Rachel Reeves would have been dammed whether she went to China or not.
Cancelling would have looked like panic, especially as the Chancellor is choosing to travel with some of the City’s finest.
But the reality is, except for HSBC chairman Mark Tucker, the undisputed power brokers in the London financial markets, investment bankers Goldman Sachs, JP Morgan, Morgan Stanley and possibly Barclays, are missing.
If there are deals to be done, despite Beijing’s suppression of Hong Kong and targeting of UK pharma champion AstraZeneca, it is the deal makers and traders who would be leading the charge.
Persuading the governor of the Bank of England, Andrew Bailey, to join might have seemed a great idea. But what does it say about central bank independence when he becomes part of a UK government marketing exercise? One cannot imagine Jay Powell of the Federal Reserve cosying up on Air Force One with Joe Biden or Donald Trump to ensure that a fashion group, with a dodgy supply chain and favoured by teens, chose to list its shares in New York.
The idea of both the Chancellor and governor being on the other side of the world, as the yield on UK government bonds exceed Truss-era levels and the pound subsides, is not the best optic.
Wise move?: Rachel Reeves and the governor of the Bank of England are both visiting China
There is an element of ‘crisis what crisis’ about the Government’s response to the current market upheaval.
The phrase deployed at Westminster and by deputy-governor Sarah Breeden in Edinburgh is that the surge in bond yields, with the return on the 30-year gilt now at a 26-year high, ‘have been orderly’.
Certainly, there has been no repeat of the October 2022 experience when the severity and speed of the shift in bond rates led liability-driven investments (LDIs) to implode. The fear then was that the leverage backing these derivatives would be called in, leading to a cascade of defaults which could damage the pensions of millions of retirees. That is why the Bank of England intervened. The disorder was all about feeble policing by the Bank and Pensions Regulator.
Commentators such as Oxford Economics and fixed income specialists Pimco dismiss the rise in the return on UK gilts as a global phenomenon. UK bond yields tend to move in line with the US.
Wall Street traders are concerned that a buoyant US economy, symbolised by a stronger than projected 256,000 jump in non-farm payrolls in December, will mean that American interest rates will remain higher than expected for longer. The yield on American bonds, dated from two-years to ten-years, ticked up in latest trading.
That, in turn, had an adverse impact on UK markets with the return on the ten-year gilt rising to 4.84 per cent, which is 25.74 per cent up on the last 12 months. That’s a huge adverse shift in the way that global markets assess Britain’s prospects.
Markets may seem orderly but the consequences for the Chancellor of this blow out in yields are little short of disastrous.
The October 30 Budget projections are being overwhelmed by the cost of servicing the national debt. Arguably, the fiscal bind which Reeves now finds herself in is far more serious for the long-term health and stability of the economy than the LDIs. Speaking to business leaders at the CBI conference in November, Reeves said: ‘I’m really clear, I’m not coming back with more borrowing or more taxes.’
The reality is that she is now compelled to do so.
Hence leaks from Westminster suggesting that the Chancellor is looking for even deeper cuts in public spending than planned. So much for filling the potholes, ending NHS queues and restoring public services. No wonder fixing social care has been pushed out to 2028 and so many pensioners, unable to claim the pensions credit, are shivering at home during the current cold snap.
A second plan being touted is to speed up the expansion agenda by telling ministers to ‘cease anti-growth measures’.
Cutting back on regulation and red tape is a start. If, however, the wealth creators and investors are crowded out of private markets by high borrowing costs, that’s going to be a hard grind.
Do Reeves and the Government really think that a mercurial Chinese administration, out with the begging bowl at Jingye-owned British Steel, is the answer?
If so, good luck.
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