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How China’s reopening will disrupt the world

economy
A tale of death, growth and inflation

Jan 5th 2023

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F or the better part of three years—1,016 days to be exact—China will have

been closed to the world. Most foreign students left the country at the start
of the pandemic. Tourists have stopped visiting. Chinese scientists have stopped
attending foreign conferences. Expat executives were barred from returning to
their businesses in China. So when the country opens its borders on January 8th,
abandoning the last remnants of its “zero-covid” policy, the renewal of
commercial, intellectual and cultural contact will have huge consequences,
mostly benign.
First, however, there will be horror. Inside China, the virus is raging. Tens of
millions of people are catching it every day . Hospitals are overwhelmed.
Although the zero-covid policy saved many lives when it was introduced (at

great cost to individual liberties), the government failed to prepare properly for
its relaxation by stockpiling drugs, vaccinating more of the elderly and adopting
robust protocols to decide which patients to treat where. Our modelling suggests
that, if the virus spreads unchecked, some 1.5m Chinese will die in the coming
months.

There is not much outsiders can do to help. For fear of looking weak, the Chinese
government spurns even offers of free, effective vaccines from Europe. But the
rest of the world can prepare for the economic effects of the Communist Party’s
great u-turn. These will not be smooth. China’s economy could contract in the
first quarter, especially if local officials reverse course and seal off towns to keep
cases down. But eventually economic activity will rebound sharply, along with
Chinese demand for goods, services and commodities. The impact will be felt on
the beaches of Thailand, across firms such as Apple and Tesla, and at the world’s
central banks. China’s reopening will be the biggest economic event of 2023.

As the year progresses and the worst of the covid wave passes, many of the sick
will return to work. Shoppers and travellers will spend more freely. Some
economists reckon that gdp in the first three months of 2024 could be a tenth
higher than in the troubled first quarter of 2023. Such a sharp rebound in such a
huge economy means that China alone could power much of global growth over
the period.

The party is banking on it. It hopes to be judged not on the tragedy its
incompetence is compounding, but on the economic recovery to follow. In Xi
Jinping’s year-end address, the party chief thanked pandemic workers for
bravely sticking to their posts and, while nodding to “tough challenges” ahead,
promised that “The light of hope is right in front of us.” He sounded eager to look
past the pandemic, emphasising the chances of a swift economic revival in 2023
and offering reasons to be proud of living in a rising China under party rule.

The ending of China’s self-imposed isolation will be good news for places that
depended on Chinese spending. Hotels in Phuket and malls in Hong Kong
suffered as Chinese were locked up at home. Now would-be travellers are
flocking to travel websites. Bookings on Trip.com rose by 250% on December
27th compared with the previous day. Economists are pencilling in a gdp boost
for Hong Kong of as much as 8% over time. Exporters of the commodities that
China consumes will also benefit. The country buys a fifth of the world’s oil,

over half of its refined copper, nickel and zinc, and more than three-fifths of its
iron ore.

Elsewhere, though, China’s recovery will have painful side-effects. In much of

the world it could show up not in higher growth, but in higher inflation or
interest rates. Central banks are already raising rates at a frenetic pace to fight
inflation. If China’s reopening increases price pressure to an uncomfortable
degree, they will have to keep monetary policy tighter for longer. Countries that
import commodities, including much of the West, are at the greatest risk of such
disruption.

Take the oil market. Rising Chinese demand should more than compensate for
faltering consumption in Europe and America, as their economies slow.
According to Goldman Sachs, a bank, a rapid recovery in China could help push
the price of Brent crude oil to $100 a barrel, an increase of a quarter compared
with today’s prices (though still below the heights reached after Russia invaded
Ukraine). Rising energy costs will prove another hurdle to taming inflation.

For Europe, China’s reopening is another reason not to be complacent about gas
supplies later in the year. Zero-covid, by suppressing China’s demand for gas,
made it less costly than it otherwise would have been for Europe to fill its
storage tanks in 2022. A strong recovery in China will mean more competition
for imports of liquefied natural gas. In December the International Energy
Agency, a forecaster, warned of a scenario in which winter starts punctually in
2023 and Russia cuts off piped gas to Europe entirely. That could result in
shortages amounting to as much as 7% of the continent’s annual consumption,
forcing it to introduce rationing.

For China itself, the post-pandemic normal will not be a return to the status quo
ante. After watching the government enforce zero-covid in a draconian fashion
and then scrap it without due preparation, many investment houses now see
China as a riskier bet. Foreign firms are less confident that their operations will
not be disrupted. Many are willing to pay higher costs to manufacture elsewhere.
Inbound investment in new factories seems to be slowing, while the number of
companies moving business outside China has jumped, by some accounts.
Normal not normal
As Chinese officials struggle to repair the damage, they should remember some
history. China’s previous great reopening, after the stultifying isolation of the

Mao years, led to an explosion of prosperity as goods, people, investment and

ideas surged across its borders in both directions. Both China and the world have
benefited from such flows, something politicians in Beijing and Washington
seldom acknowledge. With luck, China’s current reopening will ultimately
succeed. But some of the paranoid, xenophobic mood that the party stoked
during the pandemic years will surely linger. Exactly how open the new China
will be remains to be seen. 7

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