BEIJING: China’s reopening is set to provide a welcome boost to global growth, offsetting weakness in Europe and a looming recession in the United States.
But unlike in 2009, when China’s four trillion yuan (US$588bil or RM2.5 trillion) stimulus helped kick-start a recovery from the Lehman slump, in 2023 there’s a catch – a boost to inflation at exactly the moment the Federal Reserve (Fed) and other central banks race to bring it back under control.
That’s why Kristalina Georgieva, the head of the International Monetary Fund, said this month that China’s pivot from zero-Covid is probably the single most important factor for global growth in 2023, but cautioned on what it might mean for inflation.
“What if the good news of China growing faster translates into oil and gas prices jumping up, putting pressure on inflation?” she said at the World Economic Forum in Davos.
Bloomberg Economics forecasts an acceleration in China’s gross domestic product from 3% in 2022 to 5.8% in 2023. Modelling the relation between China’s growth, energy prices and global inflation suggests that could lift consumer prices by close to a full percentage point in the final quarter of 2023.
If China outperforms, with growth surging to 6.7%, the boost would be closer to two percentage points.
Against a backdrop of consumer price inflation that recently touched 9.1% in the United States and 10.6% in the eurozone, that might not seem like much. In the context of central banks laser-focused on getting price gains back to their 2% target, it matters a lot.
If China’s rebound keeps US inflation stuck around 5% in the second quarter – which our model suggests is possible – that might frustrate expectations for the Fed to halt hikes at its May meeting.
For the rest of the world, the difference between China in a lockdown slump and China in a reopening boom is an additional US$500bil (RM2 trillion) in demand – the equivalent of adding the spending power of another Nigeria to the global economy.
Already, anticipation of that extra demand is lifting commodity markets, while service industries and retail prepare for the return of Chinese consumers.
Copper prices have raced above US$9,000 (RM38,223) a tonne and Chinese oil consumption is forecast to hit a record this year.
Air New Zealand is adding flights to Shanghai. Shares in luxury retailer LVMH, Moet Hennessy, Louis Vuitton SE have rallied, and Swatch Group said it could hit record sales as China rebounds.
China’s reopening is even tipped to shorten the United Kingdom’s recession as high-spending tourists return.
For sure, China’s rebound won’t be linear. The sudden exit from zero-Covid in the final weeks of 2022 triggered an immediate slump in activity.
Lack of transparency over infection and fatality rates adds uncertainty to public health costs and the economic outlook. Neither is it clear that China has the pent-up demand seen in other major economies, given Beijing’s relatively restrained stimulus through the pandemic.
Other variables from price caps on Russian oil to weather in Europe, Organisation of Petroleum Exporting Countries supply decisions and goods inventory at retailers could all offset or exacerbate the impact of China’s reopening on global prices.
Yet high-frequency data showed China’s slump already coming to an end and the Covid wave easing.
The number of patients in hospital emergency rooms is down. Metros in major cities are filling up. And early signs from the Lunar New Year holiday show travel and box-office spending significantly stronger than a year ago.
On the first four days of the festivities there were some 95.9 million trips by planes, trains and automobiles.
Pan Mei, from Liuzhou, a southwestern city in the autonomous region of Guangxi, was one of those travellers. She visited Macau during the holidays with her husband, son and five other family members to reunite with her eldest daughter who is studying for a masters degree there. Celebrating their newfound freedom to travel, the family tried their luck at casinos and spent time in shopping malls.
“The pandemic has kept us within China’s borders for so long. It’s great we can take family members outside the borders again.
For many of them, this is the first time in many years,” she said. “Now that travel normalises, we can travel more.”
Another wave of Covid – the consequence of holiday travel and celebrations – appears inevitable. By the end of the first quarter, though, with rising vaccination rates and natural immunity, China’s 1.4 billion population are expected to have built up their resilience and adjusted to living with the virus.
Pandemic lockdowns and infection-dodging caution will no longer be a constraint on the economy. Pro-growth policies for the all-important property and technology sectors add to the reasons for optimism.
Since August 2020, when controls on property developers showed Beijing getting serious about squeezing the air out of the housing bubble, real estate has turned from the biggest contributor to China’s growth to a significant drag. In 2022, real estate sales fell 24%, investment shrank 10% and prices stagnated.
Now, with Beijing again focused on restoring growth, the financing taps for developers and homebuyers have been turned back on. — Bloomberg