China’s reopening – Good for global inflation but not for growth

China's expansion is much more domestically focused than in the past, with more emphasis on services than industry. The impact on commodity prices will be milder, helping the global disinflation process.

At the beginning of the year, after almost three years of severe restrictions, the CCP decided to abruptly end its zero-COVID policy. The pace of the reopening has been much faster than expected and the market reaction was a rally in Asian and European stocks: the Hang Seng, Nikkei 225 and STOXX Europe 600 were up 10.4%, 4.7% and 6.7% respectively in January.

China's macro data for the first couple of months of the year shows clear signs of a strong, broad-based recovery in economic activity. Consumption: retail sales and services activity showed a solid sequential recovery in January-February, with domestic travel picking up during the Lunar New Year holidays. Business investment fixed asset investment is growing at a fast pace (5.5% YoY), especially in infrastructure and manufacturing, while the pace of decline in real estate has slowed.

Encouragingly, housing market activity is showing clear signs of improvement after a sharp decline in 2H22. Money and credit: M2 money supply growth accelerated to 12.9% YoY in February (up from 12.6% YoY in January), while bank loans grew by 10.8% YoY and total social financing is expanding at 10% YoY.

China's central bank, announced in March that it reduced the amount of deposits that banks have to set aside to step up efforts to accelerate economic growth. Foreign trade: China’s foreign trade has been surprisingly weak in January and February. China’s exports surged during the pandemic, as global consumers devoted more of their outlays toward goods. However, with spending patterns normalised and global growth slowing, exports have recently come under pressure. Imports have also been very weak, falling by 10.2% YoY in February.

Similar to the reopening of Western economies, the removal of restrictions on mobility favours more services than industry: services was the sector that declined the most in 2022.

This means that China’s expansion will be more domestically-focused this time than in the past and its spillover to other regions will be much weaker. The silver lining is that the impact on commodity prices will also be weaker, helping the global disinflation process.

Santiago Rossi, Senior Economist