China’s Belt and Road Initiative
* China’s growth rate has slowed in recent years. Its sustainable growth rate has almost halved, to around 6.0% in a decade or so.
* By Western standards this is an unattainably rapid growth rate. It would enable China’s economy to double in size every 12 years. China is still a fast-growing country, and one that exercises growing authority on the world stage. From technology to overseas investment and geopolitical influence China increasingly matters.
* China’s BRI (Belt and Road Initiative) – dubbed by the authorities as “the Project of the Century” – illustrates the scale of the government’s ambitions. Launched in 2013 as a vast programme of overseas infrastructure, president Xi Jinping proclaimed it would restore the ancient Silk Road trading route that connected Asia and Europe.
* In reality its aims are more nebulous, involving infrastructure investment in Asia, Europe, Africa, the Middle East and the Americas. There is no blueprint for the BRI. Indeed, it is, perhaps, better seen as set of aspirations, rather than a detailed plan.
* The BRI is a reflection of China’s emergence as a global economic power. Like America in the twentieth century China sees overseas investment as bolstering trade and influence with the rest of the world.
* Slowing activity at home has reinforced the search for new sources of growth. China is grappling with too much unproductive capacity, the consequence of a multi-decade investment boom that is now drawing to an end. China’s sizeable construction and infrastructure sectors needs new opportunities. And shifting some of China’s vast foreign exchange reserves from US Treasury bonds into overseas infrastructure offers the benefits of diversification and, and potentially, higher returns.
* The BRI has faced a number of criticisms from outside China.
* Some see it mainly as a vehicle for exporting excess capacity, especially, in construction, and of guaranteeing the raw materials China needs.
* The choice of investment projects, and the absence of a commercial plan for the BRI, has prompted claims that the initiative is being used to extend political influence, particularly in neighbouring countries and around the South China Sea.
* Since China is able to bring in most of the people, from engineers to cooks, needed to build infrastructure, projects do not always do much for local job creation.
* And by funding some projects other lenders have shunned as unviable, critics argue that China may saddle countries with unaffordable debt – making them beholden to China. (High levels of bad debts in China’s own banking system testifies to the problems China has faced in efficiently allocating capital at home).
* Sri Lanka has been unable to service the debt it took to build a port in Hambantota. It handed the port over to state-owned China Merchants Port Holdings on a 99-year lease, a move which some saw as an erosion of Sri Lankan sovereignty.
* It is because of such concerns about debt that a number of developing countries, including Pakistan, Malaysia, Myanmar and Bangladesh, have recently scaled back BRI commitments.
* Few of the criticisms made of the BRI are entirely new. Similar claims might have been levelled against overseas investment by other countries in the past. All countries want to maximise their influence overseas, boost trade, secure raw materials and protect their wider interests.
* In the aftermath of the Second World War, for instance, the US Marshall Plan helped fund the reconstruction of Western Europe. The aim was to tie Europe in to the US, and to secure it against communism. As often happens, economic and geopolitical objectives went hand in hand.
* But the Marshall Plan differed from the BRI in execution. It had investment objectives and set deadlines. The objectives of BRI projects are relatively vague; various groups are involved in running it and the choice of projects seems opportunistic. Marshall Plan investment was largely concentrated in US-ally nations, where it did not compete with Soviet financial muscle. BRI investments necessarily occur where countries already have access to the US-dominated World Bank and International Monetary Fund system. This leaves scope for competition and even friction.
* Most western European countries have been cautious about the BRI and mindful of its capacity to advance China’s wider interests. The countries of southern, central and eastern Europe see opportunity. Many, accounting for more than half of the EU’s 28 members, including Italy, Poland and Portugal, have signed bilateral endorsements of the Initiative. Italy’s decision to do so was a coup for the BRI and a source of concern in Brussels and Washington.
* The promise of the BRI is alluring. Emerging economies need new, productive infrastructure to aid their development. Global trade could do with a boost. The test for the BRI is to deliver for the world as much as it does for China.
PS: Last week the chairman of the US Federal Reserve Jerome Powell said the Fed will “act as appropriate to sustain the expansion” of the economy as it monitors the impact of the trade war. This dovish shift, suggesting a cut in US interest rates might be needed, led to a further sharp downward adjustment in market expectations for interest. Financial markets now expect the Fed to make two 25 basis point cuts to the main interest rate by the end of the year. Three months ago the thinking in markets was that rates would stay on hold. The shift in rate expectations reflects concerns about a loss of momentum in the US economy and about growing trade tensions. Separately, European Central Bank president Mario Draghi followed Mr Powell’s dovish turn saying the Bank was ready to “use all the instruments that are in the toolbox” if the slowdown in the euro area’s manufacturing sector broadens to other parts of the economy. UK and euro area rate expectations have also drifted lower in recent months but not to the extent that would imply a rate cut this year.
OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week up 2.3% at 7,327 as global equity markets made gains on a perceived softening of trade tensions between the US and Mexico and dovish messaging from the Fed and the ECB.
Economics and business
* US job creation slowed in April, missing expectations. The unemployment rate remained at a 50-year low of 3.6%
* In a sign of the tight US labour market, Walmart announced plans to offer tuition subsidies and other benefits to its workers in a bid to help attract and retain staff
* UK manufacturing activity contracted for the first time in three years in May, according to PMI data which came in well below expectations
* Ford’s engine plant in Bridgend, Wales is to close in the autumn of 2020, with the loss of 1,700 jobs
* UK new car sales fell 4.6% in May on a year earlier due to confusion over new regulation and government grants
* US President Donald Trump stripped India and Turkey of preferential access to the US market
* The Reserve Bank of India cut interest rates in response to slowing growth
* The US warned that a halt to China’s exports of rare earth products would cause significant shocks to US and foreign supply chains
* China warned its citizens over the risks of travelling to the US, saying US law enforcement were “repeatedly harassing” Chinese nationals
* The Mexican peso weakened after Fitch Ratings downgraded the country’s debt amid concerns over state energy company Pemex and the trade conflict with the US
* The Bundesbank slashed German growth forecasts for this year to 0.6%, down from 1.6% in December, blaming weak exports
* European defence companies Airbus and BAE Systems are unable to sell equipment to Saudi Arabia that has been jointly developed with German firms due to Berlin’s unilateral ban on exporting defence equipment to the Kingdom
* The FCA (Financial Conduct Authority) is to limit the amount of money retail investors in the UK can put into peer-to-peer lending platforms
* The FCA is to clamp down on unarranged overdraft fees, requiring that by April 2020 banks charge the same for any overdraft and advertise those products clearly
* The US Department of Justice is to investigate Google for possible antitrust violations
* The proposed merger between the car manufacturers Fiat and Chrysler collapsed
* Australia’s economic growth slowed to a decade low in the first quarter of the year; the central bank cut rates to an all-time low of 1.25%
* Some of the world’s largest banks are preparing to launch digital currencies in 2020, which will be used to make trading less risky and more cost efficient
Brexit and European politics
* UK prime minister Theresa May stood down as the leader of the Conservative Party. She remains prime minister whilst her replacement is decided
* Boris Johnson, the clear favourite, formally announced his candidacy
* Mr Johnson and several other candidates have stated they would countenance a no-deal Brexit, reflecting the preferences of the 160,000 strong Conservative membership
* During a state visit, US President Donald Trump stated his support for a UK-US trade deal following Brexit
* The Democratic Unionist Party indicated its confidence-and-supply agreement with the Conservative Party is up for review later this year
* Nigel Farage’s new Brexit Party narrowly lost to the Labour Party in the Peterborough by-election
* The UK government’s Migration Advisory Committee has recommended relaxing rules on visa for high-skilled workers, recognising the tight labour market and fall in EU migration
* The resignation of Andrea Nahles, the leader of Germany’s SPD party, has called into question the future of Germany’s ruling coalition with the CDU. Breakdown of the coalition would likely lead to an election
* The European Commission issued a report critical of Italy as the country missed targets for fiscal discipline. Sanctions may follow
* In Denmark the Social Democratic Party won the general election as the populist DPP Party saw a drop in support
And finally… according to reports by Gloucestershire Live, a new disciplinary policy implemented at a high school in Gloucester has resulted in hundreds of pupils being excluded or given detentions. A pupil at the school is quoted “… a detention for having a 180 degree protractor instead of having a 360 degree protractor is too much.” – an acute problem