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China’s Economy Stumbles in the Fog of Covid War

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Even if the country avoids new lockdowns of big cities, question marks over the pandemic and policy direction are dogging efforts to revive growth.

China’s economic engine has shuddered in recent months, hurt by lockdowns imposed to curb the spread of Covid. Housing sales sagged. Many shops and restaurants in some cities shuttered, some maybe for good. Youth unemployment climbed.

The slowdown has kindled doubts about the viability of China’s stringent strategy of eliminating virtually all Covid infections — whether the cure is becoming worse than the social and economic costs of restrictions. But on a recent visit to Wuhan, the city where the pandemic first took hold, China’s leader, Xi Jinping, said that extinguishing Covid remained paramount.

“It would be preferable to have a little temporary impact on economic development, rather than let the physical safety and health of the public suffer,” Mr. Xi said, state media reported. He cited the need to protect older adults as well as children from infection, and warned officials against becoming weary of the grinding two-and-a-half-year war against Covid. “Persistence,” he said, “is victory.”

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That elusive victory over Covid has been made harder by the fast-moving Omicron variant — and its sub-variant, BA.5, the first domestic cases of which emerged last week in China — that is slipping through the country’s many defenses.

A month after Shanghai lifted its citywide lockdown, fresh Covid cases have emerged there in recent days, prompting officials to order many of the city’s 25 million residents to undergo testing. Anhui Province in eastern China enforced a virtual lockdown on two counties, and neighboring Jiangsu Province, a manufacturing heartland, is scrambling to contain new infections. Xi’an, a city of 13 million, has closed schools and many businesses after a flare-up.

Jade Gao/Agence France-Presse — Getty Images

Like swatting flies with a shovel, China’s Covid strategy can be effective, but also costly and contentious. It entails locking down apartment blocks, neighborhoods or even whole cities for days or weeks to stamp out even handfuls of cases. As a result, Mr. Xi’s insistence on Covid zero, or “dynamic zero” as Beijing calls it, has cast an unsettling shadow over the country’s economic expectations.

The Chinese government is scheduled to release the main economic data for this year’s second quarter on Friday. According to a survey by Bloomberg, economists expect that the Chinese government will report that gross domestic product grew by about 1 percent in the second quarter, compared with the same period a year earlier. That’s a big comedown from the 4.8 percent expansion in the first quarter, and is likely to put the government’s 5.5 percent growth goal for all of this year out of reach.

“Uncertainty is the main factor hurting our national economic development,” Yang Weimin, an economist who advises the Chinese government, said in a speech in late June to property developers, citing questions around Covid and pandemic prevention measures. He also pointed to investor wariness after crackdowns on companies accused of abusing their market dominance, flouting regulators or offending official moral codes.

“Uncertainty is the great enemy of action,” Mr. Yang said.

Mr. Xi wants officials to extinguish Covid outbreaks while also shoring up the economy. In Wuhan, he visited a laser equipment plant, hailing the potential of new technologies, and also visited a neighborhood that has been promoted as a model of effective Covid controls.

In practice, officials struggle with the diverging demands of Covid controls and economic recovery. The resulting strains are bearing down on China months before a Communist Party congress when Mr. Xi is almost certain to win another five-year term as the party’s leader, consolidating his status as its most powerful leader since Deng Xiaoping and Mao Zedong.

Kevin Frayer/Getty Images

Beijing has tried to boost confidence among entrepreneurs and consumers so they spend, invest and travel. But local officials, faced with the threat of dismissal for lapses in pandemic controls, often impose additional checks and restrictions on travelers and transport, adding to the disruptions and uncertainty.

“Often, the heads of different departments and companies attend one meeting in the morning about enhancing dynamic zero, and then in the afternoon a meeting about economic growth,” said Wu Qiang, an independent political commentator in Beijing.

“The tensions are within Xi’s own model for governing the country,” he said. “The tensions really arise from him.”

For the past two years, many Chinese people have accepted the Covid restrictions as irksome but necessary. But employees and employers appear increasingly impatient over lockdowns, checks and uncertainties, especially when they have loans, rent and wages to pay.

“The local government said for sure that they would get to zero in half a month, but I reckon half a month won’t be enough,” Wang Yongguan, who makes a living grouting walls, said in a telephone interview from Sixian County in Anhui Province, which went into lockdown. He also worried about the accompanying slump in home sales. “This year won’t be any good. It wasn’t to begin with.”

Policymakers trying to bolster investor confidence also fear they will be accused of undermining Mr. Xi’s policies to clean up companies accused of malfeasance and reckless investment, said Christopher K. Johnson, the president of the China Strategies Group, citing conversations with officials in Beijing.

Wang Zhao/Agence France-Presse — Getty Images

“Does the boss really want to relent on some of these crackdowns, or is it temporary?” Mr. Johnson said, referring to Mr. Xi. “There’s a lot of uncertainty.”

China’s stop-start Covid restrictions may continue into next year at least, in part because the government has focused on restrictions and testing over vaccinations. Older adults have a relatively low vaccination rate. The Chinese leadership has so far refused to approve more effective, foreign-developed vaccines — a decision driven by political pride rather than medical considerations, many experts say.

Yet Chinese leaders also worry that a deep slowdown could cause social discontent, an anxiety magnified by the impending party congress. Officials are under particular pressure to contain unemployment, which among urban residents age 16 to 24 rose to 18.4 percent in May, according to China’s National Bureau of Statistics. More than 10 million college graduates, a record number, are joining the job search this year. Others will take refuge in graduate school.

Even in Beijing, which has avoided a citywide shutdown by imposing only limited restrictions, business can be tough. Wang Jing said his restaurant in an alleyway usually crowded with tourists had lost more than 90 percent of its income in May, when Beijing banned dining in restaurants. The limits eased in early June, but only about a third of business has come back.

“This year is for sure the toughest we’ve had,” he said. “All my waiters have been with me for more than 10 years. They have young and old to take care of, and are waiting for me to issue wages. How could I ever fire them?”

Alex Plavevski/EPA, via Shutterstock

China has been edging toward some policy compromises. Officials halved the days of quarantine imposed on international travelers and close contacts to try to reduce some of the disruption. Mr. Xi and the premier, Li Keqiang, have also obliquely hinted that annual growth might be lower than the target of 5.5 percent that the government set earlier this year. Some former officials and policy advisers have openly said that businesses need more clarity to sustain an economic recovery.

“Our hearts can’t be riding on waves, bobbing up and down. That’s bad for economic growth and social development,” Hu Deping, a former vice chairman of All-China General Chamber of Industry and Commerce, said in a speech to Chinese private business owners in June. “Entrepreneurs will gain confidence only when there are no policy contradictions.”

Even if China is able to contain Covid without putting major cities under lockdowns, the accumulated uncertainty is prompting some companies to rethink their plans.

For Citrosuco, a Brazilian juice maker, business had been going well until Shanghai locked down in April. Its containers of frozen orange juice sat at the city’s port, held up by customs inspectors checking goods for the presence of the virus, said Joshua Lim, a general manager for the company in the city.

Clearing customs and getting the juice shipments to warehouses, which usually takes three to four days, took two weeks, he said. Citrosuco bosses in Brazil began reassessing China’s prospects, he said.

“They are asking questions like, how can we better protect our business?” he said. “If we invest now, what will the payback look like and what other risks will we be blindsided by?”

Alex Plavevski/EPA, via Shutterstock

Joy Dong, Zixu Wang, Li You, Claire Fu and Liu Yi contributed research and reporting.

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Javier Milei: Argentina's new president presses ahead with economic 'shock therapy' as social unrest grows – The Conversation

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Only weeks into his term, Argentina’s new president, Javier Milei, seems to be making good on his promise to put a chainsaw to the country’s crisis-ridden economy. In his inaugural address, Milei told the nation: “There is no alternative to shock.” He dissolved half of the country’s ministries days later, and implemented a 50% devaluation of the peso.

But amid massive spending cuts, prices continue to spiral. Argentina’s annual rate of inflation has reached a three-decade high of 254.2%. Milei blames the poor economy on years of mismanagement, and has warned his compatriots to expect more pain before any gains will be felt.

While many support his measures, there are clear signs of disconnect. His government suffered the earliest general strike in history, conceding the streets to masses of protestors. More alarming for Milei, his all-reaching “omnibus law”, which ranged from economic policy to the privatisation of state entities, failed to get sanctioned by a divided National Congress in which he lacks a majority.

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However, this resistance seems only to be emboldening the president. His plan to dollarize the currency, which some dismissed as mere electoral strategy, now seems likely to come sooner than expected. Milei has also launched a “cultural war” against his critics including Lali Espósito, a well-known Argentine pop star. But unless the economy picks up soon, he may be fighting a growing mass of unhappy citizens.

Argentina's president, Javier Milei, draped in the Argentinian flag and speaking into a microphone.
Argentina’s president, Javier Milei, addresses a crowd from the balcony of the Casa Rosada in Buenos Aires.
Juan Ignacio Roncoroni / EPA

Echoes of the past

Shock therapy – involving the sudden removal of trade barriers and labour protection, and the implementation of drastic fiscal policies – is not new in Argentina. It was integral to the last dictatorship’s economic plan (1976-1983), who had learned from the pioneer in shock therapy: Chilean dictator Augusto Pinochet. In both cases, an eventual debt crisis followed.

In the 1990s, the then-Argentinian president, Carlos Menem, announced “major surgery without anaesthesia” on the economy. Failing to curb escalating inflation, it took currency “convertibility” – pegging the peso to the dollar – to break that cycle. But this generated new public debt, chronic stagnation, high levels of unemployment, and provoked the largest sovereign default in history.

Shock therapy is not only a Latin American phenomenon. The collapse of the Soviet Union led to a rapid transition from state-based to free market economies for a large part of the world’s population.

In Poland, the Balcerowicz Plan provoked an initial hike in inflation before eventually stabilising the economy based on free market capitalism – although new inequalities and social problems were on the way.

Milei’s challenge

Two features distinguish Milei’s shock therapy. First, he has a comparatively weak political position – particularly in Congress. Second, it is unclear how much of Argentina’s population is prepared to support his measures, as memory of the crisis looms close in the public imagination.

Milei has already introduced massive spending cuts, including a reduction of salaries and pensions via both inflation and suspending funding to subnational governments to pay salaries and subsidies. He has also launched an ambitious project to reset the Argentine economy, which includes the privatisation of all public companies, liberalisation of trade, and deregulation of labour.

Social opposition was immediate. Despite the government discouraging mobilisation by banning road blocks and large public gatherings, spontaneous protests took place in cities across the country. Labour organisations and trade unions have provided the largest resistance, through declarations, protests and legal claims.

Then, on January 24, when Milei was barely a month into office, a general strike was called. The strike, which included even Argentina’s more conservative unions, brought the country to a standstill.

Aerial picture showing people gathering to protest in a large city square.

People gathering in Buenos Aires to protest during the general strike.
Juan Ignacio Roncoroni / EPA

Meanwhile, Milei has faced resistance in Congress. His omnibus law was expected to collect support from centre-right parties and subnational governors in need of national funding. However, Milei’s dogmatism prevented the government from accepting the changes requested by its potential allies, and the bill collapsed.

Since taking office, Milei has had a fragile relationship with governors and deputies, calling lawmakers a “delinquent cast set out to get bribes and perpetuate the decadent status quo”.

Instead of taking advantage of his strong electoral victory and fragmented opposition parties, he has provoked confrontation and ever-unified resistance. Public opinion also seems to be turning, as the proportion of people living in poverty has shot up from 45% to almost 60%.

With a sluggish economy, it is difficult to imagine how the president will find the necessary support for his shock therapy.

Dollarization: Milei’s big gamble

The most ambitious, yet unpredictable, element is Milei’s well-publicised plan to dollarize the currency. He claims this will generate hope and reboot a competitive economy, with the middle class able to travel and buy imported goods at ease.

But, based on current exchange rates, the average wage is set to be just US$218 (£171) per month, and this is likely to fall further following expected devaluations in the coming months.

If the plan fails, Milei can expect resistance to be mighty. Argentina has a deep history of popular uprisings. In 2001, five presidents resigned in the space of two weeks, with one of them escaping the Pink House (the president’s official workplace) in a helicopter.

Since then, despite regular protest and crisis, all governments have finished their terms and pursued their economic policies. Will Milei break the mould and be thrown out of office early? Or will he be able to show Argentinians a real economic turnaround before patience runs out?

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Canadian economy is already in recession by this measure – Financial Post

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Car Loan Review Entangles Banks and the Wider UK Economy – BNN Bloomberg

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(Bloomberg) — Britain’s banks gave investors reasons to be optimistic in their earnings over the past few days. But one key unknown won’t go away anytime soon: the ultimate cost of potentially mis-sold car finance. 

The Financial Conduct Authority’s review of commissions for car loans remains a major drag on domestic lenders’ valuations, according to UBS analyst Jason Napier. Uncertainty around the application of UK rules on this issue is one of the reasons that British banks trade at lower valuations than their peers in the euro area, Napier said in an interview.

Lloyds Banking Group Plc, the UK’s biggest auto finance provider, on Thursday set aside £450 million ($570 million) for possible compensation and other costs linked to the review — the first major firm to take a charge. Barclays Plc, which exited its motor finance business in 2019, hasn’t taken a provision due to “uncertainty” around the FCA investigation’s outcome and the “very low” level of complaints the bank got, Finance Director Anna Cross told reporters on a call Tuesday. 

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Close Brothers Group Plc has a smaller total car loan book than Lloyds but it represents a larger portion of its business. The firm has canceled its dividend amid the FCA review, and this week got downgraded by credit rating firm Fitch to two notches above junk. Its shares have shed more than half their value since the beginning of the year as hedge funds Millennium Capital and Marshall Wace held and then exited short positions in the stock. 

Smaller non-listed players expected to be affected by the FCA review include private equity-owned Blue Motor Finance, whose corporate lenders included Goldman Sachs Group Inc. 

The FCA has said it will update on its review in September. The uncertainty has stirred speculation in the industry that some lenders might be forced to exit the market. 

How It Worked

In an era of near-zero interest rates that made credit plentiful, nearly 90% of new car purchases in the UK were made on finance, according to the FCA when it examined the industry in 2018. Car dealers could often earn thousands of pounds for themselves, and the bank, by pushing up the interest rate they offered buyers, in a practice known as discretionary commission arrangements. 

Before the FCA banned this approach in 2021, every loan rate would have its own assigned commission rate, a person with direct knowledge of the practice said. This setup systematically incentivized dealers to pick a higher rate, the person said, declining to be identified discussing private information. 

The FCA has estimated that its ban is saving customers £165 million a year. Now, though, it’s been forced to take further action after a spike in complaints to the Financial Ombudsman from customers who were sold these loans. It’s reviewing loans dating as far back as 2007. 

The legal industry is already compiling multiple country court cases in order to construct a class action case, according to Henry Farris, partner at law firm Withers LLP.“The class action has a much broader scope than what Lloyds has set aside,” Farris said in an interview. He estimated that 50,000 to 100,000 people could be enough to build a substantial class action — which were until recently a rarity in English law. 

Pogust Goodhead, another law firm, has set up a portal for customers to submit claims. Global Managing Partner Tom Goodhead said it was a “watershed moment” for borrowers. “It’s high time that lenders are held to account over unfair practices that have left consumers unnecessarily out-of-pocket,” he said in a statement.

Economic Fallout

Along with the regulatory review, a mix of high interest rates and falling used car prices might spell trouble for banks — especially those who lend to less affluent customers. 

“In the pandemic, interest rates rates were low, people got loads of stimulus and delinquencies were very low too,” said Aidan Rushby, founder and chief executive officer of Carmoola, a London-based car finance firm that lends directly to consumers, rather than through dealers. “Now we’re in a recession, delinquencies will go up and car prices will go down. This means some lenders will recoup less value when a borrower defaults.”

Some industry watchers see banks potentially slowing down lending, which could lead to fewer used car sales. Banks might also decide to further trim their workforces in this space. To be sure, Lloyds reported this week that motor finance continued to grow last year, and it now has £15.3 billion on its loan books. 

“Undoubtedly the future products and services of banks and non-bank lenders may be influenced by the FCA’s decision,” said Isabelle Jenkins, who leads the financial services practice at PwC UK. But “it remains to be seen what this may look like.” 

–With assistance from Katherine Griffiths, Ellie Harmsworth, Joe Easton, Harry Wilson and Aisha S Gani.

©2024 Bloomberg L.P.

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