Can China’s rebound save the global economy?

As China sees demand return and economic activity pick up, the rest of the world is experiencing a slowdown thanks to inflation-fighting policies
While a rise in Chinese consumption may boost global growth, changing the trajectory of the global economy is a tall order

Chris Kushlis

Published: 9:30pm, 21 Mar 2023

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China’s earlier-than-expected economic reopening following the abrupt end of its zero-Covid policy has been hailed by global strategists and investors as one of the defining events of 2023. China’s growth should rebound, although to what extent depends on the strength of the recovery in consumption.

However, representing around 15 per cent of world gross domestic product, China will struggle to change the slowing of the global growth trajectory on its own.

Overall, China’s sharp reversal of zero-Covid should have the biggest impact on domestic demand, once the initial shock fades. There was concern about the impact on supply chains, given that some disruption appears likely during the initial phase of reopening.

However, given the Chinese authorities’ track record of restoring supply chains relatively quickly in the wake of shocks, we might expect them to soon return to relatively normal operational status. Indicators such as the PMI supplier delivery times or freight shipping costs are normalising relatively quickly, bearing this out.

China’s economic growth should be in the range of 4-6 per cent in 2023. But to get to 5 per cent or over, consumption will have to be the main driver and will need to grow by 9 per cent or more (including public consumption). Overall, domestic demand is likely to need to increase from 2 per cent growth in 2022 to 6 per cent or over this year.

The data from January and February suggest the recovery is on a promising path with solid gains in sequential production, retail sales and a rebound in housing sales. But there is still uncertainty around whether the pace of this initial rebound will be sustained.

One uncertainty relates to the amount of economic scarring. While scarring fears on the demand side stemming from bankruptcies and lost income proved overrated in most other countries, China’s experience with zero-Covid has meant a prolonged period of sub-trend activity different than elsewhere.

People walk along a shopping street in Beijing on March 1. Photo: AP

China’s policy mix has also been geared mainly towards supply-side support and additional infrastructure investment while generally avoiding direct consumption support. Finally, Beijing’s crackdown on the property sector post-2020 has added further pressure on the economy. This probably amplified the negative effects of the zero-Covid policies.

The spillover benefits from China’s reopening are very specific, with increased commodity demand likely, particularly in oil and gas.

There could also be increased demand for other imports, mainly from Asia, but also more capital goods. The biggest negative changes in imports in 2022 against the prior trend growth have been from Hong Kong, Singapore, Australia, Vietnam, Thailand, and the EU/Japan. Indonesia, Malaysia, the US and Africa have been the least affected.

China’s reopening could also have a positive impact on tourism in Asia, with Thailand seen as a key beneficiary. However, outbound travel and tourism may see a three- to six-month delay in ramping up post-reopening, due to constraints on resuming flights and approving passports and visas for travellers.

The reopening is likely to create some upward pressure on global growth and inflation. But this comes at a time when the outlook for the US and globally is slower growth and moderating inflation. Therefore, China’s economic reopening is unlikely to change the global trajectory on its own.

Post-Covid reopening in most other countries has been broadly reflationary. China, by running against the global cycle, may see some relief from lower commodity price pressures. Only a handful of countries have experienced a limited rise in core inflation; the large majority have seen upside surges.

The lower inflationary outcomes have mainly been due to subpar performance in domestic demand. Thus China may be able to avoid some of the larger inflation overshoots as a result of its more moderate direct consumer stimulus support and given the limited expectations for a rebound in fixed-asset investment.

Assessing the net impact of China’s reopening on global growth and inflation is complicated by the baseline outlook for a global slowdown and potential for recession later in the year or in 2024. Based on trade in value added, China’s imports of goods account for about 2.5 per cent of GDP (on average) in the rest of the world versus a higher 9 to 10 per cent share for the G3 economies (the US, the euro zone and Japan).

A 4-percentage-point increase in China’s domestic aggregate demand is estimated to add only about 10 basis points of potential growth to most developed economies and 30 to 50 basis points to China’s closer trading partners in Asia.

The main potential spillover effect on global inflation is likely to come via commodities. However, if a global slowdown outweighs the 0.5 to 1 per cent potential growth China’s reopening gives to global demand, then the effect will be more about causing less headline disinflation.

We are also seeing the impact on the oil market play out in two stages, with the first being a softening in prices during the initial wave, followed by a recovery starting in the first and second quarters of 2023. The tug of war between the improving momentum in China and the slowdown in the rest of the world will be the key determining factor.

Chris Kushlis is chief of China and emerging markets macro strategy at T. Rowe Price