Editorial The Economist, 26.05.2022
Inflexible policies are trumping pragmatism
Over the past 20 years China has been the biggest and most reliable source of growth in the world economy. It contributed a quarter of the rise in global gdp over that period and expanded in 79 of 80 quarters. For most of the period since China opened up after Mao’s death, the Communist Party has taken a practical approach to making the country richer, mixing market reforms with state control. Now, however, China’s economy is in danger. The immediate issue is its zero-covid campaign, which has caused a slump and may condemn the economy to a stop-start pattern. That is compounding a bigger problem: President Xi Jinping’s ideological struggle to remake state capitalism. If it stays on this path China will grow more slowly and be less predictable, with big consequences for it and the world.
After nearly two months the lockdown of Shanghai is easing, but China is far from being covid-free, with fresh outbreaks in Beijing and Tianjin. More than 200 million people have been living under restrictions and the economy is reeling. Retail sales in April were 11% lower than a year earlier and purchases of kfc, cars and Cartier are weak. Although some workers are living on factory floors, industrial output and export volumes have dipped. For the full year China may struggle to grow much faster than America for the first time since 1990, in the aftermath of the massacre near Tiananmen Square. For Mr Xi the timing is awful: after the 20th party congress later this year, he intends to be confirmed for a third term as president, breaking the recent norm that leaders bow out after two.
It is, however, Mr Xi who bears much responsibility for the twin blows to the economy. The first is his zero-covid policy, which has been enforced for 28 months. The party fears that opening up would lead to an exit wave that could kill millions. That may be true, but it has wasted precious time: 100 million people over 60 are not triple-jabbed. It refuses to import more effective Western mrna vaccines. Instead, the plan may be to push zero-covid into next year. China has backed out of hosting the Asian Cup, a football contest, in June 2023. There is talk of permanent testing stations and a standing army to swab nostrils forever. Since Omicron is highly transmissible, more outbreaks and lockdowns are inevitable. But since the zero-covid policy is identified with Mr Xi, any criticism of it is viewed as sabotage.
The government hopes a vast stimulus program that is in the works will help it meet the official growth target of 5.5% for 2022 and calm nerves ahead of the congress. On May 19th Li Keqiang, the prime minister, urged officials to “act decisively” to restore growth, and the central bank cut mortgage rates. The party has tried to reassure terrified tech tycoons. A likely next step is a big bond-financed government infrastructure program.
Emerging market bonds are suffering their worst losses in almost three decades, hit by rising global interest rates, slowing growth and the war in Ukraine. The benchmark index of dollar-denominated EM sovereign bonds, the JPMorgan EMBI Global Diversified, has delivered total returns of around minus 15% so far in 2022, its worst start to the year since 1994. The decline has only been slightly eased by the broad rally across global markets in recent days, which ended a seven-week losing streak for Wall Street stocks. Nearly 36 billion USD has flowed out of emerging market mutual and exchange traded bond funds since the start of the year, according to data from EPFR; equity market flows have also gone into reverse since the start of this month.
Developing economies were hit hard by the coronavirus pandemic, straining their public finances. Rising inflation, slowing global growth and the geopolitical and financial disruption caused by Russia’s war in Ukraine have added to the economic pressures they face. The investment outflows threaten to worsen their woes by tightening liquidity.
Higher yields in developed markets like the US — driven by central banks’ rate rises — make EM bonds less attractive. Rate rises in major developed market economies were not necessarily bad for EM assets if they were accompanied by economic growth. But that is not the case now, we have a major stagflation problem and central banks are raising rates to kill rampant inflation in some places, such as the US. This is a very unhealthy backdrop for emerging markets. China, the world’s biggest emerging market, has faced some of the heaviest selling. Concerns about geopolitical risk, including the possibility that China will invade Taiwan in the wake of Russia’s invasion of Ukraine, had been exacerbated by the economic slowdown as the government imposed draconian lockdowns in pursuit of its zero-covid policy.
European leaders have stepped up diplomatic efforts to loosen Russia’s hold on Ukraine’s grain supplies as Kyiv’s prospects in the eastern Donbas region worsen and the risk of a global food crisis mounts. German chancellor Olaf Scholz and French president Emmanuel Macron discussed the situation with Vladimir Putin in a phone call on Saturday. Putin told them Moscow was willing to find ways to unblock grain exports from Ukraine’s Black Sea ports and could increase its own fertiliser and agriculture exports if relevant sanctions are lifted.
Their conversation came two days after Italian prime minister Mario Draghi broached the issue with the Russian president in a bid to ease the global food crisis that threatens to inflict hardship in emerging market economies. Ukraine and some of its western allies have accused Russia of blockading the port of Odesa, holding up the export of large shipments of grain. Putin, Scholz and Macron discussed whether a negotiated solution could be found to open Odesa to allow grain exports to leave Ukraine, according to an Elysée briefing after the call. The French and German leaders “noted the Russian president’s promise to allow ships to access the port to export grain without it being used militarily by Russia — if the port was demined in advance”, according to the briefing. Berlin said the call lasted 80 minutes and was “devoted to Russia’s ongoing war against Ukraine and efforts to end it”.
The risk of a global food crisis has been intensifying since Putin launched his all-out invasion of Ukraine, a major grain producer and exporter, on February 24. Russian fertiliser and agricultural exports have also been disrupted, for which Moscow blames western sanctions. Putin told Macron and Scholz that Russia “is ready to contribute to finding options for unimpeded grain exports”, according to a summary of his words released by the Kremlin in a statement. “Increased supplies of Russian fertilisers and agricultural products, which, of course, will require the lifting of relevant sanctions, will also help to ease tensions on the global food market,” the Kremlin reported Putin as saying.
Ukraine’s president Volodymyr Zelensky discussed the Black Sea blockade in a call with UK prime minister Boris Johnson. “We talked about strengthening defence support for Ukraine, intensifying work on security guarantees, supplying fuel to Ukraine. We must work together to prevent a food crisis and unblock Ukrainian ports,” Zelensky wrote on Twitter. Johnson highlighted “the intensive work taking place with international partners to find ways to resume the export of grain from Ukraine to avert a global food crisis” and said “the UK would work with G7 partners to push for urgent progress”, Downing Street said in a statement.
India and Malaysia are among several Asian countries restricting exports of certain key commodities as nations try to safeguard supplies over concerns of food security and inflation. Thai producers of sugar, chicken and rice look set to benefit as they enjoy strong harvests this year after back-to-back droughts. Meantime, Brazilians faced the highest-ever levels of hunger in the pandemic, disproportionately affecting the poor and women.
India will restrict sugar exports as a precautionary measure to safeguard its own food supplies, another act of protectionism after banning wheat sales just over a week ago. The country was the world’s biggest sugar exporter after Brazil last year, and counts Bangladesh, Indonesia, Malaysia and Dubai among its top customers. The double crises of Russia’s invasion of Ukraine and China’s new pandemic lockdowns are jolting the world recovery by exacerbating inflation and hurting growth. Central banks in Pakistan, Ghana, Israel, Nigeria, New Zealand, South Korea and Guatemala hiked interest rates this week. Policy makers in Russia cut rates in an effort to prop up its economy, but it has still boosted more than lowered rates for the year.
China’s economy remained deep in a slump in May as lockdowns continued to weigh on activity, and as the threat of omicron and expanded restrictions dampened sentiment. A plate of chicken rice, one of Singapore’s most popular meals, is poised to get more expensive after Malaysia moved to restrict exports. Thailand -- a major exporter of sugar, chickens and rice -- looks set to benefit as many of its Asian neighbors limit shipments of agricultural commodities to shelter consumers from surging prices. The rising food protectionism and price rallies are welcome news for Thai producers that are enjoying strong harvests this year after back-to-back droughts.
US residential electricity rates have been surging for months and are poised to climb even higher this summer on a combination of tight supplies of natural gas and coal, an unrelenting drought in the Western US, and a nationwide forecast for extreme heat. More Americans are quitting their jobs than ever, and fewer are sticking around in their new positions. Among workers who took a new job in 2021, the share who had been in their previous position for less than 12 months rose by 6.5% compared with a year earlier, data compiled by LinkedIn show.
