Economy

The outlook is weakening for Foxconn amid rising Chinese coronavirus infection rates and accompanying lockdowns. The business is Apple’s main contract manufacturer of iPhones, which topped global smartphone sales rankings last year. Fourth-quarter profits at Hon Hai — the name under which Foxconn is listed in Taiwan — beat expectations. Cash flow figures tell a gloomier story.Foxconn’s quarterly profits exceeded forecasts at NT$44bn ($1.6bn), a 3 per cent decline on sales that were 6 per cent lower. The company, which assembles about 70 per cent of the world’s iPhones, remains dependent on its consumer electronics business for 60 per cent of its sales.The business of assembly and contract manufacturing has always involved razor-thin operating margins, currently less than 3 per cent. In hopes of fattening these, Foxconn has been moving into electric vehicles and low-end chipmaking. On the face of it, forecast EV sales growth of seven times until the end of 2030 to more than 30m vehicles compares favourably with the outlook for contract manufacturing smartphones.But the shift is proving too slow and too expensive. Liabilities have grown. Net cash has more than halved. Free cash flow turned a negative NT$190bn last year, from a positive NT$312bn. The components business accounts for just 6 per cent of group sales.Foxconn has, meanwhile, been forced to suspend most of its operations in Shenzhen, which analysts estimate represent around a fifth of its total iPhone production capacity. If China’s coronavirus outbreak triggers wide, extended lockdowns, the company would also lose production from big assembly plants in Zhengzhou. Foxconn faces a cocktail of other risks, including chip shortages.The shares have fallen 17 per cent in the past year. At 10 times forward earnings they trade at a steep discount to Chinese rival Luxshare. The gap reflects doubts over Foxconn’s capital-intensive bet on chipmaking and EVs. The group has limited options for boosting cash flow. Dividend yields of 4 per cent are already down from the 5.5 per cent in 2020. A return to those levels looks unlikely. Avoid. More

The writer is a senior fellow at Harvard Kennedy School and chief economist at KrollRussia’s war on Ukraine means the EU is set to become a big spender. The question is how to fund anticipated relief programmes and spending on defence and the green transition. Italian prime minister Mario Draghi suggests as much as €2tn may be needed. For the eurozone, how the money is raised may determine whether the bloc is plunged back into debt crisis or takes a step towards finally becoming an optimal currency area.The EU is disproportionately affected by the war, given geography and its enormous reliance on Russia for energy. Oil and natural gas prices have spiked since late February; last week, European gas futures were up more than 1,000 per cent year-on-year. That is not a typo. Higher energy costs will push up eurozone inflation from February’s already eye-watering 5.8 per cent annual rate. The continent’s leaders recognise rising inflation will create a massive income squeeze for consumers, dragging on demand. And in the weeks since the Russian invasion, Europe has found renewed resolve on two issues. First, Germany embarked on a new era in defence policy with a €100bn fund to modernise the military and a pledge finally to meet its Nato commitment by boosting defence spending above 2 per cent of gross domestic product. Other European countries will follow suit. Second, Europe has learnt the hard way that it must diversify its energy supply. The EU is studying plans to cut Russian gas imports by two-thirds over the next year. The proposal has yet to be adopted by member states and, even if it is, it pushes a lot of assumptions to their limits. It would require a flurry of investment in renewables and other technologies. The Bruegel think-tank in Brussels estimates that would cost about €175bn in 2022 and about €70bn each subsequent year. Where are those euros to come from? One option for countries in the eurozone is the European Central Bank, which could continue suppressing borrowing costs so member states can raise funds in capital markets at low rates. The most powerful tool for doing this is asset purchases, but last week the central bank indicated it was set on a path to wind these down in the third quarter. The ECB does have two other tools for addressing market fragmentation, although each is flawed. The central bank can reinvest the proceeds of maturing assets from its Pandemic Emergency Purchase Programme to strategically reduce yields, but with limits on the flexibility of reinvestment. Member states needing help could also sign up for the Outright Monetary Transactions plan. This, however, comes with strict conditionality that no eurozone country wants to accept. If Frankfurt won’t help finance the spending, Brussels might. When the pandemic hit, the EU created the Recovery and Resilience Facility, a package funded by joint debt issuance providing loans and grants for EU member states to address the shocks from Covid-19. Brussels could make this facility permanent, or generate a new one. EU leaders discussed such a proposal at a summit in Versailles last week. Opposition remains, particularly in Germany, where the coalition agreement rules out another recovery fund. If the EU jointly issues debt to finance the response to another asymmetric shock, what was a one-off during the pandemic may become a potential crisis-fighting tool for the future. Fiscal authorities might finally pick up the baton from the ECB and bring the eurozone closer to having a sustained fiscal union. The central bank would no doubt welcome this. But that is a big “if”. It took more than six months to find political agreement on the pandemic RRF, in the face of a much deeper crisis and alongside a simultaneous debate over the EU’s multiannual financial framework that provided room for horse-trading and compromises. Negotiating a new facility could take as long under the current circumstances. What Europe doesn’t need is for the ECB to stop its asset purchases, hoping that fiscal authorities will agree a new facility, and for EU member states to fail to come up with a financing plan. Then the necessary investments would be foisted on to already stretched national balance sheets, sowing the seeds for another euro debt crisis. As always, programme details are scarce, and time is of the essence. The good news is that, so far, the Russian war has united EU countries on the need for a robust fiscal response. If the authorities pick up the mantle, the EU and the eurozone can emerge from this crisis more unified and far more resilient. More

Securing a trade deal with the United States was one of the main goals of the campaign that led Britain out of the European Union, although critics said any deal would take years and never fully compensate for leaving the EU’s single market. Discussions will start March 21 and March 22 in Baltimore, Md., followed by another meeting later in the spring in Britain, the two sides said in separate statements. The talks “will explore how the United States and United Kingdom can collaborate to advance mutual international trade priorities rooted in our shared values, while promoting innovation and inclusive economic growth for workers and businesses on both sides of the Atlantic,” the USTR said.The “new series of transatlantic dialogues (is) aimed at deepening trade and investment ties and boosting our already-thriving 200 billon pound ($153 billion) relationship,” the UK government said. The allies are expected to discuss collaboration on easing supply-chain congestion, decarbonizing their economies, promoting digital trade, supporting domestic workforces and labor rights, said the Wall Street Journal, which earlier reported the talks, citing U.S. and UK officials. More

TOKYO (Reuters) -Japan’s Prime Minister Fumio Kishida signalled a fresh stimulus package on Wednesday, saying the government is ready to take further steps to cushion the economic blow from rising energy costs driven by the Ukraine crisis.While a weak yen is playing some part in driving up import costs in Japan, global commodity inflation is largely to blame for pushing up energy and food bills, Kishida said.With an upper house election looming later this year, Kishida is under pressure from politicians to ramp up spending to ease the pain for households and retailers still suffering from the impact of the coronavirus pandemic.”We’ll need to take further steps, all available measures, to protect the economy and people’s livelihood if the spike in prices continue,” Kishida told a news briefing.The Kyodo news agency reported on Wednesday that Tokyo is considering compiling a fresh stimulus package that includes an extension of temporary subsidies given to energy wholesalers that expire at the end of this month.The ruling coalition, together with the opposition Democratic Party for the People (DPFP), agreed on Wednesday to look into unfreezing a “trigger clause” that removes the gasoline tax when the price exceeds 160 yen ($1.35) for more than three months, DPFP Secretary General Kazuya Shimba said.”The government will consider what the most effective steps would be in addressing higher fuel costs, including the possibility of unfreezing the trigger clause,” Kishida said.The clause was frozen in 2011 to secure funds to rebuild Japan after it was hit by devastating earthquake and tsunami.The government is cautious about unfreezing it for fear of losing tax revenue, and had instead offered temporary subsidies to energy wholesalers to cap gasoline prices. [T9N2U1022]($1 = 118.1900 yen) More

China’s property market chilled last year as Beijing’s deleveraging campaign triggered a liquidity crisis at some major property developers, resulting in bond defaults and projects being shelved or left unfinished.Overall demand remains sluggish, though a slew of measures have been put in place to revive buying interest.New home prices stalled in February after edging up a month earlier, official data on Wednesday showed.The implementation of a property tax faces challenges, including macroeconomic pressures and downward pressure on the real estate market, said Yan Yuejin, research director of Shanghai-based E-house China Research and Development.”This move is bound to reduce home buyers’ concerns,” said Yan, adding it was also favourable for real estate companies.Chinese vice premier Liu He on Wednesday urged government bodies to roll out market-friendly policies and “cautiously” introduce measures that risk hurting markets. He also pledged to tackle risks in the property sector.China will implement city-specific policies to promote the healthy development of the property sector, Premier Li Keqiang told the annual meeting of parliament earlier in March.In 2011, China launched a property tax pilot in Shanghai and Chongqing, and the idea of rolling out a new trial has been resisted by stakeholders including local governments that rely heavily on land sales as a source of financing.In October, the top decision-making body of parliament said it would roll out a pilot real estate tax in some regions, but did not identify the regions or give other details.Most analysts were expecting the property tax to be delayed, according to a Reuters poll last month.At the annual meeting of parliament earlier this month, China omitted a potential property tax in its 2022 legislative plan for the third consecutive year. More

TOKYO (Reuters) -Japan will revoke Russia’s most-favoured nation trade status as part of further sanctions against Moscow following the invasion of Ukraine, Prime Minister Fumio Kishida said on Wednesday.Tokyo will also ramp up sanctions by expanding the scope of asset freezes against Russian elites and banning imports of certain products from the country, Kishida said.”Russia’s invasion of Ukraine is a historic atrocity,” Kishida told a news conference. “We’re taking necessary steps including sanctions to apply further pressure on Russia.”The moves are in line with an announcement on Friday by the United States and its allies to escalate their economic pressure on Russia, which amount to a fourth set of sanctions against the country over the Feb. 24 invasion.Russia calls its action in Ukraine a “special operation” to disarm and “denazify” its neighbour.Japan will also coordinate with other Group of Seven nations to prevent Russia from tapping loans from the International Monetary Fund and other global lenders, Kishida said.He did not clarify which goods will see tariffs raised from the revocation of the most-favoured status.But the Mainichi newspaper reported the move would lead to higher tariffs for certain seafood products such as sea urchins and crab imported from Russia. In 2021, Russia accounted for 81% of sea urchins and 47.6% of crab imported by Japan, according to government data.Japan has already slapped sanctions on Russia-bound exports of chips and high-tech equipment, as well as on dozens of Russian and Belarusian officials, business executives and banks by freezing their assets. More

(Reuters) – Emerging Asian bonds excluding China continued to see foreign inflows for a 21st straight month in February, but analysts are turning pessimistic about the outlook due to concerns over higher U.S. interest rates, soaring inflation and growing global fallout from the war in Ukraine. Overseas investors purchased a combined net total of $6.01 billion in South Korean, Thai, Indian, Indonesian, and Malaysian bonds last month, compared with net buying of $6.37 billion in January, data from regulatory authorities and bond market associations showed.Monthly foreign investment flows: Asian bonds https://fingfx.thomsonreuters.com/gfx/mkt/akvezxwlepr/Monthly%20foreign%20investment%20flows%20Asian%20bonds.jpgSouth Korean bonds received foreign purchases of $3.29 billion last month, while Thai bonds drew $1.73 billion, their fifth consecutive monthly inflows.Malaysian and Indonesian bonds also received foreign capital worth $750 million and $651 million, respectively.On the other hand, Indian bonds suffered outflows of $421 million after an inflow of $698 million in the previous month.”Considering that the Russia-Ukraine conflict occurred in the second half of February, whole-month bond flow figures may not reflect the full impact on foreign demand for Asia bonds,” said Duncan Tan, a strategist at DBS Bank.”In the near term, with geopolitical risks and Fed lift-off expected to weigh on Asia bonds, foreign bond inflows are likely to be weak.”The U.S. 10-year Treasury yield rose to the highest levels in two-and-a-half years ahead of an expected Federal Reserve decision later on Wednesday to raise U.S. interest rates for the first time in three years.Despite uncertainties over the broader impact of the Ukraine crisis, analysts expect the Fed be aggressive this year to stem surging prices, with annual inflation in February rising at the fastest pace in 40 years.”Geopolitical tensions, tighter U.S. liquidity and high energy prices will all weigh on portfolio flows into Asia,” Khoon Goh, head of Asia research at ANZ, adding that he expects outflows from emerging Asian equities and bonds in the near term. Foreign investors’ holdings in Asian bonds https://fingfx.thomsonreuters.com/gfx/mkt/byvrjewaxve/Foreign%20investors’%20holdings%20in%20Asian%20bonds.jpg More

Side pockets would allow a fund to separate suspended assets that are difficult to sell or value, from other core investments.”The FCA has begun discussions with stakeholders about options to allow UK authorised retail funds to make exceptional use of ‘side pockets’ given the significant practical challenges in disposing of Russian and Belarusian assets in the context of suspensions and extensive global sanctions,” the Financial Conduct Authority said in a statement. More