Germany falls out of love with China

This is an audio transcript of the FT News Briefing podcast episode: ‘Germany falls out of love with China’

Marc Filippino
Good morning from the Financial Times. Today is Friday, November 4th, and this is your FT News Briefing.

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US tech companies are laying off workers. The Bank of England raised rates, but it’s not taking all of its cues from the Federal Reserve. And Germany is reconsidering its relationship with China. I’m Marc Filippino, and here’s the news you need to start your day.

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Tech stocks have been tumbling and now jobs are going. Ride-hailing service Lyft yesterday said it’s laying off 13 per cent of its workforce. Also yesterday, the CEO of Stripe said his company had “overhired for the world we’re in”. The payment processor will cut 14 per cent of its workforce. Amazon also said it would pause new hires. These lay-offs are part of tech companies’ efforts to cut costs as consumers pull back on spending. This morning, we’ll get the latest reading on the broader US job market. Job growth is expected to have cooled for a third consecutive month, a sign that the Federal Reserve’s rate increases are having their intended effect.

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The Bank of England raised interest rates yesterday by 75 basis points. It’s the BOE’s highest rate rise in 30 years. But the central bank also signalled it won’t raise rates much higher.

Katie Martin
The really funny thing, in a way, is the market reaction, right?

Marc Filippino
Our markets editor Katie Martin says usually when rates go up, people buy the currency.

Katie Martin
The market gods say no. Sterling fell like 2 per cent. And the reason for that is, you know, markets are all about where reality and expectations meet and what’s the Bank of England said in the press conference after the move in rates was we’re probably going to end up raising interest rates less than the market has priced. So, you know, the market thinks that rates are gonna get to sort of, you know, say 5 per cent or thereabouts. We think it’s gonna come in less than that.

Marc Filippino
This is so starkly different than what we heard from the Federal Reserve just a day earlier on Wednesday, when, you know, Jerome Powell came out and said that the interest rate rises will be more gradual on a meeting-by-meeting basis. But the ultimate place where they end up is gonna be higher than they initially thought. And the Bank of England is saying pretty much just the opposite, like we’re topping out basically right around here.

Katie Martin
So one of the limitations on the Bank of England, one of the reasons why it can’t necessarily slam on the brakes as hard as the Fed, is because it knows that there are so many mortgages out there. There are so many households that have got these relatively short-term mortgages that we have in this country, that every time a household has to renew it, it sets a new interest rate and that blinks back to government bond yields and it links back to benchmark interest rates. Two million mortgages are going to get rolled over like that by the end of 2023. We all know, the Bank of England knows, the Treasury knows, everybody knows that there’s gonna be real pain on household finances if mortgage rates really shoot to the moon. So in the background, we have this bubbling along. We know that the Bank of England can’t necessarily be as aggressive as it might otherwise like to be.

Marc Filippino
Katie Martin is the FT’s markets editor.

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Russia this week said it will rejoin a deal to allow Ukraine to export its grain. A few days earlier, Moscow said it would quit the deal, alleging Kyiv had attacked its naval fleet in the Black Sea. Our defence and security correspondent JP Rathbone says Turkey’s President Recep Tayyip Erdoğan helped Moscow get back on board. But on the ground, nothing really changed.

John Paul Rathbone
Erdoğan called Putin and apparently made it clear that Turkey had all the leverage. So the grain deal never actually stopped because the ships kept on going anyway. And Russia was sort of worried that Turkey would join the western sanctions and sell more drones to Ukraine and generally cause more headaches for Russia in other conflicts where they backed the other side in Armenia and Libya and Syria. So it looks as though Russia’s bluff was called.

Marc Filippino
Also, JP says Russia doesn’t have the military power in the Black Sea it used to.

John Paul Rathbone
So it’s harder for it to board grain ships, I mean, because its naval vessels would then be at risk of attack from the coastline, from Ukrainians on the coast. Ukraine doesn’t really have much of a navy, it just has some patrol boats, but it has got quite a long reach with land-to-sea missiles. So the ability of the Russian navy to control the Black Sea is much diminished. It’s not gone, but it’s much diminished.

Marc Filippino
That’s the FT’s JP Rathbone.

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Today, Germany’s chancellor Olaf Scholz is in China. He’s the first G7 leader to hold talks with President Xi Jinping since the start of the coronavirus pandemic. His trip to Beijing won’t be easy. Political and business tensions have soured Germany’s relationship with its largest trade partner. The FT’s Europe-China correspondent Yuan Yang joins me now to talk more about this. Hey, Yuan.

Yuan Yang
Hi, Marc.

Marc Filippino
Yuan, you’ve been writing about German businesses falling out of love with China. Why has that happened?

Yuan Yang
Yeah. So it’s funny because the phrase, you know, falling out of love comes from a quote from the head of the European Chamber of Commerce in Beijing. And when he, Jörg Wuttke, talks about the kind of lost love affair, particularly for small- and medium-sized businesses, the kind of famous German Mittelstand, as we call it, those businesses, I think, had a lot of hope and expectation for their trading opportunities in China, and there was a huge amount of benefit for both sides. And over the last few years, particularly, I would say since 2015 and to an even greater extent since the Covid lockdowns of the last few years in China, it’s been very difficult for them to do business in China. And that’s partly, you know, short-term as a result of the Covid disruptions and the disruptions of their supply chains. Businesspeople in Germany not being able to visit their clients in China and keep up those relationships. And losing ground to Chinese competitors, either because those competitors have overtaken the German companies who used to be the major suppliers, but also because of what the German companies would consider foul play, allegations of IP theft, of unfair subsidies from the state to its state-owned enterprises, meaning that it’s an uneven playing field for them.

Marc Filippino
What about the big German companies? We’re talking Volkswagen, BASF, the country’s other global giants. How are they managing their businesses in China? Are they getting frustrated, too?

Yuan Yang
Look, the concerns that we’re talking about, a lot of those are much more painful for small and medium-sized companies than for the big giants who already have hundreds of staff in China. The risks of EU sanctions, even in the case of an invasion of Taiwan, are distant enough that, for companies that are making a huge amount of their revenues in China, as the German chemicals and automotive giants are, it’s not gonna be enough of a reason for them to pull back from their biggest market by far, where profits are still high. The era of easy profits for German companies has gone, but right now there is still tremendous growth opportunity for them in China.

Marc Filippino
Does Scholz have support from his coalition government on how to deal with China?

Yuan Yang
There’s a lot of division within the German coalition government right now on Olaf Scholz’s approach to China. Certainly the Green party-controlled foreign and economic ministries, I think, are generally more concerned, more cautious, more hawkish about China than Scholz himself. And we’ve seen that kind of inter-party dispute play out over the decision to permit the Chinese shipbuilding and ports company Cosco for acquiring a minority stake in the port of Hamburg terminal.

Marc Filippino
And just to clarify, six German ministers opposed that deal, but Scholz helped get it through. So what does it mean to not have the full backing of his coalition government?

Yuan Yang
That’s a real concern for Scholz is how he messages his trip domestically. There’s a real concern that it’s seen too much to be playing to the favour of the Chinese government. And on the other hand, Scholz himself is probably thinking to January when the China strategy of his government is gonna be published, and the overall result of that strategy is going to be presenting a lot more of a cautious and, in some ways, kind of hawkish view on China. And so it’s important, I think, for Scholz, in his own mind, to build some, some of a relationship with the Chinese government before that strategy is released.

Marc Filippino
Yuan Yang is the FT’s Europe-China correspondent. Thanks, Yuan.

Yuan Yang
Thank you.

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Marc Filippino
Before we go, one final reminder that if you’re hooked on the FT Weekend podcast, you won’t find the show on our podcast feed anymore. Our weekend friends are now only on their own feed and there’s a brand new episode out today, so you can go subscribe to that with the link that we have in our show notes. Now the FT News Briefing feed will have something tomorrow, a special episode. We’ve put our entire US midterm election series in one show, in case you missed any of the episodes. Make sure you check it out on Saturday.

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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.

The FT News Briefing is produced by Sonja Hutson, Fiona Symon and me, Marc Filippino. Our editor is Jess Smith. We had help this week from David da Silva, Michael Lello and Gavin Kallmann. Our executive producer is Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. And our theme song is by Metaphor Music.