Business and trade tensions with China back in the spotlight

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Good evening.

Travel restrictions on a senior Nomura banker and a warning from the EU’s trade chief about “new areas of concern” have once again highlighted business tensions between China and the outside world, while western companies grapple with efforts to “de-risk” their operations.

Charles Wang Zhonghe, chair of investment banking for China at the Hong Kong arm of Nomura, has been banned from leaving the Chinese mainland in a move connected to the long-running investigation into tech dealmaker Bao Fan. The decision is likely to send a chill through China’s overseas business community, where investor confidence is already low.

The move comes during a four-day visit by the EU’s Valdis Dombrovskis for talks with senior officials in Beijing including vice-premier He Lifeng. In an interview earlier with the Financial Times, Dombrovskis said he was on a mission to confront “unbalanced” dealings between the two regions, citing a record €396bn bilateral trade deficit.

His trip follows the launch last week of an EU investigation into Chinese subsidies on electric vehicles, described by Beijing as “naked protectionism”.

There did, however, appear to be some progress today, with an agreement to set up a special “mechanism” to discuss export controls, mirroring a similar effort between Beijing and Washington.

Western companies in the meantime are still working out how best to insulate their operations from trade and political pressure. 

Some, such as US toymaker Hasbro, are quitting manufacturing in China completely but most are weighing their options, ranging from partial disinvestment to making local operations disruption-proof by having them serve only the Chinese market, a strategy known as “China for China”. Some, such as Apple and Intel, are employing “China plus one” — shifting future investments to other countries in India or south-east Asia while maintaining their China plants.  

Consultancies such as McKinsey and Boston Consulting Group are among those separating their Chinese IT systems because of increasingly stringent anti-espionage and data protection laws that mean companies require regulatory approval to transfer large amounts of data out of the country. Some industries, such as solar power, are largely dependent on Chinese supply chains, making the task of de-risking even more difficult.

Western policymakers generally agree that “societal-scale” risks, such as the regulation of artificial intelligence, mean dialogue has to continue, even as they come under fire from Sino-sceptics.

The forthcoming AI summit hosted by the UK is a case in point. Deputy prime minister Oliver Dowden said yesterday that “meaningful multilateralism” was impossible without engaging with China, but is having to fight off hawkish Conservative MPs citing recent allegations of spying as evidence that policy towards China is too soft.

Dowden’s remarks were echoed by Dombrovskis, emphasising that co-operation between Europe and China remained essential. “We recognise that the world needs China. But China also needs the world,” he said.

Need to know: UK and Europe economy

The backlash from UK politicians and business groups against the possible axing of the northern leg of the High Speed 2 rail link intensified. Speculation has grown that the end is nigh for the stretch between Birmingham and Manchester — coincidentally the location for next weekend’s Tory party conference.

The Bank of England is delaying part of global banking reforms that are meant to insulate the industry against the excessive risk-taking that led to the financial crisis of 2007-08.

Russia has succeeded in avoiding G7 sanctions on most of its oil exports, according to a new Financial Times analysis. Almost three-quarters of all seaborne Russian crude flows travelled without western insurance in August, a lever used to enforce the G7’s $60-a-barrel oil price cap.

Italy is further diluting its windfall taxes on banks following criticism including from the European Central Bank that it would make lenders more vulnerable to a downturn.

Need to know: global economy

Global trade fell 3.2 per cent in July according to data, the fastest annual pace since the first pandemic restrictions of 2020, reflecting slowing global demand as interest rates rise.

The US economy could be heading for a shutdown if Republican holdouts refuse to yield in budget talks. Current funding for federal operations runs out on October 1.

A new Big Read examines how India’s dream of green energy is being held up by the reality of coal accounting for three-quarters of power generation with demand expected to grow.

The Asian Infrastructure Investment Bank, Beijing’s answer to the World Bank, is set to unveil a tripling in lending for projects to fight climate change, making it the bank’s top lending priority, accounting for more than half of the funds disbursed.

Paraguay’s president Santiago Peña said the EU had to finalise a long-delayed trade treaty with the Mercosur bloc of South American nations by December 6 or the Latin Americans would walk away and negotiate with Asian countries instead.

“Robots can’t replace senior clerics, but they can be a trusted assistant that can help them issue a fatwa in five hours instead of 50 days.” Iran’s religious establishment is exploring how AI can help with tasks ranging from parsing lengthy texts to issuing religious edicts.

Need to know: business

Amazon is investing up to $4bn in AI start-up Anthropic as it steps up its rivalry with Microsoft, Google and Nvidia to persuade AI companies to use its technology. Getty Images is giving users a new AI image-generating tool as the intellectual property debate intensifies.

A Nato-backed venture capital fund aims to help defence start-ups boost the alliance’s technological edge and fend off competition from China.

Lego abandoned efforts to ditch oil-based plastics from its bricks after finding that its new material led to higher carbon emissions, in a sign of the complex trade-offs companies face in their search for sustainability.

UK job cuts could spell the start of a prolonged period of gloom at the Big Four accountancy firms after some overhiring in the wake of the pandemic.

In an era of labour shortages, employing staff to just walk along a fence all day long might not make much sense. Welcome to the new era of robot security guards.

The world of work

Despite fears that AI could lead to the destruction of entire swaths of jobs, the Lex column (for premium subscribers) reminds us that new technology tends to create jobs, not eliminate them.

Extended paid leave for new fathers is becoming increasingly common among Wall Street and City companies as they seek to close the gender pay gap, reduce potential discrimination against women and attract and retain staff.

The corporate backlash against working from home is cheered on by many jealous retirees who spent 40 years in offices, writes columnist Simon Kuper, who says homeworking should rather be lauded as a chance to create a better society.

Some good news

A new study shows how spent coffee grounds that normally go to landfill can be transformed into a valuable resource for strengthening concrete.