Aurelia Butler

Premier Li Keqiang issued a bleak warning on Wednesday about the perilous state of China’s economy, telling more than 100,000 officials in a nationwide video conference that they urgently needed to boost growth, reduce unemployment and secure the summer grain harvest.But the lack of any concrete new initiatives from the central government and muted state media coverage of the event suggest that there is still no easy way out of the economic crisis triggered by president Xi Jinping’s controversial zero-Covid policy. The strategy has brought commercial activity to a complete or near halt in dozens of cities over the past three months.Just a few hours after Li spoke, Chinese state television’s main evening news broadcast buried a brief and much softened version of his remarks in the middle of its bulletin. It led instead with a long item about Chinese police officers — who pride themselves on being “the handle on the Chinese Communist party’s knife” — heaping praise on Xi.The footage showed more than 1,400 uniformed officers applauding Xi and carried a clear message for cadres across the country that mounting concerns about the world’s second-largest economy would not supplant pandemic control as the party’s priority. “After watching the news, it feels pretty hopeless,” said one government official in eastern Jiangsu province, who is trying to help revive the local economy. “There was much more coverage of everyone applauding [Xi].”Xi Jinping remains committed to his contentious zero-Covid strategy © Leo Ramirez/AFP/Getty ImagesLi and Yi Gang, the central bank governor, deepened local officials’ malaise when they implied that there was relatively little that the government was willing or able to do to help them, even though the economic challenges, according to the premier, were “to a certain extent greater than those experienced in 2020”, when the Covid pandemic erupted out of central Hubei province. In the first quarter of 2020, China’s economy contracted 6.9 per cent year-on-year, the first officially recognised annual decline in more than 40 years.Li even raised the spectre of potential food shortages. While most international attention has focused on Shanghai’s strict measures, which began in late March and have only begun to ease gradually over the past week, lockdowns and regional transport restrictions have also affected large agricultural regions, such as Jilin province.“Harvesting absolutely cannot stop,” he told the officials, according to an off-record transcript of Wednesday’s emergency meeting that was confirmed by three people briefed on the premier’s comments. “[Food security] is a fundamental responsibility of local party [cadres] and governments. If you cannot stabilise [agricultural] production, you will be held accountable.”Li and Yi, however, offered only a modest expansion of a corporate tax relief initiative and new policy loans of Rmb800bn ($118.7bn), an amount equivalent to just 0.7 per cent of gross domestic product. During the depths of the global financial crisis in 2008 and 2009, Beijing unleashed a stimulus effort equivalent to 13 per cent of annual economic output.“Recently, a few provinces submitted reports to the State Council [China’s cabinet] asking to borrow money,” Li said. “[But current] transfer payments to local governments are the largest in history . . . So let me give you the bottom line, the rest depends on you local governments.”Analysts argue that in areas where strict lockdowns have sapped demand from companies and consumers, more bank credit is about as effective as — according to the analogy attributed to John Maynard Keynes — “pushing on a piece of string”.“Without the central government stepping up, the upside for fiscal support is capped,” said Trey McArver at Trivium, a Beijing-based consultancy. “A V-shaped recovery is extremely unlikely.”David Zhang, who owns a small market research firm in Beijing, said that “cheap loans for SMEs won’t help — my problem is a lack of business and rising operating costs”.

Zhang, whose revenues have fallen by more than 50 per cent over recent months, added that “the situation is worse than in 2020”.Many small business owners also complain that Li’s tax rebates often come with conditions that make them impossible for struggling small and medium-sized enterprises to claim. In some regions, cash-strapped local tax bureaus will only give one party in any given transaction tax relief, which is usually grabbed by larger state-owned enterprises and foreign investors at the expense of their smaller, and predominantly private sector, SME suppliers.“Most of our clients are bigger than us and there is no way they will give up tax benefits to help us,” said Li Bin, who runs a small advertising company in Nanjing, near Shanghai. “We are too small to make our clients sacrifice for us.“Business is very bad.” More

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.Italian leader Draghi discussed the issue with Zelensky in a call on Friday, and has previously raised the issue with US president Joe Biden. Some Western capitals fear the looming food crisis and its devastating impact on poor households in Africa and the Middle East could trigger a new wave of migration to Europe.Russian forces have stepped up their attacks on Ukraine’s forces in the eastern Donbas region and claim to have taken full control of Lyman, a railway hub. The area has been home to the fiercest fighting in the three-month old conflict after Ukraine retreated from it. Kyiv said the battle was ongoing.Ukraine claimed it had driven back Russian forces from Sievierodonetsk, the only major city not yet under Russian control in Luhansk, which makes up the Donbas together with neighbouring Donetsk.Luhansk’s governor Serhiy Haidai said Ukrainian troops “managed to push back the Russians to their previous positions” after two-thirds of the city was encircled, but warned that Russian forces were “not abandoning their attempts to encircle our troops and disrupt logistics”.Putin also discussed the military situation with Macron and Scholz, the Kremlin said. He said Russia was open to returning to the negotiating table and blamed Kyiv for stalling talks.The Elysée said Macron and Scholz repeated that any end to the war must respect Ukraine’s sovereignty and territorial integrity. They also asked Russia to release 2,500 soldiers who defended the Azovstal steel plant in Mariupol and have since been held by Russia, arguing that they were effectively prisoners of war.In a late-night address, Zelensky said he was confident Ukraine would retake the areas Russia was attacking with more western military aid.“We are protecting our land in the way that our current defence resources allow. We are doing everything to increase them. And we will increase them,” Zelensky said. “If the occupiers think that Lyman or Severodonetsk will be theirs, they are wrong. Donbas will be Ukrainian.”Additional reporting by Joe Miller in Frankfurt and Amy Kazmin in Rome More

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 per cent 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 $36bn 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.“It’s certainly the worst start I can remember across the asset class and I’ve been doing EMs for more than 25 years,” said Brett Diment, head of global emerging market debt at Abrdn.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.David Hauner, head of EM strategy and economics at Bank of America Global Research, said he expected the situation to get worse.“The big story is that we have so much inflation in the world and monetary policymakers continue to be surprised by how high it is,” he said. “That means more monetary tightening and central banks will continue until something breaks, the economy or the market.”

Yerlan Syzdykov, global head of emerging markets at Amundi, said higher yields in developed markets like the US — driven by central banks’ rate rises — make EM bonds less attractive. “At best you will make zero, at worst you will lose money [this year],” he said.Hauner said that 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, said Jonathan Fortun, economist at the Institute of International Finance, which monitors cross-border portfolio flows to emerging markets.Chinese assets have received large so-called passive inflows over the past two years, he noted, following the country’s inclusion in global indices which meant that fund managers attempting to mirror their benchmarks automatically bought Chinese stocks and bonds. This year, however, such flows had gone into reverse, with more than $13bn leaving Chinese bonds in March and April and more than $5bn leaving Chinese equities, according to IIF data.“We are pencilling in negative outflows from China for the remainder of this year,” Fortun said. “This is a very big deal.”Fund managers have not allocated some of the money withdrawn from China to other EM assets, he said, resulting in a widespread retreat: “Everyone is turning from the whole EM complex as an asset class and going to safer assets.”The shock to commodity prices caused by the war in Ukraine has added to the strain on many developing countries that rely on imports to meet their needs for food and energy. But this has also delivered some winners among commodity exporters. Diment at Abrdn noted that, while local currency bonds in the JPMorgan GBI-EM index have delivered total returns of minus 10 per cent so far this year in dollar terms, there is wide divergence between countries. Bonds issued by Hungary, which is close to the war and relies on Russian energy imports, have lost 18 per cent in the year to date. Those of Brazil, a big exporter of industrial and food commodities, are up 16 per cent in dollar terms.Diment said valuations of EM debt “arguably look pretty attractive now” and that Abrdn has seen net inflows so far this year into its EM debt funds.However, Hauner at Bank of America argued that the bottom will only be reached when central banks shift their attention from fighting inflation to promoting growth. “That may happen sometime by the autumn but it doesn’t feel like we are there yet,” he said.Syzdykov said it depended on whether the surge in inflation ebbs, returning the global economy to an equilibrium between low inflation and low interest rates. The alternative is that the US goes into recession next year, adding to the drag on global growth and pushing EM yields higher still, he warned. More