China’s economic slump

This is an audio transcript of the FT News Briefing podcast episode: China’s economic slump

Marc Filippino
Good morning from the Financial Times. Today is Tuesday, July 18th. And this is your FT News Briefing.

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Thames Water saw a major backer cut its stake in the utility, and BlackRock’s biggest ETF is giving more say to retail investors. Plus, China’s economy is really struggling. We’ll take a look at whether the country can break out of the slump. I’m Marc Filippino and here’s the news you need to start your day.

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The biggest investor in Thames Water cut the value of its stake in the utility last year. Canada’s largest public sector pension fund owns a 30 per cent stake in Thames Water through multiple investment vehicles. Documents reviewed by the FT show that one of the fund’s vehicles cut its stake in Thames’s parent company by nearly £300mn last year. The reduction is important. Thames Water’s shareholders are trying to decide whether to invest more money into the struggling utility that serves London and the surrounding area. Thames has a £16bn pile of debt and it’s looking to raise two and a half billion pounds from investors by the end of the decade.

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China’s economy is losing momentum and growing more slowly than expected. That’s according to the latest GDP data. Six months after the end of the country’s Covid lockdowns, youth unemployment is up, trade is down and the property sector is struggling. Tom Hale is the Shanghai correspondent and he says the real impact of China’s Covid policy has yet to play out.

Thomas Hale
The major problem in the economy is the kind of overhang of a lot of negative themes that were dominant last year under those Covid rules. They include weak retail sales, an extremely weak property sector which has not bounced back this year — in fact, it’s got worse. And the additional problem this year is that exports, which had supported the Chinese economy through its pandemic restrictions, are now weakening quite dramatically as the rest of the world’s demand also weakens. So the core three problems right now really are consumption, property and trade.

Marc Filippino
Tom explains that the state of domestic consumption has a lot to do with China’s approach to Covid lockdowns.

Thomas Hale
Western economies tended to unleash a lot of stimulus during their own experiences of the pandemic, and China held off on doing that. And most of the support that Beijing offered was not directly to households. So there’s an argument that Beijing’s approach so far — and it still hasn’t unleashed any major stimulus that supports households — is one reason for the failure of confidence to return after the pandemic in China. The big growth driver for 2023 was supposed to be domestic consumption, and so far it has disappointed.

Marc Filippino
And while inflation has been running rampant in the west, China is having the opposite problem. Prices are getting too low because no one’s buying anything.

Thomas Hale
Deflation is the very real risk. The consumer price index is on the verge of deflation in China. Those two major risks really want one is to discourage consumers to buy anything. If prices are going to decline and the biggest problem in the Chinese economy right now is heavily indebted developers who are at the heart of the economic model of real estate in China are unable to access funding and still unable to properly restructure their debts. So deflation would make that worse.

Marc Filippino
But Tom says Beijing is still cautious about throwing stimulus measures at the problem.

Thomas Hale
There’s a huge amount of uncertainty now over the exact policy direction when it comes to the economy. There are also, with every passing day, more and more calls for Beijing to offer up some kind of stimulus, whether it’s in the form of tax breaks or whether it’s in the form of a further loosening of monetary policy to support the economy. From the perspective of Beijing, there might be many other priorities that trump, if not the need for economic growth, the need for economic growth of a certain level. And it seems like certain sacrifices are being made in terms of just how high the growth figure is.

Marc Filippino Tom Hale is the FT’s Shanghai correspondent.

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Ford announced it was cutting the cost of its flagship electric vehicle yesterday. The move caused the company’s share price to slip 6 per cent and a share sell-off in other EV makers. Ford said it was cutting the price of its F-150 Lightning models so that it will now cost drivers around $50,000. This move is part of a bigger price war in the EV market. Tesla kicked it off earlier this year when it slashed what it was charging for its cars. This back and forth shows there’s growing competition in the EV market and it seems to be working. Both companies say that cutting prices has caused rising sales.

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BlackRock is giving investors a chance to influence companies through its biggest exchange traded fund. The fund is known as IVV. It has more than $340bn in assets and it’s the second biggest ETF in the world. Starting next year, BlackRock will let investors have a say on how the asset manager votes shares in annual general meetings and mergers and acquisitions. The FT’s US financial editor Brooke Masters is with me to talk about the development. Hey, Brooke.

Brooke Masters
Hey, Marc.

Marc Filippino
Yes. So why is BlackRock doing this?

Brooke Masters
I think it’s partly because they’ve come under this huge attack from both right and left about the way they vote their shares. You know, everybody wants them to do something. The right wing says they’re woke and are, you know, prioritising some horrifying progressive leftist agenda, which BlackRock denies. And the left is like, actually, you know, you talk about saving the world and solving climate change, but you’re not voting with the leftist votes enough. And BlackRock’s answered all that as we do what our clients want. And this is a way of really making concrete the idea they do what their clients want.

Marc Filippino
So some listeners might say, Hey, you know, this sounds familiar. What’s new about what BlackRock is doing?

Brooke Masters
BlackRock has been offering institutional investors the chance to do this for almost two years and in fact, like 2tn of assets that institutions control have the ability to do exactly this. What is new is that you and I, who own tiny, tiny little shares of these giant funds, will get a chance to also have a vote. It’s not very large, obviously, because we all own, you know, fractions of tiny percents. But as a group, we can have some influence, which is exciting.

Marc Filippino
So Brooke, give me an example of what that might look like in practice.

Brooke Masters
So say you own shares in this fund, which is known as IVV. You will get a something from BlackRock saying you can choose from among seven different policies on how we will vote your shares. And so it can be, you know, Catholic values, which presumably will be anti-abortion, but, you know, environmental and anti-death penalty or it can be vote with management almost all the time, or it can be, gosh, I have no idea what to do. BlackRock, you vote. And so basically you pick the policy and then BlackRock will take all of those requests and then vote the billions and billions of shares they’ve got along with those choices.

Marc Filippino
Now, all this sounds good in theory, Brooke, but are there potential problems?

Brooke Masters
It doesn’t solve BlackRock’s problem that it is sort of in the crosshairs of Republican politicians trying to make headlines because they will still end up voting a lot of the shares. Many investors will choose to say, you know, BlackRock, you choose, so they can’t completely offload it. I suppose the other issue is maybe retail investors don’t want to do this and they are irritated by it, but I think that’s not so much of a problem. They can just sort of say, don’t vote, please.

Marc Filippino
Brooke Masters is the FT’s US financial editor. Thanks, Brooke.

Brooke Masters
Thanks for having me.

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Marc Filippino
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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