Raphael Stevens

Recent outbreaks in 28 provinces have infected more than 15,000 people and stem primarily from the highly transmissible omicron variant, China’s National Health Commission said Tuesday, according to state media.
On Tuesday, Dongguan city in the southern province of Guangdong ordered employees of businesses to work from home and locked down residential areas, permitting only necessary activities such as buying groceries and taking virus tests.
Yum China, which operates Pizza Hut and KFC in the country, announced Monday that same-store sales for the first two weeks of March have fallen by about 20% year-on-year.

Aerial view of people queuing up for COVID-19 nucleic acid testing on February 26, 2022, in Dongguan, Guangdong province.
Vcg | Visual China Group | Getty Images

BEIJING — China’s worst Covid-19 outbreak since the initial wave of the pandemic worsened Tuesday with a major factory city ordering production halts.
Recent outbreaks in 28 provinces have infected more than 15,000 people and stem primarily from the highly transmissible omicron variant, China’s National Health Commission said Tuesday, according to state media. China has 31 province-level regions.

Although the northern province of Jilin accounts for most of the cases, the latest outbreak has hit major cities such as the financial center of Shanghai and technology manufacturing hub Shenzhen.
On Tuesday, Dongguan city in the southern province of Guangdong ordered employees of businesses to work from home and locked down residential areas, permitting only necessary activities such as buying groceries and taking virus tests.
The city took a targeted approach to production halts. In industrial parks that haven’t reported cases, businesses can maintain basic production under stringent virus control measures. Factory workers often live in dormitories near their workplace.
In areas reporting local cases, businesses must stop production, the announcement said. The measures took effect at noon on March 15 and will last for about a week, until the end of day March 21.

Guangdong province produced about 24% of China’s exports in 2020, according to the latest available official data accessed through Wind Information. The database showed that among cities its size, Dongguan was the fifth-largest contributor to China’s GDP last year, with 1.09 trillion yuan ($170.31 billion) in output.

Dongguan reported nine confirmed Covid cases and 46 asymptomatic cases for Monday. The nearby tech hub of Shenzhen, also in Guangdong province, reported 60 new cases, including asymptomatic ones.
The total local case count for Monday in mainland China included 3,507 new confirmed Covid cases and 1,647 asymptomatic ones, mostly in the northern province of Jilin. That’s more than double from a day earlier.

China is set to see a sharp slowdown in March, given it is dealing with the worst Covid outbreak since 2020.

chief China economist, Macquarie

On Tuesday, China’s bureau of statistics spokesperson downplayed the impact of the Covid-related restrictions on economic activity, after reporting better-than-expected data for January and February.
Economists have said China’s zero-Covid policy — using travel restrictions and neighborhood lockdowns to control outbreaks — affects consumer spending more than manufacturing.
But the latest wave of cases surpasses the pockets of outbreaks China has dealt with since the height of the initial pandemic in early 2020.

KFC, Pizza Hut sales drop

Fast food chain Yum China reported that sales have been hurt by the outbreaks.
“Our operations are significantly impacted by the latest outbreaks and the tighter public health measures which resulted in a further reduction of social activities, travelling and consumption,” Yum China, which operates Pizza Hut and KFC in the country, announced Monday.

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Same-store sales for the first two weeks of March fell by about 20% year-on-year and are “still trending down,” the company said. The number of its stores that are temporarily closed or are offering only takeaway and delivery has more than doubled, Yum China said. There were over 500 such stores in January but more than 1,100 as of Sunday.
Yum China’s same-store sales plunged by about 40% to 50% from a year ago during the Lunar New Year holiday in 2020 when Covid first hit China.
“China is set to see a sharp slowdown in March, given it is dealing with the worst Covid outbreak since 2020,” Larry Hu, chief China economist at Macquarie, said in a note Tuesday. ”At this moment, policymakers are clearly putting COVID-zero ahead of growth.”

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CRYPTO INVESTORS sometimes say they have been “rugged” when the developers of a coin vanish, along with the capital that has been allocated to it, pulling the rug out from under them. Foreign-exchange reserve managers might never have expected to recognise the feeling. But almost as soon as Russia invaded Ukraine, American and European authorities froze the assets of the Central Bank of Russia. As others followed, the country’s first line of financial defence has been obliterated. According to the Russian government, $300bn of its $630bn in reserves are now unusable.The managers of the $13.7trn in global foreign-exchange reserves are a conservative breed. They care about liquidity and safety above all else, largely to the exclusion of profits. Much of their thinking was shaped by the Asian financial crisis of 1997-98, when currencies collapsed in the face of huge capital outflows. The lesson learned was that reserves needed to be plentiful and liquid.Watching Russia’s reserves being made functionally useless is likely to be just as formative, even for those who face no immediate prospect of a terminal rift with the world’s financial superpowers. That is particularly true for the State Administration of Foreign Exchange (SAFE), the agency in charge of China’s $3.4trn in reserves. India and Saudi Arabia, with $632bn and $441bn in reserves, respectively, may also be paying close attention.Barry Eichengreen, an economic historian, has described the choice of the composition of foreign-exchange reserves as being guided by either a “Mercury” or a “Mars” principle. The Mercurial approach bases reserves on commercial links; the currencies being held are largely determined by their usefulness for trade and finance. A Martian strategy bases the composition more on factors like security and geopolitical alliances.Mars seems to be in the ascendant. Central banks are bound to take into account which countries will and will not replicate sanctions against them. In 2020 Guan Tao, a former SAFE official now at Bank of China International, laid out a range of ways that China could guard against the risk of sanctions. In extremis, he suggested that the dollar could stop being used as the anchor currency for foreign-exchange management and be replaced with a basket of currencies.Even that option, which might have sounded extreme a month ago, now falls short of what a Martian central bank would need, given the degree of co-operation with American sanctions. There are few, if any, jurisdictions with large, liquid capital markets denominated in currencies that are useful in an emergency, but which do not pose a risk from a sanctions perspective. Some worried central banks might start increasing their holdings of yuan assets (which currently make up less than 3% of the global total). But that is no solution for China itself.Why not go back to basics? Gold, the original reserve asset, is a large liquid market outside any one jurisdiction’s control. Researchers at Citigroup, a bank, estimate that most of the $210bn in reserves that Russia can currently marshal are in gold and the Chinese yuan. Yet the West’s sanctions are so expansive that they prohibit many potential buyers from purchasing the assets Russia has accumulated over years. Even a would-be counterparty in a neutral or friendly country will think twice about transacting with a central bank under sanctions, if it means risking their own access to the financial plumbing of the dollar system.There has been more adventurous speculation, too. Zoltan Pozsar of Credit Suisse, a bank, has suggested that China should “sell Treasuries to fund the leasing and filling of vessels to clean up sub-prime Russian commodities,” arguing that the global monetary system is shifting from one backed by government bonds to one backed by commodities. Bold as the forecast is, it is also emblematic of the few conventional options available to reserve managers.And that lack of good solutions points to another drastic approach: that countries limit their use of reserves for their financial defence altogether. Various tools of autarky, such as tighter capital controls, could become more attractive. Governments also typically rely on reserves as the last guarantee that they can service foreign-currency debts. But if that guarantee is no longer absolute, then they are less likely to want to issue dollar- and euro-denominated bonds at all. Private companies may be prodded to de-dollarise, too. If you don’t invest in the first place, you won’t be rugged. More

WHEN CHINA’S government said on March 5th that it would aim for economic growth of 5.5% this year, the target looked demanding. Now it looks almost fanciful. On March 14th China recorded 5,370 new cases of covid-19. That would be a negligible number in many countries. But in China, where vaccination rates among the elderly are still worryingly low, it is an intolerable threat to its cherished zero-covid policy. The bulk of the cases are in the north-eastern province of Jilin, which has entered into a full lockdown. But lockdowns of varying severity have also been imposed in Shanghai and Shenzhen, two cities that account for more than 16% of China’s exports.In Shanghai, anyone wanting to leave the city has to show a negative result on a nucleic-acid test taken in the previous 48 hours. Parks, entertainment venues and schools for younger children have been closed. Many flights and buses into and out of the city have been cancelled. And entire blocks of flats have been locked down if anyone living in them is suspected of exposure to the virus.The restrictions in Shenzhen, a southern city of over 17m people, go further. Subway and bus services have been suspended until March 20th. Housing estates and industrial parks have been sealed off. The owner of a barbecue shop was fined for letting people into his sealed-off “urban village” through his shop’s back door, according to the Shenzhen Daily. People have been allowed to stock up on groceries, but must now stay home for a week while they undergo three rounds of compulsory tests. Everyone must work from home or not at all, unless they help supply essential goods and services, like food and sanitation, to the city or to Hong Kong next door.The lockdowns pose an obvious threat to the world’s supply chains. Shenzhen (the name of which can be translated loosely as “deep ditch”) accounts for almost 16% of China’s high-tech exports. Foxconn, which makes iPhones for Apple, has suspended operations at its plants in the area for at least the first half of the week, according to Reuters. Other links in the tech supply chain, such as Unimicron Technology, which makes printed circuit boards, have also paused production. And in the Huaqiangbei neighbourhood of Shenzhen, the wholesale electronics markets, landmarks of “low-end globalisation”, bustle no more.Shenzhen is also home to Yantian port, one of the world’s busiest, which in a good month can handle over 1.4m containerfuls of electronics, furniture, car parts and the like. After a covid outbreak in May last year, it had to operate briefly at only 30% of its capacity. That contributed to long queues of ships out at sea and high towers of containers on the docks. The latest lockdowns will “cause a surge in already inflated shipping prices,” warns Johannes Schlingmeier, head of Container xChange, a platform for leasing containers. “The shockwaves will be felt across America…and almost everywhere in the world.”The waves might even reach the Federal Reserve. Economists in America worry that China’s shutdowns will further complicate the Fed’s fight against inflation, which rose to 7.9% in February, compared with a year earlier, the highest rate in 40 years. Writing in the Wall Street Journal earlier this year, Jason Furman of Harvard University feared “we could get the worst of all worlds as strong US demand pushes against fraying global supply chains.”A worst world is possible. But China’s supply chain is still some way from snapping. Foxconn, for example, has some room for manoeuvre. It has over 40 plants in China and does much of its iPhone production outside Shenzhen. March is also not a peak delivery season for many of the things Shenzhen makes, point out Helen Qiao of Bank of America and colleagues.China’s manufacturers will go to considerable lengths to keep production going. In Shanghai, for example, a car-parts maker has asked essential workers to live and sleep on the factory premises when conditions allow, according to LatePost, a Chinese media outlet. The government will allow some factories to operate in this kind of bubble in Shenzhen, too.The more certain economic threat posed by the latest Omicron outbreak is to Chinese consumption. The country’s retail sales had recently shown welcome signs of life: they rose by 4.9% (adjusted for inflation) in January and February, compared with the same two months a year earlier. But lockdowns will bring this recovery to a halt, preventing people from consuming “tactile” services in particular. Nomura, a bank, thinks retail sales, in real terms, could shrink again in the months ahead.The outbreak has also delayed any potential relaxation of China’s zero-covid policy. In recent weeks, there had been some signs of a softening. Prominent public-health experts had begun to talk about a path to coexistence with the virus and the need for a cost-effective response. The government approved rapid-antigen tests that people can use themselves, leading to speculation that they might be allowed to quarantine at home instead of in government facilities. And China Meheco, a state-owned firm, this month signed a deal with Pfizer, a pharmaceutical giant, to supply its Paxlovid pill, which helps protect infected people against serious disease.But the latest outbreak has been met with more hawkish rhetoric. On a visit to Jilin on March 13th Sun Chunlan, one of the country’s four deputy prime ministers, said China’s provinces should follow their zero-covid strategy without compromise.That relentlessness may, however, oblige China to compromise on some of its other goals. Morgan Stanley, another bank, has cut its forecast for economic growth this year from 5.3% to 5.1%. It thinks GDP may not grow at all in the first quarter, compared with the previous three months. The economy may yet rebound later in the year. It has done so before. But if China is to come close to its growth target, it will first have to clamber out of its ditch.Dig deeperAll our stories relating to the pandemic can be found on our coronavirus hub. You can also find trackers showing the global roll-out of vaccines, excess deaths by country and the virus’s spread across Europe. More

The Federal Reserve meets this week and is expected to begin unwinding the massive economic help it provided during the pandemic.
That process will likely start with an interest rate hike of a quarter percentage point, but policymakers also will update their outlook for rates as well as GDP, inflation and unemployment.
At the last update, officials projected inflation would run at 2.7% — obviously a massive undershoot of current conditions.

Jerome Powell, chairman of the U.S. Federal Reserve, speaks during a House Financial Services Committee hearing in Washington, D.C., U.S., on Wednesday, March 2, 2022.
Stefani Reynolds | AFP | Getty Images

The Federal Reserve this week faces the monumental challenge of starting to undo its massive economic help at a time when conditions are far from ideal.
In the midst of a geopolitical crisis in Ukraine, an economy that is off to a slow start and a stock market in a state of tumult, the Fed is widely expected to start raising interest rates following the conclusion Wednesday of its two-day meeting.

Those three elements pose a daunting challenge, but it’s soaring inflation that the Fed will focus on most when its meeting starts Tuesday.

“The economic outlook supports the Fed’s current plans to boost the federal funds rate in March and to begin to reduce their balance sheet over the summer,” wrote David Kelly, chief global strategist for JPMorgan Funds. “However, there [are] a number of areas of uncertainty which should make them a little more cautious in tightening.”
The Federal Open Market Committee meeting will be focusing on more than a solitary interest rate hike, however. There also will be adjustments to the economic outlook, projections for the future path of rates, and likely a discussion about when the central bank can start reducing its bond portfolio holdings.
Here’s a look at how each will play out, according to the prevailing views on Wall Street:

Interest rates

Markets have no doubt the Fed will enact an increase of a quarter-percentage point, or 25 basis points, at this meeting. Because the central bank generally doesn’t like to surprise markets, that’s almost certainly what will happen.

Where the committee goes from there, however, is hard to tell. Members will update their projections through the “dot plot” — in which each official plots one dot on a grid to show where they think rates will go this year, the following two years and the longer range.
“The ’25’ is a given. What matters most is what comes after,” said Simona Mocuta, chief economist at State Street Global Advisors. “A lot can happen between now and the end of the year. The uncertainty is super high. The trade-offs have worsened considerably.”

Current pricing indicates the equivalent of seven total increases this year — or one at each meeting — a pace Mocuta thinks is too aggressive. However, traders are split evenly over whether the FOMC will hike by 25 or 50 basis points in May should inflation — currently at its highest level since the early 1980s — continue to push higher. A basis point is equal to 0.01%.
From a market perspective, the key assessment will be whether the hike is “dovish” — indicative of a cautious path ahead — or “hawkish,” in which officials signal they are determined to keep raising rates to fight inflation even if there are some adverse effects on growth.
“We think the message around the rate hike has to be at least somewhat hawkish. The real question is whether the Fed is carefully hawkish or aggressively hawkish, and whether the meeting springs any surprises or not,” wrote Krishna Guha, head of central bank strategy for Evercore ISI. “Our call is that the Fed will be carefully hawkish and will avoid springing any surprises that might add to uncertainty and volatility.”
Regardless of exactly how it goes, the dot plot will see substantial revisions from the last update three months ago, in which members penciled in just three hikes this year and about six more over the next two years. The longer run, or terminal rate, also could get boosted up from the 2.5% projection.

The economic and inflation outlook

The dot plot is part of the Summary of Economic Projections (SEP) , a table updated quarterly that also includes rough estimates for unemployment, gross domestic product and inflation.
In December, the committee’s median expectation for inflation, as gauged by its core preferred personal consumption expenditures price index, pointed to inflation in 2022 running at 2.7%. That figure obviously vastly underestimated the trajectory of inflation, which by February’s core PCE reading is up 5.2% from a year ago.
Wall Street economists expect the new inflation outlook to bump up the full-year estimate to about 4%, though gains in subsequent years are expected to move little from December’s respective projections of 2.3% and 2.1%.
Still, the sharp upward revision to the 2022 figure “should keep Fed officials focused on the need to respond to too-high inflation with tighter policy settings, especially against a backdrop of strong (if now more uncertain) growth and an historically tight labor market,” Citigroup economist Andrew Hollenhorst wrote in a Monday note.
Economists figure there also will be adjustments to this year’s outlook for GDP, which could be slowed by the war in Ukraine, explosive inflation and tightening in financial conditions. December’s SEP pointed to GDP growth of 4% this year; Goldman Sachs recently lowered its full-year outlook to just 2.9%. The Atlanta Fed’s GDPNow gauge is tracking first-quarter growth of just 0.5%.
“The war has pushed the Fed staff’s geopolitical risk index to the highest level since the Iraq War,” Goldman economist David Mericle said in a note over the weekend. “It has already raised food and energy prices and it threatens to create new supply chain disruptions as well.”
The Fed’s December projection for unemployment this year was 3.5%, which could be tweaked lower considering the February rate was 3.8%.

The balance sheet

Outside the questions over rates, inflation and growth, the Fed also is expected to discuss when it will start paring the bond holdings on its nearly $9 trillion balance sheet. To be sure, the central bank is not expected to take any firm action on this issue this week.
The bond-buying program, sometimes called quantitative easing, will wind down this month with a final round of $16.5 billion in mortgage-backed securities purchases. As that ends, the FOMC will start to chart the way it will allow the holdings to start reducing, a program sometimes conversely called quantitative tightening.
“Balance sheet reduction will likely be discussed but increased uncertainty makes us think formal normalization principles will be announced in May or June,” Citi’s Hollenhorst said.
Most Wall Street estimates figure the Fed will allow about $100 billion in bond proceeds to roll off each month, rather than being reinvested in new bonds as is currently the case. That process is expected to start in the summer, and Fed Chair Jerome Powell likely will be asked to address it during his post-meeting news conference.
Powell’s Q&A with the press sometimes moves markets more than the actual post-meeting statement. Mocuta, the State Street economist, said given that Fed policy acts with a lag, generally considered to be six months to a year, Powell should focus more on the future rather than the present.
“The question remains, where are you going to be in the middle of 2023?” she said. “How is inflation, how is growth going to look then? This is the reason I think the Fed should be more dovish and should communicate that.”

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