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Will Covid crisis push UK nations even further apart?

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Your level-headed briefing on how the coronavirus pandemic is affecting the markets, global business, our workplaces and daily lives, with expert input from our reporters and specialists across the globe.

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UK government scraps spending plans as Covid woes deepen

Boris Johnson’s hopes of regaining the political initiative in the UK and mapping out his priorities for a post-Covid-19 world have been dashed by the deepening economic crisis.

The Treasury confirmed on Wednesday that a proposed three-year comprehensive spending review had been scrapped in favour of a one-year one.

The decision to delay the spending review has been a source of tension between the chancellor Rishi Sunak and the prime minister over the past week as the country teeters on the edge of further lockdowns.

Last month Mr Sunak, who is increasingly seen as a possible successor to the PM, was also forced to scrap plans for an autumn Budget because of a resurgence of coronavirus that has thrown economic planning into chaos. 

Wednesday’s confirmation that the three-year spending review will not go ahead is the latest sign of chaos surrounding the government’s response to the pandemic. As the Financial Times reveals today, the disease has also exposed tensions between Downing Street and the devolved governments of Scotland, Wales and Northern Ireland.

The pandemic has presented the government in London with a unique challenge: a UK-wide crisis with no respect for borders but in an area where policy was not controlled from the centre. Crucially, the four governments of the UK are controlled by five different political parties.

Column chart of Public sector net debt excluding public sector banks, financial year showing UK's debt-to-GDP rises to the highest level in decades

As the UK government’s borrowing reaches record levels, the latest part of our series Coronavirus: Could the world have been spared? investigates the tensions and disputes at the heart of Mr Johnson’s muddled response to the pandemic and explores the policy responses needed to hold the union together.

Markets

US technology stocks rallied and the dollar weakened on Wednesday, as US Democrats and Republicans inched closer to agreeing a second major fiscal stimulus for the world’s largest economy. The tech-heavy Nasdaq Composite rose 0.7 per cent while the broader-based S&P 500 gained 0.5 per cent in early trading in New York. The dollar index, a measure of the US currency against six peers, slipped 0.4 per cent to the lowest level since early September.

Line chart of Renminbi per US dollar showing China's currency has appreciated strongly this year

China’s renminbi has hit its strongest level in more than two years, fuelling expectations Beijing will move to arrest the appreciation in the currency prompted by the country’s robust recovery from the coronavirus crisis.
The renminbi gained as much as 0.5 per cent to Rmb6.64 against the dollar in trade within mainland China on Wednesday, marking its highest level in relation to the US currency since July 2018. Strategists said the renminbi’s push past Rmb6.65 and the vigorous pace of its appreciation could foster unease among policymakers in Beijing because it makes exports more expensive.

The EU reported huge demand for an issue of new coronavirus-related bonds on Tuesday. The €17bn sale forms the start of a borrowing binge that will make Brussels one of the region’s biggest debt issuers. Buyers — who placed bids of more than €233bn — were drawn by the relatively high yields on the bonds, which came with 10-year and 20-year maturities, and offered more income for investors than the eurozone’s safest government debt.

Business

City centres have become ghost towns during this pandemic and London — with its high-rise office blocks and dependency on financial services — has been among the hardest-hit. The response of the City of London Corporation — which governs the UK’s financial capital — is to reinvent the City. It plans to draw small businesses and the arts back into the area, wants a fifth of office tenants to be new by 2025, and plans to decrease its reliance on commuters.

The boost Netflix has received from lockdown life has come to an end. Subscriber growth at the streaming service slowed dramatically in the third quarter. It added just 2.2m subscribers in the three months to the end of September — compared with 26m in the previous two quarters. Moreover, most of its growth came from outside its home market. Yet, as the Lex column points out, the competition is flailing. HBO is plagued by a huge debt burden and Disney’s theme parks and movie business has been hammered by the pandemic.

Column chart of Number of robots in use by type ('000) showing Use of robots is forecast to rise rapidly

The pandemic is driving companies’ use of technology, particularly robotics and automation. In the US, Japan, China and Europe sales of industrial robots are rapidly increasing, bucking the overall downward trend in global trade. The pandemic is “a real boost for digital factory technologies”, said Patrick Schwarzkopf of the International Federation of Robotics. The IFR expects the number of professional services robots in operation around the world to rise 38 per cent this year, helped particularly by demand from logistics companies but also medical and cleaning groups.

Global economy

Beijing is using vaccine development as a new diplomatic tool to bolster relations with nations neglected by the US. China, which has four vaccines in phase-3 trials, is promising them to countries across Asia, Africa and Latin America. It has already pledged that Malaysia, Thailand, Cambodia and Laos will be among “priority” recipients of Chinese vaccines. Beijing is determined that “vaccine diplomacy” succeeds where “mask diplomacy” failed, said one expert.

chart showing that sovereign debt has reached historic levels: general government debt as a % of GDP

The debilitating symptoms of “long Covid” suffered by patients can be replicated in the economy, writes Martin Wolf. To meet this threat governments have to spend and avoid repeating the mistakes of the 2008 financial crisis when fiscal support was withdrawn too soon. “History will judge policymakers harshly if those with room to do so do not rise to the occasion,” he concludes.

The cost of shipping goods from Asia to the US has soared in the past month as American companies seek to restock depleted inventories ahead of the holiday season and prepare for the pandemic to worsen over the winter. According to international shipping association Bimco, long-term shipping rates between China and the west coast of America jumped 12.7 per cent over the weekend and are more than 60 per cent higher than on the same day in 2019. Prices from Asia to the US east coast are 25 per cent higher than this time last year.

Science

Chart showing that Covid-19 death rates are rising again across Europe, but at a much slower pace than in the spring

While coronavirus infections have been surging again across Europe since late summer, the chances of surviving the respiratory disease seem to have improved from the first phase of the outbreak. The number of Covid-19 patients ill enough to go to hospital has risen less steeply — and mortality more slowly still, according to an FT analysis. The falling “case fatality rate” can partly be explained by increased testing and a higher percentage of young people contracting Covid-19. But even patients admitted to critical care are more likely to survive now than their counterparts earlier in the pandemic, our research shows.

Tell us what you think

How is your workplace dealing with the pandemic? How are you dealing with it as a professional or a manager? And what do you think business and markets — and our daily lives — will look like after we eventually emerge? Also — tell us what you think about this newsletter and how we can make it more useful to you. Email us at covid@ft.com. We may publish your contribution in an upcoming newsletter. Thanks.

In response to Chinese officials downplayed coronavirus risks, reader Italian expat writes:

China made many mistakes at the start of the pandemic because of their political system. But I doubt this caused the mayhem that we have witnessed in recent months in too many countries.

The essentials

I expect to be made redundant. How do I prepare? This is the latest question for our careers adviser Jonathan Black from a civil servant whose department is facing restructuring. “I have been there for decades and am worried I have become institutionalised at work. How can I change my mindset to de-institutionalise myself?” writes the correspondent. Mr Black, who is director of the careers service at the University of Oxford, will give his answer on Monday.

Final thought

As we walked along the trails, our eyes widened and our heads tipped back to follow the trunks of the trees up, up into the canopy high above © Getty

“It is hard to convey the sheer size and majesty of these titans,” writes Hugh Carnegy, recalling the wonder of California’s redwood forests for the series: Wish I were there. The state’s coast redwoods are the tallest living trees on earth and at 2,000 years old, some of the most ancient. Industrial logging in the 19th and 20th centuries almost destroyed these magnificent trees. But, as Hugh reveals, their unique flame-resistant properties have helped protect them against this year’s fires.



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Why it might be good for China if foreign investors are wary

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Chinese economy updates

The writer is a finance professor at Peking University and a senior fellow at the Carnegie-Tsinghua Center for Global Policy

The chaos in Chinese stock markets last week was exacerbated by foreign investors selling Chinese shares, leaving Beijing’s regulators scrambling to regain their confidence while they tried to stabilise domestic markets. But if foreign funds become more cautious about investing in Chinese stocks, this may in fact be a good thing for China.

In the past two years, inflows into China have soared by more than $30bn a month. This is partly because of a $10bn-a-month increase in the country’s monthly trade surplus and a $20bn-a-month rise in financial inflows. The trend is expected to continue. Although Beijing has an excess of domestic savings, it has opened up its financial markets in recent years to unfettered foreign inflows. This is mainly to gain international prestige for those markets and to promote global use of the renminbi.

But there is a price for this prestige. As long as it refuses to reimpose capital controls — something that would undermine many years of gradual opening up — Beijing can only adjust to these inflows in three ways. Each brings its own cost that is magnified as foreign inflows increase.

One way is to allow rising foreign demand for the renminbi to push up its value. The problem, of course, is that this would undermine China’s export sector and would encourage further inflows, which would in turn push China’s huge trade surplus into deficit. If this happened, China would have to reduce the total amount of stuff it produces (and so reduce gross domestic product growth).

The second way is for China to intervene to stabilise the renminbi’s value. During the past four years China’s currency intervention has occurred not directly through the People’s Bank of China but indirectly through the state banks. They have accumulated more than $1tn of net foreign assets, mostly in the past two years.

Huge currency intervention, however, is incompatible with domestic monetary control because China must create the renminbi with which it purchases foreign currency. The consequence, as the PBoC has already warned several times this year, would be a too-rapid expansion of domestic credit and the worsening of domestic asset bubbles. 

Many readers will recognise that these are simply versions of the central bank trilemma: if China wants open capital markets, it must give up control either of the currency or of the domestic money supply. There is, however, a third way Beijing can react to these inflows, and that is by encouraging Chinese to invest more abroad, so that net inflows are reduced by higher outflows.

And this is exactly what the regulators have been trying to do. Since October of last year they have implemented a series of policies to encourage Chinese to invest more abroad, not just institutional investors and businesses but also households.

But even if these policies were successful (and so far they haven’t been), this would bring its own set of risks. In this case, foreign institutional investors bringing hot money into liquid Chinese securities are balanced by various Chinese entities investing abroad in a variety of assets for a range of purposes.

This would leave China with a classic developing-country problem: a mismatched international balance sheet. This raises the risk that foreign investors in China could suddenly exit at a time when Chinese investors are unwilling — or unable — to repatriate their foreign investments quickly enough. We’ve seen this many times before: a rickety financial system held together by the moral hazard of state support is forced to adjust to a surge in hot-money inflows, but cannot adjust quickly enough when these turn into outflows.

As long as Beijing wants to maintain open capital markets, it can only respond to inflows with some combination of the three: a disruptive appreciation in the currency, a too-rapid rise in domestic money and credit, or a risky international balance sheet. There are no other options.

That is why the current stock market turmoil may be a blessing in disguise. To the extent that it makes foreign investors more cautious about rushing into Chinese securities, it will reduce foreign hot-money inflows and so relieve pressure on the financial authorities to choose among these three bad options.

Until it substantially cleans up and transforms its financial system, in other words, China’s regulators should be more worried by too much foreign buying of its stocks and bonds than by too little.



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Square to acquire Afterpay for $29bn as ‘buy now, pay later’ booms

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Square Inc updates

Payments company Square has reached a deal to acquire Australian “buy now, pay later” provider Afterpay in a $29bn all-stock transaction that would be the largest takeover in Australian history.

Square, whose chief executive Jack Dorsey is also Twitter’s CEO, is offering Afterpay shareholders 0.375 shares of Square stock for every share they own — a 30 per cent premium based on the most recent closing prices for both companies.

Melbourne-based Afterpay allows retailers to offer customers the option of paying for products in four instalments without interest if the payments are made on time.

The deal’s size would exceed the record set by Unibail-Rodamco’s takeover of shopping centre group Westfield at an enterprise value of $24.7bn in 2017.

The transaction, which was announced in a joint statement from the companies on Monday, is expected to be completed in the first quarter of 2022.

Afterpay said its 16m users regard the service as a more responsible way to borrow than using a credit card. Merchants pay Afterpay a fixed fee, plus a percentage of each order.

The deal underscored the huge appetite for buy now, pay later providers, which have boomed during the coronavirus pandemic.

“Square and Afterpay have a shared purpose,” said Dorsey. “We built our business to make the financial system more fair, accessible, and inclusive, and Afterpay has built a trusted brand aligned with those principles.”

Adoption of buy now, pay later services had tripled by early this year compared with pre-pandemic volumes, according to data from Adobe Analytics, and were particularly popular with younger consumers.

Rivalling Afterpay is Sweden’s Klarna, which doubled its valuation in three months to $45.6bn, after receiving investment from SoftBank’s Vision Fund 2 in June. PayPal offers its own service, Pay in 4, while it was reported last month that Apple was looking to partner with Goldman Sachs to offer buy now, pay later facilities to Apple Pay users.

Steven Ng, a portfolio manager at Afterpay investor Ophir Asset Management, said the deal validated the buy, now pay later business model and could be the catalyst for mergers activity in the sector. “Given the tie-up with Square, it could kick off a round of consolidation with other payment providers where buy now, pay later becomes another payment method offered to their customers,” he said.

Over the past two years Afterpay has expanded rapidly in the US and Europe, which now account for more than three-quarters of its 16.3m active customers and a third of merchants on its platform. Afterpay said its services are used by more than 100,000 merchants across the US, Australia, Canada and New Zealand as well as in the UK, France, Italy and Spain, where it is known as Clearpay.

Square intends to offer the facility to its merchants and users of its Cash App, a fast money transfer service popular with small businesses and a competitor to PayPal’s Venmo.

“It’s an expensive purchase, but the buy now, pay later market is growing very rapidly and it makes a lot of sense for Square to have a solid stake in it,” said retail analyst Neil Saunders.

“For some, especially younger generations, buy now, pay later is a favoured form of credit. Afterpay has already had some success with its US expansion, but Square will be able to accelerate that by integrating it into its platforms and payment infrastructure — that’s probably one of the justifications for the relatively toppy price tag of the deal.”

Square handled $42.8bn in payments in the second quarter, with Cash App transactions making up about 10 per cent, according to figures released on Sunday. The company posted a $204m profit on revenues of $4.7bn.

Once the acquisition is completed, Afterpay shareholders will own about 18.5 per cent of Square, the companies said. The deal has been approved by both companies’ boards of directors but will also need to be backed by Afterpay shareholders.

As part of the deal, Square will establish a secondary listing on the Australian Securities Exchange to provide Afterpay shareholders with an option to receive Square shares listed on the New York Stock Exchange or the ASX. Square may elect to pay 1 per cent of the purchase price in cash.

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Biden puts workers ahead of consumers

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US economy updates

For the past 40 years in America, competition policy has revolved around the consumer. This is in part the legacy of legal scholar Robert Bork, whose 1978 book The Antitrust Paradox held that the major goal of antitrust policy should be to promote “business efficiency”, which from the 1980s onwards came to be measured in consumer prices. These were considered the fundamental measure of consumer wellbeing, which was in turn the centre of economic wellbeing.

But things are changing. A White House executive order on competition policy, signed last month, contains some 72 discreet measures designed to stamp out anti-competitive practices across nearly every part of the US economy. But it isn’t about low prices as much as it is about higher wages.

Like the Reagan-Thatcher revolution, which took power from unions and unleashed markets and corporations, Biden’s executive order may well be remembered as a major economic turning point — this time, away from neoliberalism with its focus on consumers, and towards workers as the primary interest group in the US economy.

In some ways, this matters more than the details of particular parts of the order. Many commentators have suggested that these measures, on their own, won’t achieve much. But executive orders aren’t necessarily about the details — they are about the direction of a government. And this one takes us completely away from the Bork era by focusing on the connection between market power and wages, which no president over the past century has acknowledged so explicitly.

“When there are only a few employers in town, workers have less opportunity to bargain for a higher wage,” Biden said in his announcement of the order. It noted that, in more than 75 per cent of US industries, a smaller number of large companies now control more business than they did 20 years ago.

His solutions include everything from cutting burdensome licensing requirements across half the private sector to banning and/or limiting non-compete agreements. Firms in many industries have used such agreements to hinder top employees from working for competitors, as well as to make it tougher for employees to share wage and benefit information with each other — something that Silicon Valley has done in nefarious ways.  

This gets to the heart of the American myth that employees and employers stand on an equal footing, a falsehood that is reflected in such Orwellian labour market terms as the “right to work”. In the US this refers not to any sort of workplace equality, but rather to the ability of certain states to prevent unions from representing all workers in a given company.

But beyond the explicitly labour-related measures, the president’s order also gets to the bigger connection between not just monopoly power and prices, but corporate concentration and the labour share.

As economist Jan Eeckhout lays out in his new book The Profit Paradox, rapid technological change since the 1980s has improved business efficiency and dramatically increased corporate profitability. But it has also led to an increase in market power that is detrimental for people in work.

As his research shows, firms in the 1980s made average profits that were a tenth of payroll costs. By the mid 2000s that ratio had jumped to 30 per cent and it went as high as 43 per cent in 2012. Meanwhile, “mark-ups” in profit margins due to market power have also risen dramatically (though it can be difficult to see this in parts of the digital economy that run not on dollars but on barter transactions of personal data).

While technology can ultimately lower prices and thus benefit everyone, this “only works well if markets are competitive. That is the profit paradox,” says Eeckhout. He argues that when firms have market power, they can keep out competitors that might offer better products and services. They can also pay workers less than they can afford to, since there are fewer and fewer employers doing the hiring.

The latter issue is called monopsony power, and it is something that the White House is paying particularly close attention to.

“What’s happening to workers with the rise in [corporate] concentration, and what that means in an era without as much union power, is something that I think we need to hear more about,” says Heather Boushey, a member of the president’s Council of Economic Advisors, who spoke to the Financial Times recently about how the White House sees the country’s economic challenges. 

The key challenge, according to the Biden administration, is that of shifting the balance of power between capital and labour. This accounts for the emerging ideas on how to tackle competition policy. There are many who regard the move away from consumer interests as the focus of antitrust policy as dangerously socialist — a reflection of the Marxian contention that demand shortages are inevitable when the power of labour falls.

But one might equally look at the approach as a return to the origins of modern capitalism. As Adam Smith observed two centuries ago, “Labour was the first price, the original purchase-money that was paid for all things. It was not by gold or by silver, but by labour, that all wealth of the world was originally purchased.” Reprioritising it is a good thing.

rana.foroohar@ft.com



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