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This is an audio transcript of the FT News Briefing podcast episode: Federal Reserve eyes 2022 rate rise

Marc Filippino
Good morning from the Financial Times. Today is Thursday, September 23. And this is your FT News Briefing.

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The Federal Reserve’s timeline for raising interest rates seems to be inching closer. And a US state department adviser defends the new security pact with the UK and Australia. Meanwhile, some big names are lining up behind a former Treasury secretary’s private equity fund. Plus, market analysts are debating whether the crisis at one of China’s biggest property developers could wreak havoc on global markets. The FT’s James Kynge reminds us that China is not a free market financial system.

James Kynge
The government in Beijing says to the banks, OK, I need you to stop bailing out a certain property developer. Those banks cannot but follow the orders of the central government.

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

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The Federal Reserve meeting yesterday was a bit of a doozy.

James Politi
It was really quite important, possibly the most important meeting of the year.

Marc Filippino
That’s the FT’s Washington bureau chief James Politi pretty much summing it up. He said the Fed signalled it’s ready to start slowing its $120bn a month asset purchases. That’s the bond-buying programme to support the US economy during the pandemic. He also said the Fed’s starting to contemplate interest rate increases starting next year.

James Politi
The takeaway is that the Fed believes that the economy is sort of strong enough that it can live without massive monetary support. So it’s sort of brushing away some of the concerns about the Delta variant on the US recovery. It’s confident that sort of the fiscal policy environment will be conducive to stronger and more sustainable growth. And it shows the inflationary concerns that have flared up this year are not expected to deliver a sort of massive blow to the economy either. The Fed is confident that inflation will be transitory. It will start to raise interest rates maybe sooner than it had anticipated, but it does not expect any kind of stagflation scenario.

Marc Filippino
So, James, I got to ask, considering all the news that came out of yesterday, why were the markets so calm? The S&P was up just shy of a per cent, but usually markets hate the prospect of rate increases. They love low rates because it means cheap money sloshing around the economy. So, you know, what gives?

James Politi
I think that, first of all, the idea of a tapering timeline beginning in November had been amply telegraphed, really, by the Fed and other Fed officials in the last few weeks. So that was expected. And on the interest rate increases, I think it’s true that it was a bit of a surprise to see the split, the sort of nine to nine split on the FOMC between those who believe the first interest rate increase will happen next year and those who think it will happen in 2023. I think that was a bit of a surprise, but I think markets and investors and economists are gradually becoming more accustomed to a slightly more hawkish Federal Reserve.

Marc Filippino
That was the FT’s Washington bureau chief James Politi.

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Former US Treasury Secretary Steven Mnuchin just landed a big investment from SoftBank. Japan’s tech conglomerate has invested an undisclosed sum of money in Mnuchin’s new private equity fund. The fund’s worth two and a half billion dollars and it’s called Liberty Strategic Capital. SoftBank will join another big backer, Saudi Arabia’s Public Investment Fund. A source told the FT that SoftBank’s move to invest in Mnuchin’s Liberty Strategic Capital was influenced by the Saudi fund, which is administered by Saudi Crown Prince Mohammed bin Salman.

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The big story in the markets this week has been the financial crisis and one of China’s biggest property developers, Evergrande. One of the things the saga illustrates is just how huge a role property has played in China’s economic growth story. The building boom has been extraordinary. But now, according to one eye-popping statistic, there’s enough empty apartment space to accommodate 90m people. So what are Chinese officials doing with all those unoccupied apartments (demolition sound)? They’re blowing them up. Well, at least in this case. You’re listening to the sound of a forest of half-built high-rises in south-west China crumbling after a demolition explosion. Here’s the FT’s James Kynge with some background.

James Kynge
There has been the biggest migration in human history from rural areas in China to cities over the last 20 or 30 years. Hundreds of millions of Chinese rural residents have moved to the cities and therefore there had to be a big building boom to accommodate them. But the other side of it is the way that financing works in China is such that these are state-owned banks that are very reluctant to withdraw their credit from property developers, thereby causing those property developers to go bust. And so that has really been the reason why this oversupply of property has persisted for for several years now.

Marc Filippino
So, James, long-term demand is expected to fall, right?

James Kynge
The Chinese overall population is not yet in decline, but it is moving towards decline. And because the number of women between the key childbearing ages of 22 and 35 is expected to decline by about 30 per cent over the next decade, people are predicting significant population decline over that 10-year period. And this means that there will be much less demand for the property that is already heavily oversupplied in cities across the country. And that leads to projections that many property developers, which have huge debts on their books, are facing a rather unsustainable future.

Marc Filippino
So, James, there’s another aspect to this. We recently learnt from our economics reporter in China, Sun Yu. He told us that local governments, like big cities, are really dependent on property sales.

James Kynge
This is really the untold story, the truth about how local governments, several thousands of them all over China, finance themselves is really revealing and very much dependent on the property market itself. About one-third of the revenue that these local governments get comes from selling land to developers, which then, of course, use that land to build high-rise apartment blocks, etc. So if the developers are now in the state of facing a really lacklustre market, not being able to sell the property that they’ve built, they are not going to have the money available to buy the land. And that means that these local governments are going to face a really big hole in their balance sheets. And that will mean that they may not be able to finance the bonds that they have issued in order to build infrastructure all over China, which is another big part of China’s growth picture that we can see that this is already starting to happen.

Marc Filippino
So do you see a broader systemic crisis looming in China’s financial system, given how huge property is as a proportion of GDP?

James Kynge
When we talk about systemic crisis in China, we always have to bring in the enormous power of the Chinese Communist party because basically this is not a free market financial system. If the government in Beijing says to the banks, OK, I need you to stop bailing out a certain property developer, those banks cannot but follow the orders of the central government. So what we’re probably talking about is not a systemic problem in the sense that we would perceive it in the west, ie contagion. That type of scenario in China is quite difficult to give credence to. So it’s likely that there would be a much more gentle retreat of financing to property developers. But this would be managed in a way by Beijing that would not cause the collapse of, let’s say, several property developers or several hundred property developers and thereby bring about an economic crisis for the country.

Marc Filippino
James Kynge is the FT’s global China editor.

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UK prime minister Boris Johnson was in Washington this week and met President Joe Biden. It appears to have been a pretty happy visit coming off a week after the UK and the US joined Australia to form a new security partnership to counter China. The pact ruffled some feathers, though, including those of France. Australia cancelled a huge submarine contract with France and will buy nuclear subs from the US instead under the deal. Here’s US state department counsellor Derek Chollet with a little bit of context.

Derek Chollet
The capability of nuclear-powered subs in particular is substantial in the sense of their ability to project power throughout the Indo-Pacific. But also the deal over time could lead into other areas of military procurement, whether it’s artificial intelligence, quantum, all sorts of stuff that is going to help define the militaries of the future.

Marc Filippino
That was US state department counsellor Derek Chollet speaking with the FT’s Gideon Rachman. You can hear the entire conversation in this week’s episode of our Rachman Review podcast, which comes out every Thursday.

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

This transcript has been automatically generated. If by any chance there is an error please send the details for a correction to: typo@ft.com. We will do our best to make the amendment as soon as possible.

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