China’s reopening will impact prices, but it is not an inflation risk. It reflects an impressive domestic rebound, great regional opportunity and significant global spillovers.
When Chinese policymakers began to prepare the reopening of the world’s second-largest economy, many international observers warned it would unleash inflationary headwinds.
This was their assumption: As the world’s biggest factory and the second-largest economy re-opens for business after three years of COVID-19 pandemic restrictions, it will have to cope with a surge in demand. That, in turn, would trigger global inflationary pressures as in the United States and the European Union, which have been struggling with elevated inflation since their re-opening.
There’s only one problem with the story. Numbers do not back it up.
Soaring prices in the West vs moderation in China
True enough, the US annual inflation rate, which had soared close to 10 percent in summer 2022, slowed only slightly to 6.4 percent in January, although the interest rate has been hiked to almost 5 percent.
In euro area, the situation was worse as inflation remained 8.5 percent in February 2023 after peaking at 11.1 percent in November. Meanwhile, policymakers have raised interest rates to 15-year highs to bring euro area inflation. Markets expect a 0.5 percentage point increase this month up to 3.5 percent, with a chance of a similar hike to be delivered in May.
Even in Japan, where inflation was actually negative until the fall of 2021, it rapidly soared to 4.3 percent in January 2023, and continues to rise. As a result, Japanese central bank’s new chief Kazuo Ueda is likely to raise the interest rate over time.
Despite media hysteria in the West, China’s annual inflation rate rose to only 2.1 percent in January. Expectedly, prices of food jumped and those of non-food gained further on the back of the Lunar New Year festival and the removal of pandemic measures. Nonetheless, the inflation rate was only half relative to Japan, a third compared with the US and a fourth compared with the eurozone.
Global inflation risk
After self-defeating trade wars, a pandemic depression, unwarranted proxy wars, misguided Cold Wars, as well as energy and food crises, global economic prospects have been further penalized by the US Federal Reserve’s ill-advised monetary policies, particularly since fall 2021.
After years of easy money and rounds of quantitative easing, the Fed misread the market signals after mid-2021, when inflation started to climb rapidly and Fed chairman Jerome Powell downplayed the threat of soaring prices calling them “transitionary.”
Over a year ago, I warned that US inflation was the global risk of 2022. Indeed, due to the belated monetary response, the ensuing risks penalized the ailing global recovery. In February 2022, after the disastrous failure of international diplomacy to end the Russia-Ukraine conflict and the onset of the US-NATO-led proxy war against Russia in Ukraine, I predicted the world economy would have to cope with the risk of stagflationary recession, compounded by energy and food inflation and the consequent cost-of-living crises. The rest, as they say, is history – but deadly, costly, and unwarranted history.
The Fed raised the interest rate to 4.5-4.75 percent in its February 2023 meeting, still pushing borrowing costs to the highest since 2007. Recently, Fed Chairman Jerome Powell warned of more rate hikes and seems to be aiming at 5.25 to 5.5 percent, thus flirting with a recession.
China’s reopening is not a global inflation risk but opportunity
Since the Central Economic Work Conference in December, Chinese policymakers have been stimulating private sector growth by accelerating domestic demand and deepening regional and international trade and investment. They have also implemented a variety of measures to expand consumption, though the momentum is on the supply side, particularly infrastructure.
Already on the eve of the Two Sessions, Chinese leaders pledged stronger growth, and recovery is taking hold as economic activity picks up pace due to the mainland’s re-opening. In his much-anticipated work report, outgoing Premier Li Keqiang said it was essential to prioritize economic stability and set a goal of economic growth at “around 5 percent.”
Yet, thanks to the recovery potential and despite the dismal first quarter, China’s GDP growth could soar to 5.5-6 percent in 2023, or more than 6 percent on a quarter-to-quarter basis. Indeed, the target is modest and lower than the market expectations. It reflects the Chinese leadership’s effort to sustain solid growth without unwarranted fiscal stimulus and debt-taking, as well as proactive caution amid the West’s protectionism and geopolitics.
Ironically, external risks have been in part reduced by the misguided US trade wars and protectionism, which have compelled Chinese policy authorities to stress the importance of self-sufficiency.
Internally, the emphasis on social policies that support a moderately prosperous society promote rising purchasing power among new middle-income groups, without the kind of economic polarization that four decades of neoliberal policies have caused in the West.
Exporting stability, growth and development
Since the recovery will be demand-led, the spillovers will center on consumption and services in China. In addition to domestic demand, the recovery will also have an impact on global growth through commodity demand and travel, while the recovery in outbound tourism will be key to regional, and neighboring, economies’ recovery. The global effect is already discernible in commodity prices. As the recovery broadens, oil and metals will follow.
However, spillovers will be significant in those economies that are part of the Regional Comprehensive Economic Partnership (RCEP), the vast new trade bloc, and those participating in the huge Belt and Road Initiative (BRI).
Unlike the US, the eurozone and Japan, which are struggling with secular stagnation and exporting runaway inflation, China’s growth is accelerating while inflation remains in check. The reopening could lift global GDP by an impressive 1 percent in 2023. In brief, China’s rebound will be positive for the world and offset the Fed risks.
The original version was released by China Daily during the opening of the Two Sessions on March 6, 2023.
About the Author
Dr. Dan Steinbock is an internationally recognized strategist of the multipolar world and the founder of Difference Group. He has served at the India, China and America Institute (USA), Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more, see https://www.differencegroup.net.