Editor's note: Morning Money is a free version of POLITICO Pro Financial Services morning newsletter, which is delivered to our subscribers each morning at 5:15 a.m. The POLITICO Pro platform combines the news you need with tools you can use to take action on the day's biggest stories. Act on the news with POLITICO Pro . China's response to widespread protests against strict Covid-19 policies could make the global battle against inflation much more difficult than it already is. Thousands of protesters have taken to the streets of Beijing, Shanghai and other cities driven by outrage over how the intense lockdown policies could have contributed to the death of at least 10 people in an apartment fire in Xinjiang. The protests — whose scale is extraordinary in mainland China — represent the public's sharpest rebuke yet to President Xi Jinping's "zero Covid" strategy of severe quarantines and lockdowns, which have battered the country's economy and left it increasingly isolated on the global stage. China's emphasis on political control over economic growth is "going to now be tested in a way it's never been before," Josh Lipsky, an Atlantic Council GeoEconomics Center senior director and a former IMF and State Department adviser, told MM. That test could have sweeping implications for a world economy that has already been strained by rising inflation, an aggressive series of interest rate hikes by central banks and geopolitical uncertainty in Eastern Europe, Iran and the South China Sea. Last month, the International Monetary Fund warned that it was marking China's projected growth in 2022 down to 3.2 percent — its second-lowest level since 1977 — to reflect how lockdown policies have stressed an economy that was already hamstrung by a weakening real estate market. More of zero Covid, to say nothing of whatever crackdowns are imposed on protesters, would no doubt unleash even more pain. U.S. officials believe that Beijing might opt for even " harsher restrictions in the coming days " as case counts explode across China, sources told our Nahal Toosi and Phelim Kine. The country's worsening public health picture has been exacerbated by its refusal of Western-made mRNA vaccines that reduce the likelihood of hospitalization and death. For that reason — when it comes to zero Covid policy — China is "kind of stuck with it," Eurasia Group President and founder Ian Bremmer tells MM. "Given the case numbers and the lack of recent vaccinations — especially among the older population — there's just no way" Xi's new government would fully abandon the crushing public health policy. Hence: more lockdowns, more protests and greater potential for economic calamity. "If you're a foreign investor who was dipping your toe back into the water [in China], I think you're jumping back out right now," Lipsky said. While White House officials on Monday said there's been little evidence of the protests affecting supply chains, major companies — including Apple — are reportedly bracing for production shortfalls in light of the chaos. And more uncertainty over Chinese supply chains is the exact type of scenario that could complicate the Federal Reserve's ability to battle inflation while keeping the economy from sinking into a recession. Supply shocks could push inflation expectations higher in ways "that call for monetary policy to tighten for risk-management reasons," Fed Vice Chair Lael Brainard said on Monday. "More speculatively, it is possible that longer-term changes — such as those associated with labor supply, deglobalization, and climate change — could reduce the elasticity of supply and increase inflation volatility into the future," Brainard said. IT'S TUESDAY — Have tips, story ideas or feedback? You know what to do: kdavidson@politico.com and ssutton@politico.com .
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