Markets have overestimated the impact that China’s reopening will have on the global economy, according to Gareth Gettinby, multi-asset manager at Aegon Asset Management.
After three years of lockdowns, the easing of zero-Covid restrictions at the end of 2022 appeared to promise a boost to supply chains and global growth, but this may be overly optimistic.
Gettinby said that the nation will “undoubtedly surpass” its GDP target of 5% in 2023, but this is unlikely to have an impact outside of China.
“China’s growth will be mainly domestically driven,” he added. “It will be tilted heavily towards consumption and services, given the significant amount of pent-up demand that has been built up during lockdown, which is no different to the experience of western economies when restrictions were lifted.”
Most of the optimists forecasting the benefits of China’s reopening have come to that conclusion based on previous recessionary cycles, where the nation played a pivotal role in the global recovery.
However, conditions in markets today are very different from how they were in the past, according to Gettinby.
The lack of infrastructure spending is the key differentiator to previous cycles. Jinyue Dong, senior economist at BBVA Research, said China’s stimulus here aided a smooth landing in past recessions, but infrastructure investment dropped to an average growth of 0.4% in 2021.
“In the past two decades, infrastructure has always been the stabiliser and the main counter-cyclical measure to stimulate growth amid business cycle downturns,” she added.
“Every time, infrastructure investment expansion played a counter-cyclical role and successfully pulled the economy out of the mud.”
China’s infrastructure spending since 2004
Source: BBVA Research
Infrastructure spending by China has aided the global recovery in the past but the nation has been careful not to overreach its budget this time around, according to Jason Day, senior investment manager at abrdn.
He said: “During previous cycles where there’s been downturns in the west, the Chinese have come to the rescue with an infrastructure plan.
“That massive infrastructure spend certainly helped the global economy, but the offshoot of that was there was just too much infrastructure spend that wasn't particularly targeted, so the Chinese don't want to have a banking crisis.”
Rather than helping this global economy this year, Gettinby suggested China’s reopening might do the opposite by inflating already high commodity prices as increased activity could “dampen down any commodity revival” and stretch limited energy supplies.
“An increase in demand will put upward pressure on prices, potentially causing strain in the European energy market, particularly if there is a harsh winter ahead,” Gettinby added.
While higher commodity prices might benefit large oil exporters such as Canada and Latin America, most economies could face headwinds from increased demand, according to Devesh Kodnani, global economist at Goldman Sachs.
“The clear risk from reopening is that stronger growth could lead inflation to surprise to the upside later this year,” he said.
“As a string of mostly downside inflation surprises have driven an easing in global financial conditions and enabled central banks to slow the pace of rate hikes in recent months, a larger inflation impulse from reopening may force central banks to hike rates further than markets currently expect to keep growth below potential and remain on track to tame inflation.”
Although the positive impacts of China’s reopening are likely to be domestic, Kodnani said it should benefit the surrounding economies in Asia.
A resurgence of spending in China should result in more imports from its neighbours, plus the return of Chinese tourists should aid the recovery of other Asian nations.
“While this [travel services] took a hit during tight Covid restrictions, a normalisation in travel patterns - which we expect to occur mostly in the second half of 2023 - should lead China’s travel trade deficit to increase and boost foreign GDP.”
Indeed, a recent study by the International Monetary Fund (IMF) forecast that economies in Asia and the Pacific will account for most (67.4%) of global GDP growth this year.
Drivers of global GDP growth in 2023
Source: IMF
China is expected to lead the charge, accounting for over a third (34.9%) of global growth in 2023, with India following behind with 15.4%.
Easing Covid restrictions should boost the region this year, but Thomas Helbing, division chief of the world economic studies division at the IMF, said that China needs to tackle its shifting economic landscape if it wants to stay ahead.
“The Chinese economy that has been the primary engine of regional and global growth for decades is expected to slow considerably in the face of unfavourable demographics and a productivity slowdown,” he said.
“The region should prioritise structural reforms to boost long-term growth, including through innovation and digitalization, while accelerating the green energy transition.”