Aurelia Butler

Eurozone inflation has fallen more steeply than expected to its lowest level for a year after a decline in energy costs. But economists warned an acceleration in the rate of price increases for food and services was likely to worry the region’s rate-setters. Consumer prices in the euro area rose 6.9 per cent in the year to March, down from 8.5 per cent the previous month, to reach their lowest level since February 2022. The drop was sharper than forecast, with stock markets rising on the back of the publication of the inflation figure by Eurostat, the EU’s statistics agency.However, core inflation, which excludes energy and food costs to give a better view of underlying price pressures, hit a new eurozone high of 5.7 per cent in March, up from 5.6 per cent the previous month. Food price inflation also rose, from 15 per cent to 15.4 per cent. Services inflation was up from 4.8 per cent to 5 per cent. Analysts thought the high core figure would lead to further increases in borrowing costs by the European Central Bank, which targets inflation of 2 per cent. “The potential for core inflation to remain stickier than hoped will be the main reason for the ECB to continue to hike [rates] in the near term,” said Bert Colijn, an economist at Dutch bank ING, predicting two further quarter-point rate rises by the ECB in May and June.European stock markets, which had been flat on Friday, rose on the eurozone inflation data. The region-wide Stoxx 600 and Germany’s Dax indices both climbed 0.4 per cent while France’s Cac 40 was up 0.5 per cent. The euro weakened 0.2 per cent against the dollar to $1.088.Euro area government bond prices initially rallied before falling back, leaving yields on Germany’s two-year debt up 0.05 percentage points at 2.8 per cent, as investors continued to bet that borrowing costs would rise further in the bloc.The past month’s turmoil in the banking sector has raised the prospect of a credit crunch that could slam the brakes on both inflation and growth in the coming months.However, ECB officials have signalled they are likely to continue raising rates at their next policy meeting in May unless the banking turmoil worsens.Rate-setters’ worries about surging labour costs — which overtook those in the US after rising by 5.7 per cent in the fourth quarter — will be accentuated by jobs data released on Friday showing unemployment in the bloc was at a record low of 6.6 per cent in February.“With wages rising sharply, a new wave of inflation is on the horizon,” said Christoph Weil, an economist at German lender Commerzbank. “This will drive up prices for services in particular.”Energy prices in the 20-country single currency zone fell 0.9 per cent in the year to March, compared with an increase of 13.7 per cent in the previous month, after the sharp increase in gas and electricity costs following Russia’s invasion of Ukraine a year ago worked its way out of the data. Economists expect energy prices to continue falling year on year, as they did after the pandemic hit in 2020.Annual inflation fell in 18 of the countries that make up the 20-member single currency zone, where price growth ranged from more than 17 per cent in Latvia to 3 per cent in Luxembourg. The only countries without falling inflation were Slovenia, where it rose, and Malta, where it was steady.Further reporting by John Aglionby More

European stocks and US futures inched higher on Friday, with traders on alert for the impact on inflation of higher interest rates.Europe’s region-wide Stoxx 600 rose 0.3 per cent after eurozone inflation fell more than expected and is on track to finish the quarter up more than 6 per cent. Germany’s Dax — which is up more than a tenth since the start of the year — also rose 0.3 per cent, while London’s FTSE 100 was up 0.1 per cent after data showed the UK economy grew 0.1 per cent between the third and fourth quarters of 2022.Contracts tracking Wall Street’s S&P 500 and the tech-heavy Nasdaq 100 both rose less than 0.1 per cent ahead of the New York open. Shares in Digital World Acquisition Corporation, the blank-cheque company that plans to take Donald Trump’s media outfit public, jumped 8 per cent in pre-market trading after the former president was indicted on criminal charges in New York.The gains in stock markets came after Europe’s harmonised index of consumer prices slowed to 6.9 per cent in the year to March from 8.5 per cent in February as energy costs receded. Economists had expected prices to rise 7.1 per cent. However, core inflation, which strips out volatile food and energy prices, rose to a fresh high of 5.7 per cent from 5.6 per cent, in line with forecasts. Unemployment across the euro area was unchanged at 6.6 per cent. Analysts said the figures were unlikely to deter the ECB from raising rates by a quarter percentage point to 3.25 per cent when it next meets. The euro fell 0.2 per cent against the dollar to $1.087 and the yield on the policy-sensitive two-year German Bund rose 0.02 percentage points to 2.76per cent. Bond yields move inversely to prices. In the US, the February figure for the core personal consumption expenditures price index — the Fed’s preferred inflation gauge — is published on Friday. It is expected to have slowed to 5.1 per cent on a headline basis, year on year, from 5.4 per cent in January. The latest inflation figures are likely to heavily influence how the US Federal Reserve approaches its next interest rate decision, and come against a backdrop of acute tension in the banking sector. US government bond markets sold off slightly, with the yield on the two-year US Treasury note rising 0.03 percentage points to 4.13 per cent.Asian equities advanced on Friday, buoyed by stronger than expected economic data in China.Hong Kong’s Hang Seng index added 0.9 per cent, and China’s CSI 300 rose 0.3 per cent. South Korea’s Kospi and Japan’s Topix each advanced 1 per cent.Activity in China’s non-manufacturing sectors grew at its fastest rate in more than a decade in March as business confidence rocketed and demand grew steadily, according to a closely watched official gauge. “This strength won’t be sustained indefinitely, however,” said Julian Evans-Pritchard, head of China economics at Capital Economics. Much of the immediate boost from dismantling Covid-19 restrictions has “already passed” and the recovery is “likely to moderate over the coming months”. More

Japan plans to impose export restrictions on 23 types of equipment used to make semiconductors, following similar curbs by the US designed to restrict China’s access to cutting-edge chips in an intensifying battle over the technology.The move by Japan fulfils its side of a three-way agreement with the US and Netherlands that would significantly curtail China’s ability to import equipment used to produce the most advanced types of semiconductors.Japan has avoided any formal public reference to that agreement, as geopolitical tensions and US-China decoupling have raised pressure on Japanese companies to work out a strategy that allows them to straddle both markets.Japan’s trade minister Yasutoshi Nishimura told a press conference on Friday that the controls would cover six categories of equipment used in chipmaking that include the most specialised areas of lithography and etching.The ministry did not explicitly mention China in its statement, but Nishimura said the restrictions were part of Japan’s responsibility as a technological nation to contribute to international peace and stability.“We do not have one particular country in mind with these measures,” he said.Japanese officials said the scope of its restrictions went further than those imposed last year by the US. Equipment exporters would need licences for all regions, giving the ministry oversight on the sale of equipment to third-party countries that could, in theory, produce high-end chips for military use.“By expanding the regions that will be covered by the measures, we wanted to address a broader range of risks associated with advanced semiconductor technology,” one of the officials said. “China is not the only risk out there.”Applied Materials in the US, ASML in the Netherlands and Tokyo Electron in Japan globally dominate in equipment for producing the highest-end chips used in supercomputers and artificial intelligence.The restrictions, which come into effect in July, will affect a broader range of companies than previously expected. People familiar with negotiations previously said the controls would mostly affect Tokyo Electron and Nikon, but people with knowledge of the measure said the list of affected companies would be roughly 10 and could include blue-chip tech group Advantest.

In January, the Netherlands and Japan reached a deal with the US aimed at cutting off China from the most advanced chips that could be used in sophisticated weaponry and machines, but Japanese and Dutch officials had disclosed few details until this month.Before the January agreement, the US imposed a series of draconian restrictions on the export of chipmaking equipment to China, but officials had said privately that the overall impact of the scheme would only bite if it were matched by similar moves from Japan and the Netherlands.Rahm Emanuel, the US ambassador to Japan, welcomed what he said was the third example this week of the strengthening US-Japan alliance after earlier deals on critical minerals and ethanol. “I love a good hat trick . . . It’s another win for economic security and secure supply chains,” he said on Twitter.As US export restrictions tightened, Chinese chip companies have relied on equipment made by companies such as Tokyo Electron and Nikon. Industry experts say the equipment on the Japanese list is essential for the manufacture of sophisticated chips and the rules are consistent with the US controls introduced last October. “It will be difficult for SMIC and other second-tier fabs in China to move into advanced manufacturing processes in the short term,” said Lucy Chen, vice-president of Taipei-based Isaiah Research.Semiconductor companies in China have been stockpiling key materials in anticipation of the Japanese export controls. “The 23 devices were basically what we expected, and we thought there would be more equipment exports affected,” said one Chinese fab manager.A Japanese equipment distributor, who did not want to be named, said they had rushed to ship orders to Chinese customers in anticipation of the ban coming into effect in the second half of the year. Additional reporting by Qianer Liu in Hong Kong More

Good morning. First, chilling news from Russia. Evan Gershkovich, an American reporter for the Wall Street Journal, has been arrested and sentenced to two months pre-trial detention on espionage charges. Evan is a journalist, not a spy. Journalism is not a crime.Also, minutes after we sent yesterday’s email saying that negotiations were ongoing, a deal was struck between EU countries on including nuclear power in a new law on renewable energy targets. The final compromise? C’est très compliqué.Today, I interpret clashing rhetoric from Brussels and Beijing on the future of the EU-China relationship, while our Nordic correspondent sketches out the ultra-tight Finnish election this Sunday where incumbent premier Sanna Marin is under threat from two fronts.Duelling narrativesEuropean Commission president Ursula von der Leyen said yesterday that Europe should adopt “defensive tools” to protect itself from China. China, however, thinks the EU should stop listening to the US, and realise its interests lie in more, not less, economic engagement.Context: The EU’s relations with China are in a state of flux. Brussels officially defines China as a partner, a competitor and a rival — all at the same time. That reflects both a more open-minded approach to Beijing than the US, and deeper economic ties. But Brussels is under increased pressure from Washington to get tougher.Talking to the Financial Times just moments before von der Leyen gave a speech laying out her own (rather more hawkish) view of the relationship, China’s ambassador to the EU Fu Cong was clear that Beijing thought Brussels was dancing to Washington’s tune, and sacrificing its own economic interests.“We know that the US is putting a lot of pressure on European countries . . . to create obstacles for normal trade,” Fu said. “The United States will stop at nothing in trying to prevent a normal relationship between China and the EU. And we firmly believe that this is not in the interests of the [EU].”Fu’s words of caution were tinged with veiled threat. Citing the Netherlands’ decision to follow the US in curbing exports of chip technology to China, and reports that the EU could collectively adopt a similar measure, he said Beijing “cannot just sit there and see its own interests being trampled”.“Other countries will see how the European companies and European governments are acting,” he added. “And so even for their own image, for their own credibility, they need to be careful.”There’s much at stake. Von der Leyen goes to Beijing next week, and there’s a large variation among EU member states on how the relationship should be recalibrated, if at all.Perhaps Fu’s most pertinent argument was his assessment that European businesses are very enthusiastic about investing in China, and that the continent’s politicians should not “work against this sentiment”.“Who in their right mind would abandon such a thriving market as big as China?” he said, posing the €860bn question. “It will only be at their own peril.”Chart du jour: The big easeInflation tumbled in Germany and Spain this month, on a sharp drop for energy costs in two of Europe’s largest economies.Three-way battleNail-biter is a term bandied around frequently about elections, but Finland’s on Sunday truly merits the term, writes Richard Milne.No fewer than three parties are fighting it out for first place, and all three have been within the margin of error for victory over the past few weeks.Context: Prime Minister Sanna Marin’s Social Democrats have won plaudits for their handling of the Covid-19 pandemic and the journey to Finland’s impending Nato membership. But polls have long suggested victory for the conservative National Coalition party. In recent weeks, it has become a three-way race as the anti-EU, anti-immigration Finns party have joined the contest.“I can’t recall it has been so tight ever. It’s intriguing,” says Hanna Wass, professor at the University of Helsinki.The winner usually gets first go at forming the government and if either the Finns or National Coalition win, analysts expect a rightwing coalition that will focus on spending cuts amid the ongoing Finnish obsession with government debt levels. Marin has railed against what she derides as her rivals’ focus on austerity and instead talks about the importance of growth and investments. But she may well end up needing arch-rival National Coalition to form a viable government.The Finns, who would like a Fixit, do not see eye to eye with National Coalition on the EU but could compromise if they could get their way on migration, experts think.Everything suggests it will be both a tense election evening, and tense government formation talks afterwards.What to watch today Spanish prime minister Pedro Sánchez meets Chinese president Xi Jinping in Beijing, around 10am CET.EU competition commissioner Margrethe Vestager meets with US treasury secretary Janet Yellen in Washington.Now read these‘Dare to fight’: How Xi Jinping expects China’s diplomats to shape a global system around Beijing’s interests.Morally repugnant: Giving up Ukraine to Vladimir Putin may be in the naked self-interest of both the US and western Europe, writes Simon Kuper.Finnish line: Turkey’s parliament has voted to approve Finland’s membership of Nato, the final legislature in the alliance to do so. More

With China’s political class arrayed before him earlier this month, Xi Jinping summed up his robust foreign policy to delegates with one vivid refrain: “dare to fight”. The declaration at the National People’s Congress captured a new ethos for Beijing, spurred by the Chinese leader’s conclusion that the US-led world order is now in decline and ready to be replaced with a system that better suits China’s interests. A flurry of diplomacy has already begun. Emerging from the self-isolation of China’s zero-Covid policy, the president conducted a state visit to Russia this month, published a paper on peace in Ukraine and prepared to receive visits from European leaders eager for his help to end the war. Also this month China convinced Iran and Saudi Arabia to resume diplomatic relations, its first such success as a mediator in the Middle East.More subtly, China has put flesh on the bones of a series of foreign policy “initiatives” to create alternative structures for international co-operation, particularly with the developing world. “China is now ready to gradually erode American leadership and promote Chinese governance,” said Zhao Tong, a senior fellow at the Carnegie think-tank and a visiting scholar at Princeton University. For China, the diplomatic push is a natural extension of its growing economic power, and one that aims to restore its historic role at the centre of global politics. It also plans to counter Washington’s bid to “contain” China’s rise by curbing its technological and military prowess.For the US-led world order, meanwhile, Xi’s campaign represents its biggest challenge since the cold war.

China has adopted a more assertive stance on foreign relations, including the militarisation of artificial islands in the disputed South China Sea © Ezra Acayan/Getty Images

Since becoming China’s Communist party leader a decade ago, Xi has adopted a more assertive stance on foreign relations. Alongside bombastic calls for the “great rejuvenation of the Chinese nation”, he has militarised artificial islands in the disputed South China Sea, taken a more aggressive stance on Taiwan and adopted “wolf-warrior” loudspeaker diplomacy to shout down foreign critics.In October 2017, he told the party’s 19th congress: “It is time for us to take centre stage in the world.”Now, Xi wants to consolidate that position. This month, he codified the new foreign policy doctrine with a 24-character formula that included the “dare to fight” phrase. The formula’s sentence structure mirrored guidance handed down by the late reform-era leader Deng Xiaoping more than 30 years ago that counselled strategic patience on foreign relations. But Xi’s version pointedly abandoned that principle.  

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One Asian diplomat said Xi’s 2017 speech had already called time on the Deng era, where China would “hide its strength and bide its time”. “But now [Xi] has officially replaced the Deng doctrine with something very different,” the person said.In this spirit, China for the first time played a decisive role this month as a mediator in a Middle Eastern dispute, convincing Iran and Saudi Arabia to resume diplomatic relations after a seven-year rift.

Beijing achieved a notable diplomatic success recently by mediating in the Middle East dispute between Iran and Saudi Arabia © China Daily via Reuters

“In the past we would declare some principles, make our position known but not get involved operationally. That is going to change,” said Wu Xinbo, dean of the Institute of International Studies at Fudan University in Shanghai.China has also sought to portray itself as a proponent of peace in Ukraine, even though western capitals see Beijing’s position on the war as bolstering Vladimir Putin and recognising Russian conquest of Ukrainian territory.Xi was expected to discuss Ukraine with Pedro Sánchez of Spain, who arrived in China on Thursday. Beijing hopes the Spanish prime minister’s two-day trip will prepare the ground for China-EU co-operation once Spain assumes the rotating presidency of the bloc in July, said one Chinese expert. France’s Emmanuel Macron and Ursula von der Leyen, the European Commission president, will also visit in the coming weeks. But while Xi’s efforts were welcomed by Putin, the Chinese leader has notably not called Volodymyr Zelenskyy, the president of Ukraine, since his country was invaded.Beijing is also vying for leadership of the developing world. In recent weeks, Xi has promoted what he calls “Chinese-style modernisation” as a concept better suited to developing countries than the west’s “rules-based” order.

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Following the introduction of his Belt and Road Initiative in 2013, focusing on infrastructure investments abroad, Xi launched the Global Development Initiative in 2021 — another push to use Chinese economic power to rally developing countries. The following year, he announced the Global Security Initiative and this month he pitched the Global Civilisation Initiative, a still-vague policy that appears aimed at challenging the western concept of universal values. “People need to . . . refrain from imposing their own values or models on others,” China’s State Council said on the latest initiative.

Xi Jinping delivers a key address via video link with world leaders © Yin Bogu/Xinhua/Eyevine

To mark the occasion, Xi held a conference call in a sparsely furnished hall with sympathetic political leaders from around the world appearing on a huge screen.“We need to look at China’s foreign policy with new eyes because these moves are new,” said Tuvia Gering, an expert in Chinese foreign and security policy at the Jerusalem Institute for Strategy and Security. China’s argument that modernisation did not have to equal westernisation would be well received in many developing countries, said Moritz Rudolf, a research scholar at Yale Law School’s Paul Tsai China Center, particularly if it brought them material benefits from closer co-operation with Beijing. “It appears to be a counterargument to [US president] Joe Biden’s autocracy versus democracy narrative,” said Rudolf. “It’s an ideological battle that’s more attractive to developing countries than people in Washington might believe.”In Latin America, for instance, overall sentiment towards Beijing’s diplomatic strategy was positive, said Letícia Simões, assistant professor at La Salle University in Rio de Janeiro.An article by a Chinese Communist party official last year said Beijing had already approved $22bn of $35bn in lending earmarked for countries in the region. Taiwan’s flag is lowered from its embassy in Honduras after the Central American nation officially cut ties with Taipei © Orlando Sierra/AFP/Getty ImagesChinese largesse appears to be paying off politically in Central America, where over the past six years several countries, including Honduras this month, have cut diplomatic ties with Taiwan. “Leftwing governments [in Latin America] tend to have a more positive attitude towards China, but even rightwing countries need a pragmatic relationship,” said Simões, pointing to China’s role as the largest trading partner of many countries in the region.Analysts said that in the Iran-Saudi dispute, Beijing translated its trade dominance into geopolitical influence. They also predicted that China’s rapidly evolving military capabilities could enable it to start offering alternatives to the US in international security.“China is signalling to states that China can guide foreign policy solutions,” said Courtney Fung, an associate fellow at the Lowy Institute.

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China’s more activist foreign policy was motivated partly by pragmatism, including the need to protect its increasingly global economic interests, as well as nationalism and geopolitics, analysts said. “China wants to feel that we are a force in international affairs on par with our growing national power,” said Fudan University’s Wu. “But another factor is the US’s attempts at containing China. They want to isolate us, suppress us, demonise us, and so we need to acquire the ability to resist those efforts.” The Ukraine war reinforced this narrative in the minds of some Chinese policymakers. “They genuinely believe that the war was provoked by the west to finish off Russia, and that once Russia is defeated China will be next,” Zhao of Carnegie said. “Russia is China’s most important teammate in the fight with the US, so there is no room for abandoning Russia.” 

Russia’s Vladimir Putin toasts Xi Jinping after inviting the Chinese president to visit Moscow © Pavel Byrkin/Sputnik/Kremlin/AP

Chinese diplomats and academics have debated for years how to square the country’s growing global interests with its traditional doctrine of non-interference in other countries’ affairs. To provide a diplomatic framework for incidents such as China’s evacuation of its citizens from Libya in 2011 and its anti-piracy missions around the Horn of Africa, they coined the term “constructive interference”.Chinese experts see this concept at work in Beijing’s approach to the Ukraine war, which for western observers is undermined by contradictions. China, for instance, has not condemned Russia’s invasion, nor has it explicitly supported Ukraine’s sovereignty. Many believe that China faces a steep learning curve as a peacemaker. “I would hope that China could play a mediating role in the Ukraine conflict, but it would be extremely difficult,” said Zhang Xin, a Russia expert at East China Normal University. The Iran and Saudi deal was more straightforward as both parties wanted more Chinese involvement in the region and both wanted an agreement, Zhang said. Still, observers believe Beijing’s foreign policy will only become more active. Chinese scholars see Afghanistan and North Korea and some Middle Eastern and African conflicts as areas where China can play a growing role, even though it has been involved for decades in international talks on Pyongyang’s nuclear programme with few results.Some even believe it could team up with the US in efforts towards peace. “There is still a lot of room for co-operation,” said Fudan University’s Wu.Western scholars are more sceptical. But if Beijing’s new appetite for mediation did “indicate that China is not going to be a free rider any more and use some of its political capital [to get deals done] . . . then it could be a good thing”, said Paul Haenle at the Carnegie Endowment for International Peace.Additional reporting by Michael Stott in London More

Chief executives — especially of consumer-facing companies — beware.Policymakers, economists and, increasingly, the public are growing sceptical of justifications for rising prices. Bumper profits and bigger margins have not gone unnoticed and a new word, greedflation, has started to crop up.In the past two years, non-financial companies in the US and Europe have fared well despite stiff headwinds from the pandemic and the war in Ukraine. Even with supply chains bottlenecks, strains on global shipping and disruptions in the supply of energy and commodities, corporate profits have surged. Companies passed these higher input costs on to their clients, and then went further: margins reached record highs. Earnings before interest and taxes peaked in the course of 2022 at nearly 18 per cent of revenues on average for the largest US listed companies and more than 15 per cent for Europe’s biggest listed groups, according to data compiled by Refinitiv.It took some time for central bankers and policymakers, more worried at first about a potential wage and inflation spiral, to take note. But they have now identified what has also been called “excuseflation” — when companies with market power seize on publicly reported disruptions to create legitimate justifications to increase prices — as a problematic behaviour because it heightens inflationary pressures. Anecdotal evidence is mounting in the US and the EU, notably Germany.“This position, that profit and inflation have been linked, has now become mainstream,” said Isabella Weber, assistant professor of economics at the University of Massachusetts Amherst, who showed in a paper published this year that some companies had amplified US inflation in the wake of the pandemic.

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It could be that policymakers are too late to the party already. While they remain historically high, profit margins have started to shrink in the past two quarters and companies are warning investors of tougher times ahead. Partly this is because consumers, whose savings had grown during lockdowns making them more willing to pay higher prices, are becoming less amenable. Many are also having to budget for higher mortgage payments because of rising interest rates. This hasn’t stopped calls for direct action targeting companies suspected of price gouging. Distrust in matter of pricing risks outlasting the trend itself.When it emerged that prices of UK groceries had soared 17.5 per cent in March compared with the same period a year earlier, Société Générale global strategist Albert Edwards tweeted: “More Greedflation? When are government going to force a halt to this price gouging? Smacking the consumer with higher and higher interest rates to suppress profit margin inflation is too blunt a tool.”In the US, governor of California Gavin Newsom this week signed anti-gasoline price gouging legislation while in New York, attorney-general Letitia James has outlined plans to strengthen the state’s investigative powers on consumer price increases. Record high egg prices have also drawn scrutiny from Democratic lawmakers Elizabeth Warren and Katie Porter.Weber, who suggests closer monitoring of corporate behaviour and some targeted price controls, welcomed the legislative and policymaking reaction but said it was rather late. “Generally speaking, policy response is lagging. A year has passed since we saw profits explode.”A consequence of these high margins, she noted, will probably be more fractious labour relations, as workers start demanding a bigger share of the pie. “Companies need to redistribute these profits,” she said. More

More than a quarter of emerging market countries have found themselves effectively locked out of international bond markets as recent chaos in the banking sector has prompted investors to shun riskier assets.Even as the effects of the banking sector turmoil recede in developed economies, investors have adopted a “risk off” approach to high-yield debt. This has tipped emerging market countries whose credit status was already shaky into territory where their ability to raise funds is seriously impaired.According to research by Goldman Sachs, around 27 per cent of emerging market sovereigns currently have spreads on yields compared to equivalent US Treasuries of above 9 percentage points, the level at which market access typically becomes restricted.“Financial instability has two effects on emerging market high yielders. The positive is that it might help to bring down inflation and interest rates,” said David Hauner, head of emerging market cross-asset strategy and economics at Bank of America. “But at the same time it means that they don’t get market access; no one is going to buy a high-yield bond when you don’t know what is going to happen to the financial market system.”Egyptian and Bolivian dollar bonds are among those which have underperformed since the start of the banking panic, with their spreads climbing to 11 and 14 percentage points. Investors say that countries which had plans to issue bonds have avoided coming to market, such as Nigeria and Kenya, whose spreads climbed to 8.95 and 8.4 percentage points respectively in March. Even high-yield countries with spreads far below 9 percentage points, like Bahrain, have avoided doing so.However, Costa Rica, which has a B+ rating from S&P, completed a $1.5bn issuance on Tuesday at a yield of 6.55 per cent.Countries which face restricted access to international debt markets may be forced to turn to the IMF, private market debt sales and currency devaluations.“[Restricted access to debt markets] will push countries to take tough measures at a time where inflation is already high and they’re already struggling with low growth,” said Sara Grut, an emerging markets sovereign credit strategist at Goldman Sachs. “The key question for these countries is, what will be the thing to help them regain market access? One could be that they do very uncomfortable, unpopular reforms, or we see much stronger global growth that improves market sentiment.”Emerging market governments have issued $54bn in sovereign bonds in the first quarter of this year, an increase of around 60 per cent compared to the previous year. However, nearly 70 per cent of this was completed in January, before market confidence was dented by the collapse of Silicon Valley Bank, forced sale of Credit Suisse and turmoil at US regional banks.Meanwhile, continued elevated inflation, high interest rates and sluggish growth in countries around the world may further limit access for distressed sovereigns. “Even if the issues in the banking sector get sorted out, we still turn back to the inflation outlook,” said Uday Patnaik, head of emerging markets debt at Legal and General Investment Management. “To get a meaningful rally, the market has to believe inflation has peaked.” More

The World Bank has warned that technology decoupling and trade restrictions stemming from US-China tensions are hurting knowledge generation and innovation in both superpowers, posing a long-term threat to growth across Asia. The deepening division between the world’s two biggest economies now poses “the most immediate challenge” in Asia-Pacific, according to the bank’s semi-annual economic update for the region released on Friday.“Bilateral restrictions on technology flows and collaboration between large countries could reduce the global availability of knowledge,” the World Bank said, adding that empirical evidence showed the “adverse effects of recent restrictions” on companies in China and the US as well as their top trading partners.The warning came as US-China relations have sunk to their lowest level since the nations normalised diplomatic ties in 1979.China’s president Xi Jinping has become increasingly assertive towards Hong Kong and Taiwan, as well as in the South China Sea, and has supported Vladimir Putin despite Russia’s invasion of Ukraine.In the US, Joe Biden has adopted many of his predecessor’s more hawkish policies towards China, including tariffs and sweeping export controls intended to cut off Chinese companies’ access to critical technologies such as semiconductors.In the latest sign of deepening divisions between China and the west, European Commission president Ursula von der Leyen on Thursday called for the EU to develop “new defensive tools” for trade in sensitive technologies such as quantum computing and artificial intelligence, as part of “de-risking” the bloc’s industries from China’s ambitions.The World Bank’s findings, based on an analysis of patent trends in the US and China, found that post-2018 measures taken by Beijing and Washington have damaged corporate innovation in both countries. This in turn threatened to undermine decades of stable economic growth in the Asia-Pacific region, as well as co-operation in the fight against climate change, the bank said.“Once you move away from open, integrated markets which are governed by predictable trade rules to protectionism, trade division [and] politically influenced choices, you introduce uncertainty, which is to nobody’s advantage,” said Aaditya Mattoo, the World Bank’s chief economist for East Asia and the Pacific. Other countries would struggle to exploit economies of scale if they had to comply with conflicting technology standards set by different governments, Mattoo added.While a push to diversify manufacturing and technology supply chains away from China initially provided a boost to India and countries in south-east Asia, the World Bank warned that deeper problems were emerging. “On the face of it . . . new opportunities have been created. You see a dramatic increase in Vietnam’s exports, especially to the US, and also a dramatic increase in Indonesia exports, especially to China with metal,” Mattoo said.But those opportunities could be eroded by further US-China decoupling, which is disrupting trade flows and raising costs for companies by forcing them to separate their supply chains to avoid violating export restrictions. The uncertainty could lead to less investment. This is particularly the case with providing access to emerging green technologies, as developing countries in Asia, many of which remain deeply reliant on fossil fuels for growth, look to transition to renewable energy.“We need to not do what happened with vaccines,” Mattoo said, referring to unequal access to Covid-19 inoculations. “We need to ensure that these green technologies become genuine public goods.”The World Bank projected economic growth in the region of 5.1 per cent this year, up from 3.5 per cent last year and reflecting a 0.5 percentage point increase from its October forecast.

The bank also said it expected China would achieve its 5 per cent growth target for 2023, forecasting an expansion of 5.1 per cent as the economy rebounds from Xi’s zero-Covid policy.But its experts cautioned that China could face a structural shift to slower growth if it failed to implement economic reforms to shift from a reliance on exports and investments to consumption.Excluding China, the region’s economic growth is projected to fall to 4.9 per cent in 2023, from 5.8 per cent last year, as slowing global growth hits Asia’s export-dependent economies, high commodity prices eat into domestic consumption and financial tightening by policymakers inhibits investment. More