The pace of China’s reopening will weigh on the outlook for global growth and inflation after rolling back a draconian zero-virus policy last month. Share prices of U.S. companies serving the Chinese market, such as casino operator Wynn Resorts, will benefit from a smooth rebound, as will U.S. attractions that attract Chinese tourists.
The coronavirus has sickened tens of millions and overwhelmed hospitals since the Chinese government abandoned its frenetic lockdown strategy in early December. Nearly nine out of every 10 residents in Henan province, which is more populous than Germany, are sick, officials said this week.
An ordeal looms this month when workers at coastal factories return to the countryside to celebrate the Lunar New Year, which could spark a second wave of infections in areas with underdeveloped healthcare systems.
Despite the dangers, there are signs that the economy is booming. Subway ridership in major cities is rapidly returning to normal. Consumers who had been hoarding savings at home for much of the past year had money to spend. The government is rolling out policies to support the rebound.
IMF Managing Director Kristalina Georgieva told reporters last week that China’s ability to recover from nearly three years of self-isolation “is likely to be the biggest contributor to global growth in 2023.” Key factor”. “It’s very important.”
Indeed, the other major engines of the global economy are far from firing on all cylinders. While the U.S. economy ends 2022 strong, it will struggle this year due to the impact of rising interest rates, according to the latest World Bank forecasts. Europe is in recession, while Japan is expected to maintain only 1% growth.
As for China, the World Bank forecasts growth of 4.4% this year, and some private estimates are even higher. Goldman Sachs expects a gain of 5.2%. “Evidence of China’s rapid reopening is accumulating,” the investment bank said in a note to clients this week.
Still, it will take time for the Chinese to return to pre-pandemic routines, including the government cutting off ties with the outside world in hopes of keeping the virus at bay. Analysts say the next few months are likely to see a patchy recovery before broader economic activity resumes in the spring.
Even with a smooth reopening of China, the global economy faces a year of anemic growth, according to forecasts from the World Bank and the International Monetary Fund.
“It did provide a big boost. But we don’t expect China to have this huge growth surge and catch the rest of the world to the rescue,” said Ben May, head of global macro research at Oxford Economics in London.
Chinese policymakers are doing what they can to help. The People’s Bank of China — unlike central banks elsewhere — cut rates last year and may cut them again because of low domestic inflation. The government has also resumed lending to some major property developers, temporarily abandoning efforts to reduce the industry’s overall debt.
Signs of China’s awakening are already evident. Chinese tourists, who have been largely confined to their home countries for the past three years due to onerous quarantine and testing requirements, are starting to travel.
Nearby destinations such as Thailand and Hong Kong are immediate beneficiaries. But American tourist attractions are also anticipating the return of the Chinese.
“Booking inquiries are going through the roof. In the first few days after the policy change, the number of Chinese search engines increased a thousand-fold,” said Adam Burke, chairman of the Los Angeles Tourism and Convention Commission, the most popular destination for Chinese tourists one.
He added that two Chinese airlines — Air China and Hainan Airlines — plan to resume daily nonstop flights between Beijing and Los Angeles this month.
Nearly 1 million Chinese tourists are expected to visit the U.S. this year, up from 359,000 last year, according to the U.S. Travel Association.
That’s an impressive growth. But the total is still a fraction of the annual immigration of more than 3 million in the years before the pandemic. USTA President Jeff Freeman said the industry isn’t expected to return to that level until 2026. Visa approvals and required coronavirus testing will also prevent international travel from rebounding as quickly as domestic travel.
Before the pandemic, China was second only to the United Kingdom and Japan as a source of international tourists to the United States. But the typical Chinese tourist stays for 14 days — compared with an average of 10 days — and can spend as he pleases. In 2019, China was worth more than $33 billion to U.S. airlines, hotels, entertainment venues, and universities.
“Chinese tourists are absolutely critical to the U.S. tourism economy,” Freeman said.
How quickly Chinese consumers resume their usual spending habits will determine the trajectory of the economy. Consumer confidence in China fell to an all-time low last year as lockdowns were reimposed amid the rise of an omicron variant of the coronavirus.
But household bank balances are up 42%, or $4.8 trillion, since the start of 2020, said Andy Rothman, investment strategist at Matthews Asia in San Francisco. This suggests that as Chinese consumers resume spending, they could unleash more than the UK’s entire economy.
Some analysts worry that a recovering China will consume more oil, driving up global prices, stoking inflation and forcing the Federal Reserve and other central banks to keep raising interest rates.
Bank of America expects Brent crude, the global benchmark, to hit $110 a barrel in the third quarter of this year, up from around $80 now.
But China is expected to resume exports of as much as 1.5 million bpd of refined products such as diesel, even as its oil demand increases, which should take pressure off retail prices, according to Citigroup. China has halted those exports at the end of 2021 to address domestic supply issues.
Much of the increase in consumer spending will also be on domestic restaurant meals, movies, sporting events and other live events banned during the lockdown, rather than on products from other countries. American brands such as Starbucks and KFC owner Yum Brands could benefit.
Luxury retailers are also hoping to benefit from higher sales in China and elsewhere. Shares of Louis Vuitton owner LVMH Moet Hennessy Louis Vuitton have risen nearly 13% since Beijing lifted coronavirus restrictions on Dec. 7.
Still, China is emerging from a period of troubling weakness. Last year’s 3.2% annual growth rate was the slowest in decades, excluding the pandemic-hit 2020. Repeated lockdowns have demoralized the population and killed consumers, small businesses and factories.
The end of the year saw unprecedented anti-government protests in Beijing and other cities.
“2022 is a really dismal year,” said economist Mary Lafley of the Peterson Institute for International Economics.
Factories fell for a third straight month in December, according to the official purchasing managers’ index from the National Bureau of Statistics. Youth unemployment hit a record 19.9%. An overbuilt real estate industry is heavily indebted, dragging down investment.
China’s long-term outlook is more challenging. The country’s working-age population is shrinking. According to BNP Paribas, the real estate sector, which accounts for 15 percent of the economy, remains vulnerable to falling prices that could trigger wider financial problems.
While China’s economic growth is expected to outpace that of the United States, Europe and Japan this year, its performance will also fall short of its contribution to the global recovery from the 2008 financial crisis. China’s economy grew by more than 10 percent in 2010, roughly double the rate expected for this year, thanks to heavy government spending on infrastructure projects.
“There will be positive spillovers from China. But it won’t be as strong as the Chinese recovery in the past,” said Nathan Schitz, global chief economist at Citigroup.
