China’s Reopening: Economic Growth and Investment Opportunities, Inflationary Effects, and US-China Relations
By China’s reopening from Covid-19 restrictions is a welcome development that will not only accelerate the country’s economic recovery, but also boost global economic growth.[0] On February 10th 2023, Goldman Sachs Research released a report forecasting China’s GDP to grow by 6.5% in 2023 on a Q4/Q4 basis and the recovery of Chinese domestic demand to raise global GDP by 1% by the end of 2023.[1]
Economists expect China’s GDP to rebound to around 5% this year from 3%in 2022, led by a recovery in consumption which is projected to grow 7% this year after a contraction of 0.5% last year.[2] Investors are advised to be most preferred on Chinese and emerging market equities, and to look for opportunities in Chinese sectors that will directly benefit from the country’s reopening.[1] These include pharmaceuticals, medical equipment, consumer, internet, transportation, capital goods, and materials.
With China’s reopening policy prioritising economic growth, this opens up sizeable economic growth and investment opportunities.[3] Morgan Stanley analysts are predicting a 5.7 percent GDP growth this year, and Chinese Vice-Premier Liu He’s speech at the World Economic Forum annual meeting in Davos suggests government policies will be adjusted to encourage growth.[3]
The reopening is also likely to boost global commodities demand and prices, particularly for oil.[3] It is estimated by our commodities experts that Chinese oil consumption could climb approximately 1 million barrels a day, leading to an approximate price increase of $15 per barrel for Brent oil.[4] Higher oil prices will weigh on economic growth for most economies, but net oil exporters such as Canada and some Latin American economies could benefit.[4]
However, the reopening could also lead to inflationary effects.[2] While the impact on core inflation is likely to be minimal, rising commodity prices will contribute to headline inflation, particularly for oil-dependent emerging markets.[4] China’s reopening could account for a 0.5 percentage point boost to headline inflation in many economies according to Goldman Sachs Research.[2]
US-China relations remain a popular conversational topic and provide a safe-haven bid for the US dollar in Asia, as investors hedge bets against the Biden administration's anti-China plays.[5] Meanwhile, China stocks may be losing some momentum, but some investors believe shares will continue to go up after a short-term pullback.[6]
0. “Why China’s Reopening Could Be a ‘Ray of Sunshine’ for the U.S. Stock Market” Money, 10 Feb. 2023, https://money.com/what-chinas-economic-reopening-means-for-stocks/
1. “China's rally interrupted, not ended” UBS, 7 Feb. 2023, https://www.ubs.com/global/en/wealth-management/our-approach/marketnews/article.1584593.html
2. “China's Reopening Bodes Well for Asian Fixed-Income Markets” AllianceBernstein, 7 Feb. 2023, https://www.alliancebernstein.com/corporate/en/insights/investment-insights/chinas-reopening-bodes-well-for-asian-fixed-income-markets.html
3. “China is Back: What Its Reopening Means for the World” INSEAD Knowledge, 9 Feb. 2023, https://knowledge.insead.edu/economics-finance/china-back-what-its-reopening-means-world
4. “China's Reopening is Poised to Boost Global Growth” Goldman Sachs, 10 Feb. 2023, https://www.goldmansachs.com/insights/pages/chinas-reopening-is-poised-to-boost-global-growth.html
5. “China's Fork in the Road” Investing.com, 10 Feb. 2023, https://www.investing.com/analysis/chinas-fork-in-the-road-200635182
6. “Four Charts Show China Reopening Trade to Resume After Pause” Yahoo Canada Finance, 8 Feb. 2023, https://ca.finance.yahoo.com/news/four-charts-show-china-reopening-043044522.html
