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Analysis-Europe’s big payday remains elusive even as inflation surges

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Analysis-Europe’s big payday remains elusive even as inflation surges
© Reuters. FILE PHOTO: A commuter train passes by the skyline of the financial district in Frankfurt, Germany, October 25, 2021. REUTERS/Kai Pfaffenbach

By Balazs Koranyi and Michael Nienaber

FRANKFURT (Reuters) – Visions of spiralling wage inflation in the euro zone have dominated the talking points of conservative central bankers in recent weeks as they called for a moderation in central bank stimulus.

The fear is that high inflation now, even if temporary, will prompt firms to boost wages, perpetuating inflation by increasing consumer demand.

On first look, this is not an irrational fear. Wage-price spirals have pushed inflation to unexpected highs in the past, most notably in the 1970s.

This could then keep inflation stubbornly above the European Central Bank’s 2% target, potentially forcing the bank to bring the economy back down to earth by tightening policy after years of unprecedented stimulus.

“Companies’ complaints about labour shortages have increased significantly, particularly in Germany, but also among our European neighbours,” Bundesbank President Jens Weidmann said.

“In the future, such tensions on the labour markets could make it easier for employees and trade unions to push through noticeably higher wages.”

LITTLE EVIDENCE

But there is very little evidence out there, from actual wage figures to labour market trends or union demands, to support these fears.

Wage growth remains anaemic, though the data are arguably distorted by the pandemic. Copious furlough schemes and wild swings in employment as the economy shut and opened, make it difficult to ascertain just how healthy the labour market is.

But union demands for next year’s pay have been underwhelming so far, especially in light of an inflation rate now at 4.1%.

Some sectors with a notable skills shortage of course stand out. Germany’s construction industry negotiated a 3.4% increase while in retail, the increase is 2.2%. Still, with inflation likely holding above 2% next year, that is modest, at best, in real terms.

Europe stands in stark contrast to the U.S. in this respect. U.S. labour costs increased by the most since 2001 last quarter as companies boosted wages and benefits amid a severe worker shortage, pointing to elevated inflation for some time.

Most wage deals in Germany, arguably the bloc’s strongest labour market, so far appear to be in the 1.5% to 2.5% range, which may actually be too low to keep inflation at 2%, economists say.

This is primarily because unions are now increasingly prioritising non-wage benefits from more leisure time to increased job security.

“The wage agreements that we’ve seen so far this year do not indicate that wage developments are currently posing an increased risk of inflation in Germany,” Sebastian Dullien, an expert at the IMK economic institute, said.

“The ongoing negotiations can be described as moderate – especially when you compare them with demands made during the times before the pandemic,” he added.

Indeed, labour cost growth in the euro zone was in the 2% to 3% range before the pandemic, yet inflation still fell short of the ECB’s target.

The labour market has also yet to recover from the pandemic. Employment is still below the pre-crisis level, hours worked are down 4% and nearly 2.5 million people are still in some sort of job retention scheme, all indicating that there is still plenty of slack.

Some even argue that a rise in wage growth would be welcome after the pandemic battered households.

“We should not be alarmed if we see signs of a one-off catch-up in wages next year,” ECB board member Fabio Panetta said this week. “Over the medium term it is desirable that we see increases in unit labour costs.”

Ironically, Germany’s incoming government and not the ECB could give inflation a big boost.

Their plan to raise the minimum wage by around 25% to 12 euros an hour could push wages up across the board, a move heavily criticized by the Bundesbank, which normally refrains from discussing political decisions.

“The significant minimum wage increase would affect the lower wage brackets markedly and would have non-negligible spillover effects on the wage brackets higher up,” it said.

Finally, the economy is far from healthy. A new wave of the pandemic is forcing economies to restrict economic activity that is likely to squeeze services once again and put downward pressure on economic growth.

Rapid wage rises are thus only a theoretical possibility for now, with evidence still heavily skewed towards a more benign outcome.

Economy

China central bank says to promote healthy development of property market

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China central bank says to promote healthy development of property market
© Reuters. FILE PHOTO: People wearing face masks walk past the headquarters of Chinese central bank People’s Bank of China (PBOC), April 4, 2020. REUTERS/Tingshu Wang

SHANGHAI (Reuters) – China’s central bank said on Saturday it will safeguard the legal rights of home buyers and better satisfy their reasonable living needs, vowing to promote healthy development of the country’s real estate market.

The statement from the People’s Bank of China (PBOC), made following its fourth-quarter monetary policy committee meeting, is the latest sign that Chinese regulators are marginally easing curbs on the property sector to prevent a hard-landing.

Echoing China’s annual Central Economic Work Conference held in early December, the PBOC said it will prioritise economic stability, amid an increasingly severe external environment and the unrelenting global pandemic.

The PBOC said it will keep its monetary policy flexible and appropriate, and liquidity reasonably ample. It will strengthen support to the real economy, with a bias toward small companies.

The central bank reiterated that it will deepen reforms of the forex market and increase the flexibility of the yuan’s exchange rate while guiding companies and financial institutions to be “risk neutral”.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.

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Economy

China’s offshore listing rules seen easing market uncertainty

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China's offshore listing rules seen easing market uncertainty
© Reuters. FILE PHOTO: People are seen on Wall Street outside the New York Stock Exchange (NYSE) in New York City, U.S., March 19, 2021. REUTERS/Brendan McDermid/File Photo

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By Kane Wu and Julie Zhu

HONG KONG (Reuters) – China’s plan to tighten scrutiny over mainland companies’ overseas share sales is likely to ease the regulatory uncertainty that roiled financial markets this year and stalled offshore listings, bankers and analysts said.

But the securities regulator’s new filing-based system, designed to rein in once freewheeling Chinese listings in the U.S. market and elsewhere, leaves open questions about rule enforcement and compliance criteria, they added.

“The new rules represent a comprehensive, systemic and market-oriented regulatory upgrade,” investment bank China International Capital Corp (CICC) said in a note, but added they contain “some items that need further observation, and clarification”.

The China Securities and Regulatory Commission published draft rules https://www.reuters.com/markets/europe/china-securities-regulator-says-vie-compliant-companies-can-list-overseas-2021-12-24 late on Friday requiring filings by companies seeking offshore listings under a framework to ensure they comply with Chinese laws and regulations.

Companies using a so-called variable interest entity (VIE) structure will still be allowed to seek offshore listings as long as they are compliant, removing uncertainty for investors who feared China would block such listings.

That risk loomed large after Didi Global Inc’s U.S. listing in July sparked a major regulatory backlash from Chinese officials, who were concerned over national security.

The VIE structure has been used by most overseas-listed Chinese tech companies, such as Alibaba (NYSE:) and JD (NASDAQ:).com, to skirt Chinese restrictions on foreign investment in certain sectors.

Uncertainty over the future of VIE structures, coupled with China’s regulatory crackdowns in major sectors such as e-commerce and tutoring, has bashed shares in offshore-listed Chinese companies this year.

And while Chinese firms raised $12.8 billion in the United States this year, the value of deals ground to a halt after Didi’s July listing. In Hong Kong, the value of IPOs in 2021 fell to $26.7 billion from the previous year’s $32.1 billion, according to Refinitiv data.

REGULATORY COORDINATION

Reaction to the new rules will be seen Monday when the U.S stock market resumes trade after closing on Friday for the Christmas holiday. Hong Kong stocks will resume trading on Tuesday.

The planned filing-based system is also expected to ease uncertainty by calling for closer coordination between the securities regulator and various industry regulators, such as the cyberspace watchdog.

“The issuance of the draft rules shows that major communication obstacles have been removed between different regulatory bodies,” said Ming Jin, managing partner at Chinese boutique investment bank Cygnus Equity.

But it remains unclear how the rules would be enforced and compliance determined, especially when a VIE structure is used to circumvent foreign investment restrictions, the CICC note said.

The investment bank added that even if a company plans a Hong Kong listing, which would pose no risk to national security, “we still suggest the issuer voluntarily contact the Cyber Administration of China () for its nod” before going to the securities regulator.

The new rules cover all types of offshore share sales, including initial public offerings, secondary listings, backdoor listings, and flotation via Special Purpose Acquisition Companies (SPACs).

Winston Ma, adjunct professor at NYU Law School, stressed that cross-border data security had become critical in the global digital economy and was a main driver for the latest move.

“As such, under the proposed new rule, cybersecurity review must be completed before the (security regulator’s) clearance process,” Ma said.

Public consultation on the draft rules will remain open until Jan. 23.

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Economy

More than 10,000 Russian troops returning to bases after drills near Ukraine -Interfax

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More than 10,000 Russian troops returning to bases after drills near Ukraine -Interfax
© Reuters. FILE PHOTO: A satellite image shows Russian armored units training in Pogonovo Training Area near Voronezh, Russia, November 26, 2021. Picture taken November 26, 2021. Satellite Image ?2021 Maxar Technologies/Handout via REUTERS

MOSCOW (Reuters) – More than 10,000 Russian troops have been returning to their permanent bases after month-long drills near Ukraine, Interfax news agency reported on Saturday, citing the Russian military.

Interfax said the drills were held in several regions near Ukraine, including in Crimea, which Russia annexed in 2014, as well as in the southern Russian regions of Rostov and Kuban.

Russia’s deployment of tens of thousands of troops to the north, east and south of Ukraine had fuelled fears in Kyiv and Western capitals that Moscow was planning an attack.

Russia denies any such plans, saying it needs pledges from the West – including a promise from NATO not to expand the alliance eastward towards Russian borders – because its own security is threatened by Ukraine’s growing ties with the Western alliance.

Moscow also says that it can deploy its troops on its territory as it sees fit.

Estimates for the number of Russian troops recently moved closer to Ukraine vary from 60,000 to 90,000, with one U.S. intelligence document suggesting that number could be ramped up as high as 175,000.

“A stage of combat coordination of divisions, combat crews, squads at motorized units… has been completed. More than 10,000 military servicemen… will march to their permanent deployment from the territory of the combined arms’ area of drills,” Interfax quoted the army as saying.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.

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