What is the impact of China reopening on international trade and the global economy?
Lewis Evans, Junior Economic Research Analyst at Berne Union, looks at the early indicators of China’s post COVID-19 reopening and at the impact on international trade, the global economy and the potential impact on export finance.
China’s decision in January to abandon its Zero COVID policy and reopen its economy after nearly three years is one of the biggest economic events of 2023 so far and will have many ramifications on the global economy. But, like the reopening of the US and Europe in 2021, predicting how economies will respond is challenging. Some of China’s trading partners have welcomed the decision as COVID management had supressed Chinese demand for goods, services, and commodities. At a time where economic conditions have been deteriorating in the US and Europe, the reopening of China could provide a boost to global growth but could also become another obstacle in the fight against inflation, particularly in energy markets.
The IMF predicts that China’s GDP growth in 2022 will have been 2.6%, which was below the global growth rate for the first time in 40 years. The pandemic, the contraction in the property market, a regulatory crackdown on its technology sector, and weaker external demand had slowed the economy well below the China’s growth target of 5.5%. However, following the reopening, the IMF revised its January growth prediction for 2023 upwards to 5.2% from the 4.1% predicted in October, which should have positive spill over effects on global markets.
Economies that have integrated themselves with the Chinese consumer are set to benefit from the reopening, especially exporters of durable goods. The People’s Bank of China reported that household deposits grew by $2.6 trillion in 2022. Chinese consumer spending and outbound travel will inevitably see a boost from the excess savings, which will have a considerable effect on the global economy. According to Fitch Solutions, Chinese goods imports in US dollar terms are forecast to increase by 3.9% in 2023. As China is the second largest importer of goods worldwide, this should come as an encouragement to emerging markets in Asia, Sub-Saharan Africa, and Latin America.
Despite its share in global good imports, China has been a difficult destination market for export credit. Berne Union data shows that China has much lower exposure in short term export credit insurance relative to its merchandise imports when compared to other top importing countries. Now the country is reopening its economy the pent-up demand could give rise to new opportunities in the export credit industry and for Berne Union members to collaborate on initiatives to increase market presence in China.
Figure 1: Merchandise Imports and Short-Term Export Credit Commitments
[2021, USD million]
Exports were a source of growth for the Chinese economy during the pandemic as consumers in advanced economies switched their demand from services to goods. However, as central banks undergo a simultaneous monetary tightening policy to re-establish price stability, external demand for Chinese goods is falling. Merchandise exports dropped by 9.9% year-on-year in December, the steepest decline in almost three years and exports to the US fell 25% year-on-year in December.
China is a net consumer of commodities and is also the world’s largest importer. The country imports roughly 22% of the world’s oil, and is the world’s largest importer of copper, zinc, and iron ore. The impact on commodity markets will depend on the actions the central government takes to revitalise the property market, rather than the general development of the reopening, which has been shown by the benign response in metal prices. If the government decides to pursue aggressive actions in rebuilding the property sector prices will likely surge, benefiting commodity exporters such as Chile, Peru, Brazil and Australia.
Energy as a direct channel of influence
Perhaps the most direct channel of influence will be in energy markets. Unlike metals, Chinese demand for energy in 2022 was much less buoyant. According to the Chinese General Administration of Customs, LNG imports dropped by 19% in 2022 to 64.13 Mt, from 79.3 Mt in 2021. The fall in Chinese demand for LNG allowed Europe to diversify away from Russian gas without a huge impact on prices.
The return of Chinese demand for energy, particularly LNG, will put upward pressures on energy prices. This will be an issue for Europe, where inflation has been driven by soaring energy prices, and also for net energy importers. The picture is the same for oil. The return of full industrial activity and travel will increase Chinese demand for oil and thus prices. Goldman Sachs estimates the price of oil will reach $110 a barrel by Q3 if China returns to its pre-pandemic demand. The impact on energy prices will present itself as an additional challenge to central banks which may be forced to maintain their hawkish stance for longer than they intended.
Last year was a poor one for investment and capital flows in China. Greenfield investment dropped from a capital expenditure of $27.5 billion between January and November in 2021, to $14.4 billion during the same period in 2022. This is the worst January-November performance for FDI into China on record. Investment in greenfield factories slowed sharply as manufacturers diversified their production lines into nearby countries, such as Vietnam and Thailand, to reduce disruptions in their operations. We can see this trend beginning to emerge in 2021 as longer-tenor investment cover in the manufacturing sector increased significantly in Bangladesh, Thailand, and Vietnam. Due to the long-term nature of these investments, there is now room for inward investment from other manufacturing firms.
Figure 2: Longer-tenor Investment Cover in the Manufacturing Sector
[2019 - 2021, MLT Export Credit, USD million]
As part of China’s Belt and Road Initiative, The China Development Bank and the Export-Import Bank of China committed $498 million in overseas development finance between 2008-2021. However, both institutions have reduced their business every year since 2016 with the slowdown accelerated during the pandemic when new loans committed fell to $3.7 billion in 2021, according to the Boston University Global Development Policy Center. The drop in new commitments has mainly come from the scaling back of investments in oil and gas. This has left a large market gap for ECAs and DFIs to fill in infrastructure, energy, and renewables sectors in emerging and developing economies.
China’s influence on the global economy means its reopening will have major consequences. Whether it be a boost to global trade or upward price pressure on energy markets, the reintegration of a fully open China will have both positive and negative effects, depending on the nature of the industry and on the country concerned.
- Mainland China Reopening Will Boost EM Asia (fitchsolutions.com)