What the reopening of China means for the global economy

The stimulus, a $568bn (£462bn) package, which was spent on roadbuilding and other infrastructure projects, boosted demand for commodities such as industrial metals and fuelled a wave of fixed asset and real estate investment within the country.

And while the economic data in Europe and the UK has been slightly better than expected, it is the reopening of the Chinese economy and society that has provided the bulk of recent optimism in the developed world. 

At the same time, Chinese consumers were relatively unscathed by the impact of the financial crisis and in many cases had increased spending power, which boosted global demand for items such as cars and consumer goods. 

But the key question for advisers and their clients is whether a repeat of the upwards 2008 trajectory for the Chinese economy is on the cards, and what this would mean for the rest of the world.

Federated Hermes senior economist Silvia Dall’Angelo says: “The reopening of the Chinese economy will probably mean a slight boost for global growth and for global inflation, but I don’t think it will be on anything like the scale we saw after the global financial crisis.” 

She adds that following the global financial crisis, Chinese policymakers embarked on a spree of investment in infrastructure. 

This type of spending tends to boost the rest of the world, have a high multiplier and extensive spillover effects, as economists call it, because infrastructure investment requires spending on commodities that are produced outside China. 

But Dall’Angelo says that policy priorities have changed, with a new focus on decoupling China from the rest of the world and a determination to grow the Chinese economy in isolation, rather than be part of the global economy.

The reopening of the Chinese economy will probably mean a slight boost for global growth and for global inflation, but I don’t think it will be on anything like the scale we saw after the global financial crisis Silvia Dall’Angelo, Federated Hermes

Mike Kerley, who runs the Janus Henderson Asian Dividend Income investment trust, says Chinese consumers are estimated to have built up $2.6tn in excess savings as a result of the pandemic.

Zhixin Shu, senior equity analyst at J Stern and Co, recently returned to China for the first time since the pandemic began. She says the excess savings built up could amount to as much as 10 per cent of gross domestic product. 

The key here is that even if Chinese government policy is less stimulative than was the case after the global financial crisis, the spending of these accumulated savings could have much the same impact. 

Kerley says the initial data from the recent Lunar new year celebrations indicates that the bulk of the travel occurred within China, rather than in overseas destinations, indicating that wider Asia and Europe may not yet be benefiting from an increase in tourism. 

He adds that the trend towards more patriotic spending has been going on for many years, and while he does not believe it will materially dampen demand for western brands, the current focus of his trust is on companies that profit from domestic spending within China. 

Price pressures? 

Perhaps the most significant potential impact of the reopening of China is on inflation levels. 

Dall’Angelo expects a moderate increase in inflation as a result of higher demand in China for oil pushing prices up, but she believes the impact on commodity prices will be more muted as a result of the shift in focus to a more consumer-based economy. 

But David Rees, emerging market economist at Schroders, expects an initial “sugar high” of economic activity in China, which he believes may fade by late summer.

The reopening means he does not anticipate that the release of pent-up demand will lead to a more sustained recovery – and obviously that will have an impact on global growth and inflation, just on the basis that the Chinese economy is very large.

The big deciding factor will be the level and extent of China household savings. We saw in the US the impact this had, but in China it is more difficult to get reliable data David Rees, Schroders

“But while it is a big economy, it is not actually a big source of final demand, so we think the impact will be limited,” says Rees. 

“The big deciding factor will be the level and extent of China household savings. We saw in the US the impact this had, but in China it is more difficult to get reliable data. There has already been some recovery in commodity demand which is inflationary, but it is coming off a low base.”

As with Dall’Angelo, Rees takes the view that the impact on inflation and growth will be moderate and focused on certain areas.

He believes countries such as Germany will benefit from a rise in demand for consumer goods, such as luxury cars, but in general he feels the reopening will lead to increased demand for services, rather than goods, which mirrors what happened when developed market economies reopened.

Such services spending is likely to boost tourism as well as domestic demand. 

Link in the chain 

One of the root causes of the supply side inflation that has bedevilled developed markets over the past year has been the disruption to supply chains caused by pandemic restrictions and lockdowns in various parts of the world.

Given China’s role as a global manufacturing centre, lockdowns in that country have impacted supply chains, but the reopening is unlikely to have a profound effect on the global level of supply side inflation, according to Rees. He says the supply chain issues had already begun to ease before the reopening, so any boost from here will be marginal. 

Kerley adds that there is a risk the reopening will lead to a rapid increase in the infection rate, and this serves to restrict supply chains again as workers take time off. 

This is something that Bank of America investment strategist Thomas Pearce has been monitoring.

He says: “China’s decision in December to reopen its economy despite a high case count, low natural immunity and low vaccination rates appears to have gone better than feared.

“While the spread of infections has been significant, it has also been rapid, with officials declaring that the peak of infections has already passed.”

With the negative scenarios around reopening likely behind us, the main question now is, how much of a China reopening boost is already discounted in the market? Thomas Pearce, Bank of America 

Pearce continues: “The data flow so far points to more economic resilience than expected. Even if the lunar new year holidays cause a second wave of infections, the relatively minimal damage the massive exit wave has imparted on the economy so far suggests limited scope for renewed economic and, hence, market worries.

“With the negative scenarios around reopening likely behind us, the main question now is, how much of a China reopening boost is already discounted in the market?”

And attempting to answer his own question, Pearce says he believes that markets are already reflecting the possible upside from China’s reopening and is particularly cautious on European equities, which might be expected to be the major beneficiary of the country’s reopening as he expects the higher interest rates implemented in 2022 to drag equities down this year. 

China’s role in boosting the global growth after the financial crisis was a major theme of the past decade and, given the reaction of equity markets to the reopening, the outlook for that economy will have a major bearing on investors’ portfolios for the year ahead.  

David Thorpe is investment editor at FTAdviser

david.thorpe@ft.com