The UK tax cut and pound U-turn

This is an audio transcript of the FT News Briefing podcast episode: The UK tax cut and pound U-turn

Sonja Hutson
Good morning from the Financial Times. Today is Tuesday, October 4th, and this is your FT News Briefing.

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The British government made a U-turn and the pound did, too. Brazil’s presidential election is headed to a runoff. And Credit Suisse says rumours of its demise are overstated. Plus, we look at the property market crash in China.

James Kynge
And what we’re seeing now is real carnage among these big property developers that have projects all over the country.

Sonja Hutson
I’m Sonja Hutson, in for Marc Filippino, and here’s the news you need to start your day.

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The pound has made a comeback after a nasty week and a half. The rebound came after Chancellor Kwasi Kwarteng announced yesterday that he’s scrapping controversial plans to cut the country’s top tax rate. Here he is speaking at the Conservative party conference in Birmingham.

Kwasi Kwarteng
But I can be frank, I know the plan put forward only 10 days ago has caused a little turbulence. I get it. I get it. We are listening and have listened. And now I want to focus on delivering the major parts of our growth package.

Sonja Hutson
Sterling has now returned to where it was before the government announced the tax cuts. UK government bonds also made gains yesterday, but ten-year yields are still way above where they were before the tax cut announcement on September 23rd.

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Brazil’s two leading presidential candidates are heading to a runoff at the end of this month. The first round of voting took place on Sunday and neither candidate received more than 50 per cent of the vote. President Jair Bolsonaro did better than the polls expected, but he’s still trailing his challenger, former President Luiz Inácio Lula da Silva. The FT’s Michael Stott says Bolsonaro needs to pick up four times as many votes as Lula to win.

Michael Stott
So he’s gained some momentum, he’s outperformed expectations. But that doesn’t mean necessarily he’s gonna win.

Sonja Hutson
Michael, what did we learn about Brazil’s political landscape from this first round of the presidential election?

Michael Stott
I think, Sonja, the first thing we learnt is that Bolsonaro’s coalition, these conservatives are here to stay in Brazil. They’re now a strong established group, they’re gaining ground politically in almost all parts of the country apart from the north east. The second thing I think we learnt is that Lula, although he’s still the undisputed leader of the left, he also has problems of a high rejection rate among the electorate, partly related to the corruption scandals and the economic mismanagement by his party after he left office. And he’s not yet shown that he’s able to come up with new ideas that can win over undecided voters and people who remember the bad points about his previous time in power.

Sonja Hutson
There’s been a lot of concern about potential violence after this election, the possibility that if Bolsonaro loses, he may not accept defeat. Has that changed at all now that Bolsonaro essentially beat the polls and did better than anticipated?

Michael Stott
I would say the risk of a dispute after the second round runoff at the end of this month has probably risen. One of the problems is, of course, the polls are wrong. Bolsonaro has said all along that the polls were wrong. So Bolsonaro has now got fresh ammunition for his argument that the polls are rigged and not true. The other issue is that, of course, it’s now probably going to be a fairly close second round. And again, that makes it easier for Bolsonaro to question the result.

Sonja Hutson
That’s the FT’s Latin America editor Michael Stott.

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Credit Suisse has spent the last few days battling social media rumours that the bank is at risk of defaulting. The rumours began after recent reports that the lender will need to find billions of Swiss francs to cover restructuring costs. The bank’s share price hit historic lows yesterday and investors rushed to buy insurance against it defaulting on its debt. The cost of that insurance soared to a record high. It’s called a credit default swap. The FT’s Rob Smith explains.

Robert Smith
For a long time, Credit Suisse has been viewed as the most accident prone bank in Europe, shall we say. Now, the kind of steady drumbeat of this crisis after crisis has raised concerns around the bank’s capital position. I think what has been unusual was from Friday to Monday, nothing really fundamentally changed with Credit Suisse.

Sonja Hutson
So, Rob, what’s got investors so worried? What’s the big question here?

Robert Smith
It’s less like a big question. It’s more to do with a lack of clarity. Credit Suisse needs to bolster its capital position, and it’s about how it does that. Does it go to investors, does it go to shareholders and raise more capital from them? That’s typically bad for shareholders, it dilutes them. It means the share price goes down. Or does it do that by restructuring the bank? It seems to be guiding, it’s hoping to do more through cost saving and restructuring, but investors don’t actually know what its plan is. And in that vacuum, it leaves a lot of uncertainty and sort of fear can drive markets when there’s uncertainty.

Sonja Hutson
So is this a real problem for Credit Suisse or are these rumours overblown?

Robert Smith
I think what a lot of people maybe don’t understand is that things like credit default swaps, you know, they sound very scary, has the word default in there. But it actually has no connection to the solvency of the bank. So there’s all this kind of signal, a noise out there that can seem very concerning. But ultimately, you know, it’s quite hard to see a situation in which any of this stuff means people yank their money out of Credit Suisse and it has a real problem within the next few weeks.

Sonja Hutson
That’s the FT’s capital markets correspondent Rob Smith.

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For some people in China, the dream of owning a home is turning into a nightmare. The country’s massive property sector has become paralysed under mountains of debt. And now everyone from homeowners to local governments, are feeling the pain of this crisis. To find out more, I’m joined by the FT’s James Kynge. Hi, James.

James Kynge
Hi.

Sonja Hutson
So let’s start with the story of a homeowner that you spoke to that you wrote about, Lucy Wang. Tell me about her and the situation that she’s in.

James Kynge
Lucy Wang is one of those very unfortunate people in China. She’s one of hundreds of thousands of would-be homeowners who paid for a property that had not yet been built on the understanding that the developer would then deliver the property at a later date. And that hasn’t happened because many developers in China are simply running out of money. So Lucy Wang is now boycotting her monthly mortgage payment on a property that doesn’t exist. This is happening in about 100 cities all over China. About 300 property developments have this problem of people boycotting their mortgages.

Sonja Hutson
Why are these property developers running out of money in the first place?

James Kynge
So this really goes back to 2020, if not before. But in 2020, the Chinese government issued a policy which has now become famous called the “three red lines”. And just to summarise, it was an attempt by the Chinese government to restrict the access of property developers to debt, because there was a sense that these property developers had taken on far too much debt and were themselves, you know, posing a systemic risk to the Chinese economy if they were just going to continue their debt-fuelled expansion. So the government imposed these three red lines and they have imposed the regulations quite strictly. And this has hit one property developer after another.

Sonja Hutson
So the Chinese government stepped in to limit how much debt these developers could take on, but they still needed money to finish projects. How does this situation impact local governments?

James Kynge
As the Lucy Wang issue shows, many property developers are deeply in financial trouble and so very little investment by property companies is going on. And that means that property companies are no longer buying the huge amounts of land from local governments that they used to. And therefore, those local governments are not getting the money from those land sales, and that is hitting their ability to do all kinds of things, such as build the roads, railways, power stations, hydro dams, everything else you can imagine that they used to.

Sonja Hutson
James, what are the broader implications of these struggling local governments?

James Kynge
China is an economy that has really depended on the economic actions of local governments, provincial governments, city governments, even township governments over the last 20, 30 years. These local governments have been responsible for the biggest economic boom in human history, that of China over the last 30 years. And so if these guys are hurting, it’s a kind of a depth charge of a problem. It’s not gonna grab headlines, but it’s gonna deeply wound the Chinese economy’s ability to sustain its blistering growth. And that will affect everybody all over the world because China’s contribution to global growth cannot but decline.

Sonja Hutson
James Kynge is the FT’s global China editor. Thanks, James.

James Kynge
Thanks very much.

Sonja Hutson
Tomorrow, we’ll hear from Ed White, the FT’s China correspondent, about the consumer spending model that could turn things around.

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You can read more on all these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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