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What is in the EU-China investment treaty?

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After seven years of talks the EU has secured one of its top priorities in relations with China: an investment agreement that Brussels insists will resolve longstanding problems faced by European companies.

But the agreement is likely to be controversial with human rights advocates, given allegations of abuses in China. It could also create friction with the incoming US administration of Joe Biden, who has made clear that he wants an alliance with the EU to bring joint pressure to bear against Beijing over aggressive trade practices. 

Businesses will also now want to study the small print of the new rights created by the agreement, and how they will be enforced. 

1. What does the deal do for the EU?

The deal tackles a number of EU grievances.

These include longstanding concerns that the bloc’s companies are being forced to share valuable technological knowhow in exchange for being allowed to compete on the Chinese market, along with fears that the country’s state-owned enterprises are unfairly favoured and that the Chinese system of state subsidies is opaque. 

The deal will “significantly improve the level playing field for EU investors”, including by “prohibiting forced technology transfers and other distortive practices”, the EU said in a statement.

Other parts of the deal concern specific sector-by-sector market access rights, removing barriers such as requirements for companies to have partnerships with local firms in joint ventures, and eliminating caps on levels of investment.

Areas where EU companies will win enhanced access rights include the automotive sector, telecoms equipment, cloud-computing, private healthcare and ancillary services for air transport. The deal will also put the EU on the same footing as the US when it comes to operating in the Chinese financial services market.

2. Does it resolve problems in the EU-China trade relationship?

Working with molten iron at a Dongbei Special Steel mill in Dalian, Liaoning province, China © Reuters

Speaking to the Financial Times on Wednesday, Valdis Dombrovskis, the EU’s trade commissioner, cautioned that the deal “is not a panacea to address all challenges linked to China, but it brings a number of welcome improvements”. 

Crucially, the investment treaty is far narrower in scope than the comprehensive free trade agreements that the EU has negotiated with the likes of Canada, Japan and — most recently — the UK. It essentially covers certain non-tariff barriers to business and investment.

Mr Dombrovskis identified overcapacity in steel production, unequal access to public procurement contracts and trade in counterfeit goods as issues in the EU-China trade relationship that the deal could not address.

The EU is also seeking to tackle broader issues, such as China’s use of industrial subsidies, through reform of the World Trade Organization.

“This agreement is just one element, just one thread in a complex tapestry of the EU-China relationship, and of course it is clear that many complex challenges still need to be addressed,” Mr Dombrovskis said.

3. What does China get out of it?

For China, the deal is good diplomacy: the incoming Biden administration in the US has made clear that it wants to build an alliance of democracies to put pressure on Beijing over both its human rights record and aggressive trade practices. The deal on the investment treaty strengthens ties with Brussels at a pivotal moment. 

China entered the talks with fewer market access goals than the EU, which argued that it was the victim of an unlevel playing field. Still, the deal locks in existing rights for Chinese companies in the EU market at a time when the EU is looking to expand its legal arsenal against unfair foreign competition.

It also offers China new openings in manufacturing and the growing EU market for renewable energy.

EU officials stress that the market opening on renewables is limited (capped at 5 per cent for each EU member state market) and contingent on reciprocal openness from China.

4. How will the deal affect relations with the new US administration?

Valdis Dombrovskis, EU trade commissioner, said the agreement brought a “number of welcome improvements” © Kenzo Tribouillard/Pool/AP

The EU has taken a risk by pushing ahead, particularly in the light of its parallel efforts to revive the transatlantic relationship after severe tensions during Donald Trump’s presidency.

Just four weeks ago, it publicly urged the US to join it in an alliance to assert the interests of the democratic world against “authoritarian powers” and to meet the “strategic challenge” of China.

Critics say the EU deal undermines that call for partnership; the EU insists that it is merely winning similar trade benefits to those established in the so-called “Phase 1” trade deal struck by Mr Trump with Beijing. 

The EU also argues that the deal can help other countries be more assertive in their dealings with China by establishing a new reference point in terms of commitments from Beijing.

“We want to engage very closely with the US,” Mr Dombrovskis said. “I am not seeing the Phase 1 deal or our comprehensive agreement on investment as hindering this co-operation in any way.”

5. Is the deal consistent with EU goals on human rights?

The EU claims that “universal, indivisible and interdependent” human rights are “at the heart” of its relations with other countries. But the accord has raised concerns among rights activists because of allegations — denied by Beijing — that Uighur Muslims detained in the western region of Xinjiang are being used as forced labour. 

The bloc says it has won unprecedented commitments from Beijing, including that China shall make “continued and sustained efforts” to ratify two International Labour Organization conventions against forced labour — but human rights advocates argue this does not go far enough as a guarantee. 

Reinhard Bütikofer, chair of the European Parliament’s delegation for relations with China, wrote on Twitter on Tuesday that “it is ridiculous [for the EU] to try selling that as a success”.

The EU emphasises that the agreement includes a strong “implementation and enforcement mechanism” that covers the commitments on labour rights, as well as other dispute-settlement arrangements.

Mr Dombrovskis said that neither the Phase 1 deal with the US nor a Regional Comprehensive Economic Partnership agreed this year by Asian and Pacific countries have “sustainable development commitments coming anywhere close” to the EU-China accord.

Tensions over this point are certain to feature prominently during the EU’s work on ratifying the agreement — a process that will require endorsement of the deal by the European Parliament.





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Emerging Markets

Tech-heavy Taiwan stock index plunges on Covid outbreak

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Taiwan’s stock market, home to some of the world’s biggest tech companies, suffered one of the largest drops in its history as investors were rocked by a worsening Covid-19 outbreak.

The Taiex fell as much as 8.55 per cent on Wednesday, the index’s worst intraday fall since 1969, according to Bloomberg. It finished down 4.1 per cent.

Construction, rubber, automotive and financials — sectors retail investors had been shifting into from technology in recent months — were the worst hit in the sell-off.

The world’s largest contract chipmaker, Taiwan Semiconductor Manufacturing Company, which has a 30 per cent weighting in the index, fell as much as 9.3 before recovering ground to be down 1.9, while Apple supplier Hon Hai Precision Industry, also known as Foxconn, dropped 9.8 per cent before paring losses to be down 4.7 per cent.

While Taiwan’s sell-off was related to domestic Covid-19 problems, it followed recent declines in global markets as investors worried about possible inflationary pressures.

The falls came as Taiwan’s government was expected to partially close down public life to contain a worsening coronavirus outbreak — something the country had managed to avoid for more than a year.

“The reason that triggered the escalated sell-off during the trading session is the new [Covid-19] cases to be reported this afternoon, and probably the raising of the pandemic alert level,” said Patrick Chen, head of Taiwan research at CLSA. “On top of that, the market before today was already at a point where the index was at an inflection point.”

Taiwan’s strict border controls and quarantine system and meticulous contact tracing measures had helped it avoid community spread of Covid-19 until recently.

That success, which allowed Taipei to forego lockdowns, helped boost the local economy, which grew about 3 per cent last year and 8.2 per cent in the first quarter of 2021.

But health authorities announced 16 locally transmitted confirmed cases on Wednesday, for three of which the infection source was unclear — a sign of widening spread in the community. Authorities had confirmed seven untraced cases on Tuesday, and domestic media reported that the government might introduce partial lockdown measures.

President Tsai Ing-wen called on the public to be vigilant but avoid panicking.

Taiwan’s stock market rose almost 80 per cent over the past year, peaking at a historical high late last month. It is now down 8.5 per cent from that mark.

Retail investors have increasingly moved out of technology stocks in recent weeks, reducing the sector’s weight in trading volume from almost 80 per cent at its height to just over 50 per cent.

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China factory gate prices climb on global commodities boom

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The price of goods leaving factories in China rose at the fastest pace in more than three years, on the back of a rally in commodities supported by the country’s economic recovery.

The producer price index rose 6.8 per cent in April year-on-year, beating economists’ expectations and surpassing March’s increase of 4.4 per cent.

The rate was driven in part by comparison with a low base last year in the early stages of the pandemic. But it also reflects a global surge in the prices of raw materials that was first stoked by China and now incorporates expectations of recovering global demand.

While PPI prices in China have leapt, economists suggested there was limited spillover into consumer prices and that the central bank was unlikely to react. China’s consumer price index added just 0.9 per cent in April, the National Bureau of Statistics said on Tuesday, although it touched a seven-month high.

“It tells us that demand at this moment is super strong,” said Larry Hu, head of greater China economics at Macquarie, of the PPI data, although he suggested policymakers would see the increase as “transitory” and “look through it”.

“We’re going to see some reflation trends,” he added.

Signs of tightening in China’s credit conditions have drawn scrutiny from global investors eyeing the prospect of higher inflation as the global economy recovers from the pandemic, especially in the US, which releases consumer price data on Wednesday.

China’s PPI index remained mired in negative territory for most of 2020 following the outbreak of coronavirus, but has started to gather momentum this year. Gross domestic product growth in China returned to pre-pandemic levels in the final quarter of 2020.

An industrial frenzy in China has stoked demand for commodities such as oil, copper and iron ore that make up a significant portion of the index and have helped to push it higher. 

Policymakers in China have moved to tighten credit conditions, as well as attempted to rein in the steel sector. Ting Lu, chief China economist at Nomura, said the relevant question now was “whether the rapid rise of raw materials prices will dent real demand, given pre-determined credit growth”.

Retail sales in China have lagged behind the growth rate of industrial production, putting downward pressure on CPI, which has also been weakened by lower pork prices that rose sharply on the back of African swine fever. Core CPI, which strips out food and energy, rose 0.7 per cent in April 

Julian Pritchard-Evans, senior China economist at Capital Economics, said that producer prices were feeding through into the rebound in consumer prices, but also suggested that pressures on the former were “likely to be mostly transient”.

He added that output prices for durable consumer goods were rising at their fastest level on record.

China’s rapid recovery has been driven by its industrial sector, which has churned out record quantities of steel and fed into a construction boom that policymakers are now trying to constrain. On Monday, iron ore prices hit their highest level on record, while copper prices also surged.



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Iron ore hits record high as commodities continue to boom

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The price of iron ore hit a record high on Monday in the latest sign of booming commodity markets, which have gone into overdrive in recent weeks as large economies recover from the pandemic.

The steelmaking ingredient, an important source of income for the mining industry, rose 8.5 per cent to a record high of almost $230 a tonne fuelled by strong demand from China where mills have cranked up production.

Other commodities also rose sharply, including copper, which hit a record high of $10,747 a tonne before paring gains. The increases are part of a broad surge in the cost of raw materials that has lasted more than a year and which is fanning talk of another supercycle — a prolonged period where prices remain significantly above their long term trend.

The price of timber has also hit a record high as US sawmills struggle to keep pace with demand in the run-up to peak homebuilding season in the summer.

“Commodity demand signals are firing on all cylinders amid a synchronised recovery across the world’s economic powerhouses,” said Bart Melek, head of commodity strategy at TD Securities.

Strong demand from China, the world’s biggest consumer of commodities, international spending on post-pandemic recovery programmes, supply disruptions and big bets on the green energy transition explain the surge in commodity prices.

Commodities have also been boosted by a weaker US dollar and moves by investors to stock up on assets that can act as a hedge against inflation.

The S&P GSCI spot index, which tracks price movements for 24 raw materials, is up 26 per cent this year.

Strong investor demand pushed commodity assets held by fund managers to a new record of $648bn in April, according to Citigroup. All sectors saw monthly gains with agriculture and precious metals leading the way, the bank said.

Agricultural commodities have had an especially strong run owing to rising Chinese demand and concerns of a drought in Brazil. Dryness in the US, where planting for this year is under way, is also adding to the upward rise in prices. Corn, which is trading at $7.60 a bushel and soyabeans at $16.22, are at levels not seen since 2013.

“From a macro economic environment to strong demand and production concerns, the ingredients are all there for the supercycle,” said Dave Whitcomb of commodity specialist Peak Trading Research.

Rising copper and iron ore prices are a boon for big miners, which are on course to record earnings that will surpass records set during the China-driven commodity boom of the early 2000s.

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JPMorgan reckons Rio Tinto and BHP will be the largest corporate dividend payers in Europe this year, paying out almost $40bn to shareholders. Shares in Rio, the world’s biggest iron ore producer, hit a record high above £67 on Monday.

Brent crude, the international oil benchmark, has crept back up
towards $70 a barrel, which it surpassed in March for the first time in
more than a year, recovering ground lost as the pandemic
slashed demand for crude and roiled markets.

Supply cuts by leading oil producers have helped to bolster the market
as consumption has begun to recover around the world.

While some Wall Street banks have hailed the start of a new supercycle, with some traders talking of a return to $100 a barrel oil, others are less convinced. The International Energy Agency said oil supplies still remain plentiful meaning any talk of a supercycle is premature.



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