China’s reopening is ‘good news’ for growth – but could be inflationary, economists in Davos warn

The reopening of China was one of the most discussed topics at the World Economic Forum in Davos.

Bloomberg | Bloomberg | Getty Images

DAVOS, Switzerland — China’s economic reopening could boost global growth, but business leaders and policymakers at the World Economic Forum this week are also a bit worried about its potential inflationary impact.

China’s decision to welcome tourists back and make it easier for people in the country to travel abroad was one of the most discussed topics at the Davos gathering in the Swiss Alps.

Overall, this is seen as one of the most important economic events of 2023 and the business community is visibly excited to strike new deals with the world’s second-largest economy.

On the other hand, however, there are concerns about what this means for inflation and the cost of living.

“[If] Chinese demand for other goods starts to increase, if that puts more pressure on commodity prices, for example, natural gas, big problem in Europe, if Chinese demand for natural gas increases, because factories, their households demand more electricity, so it will put pressure on Europe because natural gas, they are in competition [in] the same markets for liquid natural gas,” Raghuram Rajan, former central bank governor of the Reserve Bank of India, told CNBC.

“So the opening of China [is] good news overall, but potentially, the inflationary impact – there could be,” he said.

WEF Davos: reopening of China

The International Energy Agency has warned that European companies could face higher costs when looking to buy natural gas this year as there will be more competition for the product. Inflation has been one of the biggest challenges for European citizens over the past year, mainly due to higher energy bills.

Speaking on a panel moderated by CNBC, Satish Shankar, managing partner for APAC at consultancy Bain & Company, said: “I think China’s opening up will therefore increase the consumption of world energy, it could cause some inflation”.

Felix Sutter, president of the Swiss-China Chamber of Commerce, said at the same panel that “China’s energy needs and raw material needs will be competing with European needs, global needs, so I see a relaxation inflation right now, [but] we will see more pressure on inflation in the third quarter.”

Some economists have warned that if that turns out to be the case, the US Federal Reserve may have to keep raising rates. “In our view … a stronger China increases the odds of a stubbornly hawkish Fed,” said Tavis McCourt, institutional equity strategist at Raymond James, in his outlook for 2023.

“With China, we need more of everything – if that stimulates demand enough to bring commodity prices closer to where they were in the spring of last year, then that puts the progress we’ve seen on the table. ‘inflation in a much more tenuous state’. post,” he said.

Second half of the year will be better as China surprises on the upside: Standard Chartered

China recently announced a 3% growth rate for 2022, its second-slowest growth rate since 1976. Nonetheless, shorter-term data bolstered expectations of a better-than-expected recovery with retail sales and industrial production above consensus in December.

Standard Chartered Chairman José Viñals told CNBC in Davos this week that China is going to have a very good year and an upside surprise.

“The Chinese economy is going to be on fire and that’s going to be very, very important for the rest of the world,” he said.

Meanwhile, Rio Tinto CEO Jakob Stausholm was also positive about China’s economy and its natural impact on global growth, telling CNBC in Davos he was “absolutely convinced” that reopening China will help the global economy.

— CNBC’s Arjun Kharpal and Jihye Lee contributed to this article.

Leave a Comment