How the paths of geopolitical fortune can change. It was only a few short years ago that some commentators and politicians took the view that the United States was in decline, and it was only a matter of time before China took over as the world’s leading economic power. The current view coming out of Washington and other capitals of the G7 is that they are gaining the upper hand against a weakening China, mostly due to deep-seated economic and structural problems. Experts suggest that flows of economic capital around the world that have been guided by economic narrative for the last twenty years or so are quickly being turned on their head.

Experts are suggesting that the combined wisdom of the G7 see both opportunity and risk as China’s economy begins to slow down and that concern over China’s inevitable rise to power as “The Political and Economic Powerhouse” of the 21^st Century has now turned to concern over a declining China economy and population. Indeed, President Biden at a political rally in Utah earlier this summer, referred to China as a “ticking time bomb in many cases”, because of weak growth and the many different economic challenges it is facing. 

Furthermore, on Tuesday 29^th August whilst travelling on board a high-speed train from Beijing to Shanghai, Gina Raimondo, the Secretary of Commerce for the United States of America, articulated that a number of US companies had advised her that due to increasing risk, China had become increasingly uninvestable. Global investors have been turned off by unpredictable crackdowns in sectors such as education and e-commerce. As a result, a record outflow of foreign net selling of USD 11.4 Billion (Renminbi 82.9 Billion) in Chinese stocks was recorded for the month of August with FDI (Foreign Direct Investment), at its lowest level since 1998, when records first began.

Secretary Raimondo went on to say that China’s policies are giving American firms a different set of challenges as they have charged exorbitant fines without any explanation, sending shockwaves through the American community by revising counterespionage laws and conducting raids on businesses. Furthermore, in May of this year, Chinese authorities in this case their Cybersecurity Administration, barred operators of key and influential domestic infrastructure from purchasing products from Micron, America’s biggest chip maker, citing without any detail that they are a national security risk. This was a strange policy as for China’s chip making industry to be effective and competitive, they need to import tools from the US, Japan and the Netherlands, and there are no credible alternatives in China.

In June of this year Janet Yellen, the United States Treasury Secretary said China is facing a challenge in terms of investment and growth due to their declining population. Secretary Yellen also alluded to soaring youth unemployment and the currently collapsing real estate sector which originally made up about 25% of aggregate demand. Many officials in the United States suggest that China has made a grave error and should have opened their economy more, instead they ignored decades of advice, and they now predict a brake on growth in the coming years. Even Secretary Yellen’s No2 Deputy Secretary Adeyemo recently said, “the Chinese are creating a less favourable environment for FDI and foreign companies. 

China is considered to be the world’s foremost growth driver, and administrators and officials within the G7, are already wondering how their own markets will fare, as the USD18 Trillion market begins to slide south. In fact, recent data released showed that China fell into deflation in July, with factory gate prices seeing an extended decline. Experts suggest that China is entering a period of declining economic growth with wages and consumer prices stagnating. The main gauge of inflation, the CPI (Consumer Price Index), fell by 0.3% in July as confirmed by the NBS (National Bureau of Statistics China), with analysts predicting a year-on-year decline of 0.4%. They confirmed that the data was a strong signal that the economy was weakening, which is a grave concern for eurozone economies and companies as China is a key trading partner.

The US-China Economic and Security Review Commission is a bipartisan panel which is a platform for warning of the consequences of China’s rise to economic and geopolitical power. The commission was created on 30^th October 2000, and was charged with reporting to congress the national security implications of the bilateral trade and economic relationship between the United States and China. On the 21^{st of} August Congress held a review into the commission’s findings on China’s current economy and implications for investors and supply chains. 

Among the speakers was Logan Wright, Director of China Markets Research at the Rhodium Group, who informed the hearing that China’s economic slowdown is structural in nature, saying “Beijing is no longer a current pacing threat or likely to overtake the United States in any significant measure of economic power over the next two decades”, citing issues such as China’s property sector and the local government debt crisis. 

Another speaker was Nicholas Borst, Vice President and Director of China Research at Seafarer Capital Partners, who suggested that three policy mistakes could be attributed to China’s current economic slowdown. He cited “a failure to moderate the real estate deleveraging campaign, a crackdown on the private sector that has damaged business confidence, and a failure to adequately prepare for the post-covid era”. Borst suggested that China will, over the next few years, place its focus on their economic domestic challenges. Given China’s need for on-going and increasing foreign investment, this would consequently place US policymakers in strong negotiating positions. Borst went on to say, “China is still one of America’s most important investment and export markets”. He suggested that in order to directly benefit American firms and boost exports, US policymakers should grab the opportunity and seek greater market access and other reforms. 

Just how long the slowdown in China will take is still unclear because as experts and analysts point out, the country has more than enough financial resources to avoid an out and out financial collapse. Even though Beijing, on an almost daily basis, has been making efforts to support the property sector, and despite recently announced plans to support the Renminbi, officials in Beijing have refrained from an all-out stimulus to the economy. As such, more than one in five people are unemployed, with some estimating that the actual jobless figure is much higher that the 21.3% as shown recently by data released from official sources. 

In recent months America’s economy has moved ahead of China’s economy, opening a substantial gap thanks to a stronger US Dollar, with analysts confirming that this trend is likely to continue. However, cautionary notes from European, American and Japanese officials is that there should be no indulging in triumphalism since concerns arise over the impact on their own companies and the global economy as a whole due to weaker demand from China. 

Sentiment is appearing to shift and is impacting on western governments’ policies, as was shown in August by the much-anticipated limits on outward bound investment in China. These limits released by the Biden administration were narrowly focused and fairly weak, but as a White House source said, the limits were deliberately dumbed down due to China’s own economic strains and hostile policies. Indeed, their own government is succeeding in discouraging any American investment much better than any White House restrictions might achieve.

However, certain officials suggest that within many strategic sectors, China remains a formidable challenge, and that challenge will remain in place for many years to come, suggesting that they will beef-up their own industrial policies whilst buttressing any alternative supply chains. One expert on American US trade with China suggested that China will now get old before it gets rich, but of equal importance is the strength and ability of China’s industrial policy that is trained on certain strategic industries, such as the electric car sector. Faced with all the negative economic factors and China’s slowing economy, America should not get overconfident as China still remains a formidable economic rival.

This is exemplified by China’s deepening links to countries in the Middle east and Global South, where an increasing number of countries are showing interest in joining the BRICS* group, further illustrating China’s increasing influence in emerging markets. However, China’s de facto leadership of BRICS is built on its own economic rise and growth, and that particular model is certainly looking somewhat patchy. With China’s economy slowing down there will be less demand for imports such as commodities, which may result in countries such as those found in Africa.

*BRICS – is a grouping of Countries of Brazil, Russia, India, China and South Africa formed in 2010 by the addition of South Africa to the predecessor BRIC. The common goal is to deepen cooperation between member countries, and to stand in contrast to the western sphere of power. The countries that were invited to join BRICS in 2023 are Argentina, Egypt, Ethiopia, Iran, United Arab Emirates and Saudi Arabia. Recent developments hint at a new currency backed by gold. 

This will also impact China’s ability as an economic partner with richer countries such as the G7 who US officials are trying to encourage to reduce economic ties with China. There is plenty of evidence to support the US officials, in fact on 28^th August, whilst addressing the Centre for Strategic and International Studies in Washington, the German Ambassador said Chinese markets are not as promising as they once were. He went on to say that the Chinese economy is not growing at rates it previously used to grow, and reports from Germany suggest they are currently making efforts to diversify away its economic relationships with China. However, a number of analysts suggest that they cannot really move away from ties with China especially if they wish to remain an export nation. 

Meanwhile in Italy, due to be unveiled in October a new foreign policy will be directed at increasing energy flows from the continent to Europe, which can only benefit Italy thanks to Russia’s war with Ukraine and China’s economic slowdown. Furthermore, the government recently passed a Golden Share law, allowing the government special powers within the strategic sectors to block transfer of technology abroad, (which is basically seen as to limit transfers to China) in areas such as semiconductors, energy and artificial intelligence. Also, the Prime Minister Giorgia Meloni has indicated to Beijing that she intends to withdraw Italy from the investment pact (which has partially strained relations with America) the Belt and Road Initiative* which was signed in 2019.

*The Belt and Road Initiative – also known within China as the One Belt One Road or OBOR/1BR for short. It represents a global infrastructure development strategy adopted by the Chinese government in 2013 to invest in more than 150 countries and organisations. There are currently 154 member countries ranging from Afghanistan and Algeria, to Bahrain and Barbados, to Saudi Arabia and Singapore, and to Turkey and the United Arab Emirates.

In Great Britain the authorities are somewhat sitting on the fence as they tread the fine line of treating Beijing as a national security risk and an important economic partner. The slowdown in China’s economy is welcomed not for any geopolitical reasons, but for the fact it will help bring down inflation which is currently the highest within the G7 group. 

Finally, in the capitals of the G7 countries it is reported that officials worry whether or not China’s economic travails will lead to them being more accommodating or more belligerent/ combative. There are of course two separate views on which way China may choose to go. One view is that a stagnant or receding economy will push Beijing into more aggressive moves on the geopolitical stage, while others suggest that they will concentrate on domestic matters rather than the global geopolitical stage. One think tank has even suggested a de-escalation on competition between the United States and China particularly in respect to the rest of the world. 

Whatever happens China will still remain a serious global force and competitor within the global economy, and despite problems at home their defence and military expenditure continues to increase. They enjoy global diplomacy on a par with their western counterparts and in some cases stronger relations, and they are according to a number of experts party to economic transactions and arrangements that America is not. So, hawks beware, write China off at your peril. Despite big economic problems at home, they are still a major force in global geopolitics and will be for some time to come.

Despite conflicting views from various experts and analysts, signals coming from the Federal Reserve suggest that officials are optimistic of avoiding a recession. Such is their optimism, there is a feeling that they can win the war with inflation without inflicting too much pain on the economy. Even though the Federal Reserve is committed to returning inflation to 2%, it appears that officials do not want to miss the opportunity of a “Soft Landing” by raising interest rates even higher. One expert pronounced the Federal Reserve when battling inflation tends to overtighten straight into a recession, and policymakers are determined to avoid this mistake this time round.

Bearing this in mind, experts suggest the Federal Reserve will now hold interest rates at the next meeting slated for later this month on the 19^th/20^th September. However, the common consensus is they may well increase them one more time if the officials feel one more hike in interest rates will finally put to bed the war with inflation.

The Federal Reserve, and indeed their Chairman Jerome Powell, have been on the wrong end of criticism suggesting that they, (along with the Bank of England) acted too late to fight rising prices. If indeed the Federal Reserve can restore price stability after an electrifying increase in inflation, without the economy going into recession, this would be a standout and even rare achievement in modern day policy decisions. 

The FOMC (Federal Open Market Committee), has raised interest rates eleven times since March 2022, and currently sit at their highest level of 5.5%, which is their highest level since 2021. Chairman Powell has been at pains to emphasise that the aggressive interest rate hikes are reaching the end of their cycle, and that economic data will decide whether or not there will be any more rate hikes.Despite the signals coming out of the Federal Reserve there are some experts who expect the hawks to keep a bias to keeping interest rates high as some of those who make policy have been let down by false dawns due to disinflation and are therefore mindful of confirming an end to interest rate hikes and quantitative tightening. Officials at the Federal reserve will see one more key data on inflation before their next meeting. Experts suggest that the FOMC will pass on a rate hike this month but are suggesting it is 50/50 as to whether or not interest rates are raised by a ¼ of 1% at the next meeting on October 31^st – November 1^st.

After a run of 2 defeats our congratulations go to Farsley as they bounced back with an away win at Gloucester City. Although Gloucester had a number of chances in the first half, the Celts defended extremely well and scored a goal on the counterattack to lead one nil as the referee blew for the end of the first half. Although Gloucester changed their formation from 433 to 422 for the second half, the Celts goalkeeper made some notable saves helping the team to run out one nil winners. This leaves the Celts in 13^th place but only 4 points off the leaders, in what is turning out to be a very tight division. Our congratulations once again go to the team and the staff, and we look forward to a win in the FA Cup qualifier this Saturday when the Celts play Scarborough Athletic.

The will they won’t they debate rages on as to whether or not the European Central Bank will raise interest rates by 25 basis points at their next meeting on 14th September. Experts suggest that recent data released shows Germany’s inflation slowing at a less than expected rate, as inflation in Spain increased. Whilst inflation remains low in Spain, it quickened again in August where consumer prices rose by 0.3% from July to 2.4% with analysts advising that the increase was driven by fuel costs.

Furthermore, recent figures released showed inflation accelerating in France rising by 5.4% from August 2022, with analysts advising the increase in the eurozone’s second largest economy was due to the cost of energy. Figures released today for August, for the eurozone which encompasses 20 countries confirmed overall inflation remained at 5.3% defying expectations that there would be a drop to 5.1%.

This has left the markets with a conundrum as to whether or not the ECB will raise interest rates again. However, with the latest data emerging from France, Spain, Germany and the rest of the eurozone, the markets appear to be leaning towards a hike in interest rates. The feeling is that if there is any evidence of strong consumer price growth, the ECB may well err on the side of caution and raise interest rates, especially if there are signs that any underlying pressures remain doggedly high.

There are growing signs that the bloc itself is heading for an economic downturn, however many investors feel that the price data will be enough to tip the balance in favour of the hawks whereby the ECB will raise interest rates for a 10th consecutive time on September 14th.  However, the doves on the ECB’s governing council will argue for at least a pause due to a rapidly deteriorating economic background across the eurozone.

Meanwhile, many economists are split on the subject of a rate hike. Some favour no rise saying that the upward pressure on underlying prices has continued to ease thereby negating a decision by the ECB to hike interest rates. Opposing opinions suggest that the latest inflation figures will probably ensure one more rate hike. Whichever way it goes, Christine Lagarde the president of the ECB is playing her cards close to her chest and has yet to give any indication as to where the cards will fall.

The City of London, The Square Mile or the affectionate term which has been used since the 1950’s “The City”, has, since Brexit, come under considerable pressure from Paris, as the financial centre of Europe. Sadly, the Brexit deal was bereft of any financial services agreements, and considering the city was earning 10% of GDP and provided 11.5% of tax receipts, this has been an unmitigated disaster both for the City itself and the British economy. 

An Exodus

It is estimated that in excess of 7,500 personnel and £1.1 trillion in assets had already fled the City to the European Union prior to the Brexit agreement. Back in November 2022, Bloomberg’s released figures showing that in US Dollar terms primary listings in Paris overtook London, and to add insult to injury, Paris is now home to Europe’s largest stock market by value. 

Even Wall Street is benefiting from the demise of the City as ARM, the titan of the UK’s Tech Sector announced it would do its IPO in New York, whilst CRH (the world’s biggest materials supplier), announced it would move its primary listing to the USA. This in itself is an indictment on the City, and further bad news may be lurking on the horizon with rumours that the City’s largest listed company Shell, may be considering upping sticks and moving to another jurisdiction.

As far as the City is concerned there was no Brexit deal. The City has already lost in excess of €6 billion to Paris and Amsterdam in euro trading revenues, and staff have been repositioned in various centres of Europe, with Paris being the major beneficiary. Even before Brexit, many of the big city firms anticipated that the City would be bereft of a Brexit deal, and as such companies such as Bank of America are now headquartered in Dublin, and in Paris they have opened a trading floor with a capacity for 1,000 traders and back-up staff.

The Post-Brexit Landscape

As of Q2 2023, the financial landscape post-Brexit had changed dramatically with a clear shift being seen across the English Channel, especially from the big Wall Street companies with the spoils being split amongst various EU cities, of which the lion’s share has gone to Paris. For example, Goldman Sachs co-head in Paris confirmed that Paris is their largest trading hub in Europe, with their staff at the global markets team more than doubling in the last two years. The staff at Bank of America Paris has increased by 600% since the 2016 Brexit vote, whilst JPMorgan Chase has increased their staff more than 20-fold since 2019. Currently Citigroup is building a new trading floor and even hedge funds have increased their staff, such as Millennium Management who circa doubled their employees in the last year.

The ‘ Edinburgh Reforms’

The UK government is so alarmed they have put in place the “Edinburgh Reforms”, which is, for the first time in twenty years, a major revamping of Britain’s financial services spanning insurance, asset management, capital markets and banking. This, they hope, will stop the haemorrhaging, and hopefully from a capital markets standpoint, the City will be able to provide a first-class and best possible funding environment for both global and UK companies.

However, all is not lost for the City, as over USD 3.8 trillion of foreign exchange trades (forex) are transacted in London, which is more than the combined forex trades of Tokyo, Hong Kong, Singapore and New York. Furthermore, according to the London Stock Exchange, 70% of global secondary bond market trading takes place in the City. The City, unbeknownst to many, is also the third largest fintech hub in the world. 

Conclusion

With regard to European finance, the City and London in general still remains the big fish in a big pond with their headcount still way above what the rest of Europe has to offer. It is still much bigger in terms of volume of business and assets, but since Brexit their status has been somewhat eroded. In essence, some of the companies who would use the City as the “default location” to obtain capital from the bond and stock markets are now looking elsewhere. 

The lack of access to EU markets and clients will continue to hamper the city for years to come and it is hoped that the City will be able to reverse the outflow of traders to Europe, otherwise their standing in the global financial markets will continue to diminish.

Farsley Celtic were looking to bounce back from an away loss to Chester last Monday, but in the end managed a hard-fought draw against Kings Lynn Town. The Celts certainly had the better of the first half, but in the second half Kings Lynn defended their box with great determination. This result leaves the Celts in 11^th place in the league, but only 5 points off the leaders Brackley Town. There is still a long way to go until the end of the season and we at IntaCapital Swiss guarantee our continued support and look forward to the team climbing back up the league.

On Tuesday 15^th August Farsley achieved a notable draw with a penalty goal in the dying moments of their home game against newly promoted South Shields. They had a number of near misses during the game but Farsley’s fighting spirit saw them through to a draw.

Moving forward to Saturday 19^th after a four-hour plus coach trip to Bishops Stortford, Farsley produced an excellent goal on the half hour, which allowed the visitors to walk away with all three points.Farsley remain unbeaten this season and their impressive start leaves them in 6^th place on 8 points, 2 points off leaders Scunthorpe United. Our congratulations once again go to the team and their management for an impressive start to the season.

The outlook for construction companies in the United Kingdom is certainly gloomy, as developers with concerns regarding inflation, high borrowing costs and the economy in general have slowed up on house building projects. In fact, in London itself, new home sales have fallen to an 11-year low not seen since 2012 thanks mainly to the cost-of-living crisis and once again the high cost of borrowing. 

Interestingly, Country Garden Holdings, China’s largest privately owned home builder, and considered one of the safer bets, missed payments on international debt obligations. Their cash flow problems have also impacted on land in an impoverished part of east London, where 5 years ago a site was purchased to build hundreds of apartments, sadly to date not one brick has been laid. The plans for the land are therefore being impacted not only by the cash crisis in Country Garden Holdings but also the problems facing the UK economy.

Construction however only forms part of the problem as after a strong Q1 and Q2, sadly in August private-sector companies suffered their first contraction in seven months. Experts and economists advise that the impact of higher interest rates is finally beginning to be felt throughout the economy. This had led to more companies and households adjusting their spending downwards thereby reducing demand throughout the economy. 

In other parts of the economy, consumers are cutting back on their spending on non-essentials which is impacting on the services sector, which not only represents the largest part of the economy but is now showing signs of weakness. In August data released by the CBI (Confederation of British Industry), showed that retail figures suffered their largest year on year drop for nearly 2 ½ years. Analysts at the Marks and Spencer Group have recently advised that there is a risk that as the year progresses the consumer market may tighten even further.

A number of experts and analysts suggest that as the year progresses more negative data will be released into the market, which may show signs of a further slowdown in the UK economy. According to recent data released, circa 445,000 firms are today in Significant Distress, a year-on-year increase of 8.5%. The Bank of England recently warned the increase in the cost of borrowing has also accelerated the risks of corporate defaults, with some companies cutting back on employment and reducing investment. 

Indeed, the Bank of England is expected to raise interest rates again to 5.5% with some commentators suggesting a high of 6% in 2024, the highest for 23 years, further squeezing the pocket of Britain’s consumers. The British economy may or may not be heading for a recession. Many commentators feel this has been avoided, no doubt we will all know by the end of the year. 

Another hard-fought draw leaves Farsley unbeaten this season and they remain 6^th in the league on 9 points, 3 points off the leaders Spennymoor Town. There are six other teams on 9 points, so this season is already showing signs of being highly competitive. Farsley went in at half time one nil down but came out firing on all cylinders in the second half and levelled the score early on with an excellent goal. Farsley went two one up and only a bizarre penalty, where no Tamworth player appealed, denied the Celts a well-deserved three points.

Is Europe’s largest economy heading for another downturn? Data released from the highly respected Munich based ifo Institute* said that following their monthly survey they found confidence has been falling in all four main sectors of the economy: retail, services, manufacturing and construction. The survey found that many German companies have a negative outlook on the current future of the economy.

*ifo Institute – This is a highly regarded Business Climate Index and is representative of early indicators of economic development in Germany with data being published on a monthly basis.

As companies become increasingly pessimistic about the current state of the economy and indeed in Q4, the confidence index has fallen to a 10-month low of 85.7, a fall of 1.7 points. These findings reflect another survey of purchasing managers, where falling new orders, inventories and output, showed German companies had suffered a steep decline in activity not seen for three years.

The across-the-board decline in leading economic indicators suggested another contraction in the German economy for Q3 and Q4 of this year. Indeed, the German economy has been slower to recover from the Covid-19 pandemic than the rest of the Eurozone and the United States. Germany has not seen positive growth for Q1, Q2 and Q3 indicating that Germany’s huge industrial base has been hit hard by a sudden downturn in manufacturing. 

Recent data released showed a further sign of weakness where new orders in the construction sector fell by 2.7% compared to that of June 2022. Such figures show how high interest rates have filtered through to the housing market thereby negatively impacting on activity. Furthermore, recently revised data on German GDP showed the German economy stagnating three months to June compared to the same period in 2022. 

Experts suggest that a lack of momentum in the foreign trade arena combined with high interest rates will keep weighing on the economy in Q3 and Q4, with some senior figures in the finance industry suggesting that the economy could slip into a recession by the end of the year before mounting a recovery in 2024.

Analysts are suggesting that due to the grim outlook for the German economy, the European Central Bank ECB, may not raise interest rates (10^th consecutive time) at their next meeting in September. Since reaching a record high of 10.5% in October 2022, headline inflation in the eurozone is expected to be in the region of 5% in August 2023, however core inflation (excludes food and energy data) remains a problem. So, will the ECB attack core inflation in September with another rate hike or will Germany catch a break with the ECB keeping interest rates where they are?