Bailouts on the Belt and Road

Covid-19 then central bank interest rate hikes, the banking crisis and slower global economic growth has adversely impacted many smaller emerging economies.

China’s Belt & Road Initiative (BRI) infrastructure finance programme is believed to have been hit by $78bn of bad debts over the last three years. No official data is available, but since 2013 China is thought to have provided loans of up to $8 trillion as part of its BRI strategy. Some 150 countries have signed up to BRI funding including Afghanistan, Pakistan, and Sri Lanka.

Beijing is also believed to have extended the level of rescue loans to an estimated $240bn to prevent sovereign defaults amongst the bigger borrowers that have signed up to the BRI. “Bailouts on the Belt and Road” has positioned China as the global lender of last resort, akin to a loan shark, to the desperate and financially strained developing countries.

Relations between the West and China remain strained and Beijing’s actions over BRI loans are another area of friction. Western creditors have blamed China for blocking debt-restructuring negotiations with its BRI partners.

Meanwhile, besides the BRI, China is gaining economic and political clout in the Middle East. The recent China-brokered agreement between Iran and Saudi Arabia is transformational. Saudi Arabia has also joined the China-led Shanghai Co-operation Organisation as a dialogue partner.  Significantly, the change in the geo-political landscape in the Middle East has coincided with the recent decision by Saudi Arabia and other major oil producers to cut oil production.

While tension between the West and China over Taiwan has tended to dominate the news, there are plenty of other issues bubbling just below the surface. Just to further underscore the lack of trust, the US Senate Committee has published its long-awaited report on the global Covid-19 pandemic concluding “the preponderance of circumstantial evidence” supports “an unintentional research-related incident” or to be precise the Wuhan Institute of Virology.

ECB President Christine Lagarde has warned the ongoing US-China rift could push inflation higher, as any further escalation of tensions would hit supply chains, leading to shortages and potentially higher prices.

What have we been watching?

Markets continue to watch inflation data closely as markets try to pin down the date of peak interest rates. Given the US Federal Reserve was ahead of the UK and Europe on the pace and scale of increases, markets have tended to assume the US will peak first. This has led to US Dollar weakness in recent weeks and Sterling has remained above $1.24 following the latest inflation data. Given this and UK stock market valuations, it is not surprising that there has been a sudden pick-up in takeover activity in the UK with private equity firms and venture capitalists announcing potential bids particularly within the UK mid-cap index.

While the banking crisis appears to have calmed for now, the structural changes within the US banking system were reflected in news that Apple and Goldman Sachs are to launch a new savings account in the US with a market-leading interest rate of 4.15%. Meanwhile, three traditional US banks, Charles Schwab, Sate Street and M&T confirmed they had suffered almost $60bn in combined bank deposit outflows in the first quarter as US savers sought higher returns. In Europe, Credit Suisse revealed that it had suffered £55bn of deposit outflows by clients in the three months prior to its takeover by UBS.

 

In the UK, price stickiness in key sectors, especially food, is delaying what should eventually be a sharp decline in headline inflation. A smaller than expected drop in inflation to 10.1% leaves the UK as the only major European economy with double-digit inflation in March. Food inflation hit a 45-year high at 19.2%. Energy prices will be the key downward influence in the next few months. Following the inflation data, the market now expects the Bank of England will increase interest rates by a further 0.25% to 4.5%, although the 5% base rate now implied by the sterling forward curve by the end of 2023 looks too aggressive. Meanwhile, the April ‘flash’ UK composite PMI business activity indicator hit the strongest level in 12-months as growth in the service sector compensated for a contraction in manufacturing.

 

Eurozone business activity picked up in April to an 11-month high driven by the services sector while manufacturing struggled amid de-stocking and weakening demand.

 

In the US, the Federal Reserve’s Beige Book suggested economic activity was little changed in recent weeks but the outlook for inflation found that business respondents ‘expect further relief from input cost pressures but are anticipating changing their prices more frequently compared with previous years.’

Read our latest Chinese investment insights from Alpha PM

 

China’s economy grew by 4.5% in the first quarter, which was slightly better than expected, as the country exited lockdown. Retail sales were also ahead of expectation in the first quarter, increasing by 10.6%.

Read our latest investment insights from Alpha PM

 

Brent oil fell back to $81 as the IEA warned that supply cuts by OPEC+ would hurt western economies. However, China is expected to drive global demand growth in 2023.

Finally, it is not just us Brits getting heavier, but our cars as well. The British Parking Association has highlighted the risk to old multi-storey car parks from modern vehicles. The average petrol-powered car is twice as heavy today as it was when many of these car parks were built. Furthermore, the added weight of batteries in EVs will also present a challenge. Perhaps putting EV chargers on the ground floor may help along with widening car spaces to spread the load of fewer cars across the structure?

 

Read Last Week’s Alpha Bites – Return to Kernow

 

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