Alright me old China?

 

Ream Naval Base is a facility operated by the Royal Cambodian Navy on a peninsula along the coast of the Gulf of Thailand.

However, Cambodia is believed to have signed a deal with China that will allow the Chinese PLA Navy exclusive access to the base for at least 30-years. China may want to use the base to protect and control its shipping lanes in the Malacca Strait which is strategically significant given its reliance on energy imports. China recently admitted that it is helping Cambodia upgrade the Ream Naval Base to enable access to the facility by bigger vessels.

The expansion marks a tangible increase in China’s military presence in the Indo-Pacific region and a challenge to United States policy.

President Joe Biden had a meeting on the side lines of the recent G20 summit in Bali, with Cambodia’s long-serving PM Hun Sen, stressing the importance of full transparency. Hun Sen is Beijing’s closest ally in the Pacific region and China is Cambodia’s largest source of investment, aid and military equipment.

China continues to flex its muscles in the South China Seas and the long-term intent regarding Taiwan is clear. Last week President Joe Biden and Xi Jinping met at the G20 summit for the first time. At the press conference Biden did his best to ease recent tensions, stating ‘I absolutely believe there will not be a new Cold War. I do not think there is any imminent attempt on the part of China to invade Taiwan. Biden made it clear US policy towards Taiwan has not changed and that the US wants to see issues ‘resolved peacefully.’

China’s economy has been hurt by its draconian Covid lockdown policy. However, there are signs that some restrictions are being eased and this may help international travel and could start to help ease supply chain challenges. Nonetheless, western businesses will no doubt be concerned about China’s long-term ambition for Taiwan.  Any ongoing zero-Covid disruption will continue to put pressure on companies to move the sourcing of key components away from the Chinese mainland.

Weak economic data and an ongoing property slump will keep the pressure on Beijing to step up support for the Chinese economy or ease Covid-19 restrictions. However, China has just reported its first Covid-19 deaths in six months with cases continuing to rise

*Cockney rhyming slang – China – China plate – mate.

What have we been watching?

The G20 summit in Bali was the main feature of last week as investors assessed meetings between China and the US. Global food security was a major theme of the summit given the war in Ukraine and particularly relevant given the world’s population is estimated to have reached 8billion. Global investors continued to focus on a possible slowdown in the pace of interest rate hikes by central banks. Besides hopes of a shift from 0.75% to 0.5% increments from the US Federal Reserve, European investors latched onto stories that the European Central Bank might also dial back on the size of its next hike to 0.5%. European markets have been rallying on hopes of China easing lockdown measures which would help engineering exporters such as Germany, as well as the French based global luxury brand owners. However, China has just reported its first Covid-19 deaths in six -months and cases are rising. Brent oil slumped to below $87. Elsewhere, markets appeared to take the UK Autumn Statement in its stride given much had been pre-released with Sterling steady at around $1.18.

There was a reminder of the risk of escalation in the war in Ukraine. A missile strike killed two in Poland which could have triggered a NATO response against Russia. However, current intelligence suggests it may have been a Ukrainian air defence missile.  While the G20 met and passed a resolution demanding Russia should pay for war damages, Putin unleashed another wave of missile strikes on Ukraine’s energy infrastructure. Following Russia’s withdrawal from Kherson, the long war of attrition continues with no end in sight currently

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In the UK, headline CPI inflation unexpectedly jumped to 11.1% in October – a 41-year high –due to higher food and energy prices. The October data could mark the peak, although the persistence of ‘core inflation’ may concern the Bank of England (BoE) as it likely reflects the impact of labour shortages on pay growth.

Chancellor Jeremy Hunt faced a major challenge with his Autumn Statement -not to make matters worse for the UK economy and to give the Conservatives some hope that they might be able to win the next general election. At the same time, investors needed to be assured that the government was serious about getting borrowing under control. The new Chancellor found a simple way of doing this. He announced £55bn of tax increase and spending cuts but delayed the pain. Fiscal policy will be actually loosened slightly this year and next, but by the time the Treasury’s measures start to bite in 2024, the hope is that the UK economy is emerging from recession and inflation is heading lower. Global credit rating agency Moody’s said the Autumn Statement demonstrated the UK’s ‘commitment to fiscal prudence’ but warned that ‘the polarised domestic political environment and heightened unpredictability may undermine efforts to deliver on fiscal consolidation, particularly in the light of strong social and political pressures on government spending.’

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In the US, Republicans took control of the House of Representatives from the Democrats, narrowly securing a legislative base to oppose President Joe Biden’s agenda over the next two years. Meanwhile, Donald Trump launched his campaign for the race to the White House in 2024 which looks set a real fight within the Republican party.  Elsewhere, the Vice Chair of the US Federal Reserve (Fed) said it likely will be ‘appropriate soon’ for the central bank to slow the pace of interest rate hikes but added that the Fed still has ‘additional work to do both raising rates and tamping down on high prices.’ Despite the Fed warning the market about reading too much into single data points nonetheless, this is just what investors did on the release of the latest Producers Prices Index. This showed manufacturing or US factory gate prices rose at a slower than expected rate in October of just 0.2% adding to hopes of a slower pace of Fed interest rate hikes. Meanwhile, US headline retail sales were better than expected in October.

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China’s economic data continued to reflect the impact of its zero-covid policy. Chinese industrial production growth in October was 5% but below expectations while retail sales volumes turned negative for the first time since May. Covid-19 cases are on the rise once again in parts of China, and poses a real test for Xi Jinping. Mass unrest seems to be growing with the BBC releasing footage of a police car being overturned by an angry crowd in China’s industrial centre Guangzhou.  Numerous Chinese cities are reported to have cancelled routine mass Covid-19 testing after Beijing announced limited relaxations on its strict zero-covid policy.

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Brent oil slumped to under $87 mainly reflecting concerns about the Chinese economy.

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Finally, so much for The Entente Cordiale.  Britain’s stock market has lost its position as Europe’s highest by value. Paris has just edged ahead of London by a whisker for the first time since records began in 2003 with a value of $2.823trillion according to data from Bloomberg. The French index contains some of the leading global luxury brands which have recovered on hopes of China easing lockdown measures and boosting consumer spending. The recent ‘mini-budget mayhem’ did the UK no favours with money flowing out so let’s hope the Autumn Statement and potential ‘Fed pause or pivot’ leads to a flow of funds back into UK assets.

 

Read Last Week’s Alpha Bites – Triple Dip

 

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