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THIS WEEK IN FINANCE: NOV 6-12 2023


By Kendrick Low and Shayan Mukherjee




BEIJING: The Chinese yuan is losing value, yet gaining ground

Kendrick Low

In the third quarter of this year, reports the Economist, the foreign direct investment flow into the economic powerhouse ‘remarkabl[y]’ turned negative. Through the selling of assets, profit repatriation and repayments of intra-firm loans, foreign investors’ money exited the Chinese market. This is likely due to foreign discontent with Beijing’s actions over international issues, such as the pandemic, and its own ‘regulatory crackdown’ on domestic tech firms and its probing of ‘foreign due-diligence firms’. Investors are now hard-pressed to find both commercially viable and ‘politically palatable’ investment opportunities.

However, this huge U-turn may simply be the result of multinational companies’ calculated decision to remove cash from the country and instead benefit from more Chinese funding due to lower interest rates. In September, it surpassed the euro to become the second most popular trade financing currency. State-owned lenders are also increasing financial commitments in yuan, from 6 in 2013 to 50% in 2021, according to a recent AidTech report. Several of the loans were extended to nations in debt distress. The recipients subsequently used the yuan to repay the IMF and other Chinese creditors and save their ‘scarce dollar reserves’ for other needs. This helped prevent the nations defaulting while encouraging global use of the yuan. Countries borrowing the yuan are more susceptible to using it for international payments. Forty economies have signed a swap agreement with the Bank of China, obliging them to temporarily exchange yuan for an equivalent amount of the other nation’s currency. The London School of Economics’ findings state this increases the yuan’s share in a country’s international payments by a whole 1.3%. Certainly, foreigners are more persuaded to ‘embrace the redback’, and thus China is wielding even more soft power.

WASHINGTON: Trump’s tariff plans would be disastrous for America and the world

Kendrick Low

If and when Trump is re-elected, which is increasingly likely given Biden’s eroding position, he has promised to add a 10% tariff on all imported goods, tripling the country’s current average and certainly destroying America’s once great reputation as a force for free trade. This isn’t an empty threat, either. His chief trade negotiator has proposed a universal tariff, with the unsettling statement that it ‘would be as high as necessary to eliminate the country’s trade deficit’. Populist economists aren’t helping either- the Wall Street Journal itself published an article purporting ‘Trump was right about tariffs’. Trump and his backers argue that tariffs reduce a trade deficit, to them a ‘source of economic weakness’, encourages domestic production from businesses and finally counter the injustice of the current global economy where countries(mainly China) exploit American accessibility.

Furthermore, the trade balance’s situation doesn’t entirely depend on tariffs- its cause is the nationally low savings rate and its consumer-led economy. This ‘appetite for imports’, states the Economist, is ‘proof of its vitality’. America has run a trade deficit every year since 1975, during which it has remained the world’s dominant global power. While this ‘coddl[ing]’ does allow domestic firms to expand their market share, it also gives them too much leeway for inefficiency to occur. Other issues are clear- for each new job created via Trump’s tariffs, steel users pay a total of US$650,000, and to counter Trump’s tariffs, Chinese firms may simply raise their prices, costing each American household an added $2000 a year. If other countries retaliate, much like Trump’s first ‘rodeo’, there would be a ‘global tax on trade’, exacerbating inflation risks. This would also cause its ties with its allies to plummet, especially those that don’t ‘hing[e] on China.’ With Biden having done little to counter this errant influence, even introducing discriminatory subsidies on electric vehicles, wind turbines and more, akin to ‘squandering public money’. This is a disconcerting reality check for Trump sympathisers, and Biden, too, must truly disassociate himself from this, lest America soon revert to becoming an ‘apologist for protectionism’.


LONDON: Bank of England follows Fed’s suit, stabilising minimum lending rates at 5.25%

Shayan Mukherjee

After the Federal Reserve maintained their level of interest rates, the Bank of England decided to pursue the same approach, ending a streak of 14 back-to-back increases. While this could be positive news for consumers, potentially signifying a peak in commercial interest rates (meaning that the cost of taking out loans will not continue to rise), the BoE “reinforced its message that it would keep [interest rates] high” (Reuters). Following the massive amounts of government expenditure pumped into economies during COVID-19 in the form of welfare benefits, healthcare provisions, and other forms of aid, central banks have been raising interest rates in a desperate bid to curb inflation. This is a part of contractionary monetary policy, and is specifically designed to reduce the amount of demand in the economy by essentially taking money out of consumers pockets (through charging them higher interest rates on loans).

It is important to note that this can backfire - Reuters reports that the BoE itself recognises that the country is “close to a recession and [will] have no meaningful growth in the coming years”. The institution continues to prioritise curbing rising price levels over other economic issues associated with economic stagnation, like rising unemployment rates and falling output. However, Despite inflation being the policy’s primary focus, it has yet to prove wholly successful: while inflation has decreased from its height of 10% to 6.7% in the UK, it is still far above the target 2%. So, for anyone looking to buy a car, house, or other big ticket item: be prepared to pay off hefty interest rates for the foreseeable future!


WALL STREET: Market soars, signalling promising period for investors, corporations, and (potentially) the economy

Shayan Mukherjee

After a period of sustained stagnation, the stock market is finally showing indications of recovery. Nasdaq, a stock index comprising of all firms that are listed on the stock exchange, posted its “biggest one-day percentage rise” since May 26th (Reuters). The price of the index rose by a whopping 2.05% on November 11th, representing an overall increase in share prices across industries. Indexes are often looked at as a key indicator of economic activity - if they are rising, it means that businesses in many sectors of the economy are booming and performing better (in terms of profit margins, revenue, output, and other metrics). Therefore, investors and economists are justifiably excited about future prospects following this development, and are particularly buoyed by the fact that Nadsaq is not alone. S&P 500, an index comprising the top 500 companies on the New York Stock Exchange, also grew by 1.56% on the same day, and the Dow Jones index (including 30 prominent companies listed on stock exchanges in the United States) grew by 1.15%.

Investors are attributing this boost to the growth of tech stocks in particular, citing the performance of the Nasdaq composite, a specific index concentrating on tech companies. According to Reuters, the Federal Reserve’s decision to maintain interest rates (as opposed to increasing them), which could signify an end to contractionary monetary policy (as discussed above regarding the BoE’s decision), encouraged investors to remain optimistic about future levels of demand. They believe that, if consumers don’t have to pay continually increasing interest rates, they will retain a larger proportion of their disposable income and might wish to purchase more goods and services in general. This should lead to an improvement in the overall performance of the market, encouraging investment on market indexes like Nasdaq and S&P 500. However, the Federal Reserve’s policy regarding interest rates is purely dependent on the level of inflation - investors eagerly await “next week’s reports on inflation [through the consumer price index] and other economic data”. Time will tell if this boost is the start of an economic recovery in the United States.

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