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Those ready to write off the country underestimate the resources of policy makers and the power of an $18 trillion economy that is home to 1.4 billion people.

The forces that powered China’s growth over the past 20 years have stalled or shifted into reverse. While that hardly qualifies as good news, it’s also not a catastrophe, for China or for the rest of the world.

China’s economy is in the worst shape in decades as financial and geopolitical pressures mount and policy makers struggle to persuade consumers and businesses to spend their way out of a slowdown. At the same time, the world’s second-largest economyisn’t on the brink of a “Lehman moment” that spirals into a global financial meltdown or destined for a Japan-like decadeslong deflationary spiral, China experts say.

Those ready to write off China underestimate the resources of Chinese policy makers and the power of an $18 trillion economy that is home to 1.4 billion people. And talk of a broad-based breakup, or decoupling, of companies and other nations with China ignores how intertwined it is with the rest of the world. China is the top trading partner for 120 countries.

There’s no doubt that China’s feeble recovery from a three-year period of strict Covid restrictions and crackdowns on property and the private sector has battered business and consumer confidence. And Chinese leader Xi Jinping’s focus on deleveraging, in part to shore up the country’s fiscal health, complicates efforts to stabilize the property market and the broader economy.

Even beyond this current trouble, economists see China growing at just 3% to 4% a year, or roughly half the pace it averaged in the decade before the pandemic. Its labor force is shrinking, the unprecedented credit and investment expansion that powered growth has been cut in half, and the property market is in ill health and likely to emerge far smaller, according to Logan Wright, director of China research for Rhodium Group.

Slower growth combined with Xi’s increased intervention in the economy and more aggressive stance globally—including military exercises over Taiwan and raids on foreign businesses—have shined a harsher light on problems that have long worried U.S. executives and investors. Foreign direct investment in China has dropped from $100 billion a quarter about five years ago to $5 billion as companies repatriate profits rather than reinvest, says Nicholas Lardy, a nonresident senior fellow at the Peterson Institute for International Economics and a China economy expert. “That’s a marked change from when companies used to think China was a great place to invest,” he says.

The MSCI China has lost almost $2 trillion in value since its peak in February 2021, with the index down 54% since then. Since 2019, U.S. investment in Chinese private equity and venture capital has fallen by more than 50%. And while the latest survey of members of the American Chamber of Commerce in Shanghai showed a marked increase in the difficulty of doing business in the country, two-thirds said they haven’t changed or considered altering their business strategies or business models in China.

The bad news can lead to good news: The worse the near-term economic situation gets, the more confident money managers and economists are that Beijing will step in with more stimulus to stabilize the economy, and eventually offer a floor for stocks.

Worries about an economic collapse “overlooks that Beijing always intervenes and is willing to kick cans down the road to ensure it is a grinding decline versus a U.S.-style collapse,” says Rory Green, head of China and Asia research for TS Lombard. “There are lots of levers Beijing could pull if they wanted.”

Though some have painted China’s slowdown as an existential crisis, veteran investors point to the breadth and size of the economy. “It’d be one thing if it was a depression, with GDP down 10% and people on the street complaining. But this is not that. It’s going from 8% to 4%,” says Arjun Divecha, who oversees $3.3 billion across GMO’s emerging equity strategies.

Divecha doesn’t think the current economic troubles will spark political instability or that a more nationalist pivot will trigger a conflict over Taiwan. “The Communist Party’s ultimate goal is to stay in power, which means keeping their population happy,” he says.

A further collapse in the property marketwould go against that goal, eviscerating a large store of household wealth. Property sales are down about 40% from their peak in 2021, and housing starts are down 60%, though Beijing has been able to manage the decline in prices, which are off about 33% from their peak levels.

But two years after China Evergrande Group (ticker: 3333.Hong Kong), one of the world’s largest developers, collapsed, Country Garden Holdings (ticker: 2007.Hong Kong)is flirting with defaultas it struggles to find home buyers in smaller cities. The embattled developer’s troubles could add to the burden of indebted local governments that have seen land sales dry up, hurting their ability to finance their debt.

Policy makers still have options to keep the situation from turning into a systemic problem. They could roll back more of the restrictions they had implemented in recent years, including those on second-home buyers, and even force banks to provide cheaper mortgages, says Shehzad Qazi, managing director at independent research firm China Beige Book. If those efforts fail, that could be enough for Xi to reassess his aversion to household-focused stimulus.

Already, Beijing has introduced a spate of incremental measures including reducing reserve requirements at banks and down payment requirements to spur borrowing and home buying. More clarity on the direction of reform and policy broadly could come at China’s meeting of the Communist Party’s Central Committee, where new economic thinking is often previewed, probably in October.

The property turmoil is overshadowing glimpses of improvement elsewhere. Spending data this summer have been strong, with August retail data better than expected, and per capita consumption in the first half having grown 8.4%, outpacing the 6.5% growth of per capita disposable income. That indicates Chinese households were dipping into the savings built up during the pandemic, and could mark a turning point, says Lardy, who adds that the sentiment in China isn’t as dour as it is on Wall Street.

Repairing confidence among entrepreneurs to revive investment could snap investors out of their funk. Sentiment among privately owned businesses is crucial because they account for about 90% of urban employment. But Beijing’s erratic and sometimes draconian policies with Covid, its crackdown on internet giants like Alibaba Group Holding (BABA) and Tencent Holdings (700.Hong Kong), and its decision to let Evergrande default on bonds rather than provide it support, have made businesses skittish.

Policy makers have vowed more clarity on regulatory measures, but it will take time to repair confidence. While it took two quarters for economic activity to stabilize and spending to start recovering in past crises, Green expects that the magnitude of shocks this time means it could take longer to see the turn—and that could mean three quarters of lackluster data ahead.

Beyond that, China’s recovery is unlikely to get it back to its robust past. From 2008 to 2016, China’s banks added almost $27 trillion in assets, roughly a third of global gross domestic product, which was poured into the infrastructure and construction boom that led to the property bubble that policy makers have spent years trying to deflate. This recovery won’t have the same power, with credit growth cut in half to roughly 9% this year, though this still amounts to new credit growth of $4 trillion to $5 trillion—roughly Germany’s GDP, Rhodium Group’s Wright says.

Cautious investors like Divecha favor companiesthat should benefit as Xi tries to revitalize technology and other companies that will benefit from increased investment as Beijing focuses on extending its global lead in clean energy and reducing reliance on foreign suppliers.

J.P. Morgan economists warn that China could be vulnerable to a systemic default if the troubles at Country Garden ripple through wealth management products, which lent money to developers and local governments, and then spread to commercial banks.

Yet, a debacle like the global financial crisis is unlikely, since the majority of China’s financial system is controlled by the government. “Provincial authorities, for example, will step in and force banks—or create other financial institutions like asset managers—to take over failing lenders,” Qazi says.

Japan’s “balance sheet” recession took form amid an indebted corporate sector, crashing property prices and tumbling stocks that forced companies to use their earnings to service debt. That curtailed Japan’s economic growth for years, with the corporate sector suffering losses that totaled about 60% of GDP.

China isn’t in as bad a spot yet, in part because policy makers have limited property price declines, and its debt troubles aren’t as severe. China also has a lower urbanization and GDP per capita rate than Japan did, providing room for improvement and a catalyst for growth.

China’s main problem is that consumers don’t feel good enough to spend. To avert a Japan-like deflationary cycle, economists say policy makers need to improve the outlook for the economy, even as it goes through the bumps associated with shrinking its reliance on the property sector.

How much policy makers will have to do to stabilize the economy depends in part on how quickly and effectively they act—and if they can do it before investors, consumers, and businesses give up.

Pentwater Capital predicted that FTC attempts to block big deals would fail

The efforts by Federal Trade Commission Chair Lina Khan to protect Main Street are inadvertently enriching some on Wall Street, generating outsize profits for Pentwater Capital Management and other large hedge funds that bet on merger deals.

For the past two years, Khan has pursued an aggressive strategy as head of President Biden’s antitrust agency, attempting to block proposed deals including Microsoft’s acquisition of videogame maker Activision Blizzard ATVI 1.70%increase; green up pointing triangle and Amgen’s AMGN -0.63%decrease; red down pointing triangle pursuit of drugmaker Horizon Therapeutics HZNP 0.10%increase; green up pointing triangle.

In both cases, the FTC’s intervention spooked investors and sent shares of the target companies swinging. This phenomenon complicated the playbook for a group of hedge funds whose main strategy relies on wagering that mergers and acquisitions will succeed or fail.

Yet for a handful of firms willing to stomach the volatility, the FTC’s antitrust efforts have yielded an unexpected windfall.

Their strategy? Betting big against Khan.

Florida-based Pentwater stands to be a large winner from the FTC’s recent failed bid to block the Amgen-Horizon deal. It built a stake of almost 7% in Horizon after the drugmaker began fielding takeover interest last year.

Pentwater is estimated to have scored around $100 million on its Horizon trade on paper, according to an analysis of the hedge fund’s public filings. It also holds stock valued at more than $1 billion in Activision and in Seagen SGEN 3.54%increase; green up pointing triangle, the biotech company that agreed to sell itself to Pfizer—and is betting that outstanding bids for each of them will ultimately survive FTC and other regulatory scrutiny and close successfully.

D.E. Shaw Group is also among the funds that stood their ground following the FTC lawsuit against Horizon. The New York-based firm steadily increased its position and currently holds more than $500 million in the shares, filings show. Other funds that bet on Horizon include Farallon Capital Management and HBK Capital Management, according to public filings.

“Because of the FTC’s lawsuit, we have had the ability to take something that would have made tens of millions of dollars and instead make many, many times that amount,” said Matt Halbower, Pentwater’s chief executive.

Halbower, a Harvard Law School graduate with a degree in electrical engineering from the Massachusetts Institute of Technology, launched Pentwater in 2007, after stints at hedge fund Citadel and the now-closed Deephaven Capital Management. His firm is named after Pentwater, Mich., on the shoreline of Lake Michigan, near where Halbower grew up and where he and his wife spent their honeymoon.

Pentwater last year scooped up shares of Twitter, now X, in a wager that Elon Musk would ultimately acquire the company, and it was a vocal opponent of Rio Tinto’s takeover of Turquoise Hill Resources, a Canadian miner.

Pentwater was also among the firms that committed to the private investment in public equity, or PIPE, raised to take former President Donald Trump’s social-media company public through a blank-check merger. (The deal hasn’t closed, however, and Pentwater ultimately hasn’t invested and likely won’t.)

Since its inception, Pentwater, which oversees close to $5 billion, has averaged a net return of more than 11% annually, according to a person familiar with the matter. By comparison, the HFRI Event-Driven Index generated an annualized net return of 4.47% from January 2007 through August 2023, according to research firm HFR.

Pentwater’s investment in Horizon started as it often does for M&A deals: The hedge fund spotted a report in The Wall Street Journal—in this case, a late-November article saying that the drug company was holding takeover talks. Halbower’s aim was simple: Pile in shares early, then profit if the acquisition closed and Horizon’s shares rose to their agreed-upon deal price.

From late November through mid-May, Pentwater purchased more than seven million shares in the drugmaker, constructing what Halbower said was his largest risk position at the time. But Halbower was also monitoring what he called a “difficult to predict regulator”—the FTC.

Aware that the agency had moved to block Microsoft’s acquisition of Activision, he bought bearish options contracts on Horizon’s stock, offering Pentwater protection on its position in case the FTC were to intervene.

The FTC’s lawsuit arrived on May 16. As other investors rushed for the exits, Horizon’s shares plunged nearly 20%. Pentwater’s options position offered some protection, while Halbower began reading the FTC’s lawsuit. His takeaway: Buy more shares.

“It was just clear from reading the complaint that the government wouldn’t be able to prove its case,” Halbower said. “I was very surprised that the FTC would bring such a weak case.”

In its lawsuit, the commission argued that Amgen could illegally bundle its products with Horizon’s medicines for thyroid eye disease and gout to entrench its dominance of the top-selling therapies.

Halbower believed the FTC argument was flawed because there was no precedent and because Amgen had told the agency that it wouldn’t bundle Horizon products. He added over two million shares at an average price of slightly more than $93 each following news of the FTC suit—and then kept buying.

Earlier this month, the FTC agreed to end its legal challenge of the deal as part of a proposed settlement with Amgen, paving the way for the company’s acquisition of Horizon to close as soon as next month.

Horizon’s shares finished Friday up 0.1% at $115.61—below Amgen’s proposed $116.50 per share price—offering more upside for Pentwater’s stake. Pentwater now owns more than 15 million shares in Horizon, according to regulatory filings compiled by research firm M&A Monitor.

The regulator defended its opposition to the Amgen-Horizon deal and the resulting settlement.

“The FTC got extensive, binding agreements on all the concerns we raised,” FTC spokesman Douglas Farrar said in an email. “The Amgen-Horizon settlement is a legal victory for the FTC but more importantly, a big win for Americans who need access to affordable medicine.”

The recent flurry of deals on Wall Street—including Cisco Systems’ $28 billion pact for security-software company Splunk and the $11.15 billion tie-up between Smurfit Kappa and paper-and-packaging peer WestRock—opens the prospect for new opportunities for investors who have endured a long stretch of sluggish M&A activity.

Halbower thinks the current windfall from FTC actions, however, will be short-lived.

The FTC is trying to change antitrust policy to give it more powers to block deals—and that, too, has created opportunities to make money, Halbower said. Next year’s presidential election campaign, though, probably means the regulator will need to rein in its current approach, he said.

Auto industry recovery has favoured investors and bosses over workers

Carmakers return almost $85bn to shareholders and raise CEO pay but production line wages fall in real terms

Shareholders and top bosses at General Motors, Ford and Stellantis have fared far better than workers in the past five years, as the US auto industry enjoyed a stunning recovery following the 2008 financial crash, according to Financial Times analysis.

As the strike called by the United Auto Workers union enters its second week, the sector is enjoying a boom that strengthens the union’s hand in negotiations. Filings show shareholders have received almost $85bn from the Detroit Three through dividends and buybacks since the crisis.

The UAW on Friday expanded strikes, hitting GM and Stellantis harder, while stepping back from raising pressure on Ford’s operations after it increased its pay offer.

All three carmakers remain locked in heated pay talks with the union, arguing they need resources to invest in electric vehicles and to compete in an increasingly tough global market. 

However, the UAW points to stagnating wages and concerns that the shift towards EVs, which require fewer workers to assemble and take batteries from non-unionised plants, risks the future of organised labour among US car manufacturers. 

Philippe Houchois, a global auto analyst at Jefferies, says bumper profits for carmakers have left manufacturers “cornered” during talks.  

Steep rises in executive pay, especially at a time when most workers are suffering from the effects of soaring inflation, make demands for higher wages “such an easy narrative for the UAW to sell”, he adds.

In real terms, the wages of the average worker at all three carmakers have fallen by about 20 per cent in the five years to 2022 — largely driven by a pay decline at Ford.

Yet carmakers warn the union’s original demand for a 40 per cent increase — now whittled down to 36 per cent — risks the manufacturers’ financial health. 

Ford CEO Jim Farley said the company would have “gone bankrupt by now” if it had paid the wages the UAW was demanding. 

Carmakers have not publicly stated how much the UAW’s demand would cost them. Farley estimated Ford’s combined $30bn of profit over the past four years would have been a $15bn loss instead, indicating a $45bn gulf, while sources close to GM suggest a much higher cost hit of $80bn-$100bn.

Of the $84.9bn returned to investors since the crash, $52.7bn has been through dividends and $32.6bn from share buybacks. 

These included a one-off dividend of $3.5bn from Fiat Chrysler ahead of the merger with PSA to form Stellantis in 2020 to equalise the value of the combining companies. 

A large part of the total is driven by GM’s $26.3bn share buyback programme, which the company ran largely from 2012 to 2017 as it blossomed in the years following bankruptcy. 

The payments have also perplexed observers, coming at a time when carmakers need to plough billions into electric cars to compete with Tesla.

“People will say: ‘You told us EVs are going to cost, but wasted so much money on buybacks,’” notes Houchois.

Combined profits at the three hit $70.3bn over 2021 and 2022, a number that would have been even higher had Ford not reported a $2bn loss last year following the writedown of start-up Rivian and self-driving venture Argo AI. 

The profits were driven by rising prices as chronic global shortages of parts collided with robust post-pandemic demand.

For GM, 2021 was the most profitable year since it emerged from bankruptcy in 2009, with $10bn of income. Stellantis — which includes France’s PSA following the 2019 merger — made a record $17.7bn in net income last year, almost all coming from North America. 

Even as the number of cars they sold dipped, aggregate revenues for the three carmakers hit $4tn over the past 10 years.

A sore point for the UAW has been the climbing earnings enjoyed by top executives, many of whom have their compensation linked to profits or other performance indicators such as shareholder returns.

There are some mitigating factors. Stellantis doubled in size after the merger with PSA and changed its CEO, with Peugeot’s Carlos Tavares leading the new business and replacing Fiat Chrysler’s Mike Manley. 

Similarly, Ford replaced Jim Hackett in 2020 with Jim Farley, leading to a spike in 2020’s pay figures.

At GM, CEO Mary Barra’s pay grew 11 per cent in real terms in the five years to 2022 versus a decline of 10 per cent for the regular worker. 

The 29 per cent pay increase at Stellantis compares with a 9 per cent fall for its average employee’s pay, after accounting for inflation. 

Bumper executive pay is not restricted to the car industry, and is highly linked to wider economic factors.

“In 2021, when the economy was booming after the start of the pandemic in 2020, 82.5 per cent of CEOs received above-target bonus payouts,” says compensation and data group Equilar.

Private equity firms pivot away from traditional buyouts

Blackstone and Apollo executives talk up scope to expand into private credit and infrastructure investing

Some of the world’s largest private equity firms are accelerating a pivot away from mega buyouts and into businesses such as private credit as higher interest rates force them to tear up their playbooks.

After a decade of record dealmaking, higher rates have brought buyouts to a near halt over the past year and left many private equity firms saddled with portfolio companies acquired at high prices.

The grim backdrop is hastening a push that was already under way by some of the industry’s biggest names into new businesses including lending to companies, which has become more profitable as central banks have raised interest to bring down inflation.

Top executives from Apollo and Blackstone were among those laying out the potential for the business, known as private credit, as well as infrastructure investing as thousands of dealmakers and investors gathered this week in Paris at the annual IPEM industry conference.

In a sign of how private equity is rapidly moving beyond its swashbuckling roots in buying large companies, the focus in Paris was squarely on how firms are positioning themselves as an alternative to the traditional banking system, capable of making multibillion-dollar corporate loans.

Jim Zelter, Apollo’s co-president, said that in an era of higher rates there were “unprecedented” returns available in private credit. The New York-based firm is increasingly targeting loans to large companies, according to people familiar with the matter. A recent example includes a €500mn loan to Air France.

Apollo’s private credit unit now manages more than $400bn, dwarfing the $100bn in assets under management in its buyout division, historically the cornerstone of the group’s business.  

Blackstone’s founder and chairman Steve Schwarzman also pointed to the profits to be made lending to companies.

“If you can earn 12 per cent, maybe 13 per cent on a really good day in senior secured bank debt, what else do you want to do in life?,” Schwarzman told the conference. “If you are living in a no-growth economy and somebody can give you 12, 13 per cent with almost no prospect of loss, that’s about the best thing you can do.”

This month, Blackstone merged its credit and insurance arms, which together manage $295bn, more than double the $137bn in its private equity business. Schwarzman has said the combined business could grow to manage $1tn in the next decade.

The likes of Apollo and Blackstone, as well as firms specialising in private credit, raise money from investors including pension funds and sovereign wealth funds that is then used to fund their lending to companies.

But the departure from traditional buyouts is likely to come with lower returns. In the more than decade-long period of low interest rates, the average buyout fund returned around 18 per cent, according to data from Adams Street Partners.

By comparison, private credit funds are now expected to deliver returns in the low teens, albeit with investors exposed to less risk as the loans come with security over a corporate borrower’s assets.

Despite the expansion it has already had in recent years, private credit will grow faster than private equity in coming years, according to many executives at the conference.

“Credit has probably been the fastest growing part of the alternatives market,” said José Feliciano, the co-founder of Clearlake Capital. “We think that’ll continue to be the case particularly given the interest rate environment today.”

The appeal of credit compared with private equity has been made more stark by the challenges facing the buyout industry.

“The first half of this year you’ve seen capital deployment in private equity go down 37 per cent, so the industry has chosen not to make investments,” said Edwin Conway, a senior managing director at BlackRock.

The volume of exits PE firms have made from buyout deals — typically by floating a portfolio company on a stock exchange or selling it — have slumped more than 60 per cent from their peak in 2021, he said.

“The dominance of private equity and real estate, that’s changing,” Conway added. “Other asset classes are playing a more profound role.”

Deal would have included Manchester headquarters of ecommerce group headed by Matthew Moulding

A sale of a business park owned by THG boss Matthew Moulding, which also houses the ecommerce group’s headquarters, has fallen through. 

The ecommerce group, which runs websites Lookfantastic and Myprotein, is a tenant at Icon Business Park in Manchester, ultimately owned by the THG co-founder.  

Moulding Capital Limited had been in talks with property company ICG Real Estate to sell the business park but no agreement was reached, according to two people familiar with the discussions.

For a transaction to proceed, a prospective buyer would need an approval from Warrington Borough Council to novate a £128mn loan. 

The Icon complex is used as a security for a £128mn portion of a £202mn loan the Labour-led authority gave to the group of companies controlled by Moulding in 2020, according to official documents. 

In July, the council cabinet initially approved a potential novation of the loan to ICG, which subsequently did not proceed with a deal.

The approval was criticised by Conservative councillor Mark Jervis, who said the cabinet had failed to properly scrutinise “flawed and erroneous arrangements” it had made when it looked at the novation loan.

“It is time for Labour to reduce its enormous debt mountain,” he added in a press release earlier this month. “The Labour cabinet is totally ill-equipped to make decisions on this debt.”

A Warrington Borough Council spokesperson said: “Cabinet approved a potential novation of an existing loan. However, for this to work it required the agreement of the council and two other parties. These agreements were not reached and therefore no novation was required.” 

“The change is simply a movement in the commercial view of the interested parties, and not a U-turn,” they added.

THG, Moulding Capital and ICG declined to comment. 

THG is unaffected as a tenant by the sale to ICG falling through. A sale to another party could still materialise.

Over the past decade, UK local councils have made large investments in a variety of commercial ventures, often taking on significant debts, in an effort to shore up budgets hit by cuts in central government funding.

The pressures on councils were highlighted last week when levelling-up secretary Michael Gove announced that he would appoint commissioners to take over the day-to-day running of Birmingham city council, after the local authority declared itself in effect bankrupt. 

Formerly known as The Hut Group, THG was hailed as a future star of the UK tech industry when it listed with a valuation of £5.4bn in 2020. 

However, a string of profit warnings and concerns over its corporate governance have blighted its life as a public company.

THG has beefed up its board and Moulding has relinquished the chairmanship and his “golden share” rights in an effort to ease investor concerns. Moulding has often criticised what he regards as unwarranted attacks on his business by the press and City analysts.

Hedge funds rush to unwind bets against gilts

Short positions in UK government debt this week fell to their lowest level since at least 2006

Hedge funds have been rushing to unwind bets against Britain’s £2.5tn government bond market as investors become increasingly convinced that the Bank of England is nearing the end of its rate rising campaign.

The total value of the UK’s bonds borrowed by investors to wager on a fall in prices this week dropped below £65bn, according to data from S&P Global Market Intelligence - its lowest level since at least 2006. 

It later nudged a little higher after the Bank of England paused interest rate rises on Thursday.

The decline in short positions comes as gilts have staged a comeback in recent weeks, after having been the worst performing leading sovereign debt market in the first half of the year. An Ice Bank of America index of gilts has risen by 2.7 per cent over the past month, although it remains down by over 3 per cent since the start of the year.

“I think we have reached terminal rates in the UK,” said Nikolay Markov, senior economist at Pictet Asset Management. “It could be very optimal to be long gilts as recent inflation was much softer than expected last month and we might not see second round effects coming from the labour market.” 

Short positioning on gilts has fluctuated in recent years, surging in late 2016 and 2017 in the aftermath of the UK’s decision to leave the EU and again in 2021 when the Bank of England was seen to be slow in tackling the threat of inflation.

When yields were close to historic lows, betting against gilts was a relatively cheap trade — investors with short positions have to pay the interest rate received by holders. But the total value of shorts has plunged while rates climbed over the past year and a half and the decline has extended as investors anticipate an end to the BoE’s tightening cycle.

Markets are now pricing in a 60 per cent probability of one more rate rise to 5.5 per cent by early next year, having in June expected a peak rate of 6.5 per cent. A closely watched survey published on Friday showed UK economic activity has fallen at the fastest pace since January 2021, suggesting the chances of a recession have increased.

“We believe the medium-term fundamentals for UK gilts have improved given a weakening growth outlook, a softening labour market and an improving outlook for domestic inflation,” said James Bilson, a fixed-income strategist at Schroders. 

“We’re focused on buying gilts in the five and six year part of the curve, we think rates have gone high enough and, as the economy starts to slow, more people will price in more cuts,” said Craig Inches, head of rates and cash at Royal London Asset Management. 

But some investors think the lion’s share of the recent gilt rally may be over, with the BoE cautioning there was “no room for complacency” on inflation, while officials have not ruled out another rate rise in the coming months. 

“What worries me is even as unemployment creeps up, wage growth is continuing at a pace inconsistent with low inflation,” said Gordon Shannon, a portfolio manager at TwentyFour Asset Management. 

“Gilts at the front and long end aren’t rallying as might have been expected, which makes me wonder if the market worries inflation will have to be revisited [and tackled with tighter monetary policy],” he added. 

The BoE also confirmed that it would increase the pace of its quantitative tightening programme of balance sheet reduction for the year ahead from £80bn in 2022-23 to £100bn in 2023-24. It said the move would have a “modest” impact on prices. 

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Luc Rémont is trying to improve profitability at the recently renationalised nuclear power group

The French government and the chief executive it handpicked to run state-owned nuclear power group EDF have clashed over strategy and financing just as the country gears up for its biggest reactor construction programme in decades.

The state, which recently renationalised EDF, is at odds with boss Luc Rémont over some of his plans to try to make the group more profitable after his appointment a year ago, people close to the discussions said.

“It’s pretty tense,” one person familiar with the talks said.

In particular, a looming overhaul of the way nuclear power prices are regulated in France has created fractures as EDF seeks higher prices to bring in much-needed capital, while the state wants to contain energy costs for households and businesses as much as possible, the people added.

“For Rémont, electricity prices need to be sufficiently high so that the group can invest, and the government needs to have prices that are acceptable to consumers,” another person said.

At its core, the debate around EDF is an existential one — whether its executives can and should run the group as a normal company despite it being state-owned.

EDF has net debt of close to €65bn. The group’s finances have improved and it returned to profit in the first half of 2023, but Rémont has outlined annual spending needs of €25bn per year, higher than the €16bn-€17bn it used to budget for, and which he does not want to finance with more loans.

In July, Rémont, a former civil servant and executive at industrial group Schneider Electric, told a parliamentary hearing EDF was “still a company, and has to be able to function like one”.

“If this doesn’t work with Rémont it means it can’t work with anyone,” one banker in Paris said of the tensions between the government and EDF. “There’s always been this fiction that a company that belongs to the state is somehow not the state.”

The clashes have highlighted how France is struggling to move past the infighting that has long dogged the former monopoly, despite the government’s move to take 100 per cent control and appoint Rémont, to steer this new phase.

The talks over power prices are aimed at replacing a system known as Arenh, which expires at the end of 2025, under which EDF sells a chunk of its production to third-party distributors and industrial groups at a set price of €42 per megawatt hour. French wholesale electricity prices are still north of €100 per megawatt hour.

Any mechanism replacing the Arenh will need to get the green light from Brussels, at a time when the EU is also trying to agree on broader electricity market reforms. These have become bogged down in disagreements between France and Germany over nuclear power and whether or not the sector can qualify for certain subsidies.

Previously under 84 per cent government ownership, EDF has for years been gripped by state interventions which executives considered detrimental to the group.

This reached a head during Europe’s energy crisis in 2022 when EDF was made to foot the bill for caps on power prices for consumers, contributing to its record €17.9bn losses that year, though the group also faced criticism for its own failings after outages at its nuclear reactors. 

Rémont’s appointment was meant to mark a move to a more coherent structure of full government ownership, so that EDF could deliver its biggest challenge of all: the construction of at least six new nuclear reactors in France, a €52bn programme underpinning the country’s low carbon strategy. The company is also behind major nuclear projects elsewhere, including in Britain.

Rémont is now unlikely in the short term to present the full-blown strategy plan he had been expected to unveil in public by this summer, people familiar with the matter said.

Instead he has been testing the water with several proposals, including a more market-based vision for how EDF could restore its margins that is at odds with the state’s plan to regulate and set nuclear power prices, the people said.

This includes tenders launched this month for 10 and 15-year power contracts aimed at third-party electricity providers such as TotalEnergies and Engie which sell EDF’s production on, a new long-term format that did not previously exist.

A French official said the government was not convinced by Rémont’s proposals because they considered them unworkable and unrealistic, and might not pass muster in Brussels with regulators which probe whether or not EDF is in line with competition and state-aid rules.

The official played down the tensions with EDF, however, saying that ultimately both sides wanted a solution.

“Our interests are aligned now that the state owns 100 per cent of the company,” the person said. “If EDF loses money, then we lose money.”

People close to EDF acknowledge the differences in Rémont’s position and that of the state but have also played down the tensions, noting exchanges were not hostile.

EDF and the energy ministry declined to comment.