China is not out of the woods yet

This is an audio transcript of the FT News Briefing podcast episode: ‘China is not out of the woods yet’

Marc Filippino
Good morning from the Financial Times. Today is Thursday, January 18th and this is your FT News Briefing.

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The International Monetary Fund has a stark warning for central banks. And BP has a familiar face taking over as its permanent CEO. Plus, China’s economy grew last year, but it’s not exactly back on track. We’ll take a look at what needs to be done. I’m Marc Filippino and here’s the news you need to start your day.

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A top IMF official is warning that central banks need to be careful about cutting interest rates. First deputy managing director Gita Gopinath spoke to the FT in Davos. She said that inflation was going to decline more slowly than it did last year, and that if you cut rates, people would expect more of them. She said that can be counter-productive to fighting inflation. Gopinath suggested that the path towards a lower inflation would be, quote, bumpy. And she’s not wrong. Yesterday, the UK reported an unexpected rise in inflation in December. It’s now at 4 per cent, and European Central Bank president Christine Lagarde suggested that the bank would hold rates steady until the summer.

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BP named Murray Auchincloss as its permanent chief executive yesterday. He had been serving as the oil major’s interim CEO after Bernard Looney stepped down in September. Here to talk to me about what Murray Auchincloss might mean for the company is Tom Wilson, our natural resources editor. Hi, Tom.

Tom Wilson
Hi, Marc.

Marc Filippino
OK, so we’ve gotten a taste of what Murray Auchincloss’s leadership style looks like over the past few months. But, Tom, what’s his history with the company?

Tom Wilson
So Murray’s been with BP for about 25 years. He joined in 1998, and since then he’s cycled through various different financial roles at the business. What stands him apart from previous chief executives is that BP traditionally has not promoted CFOs into the chief executive role. That is Murray’s background. He’s a finance man first and foremost rather than an oil man.

Marc Filippino
Tom, what ultimately did BP like in Auchincloss?

Tom Wilson
Well, I think the reason they’ve gone for Murray at this point in time is they wanted someone to steady the ship. I mean, Bernard’s departure in September was incredibly tricky for them. You know, he left having failed to disclose to the board his past relationships with colleagues. After that point, they did engage in a large search. But there’s a couple of things to consider. I mean, the first is that BP has never appointed an external candidate to chief executive. It’s always promoted from within the business. The second thing to say is the pool of candidates able to do these types of jobs at one of the world’s biggest energy companies is relatively small. So I think as the time went on, they recognised they had relatively few options. And in Murray, they have somebody who was a key architect of the current strategy that Bernard Looney created. And therefore, I think they took a view that Murray was well placed to continue to execute that strategy going forward.

Marc Filippino
So, Tom, what is Murray’s top priority or top priorities as he becomes permanent CEO?

Tom Wilson
I think he’s really gonna be focused on the share price. BP and Shell’s share price, even before this escapade, was already lagging US rivals. And then BP has taken a further step back over the last four months. So it closed the year considerably down compared to Shell. And he’s really gonna be looking at how to maximise financial performance over the next few quarters and hope to bring that share price up.

Marc Filippino
Now, Tom, how do investors feel about the move to keep Murray Auchincloss as BP’s permanent CEO?

Tom Wilson
So far, shareholders and their advisers seem pleased with the appointment. I think, first and foremost, they’re happy that this period of uncertainty has come to an end. Secondly, in Murray, they have a former chief finance officer who they already knew very well. I think they also see in him somebody who is very focused on financial performance and therefore will, they hope, ensure that dividends continue, that buybacks continue. However, I do think that longer-term, there is a bigger question here, which is that BP has underperformed its rivals last year. I think part of that is also the market’s questions about the strategy. So the challenge now for Murray is: is business as usual going to cut it? Or, in order to close that valuation gap with Shell to improve BP’s share performance compared to the US rivals, does he have to do something different?

Marc Filippino
Tom Wilson is the FT’s natural resources editor. Thanks, Tom.

Tom Wilson
Thanks very much.

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Marc Filippino
UK Prime Minister Rishi Sunak managed to put an end to a rightwing revolt and passed his flagship Rwanda asylum legislation last night. It targets migrants who have arrived in the UK over the English Channel. The aim is to send those migrants to Rwanda to have their asylum requests processed. Far-right Conservatives who have threatened to vote against the bill backed down in what had been the biggest rebellion Sunak has faced as prime minister. The bill now goes to the House of Lords for scrutiny. But even though Sunak was able to get this rebellion under control, some Tories think the process really damaged him. And that’s not a good look for his party as the UK heads towards an election.

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On Wednesday, China’s government announced that its economy hit its growth targets for last year — but just barely. In 2023, the country’s GDP expanded just over 5 per cent. It was one of the slowest rates in decades, and the number points out some pretty big problems for the world’s second-largest economy. Here to talk to me about them is the FT’s Joe Leahy. Hi, Joe.

Joe Leahy
Hi, Marc.

Marc Filippino
All right, Joe, can you put this data into perspective for us?

Joe Leahy
Yeah. From Wednesday’s release, the key thing is not so much the headline figure, although on the surface it looked good: 5.2 per cent, slightly above the government’s target. But there’s signs within the Chinese economy of deflationary pressure. We’re getting that coming in from falling house prices, low investment in real estate. Also, the consumer has been certainly not as strong as you might have thought last year, given that they came out of a terrible year in 2022 with Covid restrictions. We had these big lockdowns in cities like Shanghai. So in a way, last year should have been a shoo-in for the Chinese economy, but it ended up not being a very strong year.

Marc Filippino
Now, another major issue I’ve heard a lot about is a demographic problem. How is that reflected in last year’s data?

Joe Leahy
Yes. The decline in population was worse than expected. It was more than double last year, and last year was the first time that we had a fall since the 1960s, when we had a sort of an artificially induced famine in China. So what this means is the demographic decline of the population — the population ageing very rapidly and the birth rate falling very rapidly — is getting worse. And this is one of the headwinds that’s running against the Chinese economy, of course. This growing demographic issue is slowing down GDP growth. And it’s one of the challenges that the government has to deal with.

Marc Filippino
All right. So Joe, what do economists say Beijing needs to do basically to get the economy back on track?

Joe Leahy
What economists are calling for is a more comprehensive package from the government, stimulating demand rather than so much manufacturing — so to have fiscal measures that are aimed more at social services. And the idea behind that is to encourage the average Chinese household to spend more and to save less. You know, Chinese households, on average, do save a hell of a lot. And that’s because they’re worried about access to healthcare, they’re worried about pensions, and they’re worried about schooling. So in the near term, people are recommending that the government does more to try to just get money into the hands of households. But that’s something that China seems to be, or the Chinese government seems to be, ideologically against. They’d always preferred to subsidise businesses or pour money into infrastructure rather than directly into the hands of consumers, as we saw in the west.

Marc Filippino
OK, so economists are calling for more stimulus. Beijing isn’t super hot on the idea. How important is it for the government to deliver?

Joe Leahy
Yeah, this is a very important year for China to try to dispel these deflationary pressures that are setting in. The problem with deflation is if it sets in, wages and prices tend to fall. But debt doesn’t. And China has a very large debt burden to GDP, something approaching 300 per cent. So if you get deflation, you start to get, this debt burden gets bigger and the burden of repayment gets bigger and people spend less. So the big challenge for China this year is to try to reflate its way out of this. And that probably means a lot more policy support from the government. But economists are worried that the government is not really stepping up with the sort of stimulus measures that they think are necessary.

Marc Filippino
That was Joe Leahy, the FT’s Beijing bureau chief.

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You can read more on all of these stories at FT.com for free when you click the links in our show notes. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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