US and China must focus on striking a deal for the sake of both economies
In 2010 almost one in five Chinese people lived in poverty. By 2017 that figure had fallen to a little under one in 30, according to the World Bank. It’s an astonishing decline in poverty achieved with a mix of authoritarianism, competitive markets and a huge increase in corporate and state borrowing.
During his state of the union speech last week to Chinese communist party officials in Beijing’s Great Hall of the People, it was clear that Li Keqiang, the prime minister, was worried this situation might go into reverse.
He told the audience that GDP growth would be lower this year at between 6% and 6.5%, down from 6.6% in 2018 and the slowest rate in nearly 30 years.
The prime minister emphasised that officials needed to be mindful of job losses in the industrial sector and put more money into retraining schemes. He instructed his officials to reduce their spending to avoid accusations of cronyism. And he countered the growing sense among private sector entrepreneurs that the Communist party no longer supported them.
Notably, though, he refrained from smoothing ruffled feathers with the promise of easier credit. With the country’s debts standing at 220% of GDP, he obviously felt any extra lending capacity should be kept in reserve to deal with the rocky times that almost certainly lie ahead.
The most immediate problem confronting Beijing is a battle it hopes will be resolved soon with US President Donald Trump over import tariffs.
Without a deal, the 20% plunge in exports during February that China reported last week is only likely to get worse. Trump has accused Beijing of subsidising its exports and artificially depressing its currency to aid that effort. In addition, the US wants Chinese companies to be banned from demanding technology transfers as the price of entering Chinese markets.
It is difficult to make a case for currency depreciation when the People’s Bank of China has sanctioned a huge expansion of credit, just as every central bank has done, not to devalue the currency but to bolster the economy.
However, subsidies in the Chinese industrial sector, both to state-owned and private companies, are rife, and technology transfers, which are a pernicious form of protectionism, are commonly demanded from foreign firms.
The White House set a deadline for talks of 1 March. However, that date passed without agreement and Trump said on Friday that he wouldn’t sign a “bad deal”, but compromise is in the air.
The most recent trade figures for the US showed the world’s largest economy suffered its worst trade deficit in 10 years. As if to emphasise the economic law that both sides lose in a protectionist war, the December data, which was delayed following the US government shutdown, revealed a 19% increase in the trade deficit for 2018 following a dip in exports and rocketing imports. The worsening data on both sides of the Pacific should bring both sides together and that is what the rest of the world should hope for.
An agreement would allow Beijing to concentrate on the bigger issue of achieving growth without an endless supply of young people and in a way that limits CO2 emissions. A meagre welfare state also needs to be given a boost, along with a health system that is undermined by corruption.
Households have the savings to pay higher tax rates in return for better services, but officials, as they do everywhere in the world, fear putting up taxes.
President Xi Jinping has proved to be more concerned with consolidating his own power than confronting these longer-term problems. Hopefully those around him will nudge him to take action.
Norway should have been bolder When you have an investment fund worth £1tn, you have true clout in financial markets. You also have the opportunity – and the duty – to demonstrate responsible investment thinking. Sadly, Norway has merely come up with a muddle as it tries to limit its exposure to oil and gas companies.
At first glance, the recommendation from the Norwegian government appeared groundbreaking. The country’s Government Pension Fund Global, the world’s biggest sovereign wealth fund, should sell its investments in oil and gas explorers and producers, said the report. Cue excitement among environmental lobbyists calling for radical divestment from fossil-fuel-dependent energy giants.
But the proposed Norwegian policy doesn’t fit the radical description. For a start, the fund would still be permitted to own shares in oil and gas explorers as long as those companies also have renewable assets. The argument is that much of the growth in renewable energy will come from companies whose main business is not renewables.
But this is a remarkably loose approach. If an energy company is 90% fossil fuels and 10% renewables, it can still get a thumbs-up from Norway, it seems. That does not imply much divesting.
Why so timid? Well, there’s a huge tension at the heart of Norway’s fund. Since the wealth flows from producing oil and gas, an outright refusal to invest in the sector on grounds of sustainability would invite the charge of rank hypocrisy. Second, being too underweight on oil and gas risks investment underperformance in some years; so a mildly underweight position is preferred instead.
At a push, you might say Norway’s shift is in the right direction. Yes, but the reform is slow and plodding. The oil and gas giants will not be rattled.
Debenhams investors should examine Ashley’s motives
Mike Ashley has lost £85m, at least, on his punt on Debenhams shares, so it’s not surprising he’s hopping mad and desperate not to see Sports Direct’s near-30% stake diluted to very little in the debt-for-equity swap the current board is preparing.
Thus Ashley wants to remove most of Debenhams’ directors and install himself. It’s a revolutionary plan but, from where he’s sitting, not illogical. Debenhams’ banks and landlords would surely prefer to negotiate with a conventional crew of plc directors than the untamed, and untameable, Ashley.
Other shareholders might also see appeal in backing Ashley. The bombedout share price values the department store at just £45m, so their downside is limited. Maybe Ashley can strike a little terror into the landlords by threatening to play rough with leases in other parts of his sprawling retail empire.
For that reason, Ashley probably starts as favourite to succeed in his attempted coup. He defenestrated Debenhams’ former chairman, Sir Ian Cheshire, in an encounter in January. It would be unwise to bet against him.
Yet non-Ashley shareholders would be grossly naive to imagine the Sports Direct founder is a noble warrior for all investors’ interests. The possible hidden agenda isn’t really hidden: Ashley has made no secret of the fact that he’d like to add Debenhams to House of Fraser, the business Sports Direct bought out of administration last year.
If that’s the game, Ashley has a simpler route open to him: just make a takeover bid. If, on the other hand, Debenhams were to be delivered into Sports Direct’s arms via administration, shareholders would be at risk of getting nothing.
The Debenhams board went to great lengths to prevent Ashley getting control of the business via the back door and was right to do so. Investors should adopt extreme scepticism: what helps Ashley may not benefit them.