Mercury Weekly (01/10/2024)

Will the Stimulus Save China?

The People’s Bank of China (PBoC) introduced a series of policies designed to inject liquidity into the financial markets, including a $114 billion lending pool to help institutions buy stocks, rate cuts, and support for stock buybacks. Whilst these actions have temporarily boosted Chinese equity markets (CSI 300 index of Shanghai has seen its best week since 2008) experts remain sceptical about their long-term impact.

The government stimulus supports the goals to spur consumer spending and restore confidence in its faltering markets, but experts argue it does not address deeper structural issues.

Firstly, Real estate (which forms the backbone of household wealth in China) still remains in turmoil. The stimulus package fails to address the housing crisis, meaning that many would-be retail investors are unlikely to turn their attention to stock market investments. Furthermore, the Chinese government’s heavy regulation of private businesses and foreign firms have dampened business sentiment, further eroding investor confidence.

Finally, the loosening of bank regulations and rate cuts supports bond-buying over equity investment. Injecting liquidity into banks when loan demands are weak and further rate cuts are expected could inadvertently fuel bond market activity over equities and economic growth.

Despite hopes for a stronger fiscal response from the government, many analysts believe that China’s stimulus efforts will remain insufficient without significant structural reforms and increased public investment.

Major Banks Signal Support for Nuclear Power

Fourteen of the world’s largest banks, including Bank of America, Goldman Sachs, Morgan Stanley, and Citi, are stepping up to support nuclear energy in a bid to help triple its global capacity by 2050. This backing follows a pledge from COP28, where nations agreed that nuclear must play a central role in achieving net-zero goals. While banks have not laid out specific actions, their support is expected to unlock much-needed financing for nuclear projects, which have long faced hurdles due to high costs, regulatory challenges, and concerns over ESG standards.

Beyond traditional lending, these banks could help nuclear companies by arranging bond sales, connecting private equity investors, or increasing direct project financing. As nuclear energy gains support from tech giants like Microsoft and Oracle for powering data centres, banks are sensing a tipping point for nuclear investment.

Nvidia’s CEO, Jensen Huang, also weighed in on nuclear energy as a solution for powering the massive data centres driving AI. In a recent interview, Huang highlighted nuclear as a "wonderful" source of renewable energy, essential to meet the growing power demands of AI infrastructure. With energy shortages already limiting data centre capacity in some regions, nuclear could offer a way to support these “AI factories” as they continue to expand globally.

Despite lingering sensitivity around nuclear financing, this collective endorsement from major financial players signals a growing recognition that nuclear energy is a key part of the low-carbon future.

UniCredit’s, Commerzbank & European Banking

Commerzbank is preparing for crucial talks with UniCredit after the Italian bank acquired a 21% stake, making it the largest shareholder. This aggressive move has sparked significant concern in Germany, with officials wary of foreign ownership of a key national institution. Incoming CEO Bettina Orlopp is working to reassure investors by outlining ambitious profit targets, including a forecast of over €3 billion in net profits by 2027 and plans to pay out more than 90% of earnings to shareholders.

The German government, which holds a 12% stake in Commerzbank, has reacted defensively, with Chancellor Olaf Scholz and Finance Minister Christian Lindner criticizing UniCredit's approach as undermining German banking sovereignty. This situation is politically sensitive, as union leaders and politicians express fears about selling a major German institution to a foreign entity.

The potential merger has broader implications for European banking integration. Analysts suggest that a UniCredit-Commerzbank tie-up could advance the fragmented banking landscape in Europe but also raises concerns about taxpayer exposure, given historical bailouts in the region.

The situation highlights the complexities of European banking, where the push for consolidation faces opposition rooted in national pride and historical caution. The outcome of these discussions may significantly impact not only Commerzbank's trajectory but also the wider landscape of financial integration in Europe.

Shigeru Ishiba Secures Leadership, Signalling Shift in Japan's Monetary Policy

Shigeru Ishiba, newly elected leader of Japan’s ruling party, is set to become the next Prime Minister, a surprising win that has notably strengthened the yen. Known for his defence expertise, Ishiba supports creating an ‘Asian NATO,’ a move that could heighten regional tensions, particularly with China. This development comes at a time when Japan faces unauthorised Chinese military activities and its own controversial naval movements in the Taiwan Strait.

Domestically, Shigeru Ishiba advocates for revitalising Japan’s rural economies and cautiously normalising economic policies, contrasting with opponent Sanae Takaichi's stance against rate hikes. His leadership aims to strengthen the U.S.-Japan security alliance amidst significant diplomatic and economic changes. By advocating for non-interference with the BoJ's decisions, Ishiba supports ongoing loose monetary policies, positioning Japan for renewed global standing and economic vitality.

France Advocates for Equitable Auto Trade Practices within the EU

In a recent discussion, France's newly appointed Foreign Minister, Jean-Noel Barrot, voiced his support for the European Union's initiative to implement tariffs on Chinese-made electric vehicles. This move, aimed at countering China's heavily subsidised dominance in the electric vehicle market, strives to establish fair competition rather than adopting a broad protectionist stance. Barrot, during his interview with Bloomberg, emphasised that the

proposed tariffs are intended to enhance Europe’s economic independence and strategic autonomy without escalating trade tensions unnecessarily.

Negotiations are ongoing between the EU and China to address the potential imposition of these tariffs, which hold significant implications for Europe’s automotive industry and its associated employment sectors amid increasing vehicle electrification.

Barrot, an economist and former academic at MIT, also highlighted France's commitment to supporting Ukraine with a substantial financial package, reflecting a coordinated effort by the G7 nations. Furthermore, he reiterated the importance of a proposed Franco-American cease-fire in the Middle East, urging involved parties to consider the truce to de-escalate the ongoing conflict.