China’s bid to leave covid behind could determine global economy’s fate
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China is powering through an epic wave of coronavirus infections, setting the stage for a rebound in consumer and business activity that could prevent the global economy from slipping into recession.
In recent days, Wall Street analysts at firms such as Goldman Sachs and Capital Economics have upgraded their forecasts for Chinese growth, citing signs that the coronavirus outbreak is peaking faster than expected.
The pace of China’s reopening, after lifting its draconian zero-covid policy last month, will shape the global outlook for growth and inflation. Share prices for U.S. companies that serve the Chinese market, such as casino operator Wynn Resorts, would benefit from a smooth rebound, as would U.S. attractions that attract Chinese tourists.
Since early December, when the Chinese government abandoned its diligent lockdown strategy, the coronavirus has sickened tens of millions of people and overwhelmed hospitals. In Henan province, with more people than Germany, nearly 9 in 10 residents are sick, officials said this week.
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A critical test is expected this month, when workers in coastal factories return to their rural villages to celebrate the Lunar New Year, potentially sparking a second round of infections in areas where the medical system is less developed.
Despite the risks, there are signs that the economy is stirring. Metro movement in major cities is quickly returning to normal. Consumers who built up savings while holed up in their homes for most of last year have money to spend. And the government is implementing policies to support a rebound.
China’s ability to recover from nearly three years of self-imposed isolation “is very likely the single most important factor for global growth in 2023,” Kristalina Georgieva, the IMF’s managing director, told reporters last week. International. “This is of tremendous importance.”
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Indeed, other major engines of the global economy are far from firing on all cylinders. The US economy, despite a strong end to 2022, will struggle this year as high interest rates fall, according to the latest World Bank forecast. Europe is in recession and Japan is projected to have a growth rate of just 1 percent.
As for China, the World Bank predicts growth of 4.4 percent this year, and some private estimates are even higher. Goldman forecasts a gain of 5.2 percent. “Evidence of a rapid China reopening is piling up,” the investment bank said in a note to clients this week.
However, it will take time for the Chinese to restore their pre-pandemic routines, including ties with the outside world that the government cut in hopes of keeping the virus at bay. The coming months could bring a smooth recovery ahead of a broader resumption of activity in the spring, analysts said.
Even with a smooth Chinese reopening, the global economy faces a year of anemic growth, according to World Bank and IMF forecasts.
“It gives a big boost. But we don’t expect China to have this big growth spurt and ride to the rescue of the rest of the world,” said Ben May, director of global macro research for Oxford Economics in London.
Chinese policymakers are doing all they can to help. With domestic inflation low, the People’s Bank of China – unlike central banks elsewhere – cut rates last year and may cut them again. The government has also resumed lending to some major property developers, abandoning for now its efforts to cut overall industry debt.
Signs of China’s awakening are already visible. After being largely confined to their homeland for the past three years by heavy quarantine and testing requirements, Chinese tourists are taking to the streets.
Nearby destinations such as Thailand and Hong Kong are the immediate beneficiaries. But American tourist attractions are also anticipating the return of the Chinese.
“Booking requests are going through the roof. In the first days after the policy change, there was a thousand-fold increase in search engines in China,” said Adam Burke, president of the Los Angeles Convention and Tourism Board, one of the most popular destinations for Chinese tourists.
Two Chinese airlines – Air China and Hainan Airlines – plan to resume daily nonstop service between Beijing and Los Angeles this month, he added.
Almost 1 million Chinese visitors are expected in the United States this year, up from 359,000 last year, according to the US Travel Association.
This is an impressive increase. But the total is still only a fraction of the more than 3 million that came annually in the years before the pandemic. And the industry doesn’t expect a recovery to that level until 2026, according to Geoff Freeman, president of the USTA. Visa approvals and required coronavirus testing will also prevent international travel from recovering as quickly as domestic travel.
Before the pandemic, China trailed only Britain and Japan as a source of international visitors to the United States. But the typical Chinese tourist stays 14 days – compared to the 10-day average – and spends freely. In 2019, China spent more than $33 billion on American airlines, hotels, entertainment venues and universities.
“Chinese travelers are absolutely critical to the travel economy in the United States,” Freeman said.
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How quickly Chinese consumers return to their usual spending habits will determine the trajectory of the economy. Consumer confidence in China last year fell to a record low amid the reimposition of lockdowns amid the rise of the omicron variant of the coronavirus.
But household bank balances have grown by 42 percent, or $4.8 trillion, since the start of 2020, according to Andy Rothman, an investment strategist at Matthews Asia in San Francisco. This suggests that Chinese consumers could release an amount larger than the entire British economy as they resume spending.
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Some analysts worry that a resurgent China will consume more oil, driving up global prices, worsening inflation and forcing the Federal Reserve and other central banks to keep raising interest rates.
Bank of America expects a barrel of Brent crude oil, the global benchmark, to reach $110 in the third quarter of this year, from around $80 today.
But even with rising Chinese oil demand, China is expected to resume exporting up to 1.5 million barrels per day of refined products such as diesel fuel, which should take some pressure off retail prices, according to Citigroup. China had halted these exports at the end of 2021 to address domestic supply concerns.
Much of the increase in consumer spending will also be on local restaurant meals, movies, sporting events and other personal activities that have been off limits during the lockdowns, rather than on products from other countries. American brands such as Starbucks and Yum Brands, owner of Kentucky Fried Chicken, could benefit.
Luxury retailers also expect to benefit from higher Chinese sales, both within China and elsewhere. Shares in Louis Vuitton’s owner, LVMH Moet Hennessy Louis Vuitton, have risen almost 13 percent since Beijing lifted its COVID restrictions on Dec. 7.
However, China is emerging from a period of worrying weakness. Last year’s 3.2 percent annual growth rate was the lowest in decades, excluding the pandemic year of 2020. Repeated lockdowns demoralized the population and put a damper on consumers, small businesses and factories.
An unprecedented flurry of anti-government protests occurred in Beijing and other cities at the end of the year.
“2022 was a really miserable year,” said Mary Lovely, an economist at the Peterson Institute for International Economics.
Factories fell in December for the third month in a row, according to the official purchasing manager index from the Bureau of National Statistics. Youth unemployment stands at a record 19.9 percent. And an overbuilt property sector mired in debt acts as a drag on investment.
China’s long-term outlook is even more challenging. The country’s working-age population is shrinking. And the property sector, which accounts for 15 percent of the economy, remains vulnerable to a price slump that could spark wider financial problems, according to BNP Paribas.
Although China’s economic growth this year is expected to outpace that of the United States, Europe and Japan, its performance will also fall short of its contribution to the global recovery from the 2008 financial crisis. Thanks to massive government spending for an infrastructure program, the Chinese economy grew in 2010 by more than 10 percent, roughly double the pace considered likely this year.
“There will be a positive spillover from China. But it won’t be as intense as in past Chinese recoveries,” said Nathan Sheets, chief global economist at Citigroup.