Reasons China’s reopening will not cause inflation

After three years, the world’s largest factory China finally opened for business, sparking a rise in demand as well as worries that it may exacerbate inflationary pressures throughout the world. But, experts claim that investors shouldn’t worry too much.

China’s quick abandonment of a zero-COVID policy coincides with concerns that pent-up mainland demand would cause another round of inflation as central banks across the world announce that the quickest rate increases in a generation will need to be extended.  

The anticipation of a shopping spree has increased the cost of everything from copper to shares in high-end fashion brands. Economists, however, do not perceive a threat to global inflation and instead highlight Chinese President Xi Jinping’s new plan for self-sufficiency, increased affluence, and a socialist philosophy as restraints on luxury spending. They assert that Beijing’s ambitions for growth and the laxity of China’s labor markets will help temper inflation.

A rebound is expected to be internally oriented and unlikely to strengthen the yuan significantly, lowering the likelihood that it will raise export prices or prices overseas. The portfolio managers at BNP are planning for a comeback in China to increase regional tourism but not higher export prices for manufactured products.

More significant price increases as a result of the reopening are unlikely in the commodities markets, where China is a price-setter for iron ore and the second-largest user of oil. Copper futures broke over the $9,000 per tonne threshold last month for the first time since June, indicating that the metals markets have already factored in some additional demand.  

As China has not offered the direct stimulus payments that fueled employment and expenditure in other Western nations, a poor labor market will also help to restrain inflation there. Beijing’s “shared prosperity” strategy has reduced bankers’ salaries and benefits, and last year saw a record-high young unemployment rate of 20%. “There is so much underutilized capacity in China that a labor shortage doesn’t seem likely. You don’t possess the same level of tremendous resignation that you did in the outside world “because of the epidemic,” according to Janus Henderson Investors portfolio manager May Ling Wee.  

Analysts warned that inflation might develop if and when people invest their 17.8 trillion yuan in discretionary spending like tourism. The question is how much more money individuals are prepared to spend, according to Value Partners Group’s Ricky Tang, co-head of client portfolio management. “The massive savings in China may undoubtedly support a rebound of consumption,” Tang said.

Although there was no apparent increase in travel, statistics from ForwardKeys indicated that average airfares for January’s flight prices to and from China were more than twice as costly as they were in 2018. With restrictions on travelers from the mainland, constrained airline options, and expensive airfares, Olivier Ponti, vice president of insights at ForwardKeys, predicted that it will be “several months” before Chinese tourist throngs appear at Western airports. There may also be delays in renewing passports and problems obtaining visas.

Price pressures are being reduced as a result of years spent organizing supply networks. According to economists, the probability of a “Goldilocks” scenario of continuous development without exporting inflation is increased by the decline in factory-gate prices.  

A key factor in the recent global stock market boom was China’s openness. After a catastrophic year in 2022, China’s growth will rebound this year because of the relaxation of mobility restrictions. Also, the normalization of supply chains will increase the demand for global disinflation, which is good news for the global economy. The increase in tourism will benefit not just China (such as the demand for luxury items), but also travel destinations in other nations, and the increase in production should help commodities like oil and industrial metals.  

We are apprehensive about the longer-term picture, though, since low vaccination effectiveness and increased mobility, which were both exacerbated last month by travel linked to the Chinese New Year, do not speak well for the fight against COVID-19.As a result, self-regulation by individuals despite increased illness risks, along with unfavorable wealth effects linked to persistent real estate troubles, might restrict consumption and, consequently, overall GDP.

The removal of limitations could eventually assist to alleviate supply chain obstructions that have led to lengthy delays for items ranging from vehicles to iPhones, helping to reduce inflation, despite some short-term inconvenience from employee shortages.  

The restart of travel to and from China is advantageous. Trips into and out of China have been reduced to a trickle, falling 79 percent for mainland residents and 95 percent for foreigners in 2021 compared to 2019 levels. This contrasts with commodities and capital movements, which remained strong even under zero-Covid.

The operations and investment of multinational corporations are boosted by facilitated cross-border travel. Executives will start traveling again between the corporate office and China to facilitate new business and initiatives. Similarly to this, Chinese businesspeople will make postponed trips to investigate the potential in other markets.

Better circumstances would also aid Chinese businesses in attracting and keeping international talent. Up to 100,000 foreigners, including teachers and other members of the family infrastructure that supports global labor, were said to be waiting to return to Shanghai alone in January. The resurgence of Chinese consumers will likely be the reopening’s most noticeable immediate effect. According to the most recent Ipsos survey, consumer confidence touched historic lows in 2022 but has since rebounded dramatically, making Chinese consumers the most confident in the world.  

In 2023, there is potential for a sizable amount of mean-reversion recovery when China’s middle-class releases restrained purchasing power. Instead of receiving government checks like customers in the West did, the Chinese kept cash on hand during the pandemic. In the first nine months of 2022, nominal disposable income per person increased by 5.3%, and as of November 2022, onshore savings held by citizens had increased by 16.7% to a record high of US$17 trillion.

China’s reopening results in more import expenditure as well as a big boost for the worldwide tourism industry, which contributes more than 10% of the global GDP. Before the epidemic, Chinese visitors spent over 20% of all money spent on foreign travel or US$255 billion in 2019. Early indications suggest they will return in full force despite the enormous black hole left by their absence. Within 30 minutes of the news regarding loose quarantine regulations, searches for popular international locations on the travel search engine Ctrip increased threefold.

According to Goldman Sachs’ projections, the first recipients of this “outbound bounce” would be adjacent nations with strong exposure to Chinese expenditure, such as Hong Kong and Thailand, where increased travel spending might result in GDP increases of 6% and 3%, respectively.The travel-related industries, including hotels, airlines, and retail, will also profit.

The long-term benefits of China’s openness to the world economy are less obvious but no less significant. Tensions between the US and China put a gloomy pall over the future of the global economy. By stifling the bilateral interpersonal dialogue that is crucial for fostering trust and understanding, Zero-Covid made this issue worse. With China’s reopening, officials, academics, business people, and students from both nations may resume in-person interactions. The next generation of decision-makers will benefit greatly from this encounter.

According to a recent survey, Chinese nationals who have studied or traveled in the United States have more favorable opinions of it. To assist in creating a pipeline of future Chinese literacy, it is hoped that 2023 would also see the return of American students to China, whose numbers dropped from thousands to less than 400 during the epidemic. 

Given the circumstances, it may not come as a surprise that Beijing’s recent policy change has prompted many critics outside of China to change their positions as well.  Many increasingly emphasize the dangers of reopening rather than the harms of lockdowns and other limitations, such as temporary labor shortages and increased inflationary pressures.   

These are legitimate worries, especially because Chinese demand is increasing as global monetary policy becomes tighter. It should not, however, obfuscate the bigger picture. Even if China’s reopening may not be easy, it will have a significant positive impact on global markets and sectors in 2023.

edited and proofread by nikita sharma