China Covid Policy

Until December 2022, China had used lockdown policies to reduce the opportunity for COVID spread
in the hope of eliminating the virus or building up enough population immunity through vaccination.
The exceptionally strict zero-COVID policy was very successful in stopping the virus’ spread while the
world faced returning deadly waves.

However, the prolonged lockdowns eventually became politically and economically unsustainable.

China’s official policy is currently concentrating on strengthening the early detection and treatment
of severe cases rather than the prevention of infections. This has led to claims the country is now
pursuing a “herd immunity” approach.The herd immunity concept was introduced some 100 years
ago to explain why epidemic waves often stop before affecting the whole population. As a disease
such as COVID spreads, more people become infected. Most of them recover and gain infection-
induced immunity. Those who become infected increasingly have contact with immune rather than
susceptible people. This leads to lower risk of passing on the infection. The epidemic wave slows
down and eventually declines. The decline is caused by a sufficiently large number of people
becoming immune, therefore protecting the whole population – or the “herd”. In the 1970s,
epidemiologists found a simple formula that predicts the proportion of immune individuals at which
the number of infections stops growing. The formula includes the R number, the average number of
people one infected person passes the disease onto. Non-pharmaceutical interventions, like social
distancing, lockdowns, or mask-wearing, are aimed at reducing the transmissibility of the virus,
lowering the value of R. The herd immunity threshold also depends on the proportion of people
with pre-existing immunity from either previous outbreaks or vaccination. Using these concepts,
scientists have designed vaccination strategies that successfully keep contagious diseases such as
smallpox, polio, diphtheria and rubella under control. For such public health policies to be
successful, mass vaccination needs to reach a high proportion of the population. Sublineages of the
omicron variant BA.5 are currently dominant in China. Omicron has an average R of 9.5, so around
90% of the population needs to be fully protected to reach herd immunity, according to the model
Quantitative Easing

When a central bank decides to use QE, it makes large-scale purchases of financial assets, like
government and corporate bonds and even stocks. This relatively simple decision triggers powerful
outcomes: The amount of money circulating in an economy increases, which helps lower longer-
term interest rates. This lowers the cost of borrowing, which spurs economic growth.
By buying longer maturity securities, a central bank is aiming to lower longer-term market interest
rates. Contrast this with one of the main tools used by central banks: Interest rate policy, which
targets shorter-term market interest rates. When the Federal Reserve adjusts its target for
the federal funds rate, it’s seeking to influence the short-term rates that banks charge each other for
overnight loans. The Fed has used interest rate policy for decades to keep credit flowing and the U.S.
economy on track. When the fed funds rate was cut to zero during the Great Recession, it became
impossible to reduce rates further to encourage lending. Instead, the Fed deployed QE and began
purchasing mortgage-backed securities (MBS) and Treasuries to keep the economy from freezing
up.Here’s how the simple act of buying assets in the open market changes the economy (mostly) for
the better:

 Fed buys assets. The Fed can make money appear out of thin air—so-called money printing
—by creating bank reserves on its balance sheet. With QE, the central bank uses new bank
reserves to purchase long-term Treasuries in the open market from major financial
institutions (primary dealers).
 New money enters the economy. As a result of these transactions, financial institutions
have more cash in their accounts, which they can hold, lend out to consumers or companies,
or use to buy other assets.
 Liquidity in the financial system increases. The infusion of money into the economy aims to
prevent problems in the financial system, such as a credit crunch, when available loans
decrease or the criteria to borrow money drastically increase. This ensures the financial
markets operate as normal.
 Interest rates decline further. With the Fed buying billions worth of Treasury bonds and
other fixed income assets, the prices of bonds move higher (greater demand from the Fed)
and yields go lower (bondholders earn less). Lower interest rates make it cheaper to borrow
money, encouraging consumers and businesses to take out loans for big-ticket items that
could help spur economic activity.
 Investors change their asset allocations. Given the now-lower returns on fixed income
assets, investors are more likely to invest in higher-returning assets—like stocks. As a result,
the overall stock market could see stronger gains because of quantitative easing.
 Confidence in the economy grows. Through QE, the Fed has reassured markets and the
broader economy. Businesses and consumers may be more likely to borrow money, invest in
the stock market, hire more employees and spend more money—all of which helps to
stimulate the economy.
 Crude Oil Prices
Facing sluggish demand, Saudi Arabia will effect a voluntary reduction of 500,000 barrels per day
(bpd), Iraq 211,000 bpd, United Arab Emirates 144,000 bpd, Kuwait 128,000 bpd, Algeria 48,000
bpd, Oman 40,000 bpd, Kazakhstan 78,000 bpd, and Gabon 8,000 bpd.

The production cuts by OPEC countries, which account for one-third of the global oil production, will
begin in May 2023 and last for the entire calendar year. Total cut is around 1.16 million bpd. That
apart, Russia has also announced a voluntary adjustment of 500,000 bpd to last until end-2023.

OPEC has said the cuts are a precautionary measure aimed at supporting the stability of oil markets.
Analysts said the cuts are intended to mitigate the impact of a sluggish global economy and the
banking crisis in the US on crude oil prices. These had weakened crude oil prices significantly ($67-
68/barrel). Following the announcement of the cuts, crude oil prices are now at December 2021-
January 2022 levels ($85 per barrel). Crude had hit $139 per barrel in March 2022.Analysts say right
now there is no issue of supplies. Global crude oil production averaged at 100 million bpd in 2022
and is expected to hit 101.5-102 million bpd in 2023, while oil supply stood at 101.5 million bpd in
February 2023. Global refinery throughput is at around 81.5 million bpd. As per the March oil market
report of the International Energy Agency (IEA), a 52.9 million barrel surge in global inventories in
January 2023 lifted known stocks to nearly 7.8 billion barrels, their highest level since September
2021 and preliminary indicators for February 2023 suggest further build-up. Despite solid Asian
demand growth, the market has been in surplus for three straight quarters. On Monday, after the
crude oil exporting cartel announced production cuts, the global benchmark Brent rose by more
than 5 per cent to hit $84.13 per barrel, one of the sharpest price rises in the past 10-11 months. For
comparison, after the Silicon Valley Bank crash in the US (March), crude oil prices fell as low as $67 a
barrel. Analysts predict a crude oil price of $95-100 per barrel by December 2023 and Q1 2024.

Analysts have warned that the cuts would impact prices thereby further exacerbating inflationary
pressures on the global economy. For India, this would mean higher oil import bills and this could
stoke inflation if the government resumes the daily retail auto fuel price revision mechanism. If the
government continues to freeze retail prices, then the oil marketing companies will again witness
huge under recoveries.

 Cut in production has started impacting crude oil prices within a day of the announcement — Brent
prices went up by $5 a barrel. Since India imports more than three-fourths of its crude requirement,
higher prices will push the import bill, which means more demand for the dollar and that will widen
the current account deficit and weaken the rupee. Dhruv Sharma, Senior Economist with World
Bank, says: “An increase of $10 a barrel could translate into 40 basis points to half a per cent
increase in CAD.”