China’s abrupt dismantling of its ‘zero-Covid’ policy towards the end of last year has provided optimism amidst the gloom associated with the global economic landscape. Indeed, many analysts believe that China’s reopening can provide an uplift to global GDP in an otherwise bleak outlook for the rest of the world, amidst elevated inflation, tighter monetary conditions, and fears over energy supply.
Data from the Chinese Centre for Disease Control and Prevention hints that the mainland’s current wave may be past its peak, with Covid deaths in hospitals dropping by 72% in the week to 9th February.[1] Though data from around the Lunar New Year period – which lasted 15 days from 21st January to 5th February this year – may not be representative. But the prior expectation had been that the Lunar New Year would be more subdued than usual because of fears about the disease. This expectation seems to have been confounded. Indeed, activity during the Lunar New Year holiday suggest a quicker-than-expected recovery in consumer spending; consumption over the festive period was 6.8% higher than it was in 2022, while tourist numbers were 23% higher, reaching almost nine-tenths of 2019 levels.[2] Assuming that Chinese virus data offer even a vaguely accurate picture of the state of Covid-19 in the country, it suggests a downward trend in infections followed closely by a recovery in domestic consumption.
How will China’s apparent Covid recovery shape economic developments in 2023?
A key talking point of China’s impending recovery is its impact on commodity prices, mainly that of energy. While energy prices have eased from their peak in mid-2022, this easing was partly due to depressed demand from the mainland, with China’s demand for oil and natural gas estimated to have fallen by 3.0% and 0.7%, respectively, in 2022, marking the first declines in both categories in over 30 years.[3] With ‘zero-Covid’ a thing of the past now, many have pegged an uptick in Chinese economic activity to result in an increase in demand for commodities, thereby adding to inflationary pressures in Western economies and culminating in tighter monetary policy for longer. Yet it is worth noting that the mainland, like the rest of the world’s economies, has also been exposed to high energy prices, and has reacted similarly by economising its energy usage and reducing its exposure to market prices. This, in conjunction with disrupted activity due to Covid-19 controls, depressed energy demand and resulted in a fall in energy imports, with imports for coal, crude oil and natural gas in 2022 falling by 9.2%, 0.9% and 9.9%, respectively.[4] So, while marginal demand for energy from China will be larger, this demand stems from a lower base, thereby downplaying the effect of China’s recovery on energy prices.
Even if a Chinese demand rebound for energy is larger-than-expected, it will likely be offset by a cooling appetite from other top energy importers. Japan and South Korea, two other top importers of crude oil and liquefied natural gas (LNG), will likely see lower energy consumption as their manufacturing sectors stall in light of elevated input prices. Both countries have also committed to increase nuclear’s contribution to their energy mix in 2023, thereby limiting their demand for energy imports further. Moreover, the mainland has also shown an openness to import from Russia – the value of Chinese energy imports from Russia jumped by more than two-thirds in October 2022 since the onset of the war in Ukraine, compared to the same period last year – while also ramping up domestic energy production in 2022.[5] Considering the above factors, there is a strong likelihood that a Chinese resurgence will have a limited effect on global energy dynamics, thereby mitigating any price increases. This is corroborated by data; futures linked to Asian LNG prices currently averages $17.50 per million British thermal units (mmBtu) in 2023, almost half the average price of LNG in Asian spot markets in 2022 ($34/mmBtu).[6]
Turning to the consumer element, recent data from China’s central bank, the People’s Bank of China (PBOC), showed that Chinese bank deposits grew $3.9tn in 2022. Many analysts postulate that the excess savings built-up could beget a ‘revenge spending’ phenomena that will drive a global recovery, similar to what we saw in the West. This, however, might not be the case. The larger-than-usual increase in bank deposits is to some extent reflective of the inability to spend as a result of strict controls, and we expect that some of these savings would translate into consumption once the economy gathers steam. On the other hand, Chinese consumers tend to place their savings into property and financial assets, and the switch to bank deposits also reflect the enhanced volatility associated with the Chinese economy amidst a property downturn, amongst other headwinds. Given the high propensity to save within the Chinese population, it is likely that this precautionary outlook will prevail and limit consumer expenditure; early signs of this are evident, with the rise in bank deposits coming at a time when the PBOC cut its base interest rates. Consequently, countries relying on a boost to their tourism and aviation sectors from Chinese consumers in 2023, including Thailand, Japan, Singapore, and Vietnam, might be left disappointed.
China’s recovery will undoubtedly lift domestic economic activity, with Cebr’s latest forecasts pointing to growth in the mainland to amount to 5.0% in 2023. The question is whether we can realistically expect large spillover effects on the rest of the world’s GDP. Historical trends suggest so; China alone has buoyed global growth before when global output has slumped. Yet, the China today is far different from the China that carried the world on its back previously. Whereas China’s influence in the past came via elevated investment spending, this is set to be replaced by consumer expenditure, and given the uncertainty surrounding the housing and financial markets at present, we expect Chinese consumers to be far more cautious with their expenditure. Following this, growth will be more internally focused, thereby limiting the spillover effect on the rest of the world. On the other hand, fears of the recovery representing the next inflation trigger may be overstated, as reduced energy demand from top importers and China’s move towards alternate sources are likely to offset its own increase in energy demand. Consequently, we expect China’s recovery to neither be a boost nor a drag to global growth in 2023.
[2] J.P. Morgan – Five Questions about China’s Economy in 2023
[3] International Energy Agency (IEA)
For more information contact:
Pushpin Singh, Economist – psingh@cebr.com – 020 7324 2871
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