The impact of China’s economic policies on global trade
China is easing its strict pandemic measures, leading to a release of pent-up demand that has built up over three years. This is expected to have a significant impact on the Chinese economy, with UBS economists predicting GDP growth of almost 5% in 2023. China and India are expected to drive half of the global growth this year, compared to a tenth for the US and euro area combined. As the Chinese economy accounts for between 15 and 20% of the world GDP, a doubling of its growth rate could have a huge impact on global economic growth.
Goldman Sachs economists estimate that every 1% increase in China’s GDP could increase global growth by 0.2%. This could result in a 1% rise in global GDP this year with a full recovery in Chinese domestic demand. The impact of reopening will be felt in national economies, with luxury exporters and the tourism industry expected to benefit. Reopening may also increase energy demand, benefiting oil exporters but weighing on real incomes and growth elsewhere. It remains to be seen whether China’s reopening will galvanize or destabilize the global economy next year.
China’s Reopening Boosts Markets and Consumer Demand
Although China is still in the early stages of reopening, data from the lunar new year period indicates that consumers are eager to make up for a lost time. Revenues from tourism and hospitality saw a 130% year-on-year increase, achieving 80% of pre-pandemic levels. As Chinese spending patterns return to normal, Chinese companies, particularly in the e-commerce and consumer discretionary sectors, are expected to benefit from increased demand. The desire for revenge spending may extend to luxury goods, benefiting European equity markets where two-thirds of the world’s top luxury goods companies are listed.
However, analysts are skeptical about the impact of China’s reopening on European economies, with the rebound expected to skew toward demand for services rather than goods. A tourism boom could provide a modest boost to global growth, but the UK may not benefit as China was not a significant source market for UK tourism inflows pre-pandemic. Other Asian equity markets, such as Japan, Singapore, and Thailand, may benefit from increased overseas spending by Chinese tourists.
China’s Reopening and Global Inflation
Concerns exist regarding the possibility that unleashing the pent-up demand of 1.4 billion people could trigger global inflation. Nevertheless, the reopening of China’s economy presents supply-side enhancements that may result in a more nuanced overall impact.
Positively, the return to normal manufacturing operations will ease supply chains, which could aid in the maintenance of a downward trend in global inflation. An analysis by Goldman Sachs suggests that these supply chain improvements could reduce core inflation in the US by approximately 0.1 percentage points. This news would be welcomed by the Fed, and the result of China’s reopening could potentially lead to a quicker end to rate hikes in advanced economies this year.
However, in reality, the disinflationary effects of supply chain enhancements will most likely be counteracted by commodity price pressures. Normalizing travel patterns will increase China’s demand for diesel and jet fuel, which will keep oil prices supported despite the slowdown in demand from the rest of the world. According to Goldman Sachs commodity strategists, China’s reopening could increase US inflation by half a percentage point and “moderately boost headline inflation in most other economies.”
While higher oil prices will benefit oil exporters, they will restrain real incomes and growth prospects elsewhere. The analysts at Oxford Economics believe that a sudden and significant increase in oil prices would negatively impact low-income US households, who have used up their accumulated savings during the pandemic. As a result, they conclude that China’s reopening will most likely be a ‘net neutral’ instead of a boost to the US economy.
Potential Risks to China’s Economic Recovery Amid Reopening
The reopening process may not go smoothly, as there are potential risks involved. According to IMF chief economist Pierre-Olivier Gourinchas, China’s recovery may face setbacks due to the continuous waves of Covid infections causing disruptions. The Bank of England’s latest monetary policy report also observed that rising cases were negatively impacting activity in China, as people turned to voluntary social distancing. Bank staff predict that high case levels will reduce consumption and output, resulting in a first-quarter contraction this year.
Oxford Economics analysts warn that although the reopening has been swift, domestic demand conditions are weaker than before. They believe that due to the fragile confidence and income levels, a quick recovery is unlikely. Furthermore, they suggest that reopening could worsen the already strained households, labor markets, and government finances, which have suffered from three years of episodic lockdowns. Therefore, Oxford Economics analysts expect near-term growth to suffer.
TS Lombard’s chief China economist, Rory Green, holds a more positive outlook on Chinese consumption, stating that it may initially rebound (although starting from a low base). However, Green believes that China’s recovery could soon falter if property market scarring affects a consumption boom. TS Lombard’s research indicates that sales across the top 100 Chinese property developers dropped by 45% YoY last month due to concerns about price drops. Green predicts that property-related scarring will keep a significant portion of China’s Covid-era savings in the bank, resulting in a slowdown in consumption after an initial reopening surge.