grain. More

JERUSALEM (Reuters) – Israel and India are preparing to resume talks on a free trade agreement, Israel’s Economy Ministry said on Monday, adding that an Indian delegation had arrived in Jerusalem to discuss framework rules and coordinate expectations for negotiations.Last October, India and Israel agreed to resume free trade talks with an aim of signing a deal by mid-2022.Israel’s Economy Ministry said a senior team from India’s Industry and Trade would meet with their Israeli counterparts to discuss the ground rules but did not say when actual trade negotiations would resume. Ties between Israel and India have grown closer in the eight years since Indian Prime Minister Narendra Modi has been in power, and the two countries have formed a number of strategic, military and technology partnerships during that time.Bilateral trade between Israel and India totalled $6.3 billion in 2021 up from $200 million in 1992 when the two countries opened diplomatic relations and Israel has emerged as one of India’s biggest suppliers of weapons alongside the United States and long-term partner Russia.”We share similar challenges in a wide range of fields, from agriculture, climate and water to homeland security, fintech and cyber,” Israeli Economy Minister Orna Barbivai said in a statement.She called the relationship between the two countries “strategic” and said a free trade deal would significantly boost existing collaboration.Ron Malka, the ministry’s director general and former Israeli ambassador to India, said in the statement that a deal would ease trade barriers for Israeli companies operating in India, strengthen trade and economic cooperation and help the government in its efforts to lower the cost of living. Last month Israel signed a free trade agreement with the United Arab Emirates (UAE). India aims to sign new trade deals with several countries including Australia, the UAE, Britain and Canada, to boost exports and help the country recover faster from its coronavirus-induced slowdown. More

Hello and welcome to Trade Secrets as I return after a two-week break. By the time this lands with you I’ll be on my way to Geneva for the big set-piece World Trade Organization meeting of all ministers, the first since 2017, postponed for pandemic-related reasons from late November last year. The meetings kicked off yesterday — there wasn’t a lot of news in the opening skirmishes — and will continue until the end of Wednesday unless everything is sorted by tomorrow (it won’t be). For a great overall view, see this by my colleague Andy Bounds. For a means of judging what constitutes success, complete with handy scorecard, you’ll be needing this by Peter Ungphakorn and Robert Wolfe, veterans of the trade circuit. Below I’m going to focus on the politics that are determining the big issues, including the intellectual property waiver (or non-waiver, as sceptics would put it) for Covid-19 vaccines, a deal on restricting fishing subsidies, a response to the global food crisis and reforming the WTO itself. Charted Waters is on trends in the global business education market. As ever: thoughts, tips, insincere praise, finely-crafted insults, whatever you’ve got, send them along to [email protected] Just Get Something Done is under wayWhen the WTO ministerial was put back from its original date in Geneva last November (actually its original date was in Kazakhstan in June 2020, also a victim of Covid), I wrote that a few governments were probably secretly happy that it had been pushed off. Chief among them was the US, which had politically trapped itself at home. Congress was opposed to any trade deal that meant making substantial concessions or handing more power to the WTO over US policy, but the administration had created a hostage to fortune by promising its vocal health campaigners a Covid patent waiver.Even those governments keen for it to go ahead weren’t necessarily wanting a positive outcome. India in particular, apart from striking a maximalist pose on the IP waiver, was also demanding a lot of leeway to keep subsidising its fishing fleet. Quixotically, it also wanted the rest of the WTO membership to bless more use of trade-distorting handouts to farmers under the name of building public buffer stocks of food. And if those talks collapsed? Well, more kudos to Delhi for sticking it to the rich world.A lot has happened in the world since then, notably the Ukraine war and an incipient global food crisis. You might have hoped that would have induced a general sense of unity and purpose. You’d be disappointed if you did.On “Trips” (the agreement on trade-related aspects of intellectual property rights), the US remains in the same bind it was before, thanks to its inept domestic political management. It’s been taking part in a small core of discussions with a “Quad” (itself, EU, India and South Africa) in the WTO, but seemingly forgot to tell Congress what it was up to. When a draft of the discussions leaked, showing some pretty minimal tweaks along lines proposed by the EU, Congress was cross it hadn’t been consulted and the campaigners were furious their dreams hadn’t come true.The almost-finished version of the text to be put to ministers this week remains, let’s say, somewhat minimal. If you think (many do not) that major holes need to punched in IP law to stimulate vaccines and other treatments for Covid and diseases yet to come, you won’t find them here.Still, there have been some rare positive developments in other countries regarding prospects for a deal, even if a weak one. India, which doesn’t really have much of an interest in a waiver anyway (its world-class generic pharma companies have no difficulty producing and exporting) has so far gone along with the draft, apparently having been leaned on by South Africa and other developing countries that would find the proposal somewhat useful. A deal this week? Maybe. That would be a solid diplomatic success for the WTO DG, Ngozi Okonjo-Iweala, who opened proceedings with an eloquent plea for compromise and unity yesterday, whatever you think of the substance.In other areas, the politics don’t seem to have improved. The US midterms now being that much closer, the Biden administration’s political room for manoeuvre has reduced yet further. It’s talked a good game on reforming the WTO but one pretty much devoid of substance, and certainly it doesn’t look like it will lift its block on the appellate body for the foreseeable.India, although it has developed a taste for bilateral trade deals, doesn’t seem to have softened its intransigence at the WTO over fishery subsidies and farming. On agriculture, the existing issue of public food stocks and India’s recent abrupt export ban on wheat hasn’t increased the chances of a harmonious outcome.There’s even a non-negligible chance that India, together with allies South Africa and Indonesia, will end a 24-year WTO moratorium on taxing cross-border electronic transmissions (software, data and so on). It would be an utterly baffling thing to do for an economy with a world-class digital sector, but there you are.Overall, the political atmosphere among trade ministers has changed less than you might imagine as a result of the Ukraine war. There’s no repeat of the gush of global solidarity that followed the September 11 attacks (this is not an unalloyed negative, since said gush ended up wasting a decade of everyone’s time by inspiring the doomed Doha round of WTO talks). In any case, security and defence rather than trade are the first thoughts of many governments these days.Ukraine may have brought the rich democracies and some like-minded countries closer together, but those governments’ ringing denunciations of Russia in the WTO (and even statements of support for Ukraine that don’t mention Russia by name) have drawn conspicuously few emerging market backers in Asia and Africa.We’ve still got the same problems we did in November. The US is still terrified of allegedly trade-phobic voters at home: India still gets capital and leverage from broad-spectrum defiance at the WTO. Getting deals this week will require some nifty diplomacy. We’ll keep you informed.As well as this newsletter, I write a Trade Secrets column for FT.com every Wednesday. Click here to read the latest, and visit ft.com/trade-secrets to see all my columns and previous newsletters too.Charted watersThe provision and purchase of education, at least at the higher end, is a sophisticated globalised market. With the publication of the FT’s annual ranking of masters in finance (MiF) courses (something I have written about extensively as business education correspondent for the last seven years) I thought it was worth looking at a couple of trends here, using two charts.Business education has been defined in recent years by escalating tuition fees and the rise of schools in the Asia-Pacific region to match those of the US and Europe. However, when it comes to MiF courses, it is students in Asia-Pacific countries that are most willing to travel elsewhere in the world to secure places on the world’s best degree programmes, and they are choosing European schools. One of the paradoxes, however, as the above chart by my FT colleagues Leo Cremonezi and Sam Stephens shows, is that alumni who moved regions for their programme earn a lower salary and pay higher tuition costs.There is a benefit for students who come to study in Europe rather than the US however — as the above chart shows — with MiF students paying lower fees and receiving larger salaries than those studying in other regions. It is therefore unsurprising that this year’s FT ranking lists are dominated by the British and French schools. (Jonathan Moules)Trade linksTalking of food crises and export restrictions, here’s David Kleimann of the Bruegel think-tank pointing out the limitations of international rules in preventing export bans. The longstanding fuel vs food debate about using crops to generate energy has started up again thanks to the Ukraine conflict.Matthew Goodman at the think-tank CSIS argues that the US’s bitty transactional deals in Asia won’t impress its trading partners there.Trade Secrets is edited by Jonathan Moules More