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China’s long-awaited lifting of COVID-zero policies in December and reopening to the world earlier this month had an immediate impact, as markets surged on the hope that China was back in business. But not everyone is convinced China’s reopening is good news for the global economy, and it might even exacerbate inflation worldwide.
For three years, China has remained largely isolated from the global economy, with leaders rarely leaving the country and foreign arrivals subject to strict quarantine, vaccination, and testing requirements. Frequent lockdowns in China’s manufacturing hubs and backlogs at port cities crippled supply chains and added to global inflation concerns. But those days may now be over, as city-scale lockdowns are no more and big-spending Chinese tourists are slowly venturing back out into the world.
Even Chinese leaders are traveling again, with Vice Premier Liu He attending the World Economic Forum in Davos, Switzerland this week. On Tuesday, Liu said in a speech that China’s economy will “return to its normal trend” this year, forecasting increases in imports, investments, and consumption—a boon to a global economy that the IMF and the World Bank have both warned is sliding dangerously close to a recession.
But the world should also look at China’s reopening with apprehension, the head of the world’s largest wealth funds warned, as the country’s sudden return could spark a new inflationary push abroad.
“I think the big, big uncertainty this year, is what will happen with global inflation when China kicks in,” Nicolai Tangen, the chief of Norway’s $1.3 trillion sovereign wealth fund, said in an interview with Bloomberg at Davos on Wednesday. “I think it will be inflationary and there is a risk that we could see an acceleration of inflation again on the back of that—that would be really bad for markets.”
Tangen said China’s reopening could come as a shock to global markets as its domestic demand for commodities picks up steam, with energy prices the most vulnerable. Last month, S&P forecasted China’s reopening would spark a surge in energy demand equal to 3.3 million barrels of oil daily this year, or nearly half of forecasted global energy demand growth in 2023.
Energy prices have fallen recently after peaking in the months after Russia’s invasion of Ukraine, especially in the U.S., where energy prices’ contribution to inflation has been shrinking for months. In the EU, which has been highly exposed to the Ukraine War, energy has played a bigger role in fueling inflation, and a surge in demand from China could lead to more aggressive interest rate hikes by the European Central Bank to reduce prices.
“One thing that we need to be sensitive to is whether the recovery in China adds to global inflationary pressures,” Chris Iggo, chief investment officer for core investments at AXA Investment Managers, told Reuters last week, adding that Europe might be forced to raise rates for longer in the event of an energy demand surge from China.
But if China’s economy returns to normal growth levels, as officials have predicted, it could lead to a surge in activity in Chinese real estate markets, which might raise prices for other commodities worldwide, including the U.S.
“If there is a strong economic rebound, property construction might pick up, then prices for raw materials like steel, copper and other construction materials will also increase,” Gary Ng, a senior economist at French investment bank Natixis, told Nikkei Asia in December.
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