Daily Management Review

Why The Reopening Of China Won't Cause Inflation


Why The Reopening Of China Won't Cause Inflation
After three years, the world's largest factory and most populous country finally opened for business, sparking a surge in demand as well as worries that it will exacerbate inflationary pressures around the world. However, economists 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 will cause another round of inflation as central banks around the world announce that the fastest rate increases in a generation will need to be extended.
The anticipation of a spending spree has increased the cost of everything from copper to shares in high-end fashion brands.
Economists, however, do not see a threat to global inflation and instead highlight Chinese President Xi Jinping's new plan for self-sufficiency, increased prosperity, and a socialist ideology as restraints on luxury spending.
They assert that Beijing's priorities for growth and the laxity of China's labor markets will also temper inflation.
"I don't think China's recovery or the reopening will cause any significant global inflation," said Chi Lo, senior market strategist for Asia Pacific at BNP Paribas Asset Management.
A recovery is likely to be internally focused and unlikely to significantly strengthen the yuan, lowering the likelihood that it will raise export prices or prices elsewhere.
The U.S. Federal Reserve and other central banks' concerns about being forced to raise rates further by Chinese demand are "overblown," according to Lo. The portfolio managers at BNP are planning for a rebound in China to increase regional tourism but not higher export prices for manufactured goods.
Further significant price increases as a result of the reopening are unlikely in the commodity markets, where China is a price-setter for iron ore and the second-largest consumer of oil.
New demand has already been factored into metals markets; last month, copper futures broke through $9,000 per tonne for the first time since June.
"The old infrastructure spending, basically roads, bridges, airports and ports; China will still build them", but that kind of spending will not be a priority in the next decade, said Lo, who anticipates only a marginal tailwind for commodities.
According to Lo, new infrastructure spending on things like technology uses fewer bulk commodities.
China has benefited from the low-cost Russian oil imports and has stocked up, which has reduced the demand for oil as an inflationary driver.
Given the moderation in economic growth and the strengthening of the domestic currency, there is comfort in the near absence of price pressures on the mainland as well.
At 3.0% in 2022, economic growth hit one of its lowest troughs in almost fifty years.
China's full-year GDP could potentially reach around 5% this year, according to UBS' APAC Chief Investment Office, but inflation will only "modestly" increase to 3%, and J.P. Morgan analysts believe it will start to decline.
Since China has not made the direct stimulus payouts that fueled hiring and spending in most Western economies, a weak labor market will also help to restrain inflation there.
Beijing's "common prosperity" policy has reduced bankers' salaries and benefits, and last year saw a record-high youth unemployment rate of 20%.
"There is so much spare capacity in China ... it doesn't feel like you're going to have a shortage of labour. You don't have the great resignation like you had in the rest of the world" due to the pandemic, said May Ling Wee, a portfolio manager at Janus Henderson Investors.
Analysts warned that inflation could develop if and when consumers invest their 17.8 trillion yuan in discretionary spending like travel.
"The large savings in China can definitely support a recovery of consumption - the question is how much more people are willing to spend," said Ricky Tang, co-head of client portfolio management at Value Partners Group.
Although there was no immediate increase in travel, data from ForwardKeys showed that average airfares for flights to and from China in January were more than twice as expensive as in 2019.
Given restrictions on travelers from the mainland, constrained flight options, and expensive airfares, Olivier Ponti, vice president of insights at ForwardKeys, predicted that it will be "many months" before Chinese tourist crowds arrive in Western airports.
"It is also likely that there will be issues with visas and delays renewing passports."
Price pressures are being reduced as a result of years spent organizing supply chains. A good example of this is pork production.
In 2022, it reached an eight-year high, but prices dropped 10.8% in January. According to analysts, the prospect of a "Goldilocks" scenario of steady growth without exporting inflation is increased by the decline in factory-gate prices.
"I'm very much of the view that (China's reopening) will be positive for the world in terms of either not being too inflationary, but more widely having deflation in some key new goods and services," Westpac senior economist Elliot Clarke said.