- Economic conditions in China seem to be improving after a terribly uncomfortable 2022 for the Asian country.
- After the havoc caused by pandemic confinements, the world’s second largest economy is recovering rapidly.
- Retail consumption and travel are showing encouraging figures that could be positive for global economic growth.
The steely determination of the Beijing authorities in their policies to curb covid-19 at all costs brought the country’s economy to a painful and heavy stagnation. Thus, 2022 became a year to forget that filled all global growth forecasts with pessimism. However, China’s recovery seems to be the new electrifying trend that could stimulate the economy again.
The markets are receiving the news of the Asian giant’s revival positively and the copper market is one of the most notable. After the biggest falls in 5 weeks, the price of the metal started to recover ground thanks to hopes of increased demand from China. In the field of infrastructure and construction, a little patience is required, say analysts. Nevertheless, the path to strong growth seems to be clearly demarcated.
As far as the housing market is concerned, a significant upturn was observed for the first time in many months. The same can be said for retail consumption and travel, both of which appear to be resurgent. Some local media are rejoicing at this new growth momentum and point out that this will favor global economic progress. At the other extreme, this movement could also represent a negative side for the global economy because it would stimulate an increase in inflation. Some experts are convinced of the latter, as we will see below.
The magnitude of China’s economic recovery
The recovery of the Chinese economy becomes a truly global phenomenon due to its weight on the international chessboard. In other words, the improvement or continuation of the current international crisis could depend to a large extent on what happens in the Asian nation. At the same time, it could also bring some problems.
In any case, the beginning of the revival process seems an unquestionable fact. Among the signs of this is the massive migration of consumers to physical stores after months of online sales dominance. Similarly, 308 million domestic trips were made during the Spring Festival, which is 23.1% above the movements of the previous year.
It is worth noting that this was only the first mass event in the country after the easing of the strict confinement policies. Thus, it was not many weeks after the measures were relaxed when the Festival reached the participation levels of 2019. At the same time, the recovery of box office experienced outstanding results. In that regard, revenues generated in this area were equivalent to nearly $1 billion. The latter was the second highest grossing Spring Festival in its history.
This scenario, which projects China with a powerful recovery, makes many dream of the miracle of global revival. This seems to be the opinion of experts from the International Monetary Fund (IMF) itself. Such is the case of the IMF’s main representative in the Asian country, Steven Barnett. During an interview with CGTN, he stressed that this is a solid and sustainable growth “that provides a welcome boost to the world economy”.
The advantages for the global economy
Although there are some countries whose borders are closed to citizens of China, that is likely to end soon. The fact that citizens of that nation can travel abroad becomes a cause for hope for countries that depend on tourism. Also, Barnett said, the faster China’s economy grows, the more goods its citizens are buying in other countries. Countries that close their doors to these people will face the fact that other countries will open their doors and take advantage of this flow of capital.
“That’s the indirect effect. It drives growth in other countries,” he explained. Added to this is the fact that the lifting of the measures is also a relief for foreign companies based in China. Production resumes the path prior to the closures, which generates an increase in the companies’ revenues. As a result, they are once again gaining investor confidence in the stock market.
The most popular cases of this focus on the powerful electric car maker Tesla and the Sino-dependent Starbucks. The list of companies can become endless, as these firms are strongly attached to the demanding Chinese market. The same can be said of local companies, many of which have a presence in other countries and are now reviving their operations.
From this angle, the recovery of the Chinese economy becomes a phenomenon that pleases almost everyone in the economic world. As mentioned at the beginning, not everyone is convinced of how good this explosive growth in Beijing can be. Inflation becomes the main cause for concern.
Inflation could be the Trojan horse of China’s recovery
The concern that inflation could be the side effect of this economic rebound also comes from the IMF. In particular, its president, Kristalina Georgieva. She considers that Beijing’s recovery is the most important factor for the growth of the world economy in 2023.
This view is shared by leading analysts, as revealed in a recent report on the Japan Times website. It stresses that this is excellent news for the weakened economies of Europe and the muddied situation in the United States. But it is at this point that warnings arise among experts.
During her participation in the World Economic Forum, the head of the IMF said that accelerated growth could weigh heavily on commodities. Thus, if those markets are stimulated by Beijing’s demand, energy and fuel prices could give a new boost to consumer prices. It should not be lost sight of the fact that this was precisely one of the drivers of inflation in the West. During the height of the war in Ukraine, commodities soared and with them so did inflation.
As Georgieva hints, a new edition of commodity inflation could occur with the recovery in China. To get an idea of the possible magnitude of this, Bloomberg Economics’ predictions for China’s growth should be taken into consideration. From 3% in 2022, they expect 5.8% in 2023.
Global inflation could grow by almost a full 2%
What looks like a breath of fresh air could turn into a nightmare for the global economy. Consequently, modeling the relationship between China’s growth, energy prices and global inflation points to an undesirable scenario. It would be experiencing a full 1% boost in consumer prices during the last quarterly stretch of 2023.
But if China’s growth is above expectations and achieves 6.7%, then global inflation would grow to very close to 2%. The peak of inflation in the US was 9.1% and 10.6% in the EU. These figures now fall back to 6.4% and 8.5% respectively during January. If Chinese growth adds 1-2% this could turn into a panic scenario.
“China’s economic growth could heat up commodity markets and cause a spike in global inflation.”
Bloomberg’s model highlights the likelihood that in the second quarter US inflation could stall at 5% as a result of China’s recovery. If so, plans to halt the Fed’s interest rate hikes in May would be scuttled. A new round of increases could follow and recession would almost inevitably follow.
The context of this problem is that OPEC+ remains reluctant to increase oil pumping. Consequently, an increase in demand from China and stagnant production would logically result in an increase in the price of a barrel of oil. Thus, the world economy is in the midst of a dilemma regarding Beijing’s awakening.
The internal drivers of the Chinese economy
Whether it is a positive or negative phenomenon for the world economy, the resurgence of Beijing is an inevitable factor. It is the world’s second largest economy and the dominant commodity consuming market. With a population of 1.4 billion and a middle class that is constantly growing in number and purchasing power, it is an explosive and unstoppable growth.
This first part of economic growth is represented by consumption. Retail spending and domestic catering by key companies in sectors such as oil, food, clothing and cars are the main drivers. This group alone accumulated growth of no less than 6.8% since last year. Similarly, compared to last year, restaurant dining grew by 15.4%.
“The manufacturing sector expanded during January 2023 after three straight months of contraction” – National Bureau of Statistics of China.
Data from the Ministry of Commerce also showed growth in average consumption in food establishments. Year-on-year, this sector saw growth of 10.8%. “China has a large number of groups with high purchasing power,” explains Yan Yilong of Tsinghua University consulted in CGTN. He adds that China will enter the ranks of high-income countries by the end of the 14th five-year development plan 2021-2025.
But China’s 2023 economic recovery is just a stepping stone in an accelerated rise over the next few years, officials expect. The consumption structure will improve further with rising per capita income, Yilong reiterates.
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