TheChek News Flow

Fall in recorded Chinese holdings highlights Beijing’s push to diversify its reserves away from America

China’s recorded holdings of Treasuries have fallen below those of the UK for the first time since the start of the century, underlining an ongoing shift in Beijing’s management of its foreign reserves.

The value of China’s Treasury holdings as recorded by US banks and custodians fell to $765bn at the end of March, down from $784bn in the previous month, while those of the UK rose by almost $30bn to $779bn, according to data published late on Friday.

The crossover makes the UK the second-largest foreign holder of US Treasuries after Japan. It is the first time the UK’s holdings have been higher than the Chinese since October 2000 and is the latest sign that China is seeking to gradually diversify away from US assets.

“China has been selling slowly but steadily; this is a warning to the US” said Alicia García-Herrero, chief economist for Asia-Pacific at Natixis. “The warning has been there for years, it’s not sudden — the US should have acted on this well before”.

The data will come as a cautionary sign for the US administration following news that Moody’s has followed Fitch and S&P in stripping the world’s largest economy of its triple-A credit rating, citing its growing debt and deficit.

Beijing has been gradually reducing its holdings of US treasuries from a peak of more than $1.3tn in 2011, diversifying into other assets including US agency bonds and gold. Some of the fall in the value of China’s holdings could also reflect market moves.

Analysts believe China also holds a growing proportion of its US assets through third party custodians, including Euroclear in Belgium and Clearstream in Luxembourg, which obscures the true level of its holdings. Luxembourg’s Treasury holdings by value were flat in March while Belgium’s increased by $7.4bn from February.

China’s enormous Treasury pile is the result of a multi-decade trade surplus with the US that President Donald Trump is now seeking to reduce. But officials in the US administration have also expressed concern over foreign selling of Treasuries, which pushes yields up and makes debt refinancing more expensive.

The proportion of China’s Treasury holdings that were in short term bills, the most liquid securities that could be most easily sold off in a crunch, in March hit its highest level since 2009.

“Based on the visible data, there is no doubt that China has shortened the maturity of its US portfolio”, said Brad Setser, a senior fellow at the Council on Foreign Relations and former US Treasury official. 

The rise of the UK’s recorded holdings does not reflect its own reserves. Rather, analysts say it reflects London’s role as a domicile for international capital.

Holders in Europe include insurers, banks and custodians. Some hedge funds hold Treasury securities and arbitrage by selling futures or swaps — positions known colloquially as “basis trades”.

Setser said the UK number “likely [reflects] an increase in Treasuries held by global banks, the availability of custodial services in London and potentially some of the activity of hedge funds”.

Analysts said that the data, which only shows moves until the end of March, did not reflect any action taken by China after Trump’s so-called “liberation day” escalation of his trade war.

“It is possible that China could have made significant changes in its reserve management in the last six weeks that will only become clear with more time,” said Setser.

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Are Big Oil companies prepared for a prolonged market downturn?

Executives seek to reassure investors as analysts warn of risks from sub-$60 oil prices

The world’s largest oil companies are braced for a prolonged downturn in crude prices — the third in just over a decade — as they seek to reassure investors that they are prepared for the worst.

Executives at ExxonMobil, Chevron, Shell, TotalEnergies and BP have used their quarterly earnings updates to reassure investors that their balance sheets remain strong, and that they will not be rushed into unnecessary reductions in spending and shareholder returns.

“We are seeing significant downward pressure on prices and margins,” ExxonMobil chief Darren Woods told analysts this month, adding that the $472bn company had prepared for a downturn by cutting close to $13bn in costs over five years. 

“Our organisation has planned for this. We pressure-test our plans and the financial outcomes with scenarios that are more severe than our Covid experience,” Woods said, referring to the 2020 slump that accompanied the pandemic. “No other international oil company even comes close.”

Oil prices dropped below $60 a barrel in April and are forecast to average about $65 for the remainder of the year, as the Opec+ cartel that includes Saudi Arabia and Russia continues to increase supply. Brent crude, the international benchmark, was trading below $65 a barrel on Friday.

Chevron, which is shrinking its workforce by a fifth, reassured investors that it would produce $9bn of free cash flow with oil at $60 a barrel. Shell said it would be able to pay its dividend even if oil dropped to $40, and that its share buybacks would continue at roughly half the current rate at $50 a barrel. 

Shell added that it had not, so far, changed its spending plans. “We’re not asking our businesses to stop on projects,” Sinead Gorman, chief financial officer, said on the company’s earning call.

Patrick Pouyanné, chief executive of TotalEnergies, said the reaction this time was the same as during the coronavirus crisis — “no panic” — and noted how his company had declined to cut its dividend even during the worst of the pandemic. 

Previous downturns in oil markets — including one that stemmed from the price wars between Saudi Arabia, the US and Russia from 2014 to 2016 — forced deep spending cuts on the industry as well as project delays. Debt also rose as Big Oil companies borrowed to maintain operations and shareholder returns.

Some also seized opportunities, such as Shell’s 2015 takeover of BG Group and Chevron’s acquisition of Noble Energy in 2020. “We’re better positioned than others to respond to market challenges and, in fact, take advantage of the opportunities they present,” noted Woods of Exxon. 

Big Oil collectively trimmed capital expenditure plans by 2 per cent over the course of the recent earnings season, estimated HSBC analyst Kim Fustier, who expected further reductions if oil prices remained at current levels.

Wood Mackenzie, the energy consultancy, has forecast $98bn in capital spending this year among the five supermajors — down nearly 5 per cent on 2023.

“They’re in a bit of a wait-and-see mode,” Fustier said. “They clearly don’t want to rush into any irreversible decisions.”

She also noted how the recent slide in crude prices came just weeks after a number of the big oil groups outlined long-term plans based on oil trading above $70 this year, making it tricky to revise guidance so soon. “I think the companies should have presented a plan where cash inflows and outflows are balanced at $65 a barrel, but none of them did,” Fustier added. 

HSBC analysts cited the adjustment to lower oil prices as they cut their 2025 earnings per share forecast for the big listed oil companies, including by 35 per cent for BP and 18 per cent for Chevron.

Bank of America analyst Christopher Kuplent said that while $65-a-barrel oil might not cause major disruption for the majors, any further slide risked a more significant impact.

“My worry is we don’t stay at $65. Our house forecast is that across the second and third quarter, Brent crude will average below $60. That kind of scenario will reveal vulnerabilities,” he said.

Kuplent also said he disagreed with big oil group’s claims that they were ready for a downturn, noting how a decade of cuts had left many companies with limited flexibility for further reductions without endangering oil and gas production.

“Ten years into an efficiency drive that has made a lot of companies a lot thinner, the scope to offer more is much reduced,” he said. 

EU faces extra €10bn bill to refill gas stores after cold winter

Gas prices likely to rise in the summer as countries rush to meet EU target

The EU will need to spend at least €10bn more than last year to refill its gas stores ahead of winter, after the first cold season in four years left its reserves heavily depleted. 

Following Russia’s full-scale invasion of Ukraine in 2022, the bloc agreed to refill storage to 90 per cent of capacity each summer, to avoid disruptions in the colder months. After this winter Europe’s gas tanks were two-thirds empty in March, requiring a significant effort and cost over the summer to restore them to normal levels.

“Europe had the first real winter since the war in Ukraine,” said Ano Kuhanathan, an analyst at Allianz Trade, which provides insurance to traders. He added that a lack of wind for renewable power generation had also pushed up the consumption of gas. 

While gas prices are lower than a year ago, mainly because of lower demand from China, Kuhanathan estimated that it will cost about €26bn to meet the 90 per cent target by November. That compares with €16bn to fill them to 99 per cent last year.

EU countries have recently agreed to more flexibility in meeting the gas storage target, after criticism that the hard 90 per cent goal prompted summer price spikes as governments rushed to fill tanks.

Germany, which is heavily reliant on gas, was among the countries that most vocally called for greater flexibility after Brussels proposed their extension until 2027. 

Revisions to the law could see the target reduced by 7 per cent, casting uncertainty over this filling season as the changes are unlikely to be enacted before the summer.

The EU spent roughly €100bn on importing gas and liquefied natural gas (LNG) in 2024, Kuhanathan said.  

Ample gas reserves are crucial for smoothing prices and reducing the risk of countries having to compete on the open market for gas during surges in winter demand. 

Eurogas, the gas industry body, said that policymakers should ensure “clear and early communication” of the measures.

“Storage obligations carry the risk of further exacerbating the problem of high and volatile wholesale gas prices,” it said.

Kuhanathan said gas traders are not rushing to refill storage because many of them believe prices have further to fall. But a push to refill gas storage at the end of the summer could also cause prices to increase, he warned. 

Analysts at Morgan Stanley believe prices will rise by roughly 10 per cent from current levels over the summer because of the scale of the refilling job. Europe will need to increase imports of LNG by 45 per cent from last year for stores to be 80 per cent full, they said.

Last week, Peder Bjorland, the vice-president of gas trading at Equinor, Europe’s largest gas supplier, said the region would have to pay higher prices to outcompete China and other Asian buyers for gas over the summer. 

“I think price is the most important tool in this game,” he told Reuters at a gas conference in Amsterdam. “China is coming back, and it can be competitive,” he added. 

China, the world’s top buyer of LNG, has recently scaled back gas buying because of favourable weather and a weaker economic outlook. But a temporary truce in the trade war between Beijing and Washington, announced earlier this month, could now mean economic activity, and gas demand, pick up. 

“If Asian demand for LNG cargoes picks up over the summer because of hot weather, the market could tighten and force prices higher,” warned Morgan Stanley in a research note. 

Activist takes on Swatch maverick as Omega empire falters

Nick Hayek has overseen a decade of decline at the watchmaker. Can he see off the threat to his grip on the group?

When Nick Hayek was asked last year why Swatch Group did not engage more with the financial community, the watchmaker’s maverick chief executive told investors that if they did not like the way the company was managed, they could invest elsewhere.

They appear to have done exactly that.

Shares in Swatch, owner of 16 watch brands including Omega, Longines and Tissot, have dropped 24 per cent in the past 12 months. That has extended a poor run in which the Swiss group’s shares have fallen from a peak of nearly SFr600 in 2014 to SFr147.85, valuing the company at SFr7.7bn.

The group’s weak performance — net profit tumbled 75 per cent to SFr219mn ($261mn) last year — is partly down to shrinking demand from Chinese consumers, amid a broader slowdown in luxury spending.

But some analysts and investors argue that many of Swatch’s problems are homegrown.

Hayek has served as chief executive since 2003 and his sister, Nayla, has chaired the board since 2010. Oliver Müller, founder of LuxeConsult, a consultant to the watch industry, said the Hayeks were running Swatch like a family business rather than a public company.

“In German we say beratungsresistent: resistant to advice. That is the essence of the problem . . . it is a sad story”, he said.

Investors, however, may soon force the family to pay more attention to their wishes.

Steven Wood, founder of US investment firm GreenWood Investors, which owns 0.5 per cent of Swatch shares, is pushing to be elected to the board of directors at Swatch’s annual meeting on Wednesday.

Wood told the Financial Times this month that Swatch was “only being run for one shareholder”, a thinly veiled reference to the Hayek family, which owns 25 per cent of Swatch’s shares but controls 44 per cent of the voting rights.

Hayek, 70, revels in needling the Swiss business establishment. As well as berating analysts and investors, Swatch’s uncompromising chief executive has been known to smoke cigars at press conferences. During his tenure Swatch has occasionally published its annual report in Swiss-German — a dialect incomprehensible to many investors — or in a font so small it requires a magnifying glass to read.

The Swiss watchmaking industry owes a significant debt to Swatch. The Biel-based company’s embrace of quartz technology in the 1980s helped make Swiss watches accessible to the masses and stave off an existential threat from cheap Asian manufacturers.

Founder Nicolas Hayek, Nick’s father who died in 2010, is widely credited with transforming Swatch into a global symbol of Swiss innovation and craftsmanship.

That dynamism has been lost under today’s management, according to Roce Capital co-founder Michael Niedzielski, a former Swatch shareholder.

“The communication with the investor community is poor and they do not take feedback,” he said, adding that “disastrous” working capital management had drained free cash flow over the past decade.

Another former Swatch investor said they had wanted to see the executives leading its various brands given more control over their strategy, “but the Hayek family did not allow it”.

Meanwhile, any attempt to offer advice to management on refreshing the portfolio to try and boost growth was rebuffed, according to a Switzerland-based investment banker. “They shut down any attempt to meet with them and offer advice,” they said.

Swatch said analysts are invited to participate in calls with executives twice a year and that investors visit the company “very frequently.” It also defended the company’s working capital management, pointing out that trade receivables were equivalent to only 31 days of outstanding invoices at the end of December.

Swatch’s brands collectively cater to virtually every corner of the market. The group sells everything from £44,000 Breguet timepieces right down to £50 watches under the Swatch brand.

However, the Swiss watch industry has been in decline since enjoying a pandemic-era boom, and faces fresh challenges in the form of US tariffs and the impact of a strong franc on export values and profitability.

Caroline Reyl, head of premium brands at Pictet Asset Management, said the “very high end” is the only part of the watch market in growth, “namely Patek Philippe, Rolex and Audemars Piguet”.

“This polarisation effect of a few brands dominating is only increasing,” she added.

Swatch’s high-end brands, however, have fallen out of favour. Jean-Philippe Bertschy, head of Swiss equity research at Vontobel, says Patek Philippe and Breguet were both making about $300mn to $400mn in annual sales 20 years ago.

Since then, the bank estimates Patek Philippe’s sales have grown roughly sevenfold to almost $2.3bn, while Breguet’s annual sales have fallen by almost half to $221mn.

It is a similar story with sales of Omega and Longines watches, which declined 20 per cent and 29 per cent respectively between 2019 and 2024, according to Vontobel.

“There is no other company that has seen sales decrease in watches by as much in the past few years,” Bertschy said, adding that “investors have really started to lose patience”. Swatch said the FT should not “listen to, rely on or trust analysts”.

Hayek has previously said his family is “not at all dissatisfied with Swatch Group” and that he is more concerned with the company’s long-term development than short-term share price moves.

“If you are a shareholder with us, you can be sure that you are part-owner of a company that is solid and will not get into trouble if a storm comes up. That’s a big difference compared to some of our competitors,” he added, referring to Swatch’s robust balance sheet.

Swatch still retains some structural advantages over rivals. Its 150-plus production sites make almost all of the components in its watches, as well as those sold by third-party watchmakers. Micro Crystal, another Swatch business, is also regarded as a leader in the production of quartz crystals used in watches and smartphones.

There have also been some successful innovations. The recent MoonSwatch collaboration between Omega and Swatch, a popular collection of affordable, colourful watches, has boosted sales.

But analysts have called for Swatch to focus on revitalising other brands to capture more of the relatively resilient high-end market. Breguet, which currently loses money, is perceived as a neglected brand with huge potential, because of its 250-year history and association with European sovereigns such as Queen Marie Antoinette and Napoleon Bonaparte.

For now, Hayek appears trapped in an unhappy marriage with the public markets. Swatch’s chief executive has repeatedly raised the prospect of taking the company private, but no deal has materialised and he is now facing a threat to his grip on the company.

Wood is seeking to be elected to Swatch’s board of directors on Wednesday as a representative for holders of so-called bearer shares, which represent 55 per cent of Swatch’s share capital, but carry a minority of voting rights.

Swatch’s board has recommended shareholders vote against Wood’s resolution for several reasons, including that he is neither a Swiss national nor a Swiss resident.

Regardless of which way the vote goes, a consensus is forming that Swatch is in need of a shake-up. But with no known succession plan, many observers have given up hope of a quick turnaround.

“Omega, Longines, Breguet . . . are among the most prestigious brands in the industry [but] unfortunately they are consistently losing market share,” said Vontobel’s Bertschy. “We strongly believe that some changes in corporate governance are urgently needed.”

Paris wins approval from Berlin to remove anti-nuclear bias in EU legislation, say officials

Germany has dropped its long-held opposition to nuclear power, in the first concrete sign of rapprochement with France by Berlin’s new government led by conservative Chancellor Friedrich Merz.

Berlin has signalled to Paris it will no longer block French efforts to ensure nuclear power is treated on par with renewable energy in EU legislation, according to French and German officials.

The move resolves a major dispute between the two countries that has delayed decisions on EU energy policy, including during the crisis that followed Russia’s full-scale invasion of Ukraine.

“The Germans are telling us: we will be very pragmatic on the issue of nuclear power,” said a senior French diplomat involved in the talks. This meant that “all the biases against nuclear power, which still remain here and there in EU legislation, will be removed.”

“This will be a sea-change policy shift,” said a German official.

The reversal comes as Merz is seeking to explore ways for Germany to join France’s nuclear shield as a deterrent against future Russian aggression. “We are now actually finally open to talk to France about nuclear deterrence for Europe. Better late than never,” the German official said.

“It’s a welcome rapprochement that will make the topic of energy easier in the EU,” said Guntram Wolff, senior fellow at think-tank Bruegel. “Politically, Merz is also thinking about the nuclear umbrella.”

Berlin’s reversal on nuclear power is part of efforts by Merz to revive Franco-German co-operation, a precondition for major decisions at EU level that stalled under former chancellor Olaf Scholz.

“When France and Germany agree, it is much easier for Europe to move forward,” said Lars-Hendrik Röller, a professor at Berlin-based ESMT business school who was chief economic adviser to former chancellor Angela Merkel. “While several challenges remain, I believe this issue will be solved.”

Merz, who won elections in February, has been critical of his country’s decision to exit nuclear energy in 2011, under party rival Merkel, which he said was depriving Germany of cheap and reliable electricity.

Merz also criticised his predecessor Scholz for shutting down Germany’s last three nuclear power stations even as the country was grappling with high energy prices. While he does not plan to reopen conventional nuclear power stations, he has vowed to invest in new technologies, including small modular reactors and nuclear fusion, which, unlike fission, produces no long-lived nuclear waste.

The new Franco-German entente on energy builds on a groundswell of enthusiasm for nuclear power since gas prices reached record highs following Moscow’s war in Ukraine.

It leaves Austria as the only EU state strictly opposed to nuclear power. Countries including the Netherlands and Belgium have recommitted to atomic energy, having previously pledged to shut reactors.

In a letter sent to the European Commission on Friday, seen by the Financial Times, ministers from 12 EU member states with nuclear reactors said it was “imperative” that the EU recognised the “complementary nature of nuclear and renewable energy sources”.

They called for an update to an existing survey of the bloc’s nuclear sector to pave the way for governments to give state aid to nuclear projects and send a “clear signal” to businesses and investors about the benefits of atomic power.

Germany, which covered more than 60 per cent of its electricity consumption with renewable energy last year, long opposed Paris’ push to label atomic power as “green”. France derives about 70 per cent of its electricity from atomic power.

Berlin’s concerns in part stemmed from concerns that French industry would gain a competitive edge thanks to its 56-strong fleet of reactors, while German industry still struggles with the impact of high gas prices following the cut-off from cheap Russian fuel.

It has also been an ideological issue in Germany, where the anti-nuclear Green party were a part of Scholz’s government. 

The stand-off resulted in long debates over the inclusion of the words “low carbon” — seen as a synonym for nuclear power — across EU legal texts, particularly those relating to renewable power and the production of hydrogen, which Berlin sees as a critical energy carrier for decarbonising German industry.

“To ensure our energy sovereignty while respecting national choices, we are calling for an end to all discrimination at European level against low-carbon energies, whether nuclear or renewable,” said French President Emmanuel Macron during Merz’s trip to Paris on May 7.

For example, Germany’s new stance means that hydrogen produced from nuclear power should now be treated on par with hydrogen made from wind or solar energy, the French official said.

If you are a fan of Apple’s own-brand over-ear headphones, the AirPods Max, you may be wondering when to expect a new generation model. Apple revised the headphones last fall, adding a USB-C port, but the model was otherwise unchanged. Despite costing the most, AirPods Max lack features that are available in even the cheapest AirPods 4, and are driven by the outdated H1 chip.

And if you believe analyst Ming-Chi Kuo, you’ve still got a while to wait before Apple will be ready to release a next-generation model. In a tweet, Kuo reports that next-generation AirPods Max will not arrive until 2027.

Kuo says the 2027 AirPods Max will feature a new design. This suggests the 2027 generation will actually be a significant update, rather than a minor revision like the USB-C change.

Specifically, Kuo says the new AirPods Max will feature a lighter weight design. This would directly address one of the biggest complaints about the current Max, in that their liberal use of aluminium makes them rather heavy on the head, which some customers can find uncomfortable for long listening sessions.

For comparison, the current AirPods Max weigh in at 386 grams. The comparable Beats Studio Pro weigh just 260 grams.