A man rides a bike past workers in protective gear in Shanghai on June 4 as the city deals with new, sporadic community outbreaks of Covid-19. Photo: EPA-EFE
Opinion
Macroscope
by Neal Kimberley
Macroscope
by Neal Kimberley
Why Shanghai reopening is good for Biden and global economy
News of Shanghai easing its strict lockdown measures could signal an end to supply chain disruptions that have plagued the global economy
Clearing the snarl-ups would reduce inflationary pressures and boost Biden’s midterm election hopes
With higher prices dominating the economic and monetary debate in Washington, the reopening of Shanghai might have come just in time for US President Joe Biden. The emergence of China’s commercial hub from strict pandemic-related lockdown measures could also be an inflection point for the commodity and currency markets.
Pandemic-related supply-chain disruptions have been a driver of global inflation, with the economic side effects of Russia’s invasion of Ukraine exacerbating the situation. But the bottom line is that China lies at the heart of global economic supply chains.
Consequently, if production lines in China are disrupted, the rest of the world is left scrambling to find alternatives. As is always the case when demand exceeds supply, scarcity translates into higher prices.
Economic dependence on Chinese supply chains may not be a palatable concept for Western policymakers, but it is a simple reality.
The West doesn’t always see eye to eye with Beijing, and it has reservations about the implications for the global balance of power given China’s increasing global footprint.
Be that as it may, and while the West might wish to bind China to a “rules-based” global order in which the West presumably writes the rules, the centrality of China to the smooth functioning of the global economy is indisputable.
Even as the prospects for China’s economy brighten, the Biden administration has already said it is considering “all options” in its review of tariffs on goods imported from China as part of its attempts to rein in US inflation.
01:29
Shanghai tourist sites remain quiet after end of two-month citywide lockdown
Shanghai tourist sites remain quiet after end of two-month citywide lockdown
The tariffs were imposed by the Trump administration and carried over by the Biden team. They might have been intended to address a China-US trade relationship that Washington decided was too skewed in Beijing’s favour, but the levies have essentially proven to be an act of financial self-harm, with US consumers bearing the cost through higher retail prices.
The fact that Biden is considering tariff relief as one way to reduce US inflation is an admission that the levies have been inflationary. A cynic might wonder whether this new focus on addressing elevated inflation has something to do with the president’s low approval ratings and the prospect of electoral losses in Congressional midterm elections on November 8.
Whatever is motivating the White House, the emphasis on reducing the rate of US consumer price rises is clear for all to see.
Meanwhile on the monetary side, and after more strong US jobs data last Friday, the Federal Reserve will continue to raise US interest rates and initiate quantitative tightening. Yet while policy tightening can influence the demand-pull component of price inflation, albeit with a time lag, cost-push inflationary pressures caused by external supply chain disruption are not so easily affected.
That is where the reopening of Shanghai and a hoped-for normalisation in broader Chinese economic activity comes in. The greater the normalisation of global supply chains, the higher the possibility that inflationary pressures – which are directly related to disruption to those supply chains – will abate. That is why the reopening of Shanghai might have come just in time for Biden.
As for market implications, there are many. In the commodity space, a gradual normalisation of economic activity in China – especially when augmented by last week’s announcement by Beijing of a plan for 800 billion yuan (US$120.1 billion) of new infrastructure investment – will logically lead to increased Chinese demand for metals such as copper.
In the currency space, foreign exchanges could view Shanghai’s reopening as supportive for the yuan. Pan Gongsheng, deputy governor of the People’s Bank of China, made the point just last week that “yuan exchange rates are basically stable with two-way fluctuations”.
On the US dollar side of the equation, foreign exchanges might also wonder whether normalisation of Chinese supply chains, possibly accompanied by Biden-authorised tariff relief, will erode cost-push drivers of US inflation. If that is the case, then the terminal rate – the interest rate at which the Fed concludes its monetary mandate is being met – could be lower than expected by the market.
It remains to be seen whether foreign exchanges are prepared to make a leap of faith. If currency markets do take that view, though, it would remove a pillar of support for the US dollar. The reopening of Shanghai is not just good news, it is a matter of global significance.
Neal Kimberley is a commentator on macroeconomics and financial markets
