News of the week summary - 01/07/2024

Global Minimum Tax Takes Effect

Initiated almost three years after a deal involving 140 countries aimed at closing loopholes in the international tax system, major economies have started applying a minimum effective tax rate of at least 15% on corporate profits. 

Implemented through a set of interconnected rules, if a multinational's profits are taxed below this 15% rate in one country, other nations can impose a supplementary levy. The Organization for Economic Cooperation and Development (OECD, a group of rich western countries), the driving force behind these reforms, estimates that this measure could boost global annual tax revenue by up to 9%, around $220 billion.

The reform has been applauded for its potential to diminish incentives for companies to use tax havens and discourage countries from becoming tax havens.

The initial wave of jurisdictions implementing the global minimum tax includes the European Union, the UK, Norway, Australia, South Korea, Japan, and Canada. Applicable to multinational corporations with an annual turnover exceeding €750 million, even traditionally considered tax havens like Ireland, Luxembourg, the Netherlands, Switzerland, and Barbados are participating, despite their lower previous corporate tax rates.

Notably, the United States and China have not yet introduced legislation to enforce this global minimum tax, although their backing of the deal in 2021 suggests that the reforms are designed to have a substantial impact even without their immediate participation.

The OECD-brokered deal consists of two main pillars. The first aims to ensure that multinational corporations pay more taxes where they conduct business, while the second establishes a global minimum corporate tax rate.

As nations begin implementing the global minimum tax, there is an incentive for other countries to follow suit. Otherwise, participating nations can collect tax at the expense of non-participating ones. While the actual impact depends on implementation and multinational responses, early analysis suggests that participating countries hosting significant low-taxed corporate profits might be the initial beneficiaries.

BYD becomes the biggest electric vehicle manufacturer in the world

In a historic shift, Chinese automaker BYD has surpassed Tesla as the world's top-selling electric vehicle (EV) maker. In the last quarter, Tesla delivered 484,000 cars, slightly exceeding analysts' expectations but falling short of BYD's record sales of 526,000 battery-only vehicles during the same period.

This development marks the ascendancy of BYD, a Chinese company that was relatively unknown a decade ago. Backed by Warren Buffett, BYD's growth has primarily been within China, but it is now eyeing expansion into new foreign markets, including Europe. The company's success underscores the challenges faced by legacy automakers in the US, Europe, Japan, and Korea in adapting to changing consumer preferences for affordable and technologically advanced electric cars. Their relatively low price makes them competitive in these markets.

In a statement, BYD declared itself the "world champion" for "new energy vehicles," having achieved total annual sales of over 3 million vehicles in 2023, including plug-in hybrid cars. Tesla, in comparison, reported annual sales of 1.81 million vehicles in 2023, with BYD delivering 1.58 million fully electric cars.

BYD's founder, Wang Chuanfu, initially focused on rechargeable batteries before expanding into the automotive sector in the early 2000s. As Chinese automakers leverage their country's control over key resources and components crucial for EV production, BYD's vertically integrated structure, controlling mines, battery production, and chips, has positioned it favorably in the evolving landscape of electric vehicles.

German inflation surge dampes rate cut expectations

The latest data reveals that German inflation accelerated to its highest rate in three months in December, reaching an annual rate of 3.8%, up from 2.3% in November. This surge, driven by the phasing out of government subsidies on gas, electricity, and food initiated last year, has cast uncertainty on investors' expectations that the European Central Bank (ECB) might start cutting interest rates as early as March.

The reduction of subsidies, which had impacted utility bills, triggered a re-acceleration of annual inflation across Europe, with German energy prices rising by 4.1% in the year to December, reversing a 4.5% annual decline in the previous month.

In France, similar figures were released, showing inflation rising to 4.1% in the year to December, up from 3.9% in November, driven by increased price growth for energy and services.

Despite the recent slowdown in consumer price growth in the Eurozone, the figures for the overall Eurozone, expected to be released today, are anticipated to show a rise in inflation from 2.4% in November to 3% in December, ending six consecutive months of falls.

The ECB, having raised its benchmark deposit rate significantly over the past two years in response to rising prices, faces a complex economic landscape. While swap markets are pricing in approximately 1.6 percentage points of rate cuts by the ECB in 2024, with a 60% chance of cuts starting in March, some economists highlight the continued decline in core inflation, excluding more volatile energy and food prices, as a sign that disinflation might occur more rapidly than the ECB predicted. 

In the US too, job growth figures reduce expectations of rate cuts.

The US job market exceeded expectations by adding 216,000 jobs in December, surpassing forecasts and marking a notable increase from November's total of 173,000. This robust employment report, coupled with strong economic data throughout the week, led investors to recalibrate their expectations for imminent interest rate cuts.

However, the shift in investor sentiment occurred after the resumption of trading this week, particularly following the release of Fed minutes indicating a preference among officials to keep borrowing costs high "for some time." The expectation of rate cuts, especially in March, has diminished, aligning more with the Federal Reserve's stance that aggressive cuts might not be necessary.

Chinese shadow bank Zhongzhi files for bankruptcy

Zhongzhi, a prominent player in China's $3 trillion shadow banking sector, filed for bankruptcy, citing severe insolvency. A Beijing court accepted the liquidation application, acknowledging the company's inability to meet its financial obligations.

The company revealed that its management had "run wild" following the death of founder Xie Zhikun in 2021. The company stated that its assets amounted to $28 billion against obligations of more than twice that amount. 

The collapse of Zhongzhi raises concerns about the broader impact of the property sector crisis and an economic slowdown on China's extensive and opaque savings industry. Over decades, Zhongzhi had built a network of investments in listed groups and developers as a shadow lender. Its high-risk lending practices and exposure to the property market led to a liquidity crisis last year, marked by missed payments to retail investors in its wealth management businesses.

This bankruptcy underscores the challenge for Beijing in managing substantial and sometimes concealed debt problems as the government attempts to deleverage riskier segments of the financial system. Analysts note that Zhongzhi's failure could indicate a potential transfer of risk to larger banks, as Chinese trust fund exposure to the property sector has been reduced under pressure from Beijing.