30 ***^ Wednesday 7 August 2019 The Daily TelegraphA
ll of a sudden, no deal is
the order of the day. And
no, I’m not talking about
the Brexit posturing of
Boris Johnson’s rottweiler
in chief, Dominic
Cummings – though that too – but of
China’s trade negotiations with the US.
For markets at least, Britain’s own
manoeuvring over Brexit is but a
sideshow compared to this mighty
clash between the American hegemon
and Asia’s rising superpower.
After more than a year of
skirmishing, China’s high command
seems to have given up hope of a
rapprochement. By refusing to defend
the renminbi from further
devaluation, it has essentially declared
all-out economic war on Donald
Trump’s America. As with Brexit, the
conflict is escalating, not abating. In
neither case does this promise to
end well.
But tempting though it is to assign
the lion’s share of the blame to the US
president, it’s not as simple as that. If
China continues to allow its currency
to devalue, the consequences for
almost everyone, including Europe,
are likely to be extraordinarily
damaging.
First, what of the charge of
“currency manipulation” that Mr
Trump has levelled against China?
This was once true enough; for
decades, China held down the value of
its currency, accumulating vast
foreign exchange reserves in the
process. And this did indeed give
China an unfair competitive advantage
in global markets.
The position it enjoys today as the
world’s biggest manufacturing
powerhouse, flooding Western
markets with cheap goods, was
acquired through years of mercantilist
currency suppression. A low exchange
rate put a rocket under exports,
supercharging the country’s
development and growth.
But right now, it’s hard to make the
manipulation charge stick. To the
contrary, in recent years, virtually all
of China’s foreign exchange
interventions have been the other way
around; if China has been guilty of
manipulation it was if anything to
support the currency, not to devalue it.
This came to an end over the
weekend following Trump’s decisionChina’s currency wars threaten
1930s-style deflationary spiral
A bank employee counts US and Chinese currency in Nantong, China’s Jiangsu provinceVCG VIA GETTYJEREMY WARNERR
I
f you’re one of Diageo’s 3,500
“insulted” Scotch whisky
workers, best look away now.
While they’re mulling industrial
action amid a “derisory” 2.5pc
pay increase, boss Ivan Menezes
has just snaffled a near-30pc hike.
Buried in Diageo’s annual report are
details of Menezes’ £11.7m pay packet.
It’s the second year running he’s been
treated to a big increase. A couple of
years ago the poor thing was
struggling to get by on a paltry £3.4m.
But – and it pains me to say it as a
thrifty Yorkshireman – Menezes
deserves every penny.
The problem is, we’ve got used to
bashing our captains of industry over
how much they get paid. Persimmon
chief Jeff Fairburn (coincidentally, he’s
a Yorkie too) provided a watershed
moment last year. His eye-watering,
Help-to-Buy-boosted remuneration of
£75m bonus was the straw that broke
the camel’s back. If you are going to
pay your head honcho a multimillion-
pound bonus you’d better have a very
good reason, was
the message.
Even Tony
Pidgley, the
colourful founder
of housebuilder
Berkeley, has now
backed down.
Annual bonuses
have been
scrapped and its
highest earners
won’t be able to
cash in shares for a couple of years.
Menezes is different. It’s worth
remembering that over the last three
years, Diageo shares have risen more
than 60pc, adding £25bn to the
company’s market value. During this
time the Diageo chief has earned
£24m – 0.1pc of the stock market gain.
But it isn’t just about total
shareholder return. Look at the annual
return and he’s smashed every other
target. Cash flow, sales growth, profits- all beaten. Meanwhile, Diageo has
won awards for female board
representation and plaudits for
limiting carbon emissions and water
usage. If this all sounds like a bit of a
Criticise
executivestoo much
and there isa chance they
will decamp
to the USI’ll raise a
glass to
Diageo’s
£11m boss
Oliver
Gill
Diageo love-in, let’s not forget what
the company does. It makes highly
addictive drinks that can ruin lives.
But that shouldn’t detract from the
fact that Diageo is an extremely
well-run company. Don’t believe me?
How about the implicit praise from
one of the world’s hardest to please
investors? Last year, Elliott advisors
took a €1bn (£922m) stake in France’s
Pernod Ricard. The activist investor
said the Malibu owner could do worse
than follow the example of the world’s
biggest spirits maker.
Menezes’ pay packet will no doubt
incense unions representing Scotch
whisky workers. For your average
person, £11.7m is an eye-watering
amount. But despite Diageo’s success,
it’s less than others running similarly-
sized companies. Royal Dutch Shell’s
Ben van Beurden has been paid
£17.2m, while Rakesh Kapoor, chief
executive of condom-maker Reckitt
Benckiser, took home £15.2m.
It’s all too easy to criticise
executives when they get paid the big
bucks and fail to deliver. But do it too
much and there is a chance that
corporate leaders will decamp to the
US where investors are intensely
relaxed about executives getting filthy
rich. Sometimes you just have to say
well done. One thing’s for sure: the
drinks are on you, Ivan.Wild world
Poor old Domino’s chief David Wild.
Announce you’re off and shares spike
by more than 8pc minutes later.
Let’s be fair, the jump wasn’t just
because of that. An impasse between
the company and franchisees that run
its outlets appears more entrenched
than ever. Acceptance is the first step
towards change; and the markets
seemed to like that (shares did fall
back thereafter, however).
Wild had a word of warning for any
franchisee thinking they’d get a bigger
slice of the profits under his successor.
He’s simply been executing the board’s
hardline strategy. “[And] I’m not sure
the message from the board will
change,” he said.
Nevertheless, franchisees have got
Domino’s in a stranglehold; they are
stopping the company from opening
new stores, stymying its only route to
growth. Something’s got to give. But
with Wild heading for the door, and
chairman Stephen Hemsley following
him shortly thereafter, one can only
wonder what that might be.Mike the Hoarder
Having added Jack Wills to his
ever-expanding portfolio of troubled
retailers, Mike Ashley is showing all
the pathologies of a compulsive
hoarder.
How long before neighbours
complain about a nasty smell
emanating from Chateau Ashley and
Big Mike’s body has to be pulled from
under a mountainous pile of old
newspapers and failed high street
brands?to impose further tariffs on Chinese
goods. Instead of supporting the
currency, the Chinese authorities
instead adopted a “let the markets
decide” approach, causing the yuan to
slip through the previously assumed
support level of seven to the dollar.
Even for a currency which
historically has always been actively
managed – making it quite unlike the
dollar, the euro or the pound – it’s not
clear that this could count as
manipulation. The renminbi has been
remarkably stable of late when
measured against a trade weighted
basket of currencies, making the US
complaint more a question of dollar
strength, which is in turn a
consequence of Trump’s fiscal and
protectionist policies, than
manufactured renminbi weakness.
All the same, a major problem is
now in the making. Trump’s trade war
is fast transmogrifying into a currency
war, with nations pitted against one
another in competitive devaluation.
Where growth is scarce, the
temptation is to steal it from someone
else by devaluing the currency, and
that’s what we are beginning to see.
It’s the Thirties in redux.
Trump said that trade wars were
good and easy to win, yet so far this
has proved far from the case. There is
very little evidence to date of
significant reshoring of US
manufacturing jobs, but growing signs
of harm to both US business and
consumers. Retaliatory tariffs byChina, moreover, have damaged US
farmers, forcing Trump into
compensatory subsidies. On multiple
fronts, then, tariffs are costing more
than they yield.
If the intention was to reduce the
trade deficit, it has plainly not worked.
Widespread import substitution was
the hope, but the main consequence
has been trade diversion, with Chinese
suppliers replaced by more expensive
foreign alternatives that do not incur
the tariff.
American consumers pay more, butthere is little if any offsetting benefit of
additional tariff income. China has lost
market share in the US, yet the
beneficiaries are not US producers, but
other foreign exporters. The trade
deficit has widened, rather than
narrowed.
The protectionist tourniquet was
intended to force China into
concessions on trade and technology,
but again the effect has been quite
different. The Chinese economy has
proved more resilient than expected,
encouraging Beijing to dig its heels in
and refuse to give ground. Chinese
growth has moderated, but continues
to perform relatively well.Consumption has responded well to
tax cuts, and with a renewed surge in
debt issuance, infrastructure
investment has rebounded.
How might Trump respond to these
unintended dynamics? There are
potentially two options, neither of
which bode well. He could further
ramp up tariffs, effectively closing off
US markets altogether to Chinese
producers. Renminbi devaluation
would then cease to matter, to him at
least. Unfortunately, it would matter a
lot to everyone else – particularly
Europe. The resulting excess in
production would be dumped on
alternative markets, where it would
act as a powerful deflationary force.
Or, Trump could attempt to
manipulate his own currency down, a
possibility he has already aired in
public. To this purpose, he is bringing
intense pressure to bear on the Federal
Reserve to further reduce interest
rates. Trump may well be right that
the Fed has been too tight. But he
might also choose to activate the US
Treasury’s Exchange Stabilization
Fund.
Currency intervention can work. In
the Plaza Accord of 1985, the US, UK,
France, Germany and Japan agreed to
act together to depreciate an
overvalued dollar. Yet as the Bank of
England discovered to its cost during
the ERM crisis of the early Nineties,
it’s much harder on a stand-alone
basis, when central bank intervention
can be little more effective than
spitting against the wind.
It is nonetheless easier to depress
the value of a currency than it is to
defend it; the Federal Reserve could
theoretically be ordered to print and
sell dollars without limit to get the
currency down.
This would be legally contentious,
and would further undermine the
pretence of central bank
independence, but it’s possible.
So to the main question; where does
all this end? Trump needs to settle
with China in order to sustain the
already very long-in-the-tooth
business cycle and bull run in stock
markets, both key elements of his
electoral sales pitch. But a climb down
could be just as politically damaging as
a stall in the economy. Trump is stuck
in a hole of his own making.
It might seem a cop-out to say it, but
analysis of this apparent conundrum,
and its knock-on consequences for
markets and the economy, suffers
from the same “if, but, and possibly”
curse as much of the increasingly
futile speculation around Brexit
outcomes. The determining politics of
it all makes the final end game
virtually impossible to predict.‘The Chinese economy has
proved more resilient than
expected, encouraging
Beijing to dig its heels in’Business comment
Rivals’ clash will send tremors
through the global economy
T
he trade war morphed into a
currency war after Donald
Trump labelled China a
currency manipulator. Beijing has hit
back, saying a “capricious” US risks
undermining the global financial
system. The new front in the clash
between superpowers threatens to
send fresh shock waves through the
global economy.What is happening?
China’s currency, the yuan, is trading
at more than seven to the dollar, its
weakest level since 2008.
Partly this is a result of the trade
war, hitting growth forecasts,
reducing trade volumes and scaring
international investors off China.
It also reflects concerns over global
growth which tend to push money
into the US, strengthening the dollar.
But the American authorities have
also detected the hand of Beijing in the
currency moves.
“In recent days, China has taken
concrete steps to devalue its currency,”
said the US Treasury. “The purpose of
China’s currency devaluation is to gain
an unfair competitive advantage in
international trade.”
Manipulation can be hard to prove.
The textbook method is to buy other
currencies, increasing demand for, in
this case, the dollar, while increasing
supply of the domestic currency.
It can also be achieved by limiting
purchases of the yuan, applying
controls to limit money flows into the
country, or in the other direction by
diverting state and business funds into
dollar-denominated assets.
The People’s Bank of China insists
the currency’s level is set by the
market, indicating it has simply
allowed it to fall. It calls the US
decision to designate it a manipulator
a “capricious act of unilateralism and
protectionism”.What could China gain?
In the short term the weaker yuan
counters the effect of US tariffs on
Chinese goods – a 10pc fall in the
currency roughly cancels out a 10pc
tax. However, the net effect is totransfer funds from Chinese exporters
to the US Government.
In the longer term, it could frustrate
US efforts to close its trade deficit with
China. A more competitive currency
makes Chinese goods more attractive
in the US and the rest of the world,
while making US exports less
competitive in China.
During its long emergence from
Communist isolation, Beijing routinely
suppressed the currency to keep
exports cheap. After becoming the
world’s second-largest economy,
however, Beijing shifted focus,
moving into more sophisticated
products and making tentative moves
to open up investment. Now the
currency has dropped, China is being
accused of manipulation, which may
be seen as a selective use of the
argument by the US.Who loses?
The US clearly feels it is losing
competitiveness, although American
consumers benefit from cheaper
Chinese imports. Other losers include
China’s competitors, such as its
goods-exporting neighbours in
south-east Asia.
Chinese importers and their
suppliers suffer from rising costs.
Germany has already been hit as
demand for its exports shrivels.
Chinese businesses with dollar
debts may struggle – it will take more
of their diminished yuan to repay
those loans. The state still holds more
than $1 trillion of US government debt,however. Other emerging markets
may struggle more. “A weaker yuan
would most likely weigh heavily on
the emerging-market currencies and
economies,” credit ratings agency
Standard & Poors said.What happens next?
Deeming China a currency
manipulator opens the door to a range
of US actions against the country,
although most analysts suspect it is a
symbolic move for now. Initial steps
point to something like mediation.
The most powerful historical
example of a currency dispute was the
spat with Japan in the Eighties that led
to the Plaza Accord, a deal under
which the yen appreciated sharply,
and the dollar’s value approximately
halved. But it is not something Beijing
is likely to back.
“The Chinese are deeply reluctant
to endorse such a move, as they
interpret the Plaza Accord as a US
strategy to destroy the rising Asian
giant that was Japan,” says Charlie
Robertson, global chief economist at
Renaissance Capital.
An alternative to a deal could be
unilateral US action to depress the
dollar. “President Trump has been
very vocal in lamenting US dollar
strength and its threat to his economic
agenda,” says George Efstathopoulos at
Fidelity International.
That, however, will hardly calm
matters. Expect both countries to keep
slapping new tariffs and restrictions
on each others’ exports instead.2014 2015 2016 2017 2018 2019
SOURCE: BLOOMBERG- 2
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6.86.66.46.26.0China’s yuan weakens past 7 per dollar
Yuan per US dollarTIM WALLACE
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