China’s reopening is an economic tide that will raise boats across Asia

China’s Covid-19 setbacks are temporary. Its reopening will boost demand for commodities, tourism and luxury goods, lift stock prices and support Asian currencies and economies, especially Hong Kong’s

Neal Kimberley

Published: 4:45pm, 3 Jan 2023

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There’s no going back. China may be facing a surge in coronavirus cases and hospitalisations after Beijing abandoned its zero-Covid policy, but that decision is irreversible. Markets have to price that in because China is on the move again.

Even allowing for the thin trading conditions between Christmas and New Year’s Day, it was notable last week how the share prices of several China-facing companies, such as HSBC, rose on the London Stock Exchange as market participants positioned themselves for a rebound in China’s economic activity.

Whether the equity market demand for these companies will sustain in early 2023 is unknowable, but perhaps what is revealing is that, although China’s problems with its surging coronavirus cases have been well documented by media around the world, that price action encapsulated a positive view of China’s economy.

Investors looking through China’s coronavirus storm towards the sunlit economic uplands beyond could well be drawn towards companies in Hong Kong.

If any jurisdiction is well placed to tap into mainland China’s economic recovery, it’s Hong Kong. Both the Hang Seng and Shanghai Composite indices fell by 15 per cent last year, but that just means a plethora of bargains for investors optimistic about China’s prospects.

After all, it’s not where prices are that matters, it’s where they are seen to be going.

Applying that logic to the equity and commodity markets, if investors are upbeat about China’s prospects, and given the country’s economic heft, a rational calculation might well be that the share prices of major global mining companies, which historically have a big footprint in the Chinese market, and indeed the commodities they sell to China, might need to be reappraised.

There’s a wider argument here that spills over into the currency markets. If China’s economy is reopening, that will affect many economies in Asia. No one should underestimate the interconnectedness of the region’s economies. If China’s economy is on the cusp of bouncing back, a lot of other economies will also make gains.

Foreign exchange traders could well conclude that China’s reopening might lend support to currencies such as the South Korean won and Japanese yen, especially if currency markets simultaneously decide that the US dollar has “topped out”.

Nor should anyone underestimate the impact of China’s reopening on global tourism. With Beijing easing travel restrictions from January 8, China’s people will respond. While some countries have announced Covid-19 testing requirements for arrivals from China, there has to be every expectation that Chinese people will again wish to visit overseas destinations en masse.

In equities, that might bode well for foreign companies making luxury goods that Chinese visitors favour, while on the foreign exchanges, the return of large numbers of Chinese to countries where tourism is a significant segment of the economy may also prompt a reappraisal of the prospects of individual currencies.

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Foreign tourists return to Thailand, with 10 million visiting the Asian tourist hub in 2022

Thailand is a case in point. In 2019, before the pandemic, Chinese tourists accounted for 28 per cent of the nearly 40 million foreign tourists Thailand received. Those visitor figures subsequently collapsed. Indeed, speaking on December 27, Thailand’s finance minister Arkhom Termpittayapaisith estimated that Thailand welcomed just 11 million foreign visitors last year.

He also expected the Thai economy to grow by 3.1 or 3.2 per cent for 2022, but added that policymakers in Bangkok were optimistic for 2023 “and hoping that we will get 3.8 per cent with tourism the main driver” amid signs of China’s reopening. The Thai tourism sector is now confronting a shortage of workers as it readies for an influx of visitors from China.

If this scenario resonates on the foreign exchanges, it could translate into support for the Thai baht.

Having irreversibly abandoned its zero-Covid policy, China is indisputably beset by a surge in coronavirus cases and hospitalisations. Markets grasp that fact but will also look to identify the opportunities that emerge as China reopens and to capitalise on them.

Neal Kimberley is a commentator on macroeconomics and financial markets