ALEX BRUMMER: The Chancellor’s trip to China is a failed mission

Rachel Reeves would have been doomed whether she went to China or not.

To cancel would have seemed like panic, especially as the chancellor chooses to travel with some of the city’s best.

But the reality is that, apart from HSBC chairman Mark Tucker, the undisputed power brokers in London’s financial markets, investment bankers Goldman Sachs, JP Morgan, Morgan Stanley and possibly Barclays, are missing.

If deals are to be made, despite the clampdown on Hong Kong by Beijing and British pharma champion AstraZeneca, it is the dealmakers and traders who would be in charge.

Convincing Bank of England Governor Andrew Bailey to join may have seemed like a good idea. But what does it say about the central bank’s independence if it becomes part of a British government marketing campaign? You can’t imagine Jay Powell of the Federal Reserve on Air Force One working with Joe Biden or Donald Trump to ensure that a fashion group, with an unreliable supply chain and a favorite of teenagers, chooses to sell its shares in New York. note.

The idea that both the Chancellor and the Governor would be on the other side of the world, as UK government bond yields exceed Truss-era levels and the pound falls, is not the best option.

There is an element of ‘crisis what crisis’ in the government’s response to the current market turmoil.

The phrase used in Westminster and by Deputy Governor Sarah Breeden in Edinburgh is that the rise in bond yields, with the yield on the 30-year government bond now at a 26-year high, has been ‘orderly’.

There has certainly not been a repeat of the experience of October 2022, when the severity and speed of the shift in bond yields caused liability-based investments (LDIs) to implode. The fear then was that the leverage backing these derivatives would be tapped, leading to a cascade of defaults that could damage the pensions of millions of retirees. That’s why the Bank of England intervened. The disorder had everything to do with the weak police action of the banking and pensions regulator.

Commentators such as Oxford Economics and fixed income specialists Pimco dismiss the rise in UK government bond yields as a global phenomenon. British government bond yields generally move in line with those of the US.

Wall Street traders are concerned that a booming U.S. economy, symbolized by a stronger-than-expected increase of 256,000 jobs in nonfarm payrolls in December, will mean U.S. interest rates will remain higher than expected for longer. Yields on U.S. bonds ranging from two to 10 years rose in latest trading.

That in turn had a negative impact on the UK markets, with the ten-year government bond yield rising to 4.84 percent, which is 25.74 percent higher than in the past twelve months. That’s a huge negative shift in the way global markets judge Britain’s prospects.

The markets may seem orderly, but the consequences of this hit to interest rates for the Chancellor are virtually disastrous.

The October 30 budget forecasts are overwhelmed by the costs of servicing the national debt. The budget problem Reeves now finds himself in is undoubtedly far more serious to the long-term health and stability of the economy than the LDIs. Speaking to business leaders at the CBI conference in November, Reeves said: “I’m very clear: I’m not coming back with more loans or more taxes.”

The reality is that she is now being forced to do so.

Hence the leaks from Westminster suggesting the Chancellor is looking for even deeper cuts to government spending than planned. So much for filling the potholes, ending NHS queues and restoring public services. No wonder the social care assessment has been pushed back to 2028 and so many pensioners, unable to claim the pension credit, are shivering at home during the current cold snap.

A second plan being touted is to accelerate the expansion agenda by telling ministers to ‘stop anti-growth measures’.

Reducing regulations and red tape is a start. However, if wealth creators and investors are squeezed out of private markets by high borrowing costs, this will be an uphill battle.

Do Reeves and the government really think that an erratic Chinese government, with the begging bowl at Jingye-owned British Steel, is the answer?

If so, good luck.