China | Covid

China’s reopening is often reported as though it’s unambiguously positive for the global economy.

At first that seems sensible. As the world’s second-largest economy, how can faster Chinese growth be anything other than an antidote to sagging activity in much of the rest of the world?

Fastest growing economy?

For China itself the narrative is undoubtedly correct. The surge in infections among a population that’s insufficiently vaccinated, and with patchy hospital capacity, will have significantly negative health implications.

But the attempt to maintain a ‘zero-Covid’ policy amidst the circulation of the highly contagious Omicron variant (and its sub-variants) has had a chilling effect on household consumption over the past 12 months.

Pent-up demand is therefore considerable. Once unleashed it’s likely to make China the fastest-growing economy in the world by the end of this year.

Pent-up demand is therefore considerable. Once unleashed it’s likely to make China the fastest-growing economy in the world by the end of this year

Moreover, because China’s economy has been operating below capacity for almost two years now, there’s plenty of room for demand to expand without hitting capacity constraints (and igniting the excess inflation seen in most other countries).

Inflation everywhere else

But for the rest of the world, and particularly those economies (such as the US) operating above capacity already, the impact is much more complicated.

Channels through which there will be upwards pressure on global inflation include commodity prices. We’ve already seen the price of industrial metals, such as iron ore and copper, rise significantly in anticipation of stronger demand.

Oil prices will also be higher than they would otherwise have been, as Chinese residents resume domestic and international travel in much larger numbers.

Increased foreign tourism will lift prices for broader travel services as well. The travel sector is struggling with an array of capacity constraints.

Some 155 million overseas visits were made by Chinese in 2019. This number fell to less than 10 million in 2022, as lengthy quarantine requirements effectively put foreign holidays on hold.

Without an accompanying lift in flight, hotel, restaurant and recreational capacity (including staffing availability), prices can only go one way.

Headache for central banks

We don’t think that Chinese goods consumption has been as constrained by zero-Covid policies as services consumption.

However, there’s still likely to be some uplift in global goods prices as well, which will hinder the pace of disinflation linked to traded durable goods.

Meanwhile, stronger Chinese financial markets will also have spillover effects on the rest of the world, partly acting against the efforts of central banks elsewhere to tighten monetary policy and fight excessive inflation.