Focus
January 06, 2023 | 13:22
What Does China’s Reopening Mean for the World?
Economics
Economics
Economics
Economics
Economics
Economics
Economics
Economics
Economics
Economics
What Does China’s Reopening Mean for the World?If there is anything we have learned since the pandemic erupted, it’s that Beijing’s ability to surprise China-watchers remains firmly intact. The abrupt decision to tear down most zero-COVID restrictions in recent weeks is being met with expectations of a swift economic rebound following a string of negative shocks (e.g., regulatory crackdown on tech and tutoring, the Evergrande/housing crisis, and Shanghai lockdown). However, we are maintaining a more cautious stance as we judge that the reopening recovery will be more drawn out, though it could ultimately extend beyond a normalization in economic activity to pre-pandemic times and lead to a much-needed structural shift in the economy. This being the long-awaited transition from an investment-led to a consumption-driven economic model. Volte-face |
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With the majority of the world having already adopted a strategy of ‘learning to live with COVID’, it was only a matter of time before the Middle Kingdom followed suit. The reopening was likely fast-forwarded by an array of factors, including street protests, a weak job market (a youth unemployment rate of 17.1% in November), and an intensifying trade war. On the latter, the Biden Administration’s new CHIPS and Science Act of 2022 upped the ante further, making it more difficult for China to advance its semiconductor fabrication capabilities and broader technological ambitions. The Act prohibits the sale of semiconductor manufacturing equipment and advanced chips to China and even prevents U.S. citizens from working at Chinese chipmakers. It appears that China’s authorities have little choice now but to start focusing on reinvigorating the economy given the increasingly challenging backdrop. Building the World’s Largest Consumer MarketThe State Council’s Strategic Plan for Expanding Domestic Demand (2022-35) released in mid-December highlights a more serious drive to rebalance the economy than in the past. The overarching objective is to raise GDP per capita to levels of (moderately) developed economies by 2035 (Chart 1). Though the statement did not necessarily break new ground, it’s clear that—reading between the lines—the authorities recognize that the workforce is shrinking, and they can no longer rely on merchandise exports to propel the economy given the escalation in global protectionism. To counter such pressure, Beijing looks to build the world’s largest consumer market in the coming years. The good news is that the average Chinese worker spends less than 40 cents of every dollar earned, well below the global average of 60 cents (Chart 2). Still, the task will not be easy as it will require difficult measures to be implemented (as part of the ‘common prosperity’ agenda) such as redistributing income (from capital to labour and from urban to rural areas) and overhauling how fiscal policy is managed (changing tax policy and developing a stronger social safety net). Complicating matters, both the household and corporate sectors are already quite financially leveraged (Chart 3). Headwinds Remain StrongIn the meantime, the economic outlook, at least in the first half of the year, is likely to remain challenging due to: |
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a) COVID surges—Rather than an immediate V-shaped recovery, the economy could experience a period of sporadic disruptions as elevated caseloads result in various work-related stoppages and hinder ‘revenge’ spending. b) Lingering housing crisis—The authorities stepped up their efforts to stabilize the housing market in mid-November by introducing a comprehensive 16-point plan to ensure property developers have access to financing, particularly from banks, to complete pre-sold homes. However, it will likely still take an extended period before homebuyer sentiment truly recovers, which in turn will depend on the ability of homebuilders to complete unfinished projects and a much stronger job market (Chart 4). c) Global recession risk—Europe and North America will likely experience (shallow) recessions this year as their respective central banks continue to raise interest rates, which will weigh heavily on global demand for goods from the Asia-Pacific region. This explains why global demand for China’s merchandise exports (in USD terms) has been contracting, declining 8.7% y/y in November with those to the U.S. tumbling 25.4% y/y (Chart 5). As a consequence, we are not expecting the sudden reopening to spark a spectacular rebound in China’s economy, similar to what occurred in the wake of the Global Financial Crisis. Indeed, one cannot rule out the possibility that the economy may contract in the first quarter of the year given difficulties on both the domestic and external fronts. Thus, we have not made any material revisions to our real GDP growth projections, which stand at 4.5% in 2023 and 5.0% in 2024, compared to an estimate of 3.0% in 2022. |
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Good News for the Global EconomyA more gradual economic recovery in China may be exactly what the doctor ordered for the global economy given that most major central banks are still fighting inflation. Just imagine how a supercharged Chinese economy would impact global commodities markets given that prices of energy and metals are still at elevated levels. Still, as the pandemic eventually moves into the rearview mirror, we believe that the normalization of domestic/international travel activity is likely to have a significant knock-on effect on the crude oil market by tightening the global supply/demand balance. After all, China has already become the world’s second largest consumer of crude oil (15% of global total) after the U.S. (20%). This explains why we are forecasting benchmark West Texas Intermediate crude to average US$90/bbl in 2023, compared to its current level of ~$75. |
The reopening itself is likely to have much less of an impact on metals even though China is far and away the top consumer of most industrial metals, accounting for roughly 50% in most cases. Chart 6 shows that the country has already become the dominant player in many clean energy technologies, which is boosting demand for many base metals (e.g., copper, nickel, lithium, etc.). The recovery in the housing market could lend further support to metals demand down the road, particularly bulk commodities (iron ore and metallurgical coal). Otherwise, China’s reopening is likely to have the biggest impact on international tourism. Many neighbouring countries, which had become extremely reliant on Chinese tourists, are breathing a big sigh of relief. Prior to the pandemic, China accounted for over 70% of total visitor arrivals in Hong Kong and Macao (Table 1). It bears mentioning that the U.S. National Travel and Tourism Office calculated that the average Chinese traveller’s expenditure reached nearly US$12,000 in 2019. So even though Chinese tourists accounted for under 4% of total U.S. visitor arrivals, they were the largest aggregate spenders by country. Of course, the new testing restrictions imposed by many nations on visitors from China will initially dull the bump for tourism flows. Key Takeaway: China’s reopening is a clear-cut positive for growth—over time—that will support its prospects for a gradual economic recovery. However, it’s not a game-changer for activity in the rest of the world, which is probably not a bad thing given the global inflation landscape remains far from settled. |
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