China's bid to leave COVID behind could determine global economy's fate
The Washington Post January 15, 2023
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China is powering through an epic wave of coronavirus infections, setting the stage for a rebound in consumer and business activity that could prevent the global economy from tumbling into recession.
In recent days, Wall Street analysts at firms such as Goldman Sachs and Capital Economics have upgraded their forecasts of Chinese growth, citing signs that the coronavirus outbreak is peaking sooner than expected.
The pace of China's reopening, after the lifting of its draconian zero-COVID policy last month, will shape the global outlook for growth and inflation. Stock prices for U.S. companies that serve the Chinese market, such as the casino operator Wynn Resorts, would benefit from a smooth rebound, as would American attractions that appeal to Chinese tourists.
Since early December, when the Chinese government abandoned its zealous lockdown strategy, the coronavirus has sickened tens of millions of people and overwhelmed hospitals. In Henan province, with more people than Germany, nearly 9 in 10 residents are sick, officials said this week.
A critical test looms this month, when workers in coastal factories head back to their rural villages to celebrate the Lunar New Year, potentially igniting a second round of infections in areas where the medical system is less well-developed.
Despite the dangers, there are signs that the economy is stirring. Subway ridership in major cities is rapidly returning to normal. Consumers who accumulated savings while shut in their homes for much of the past year have money to spend. And the government is rolling out policies to support a rebound.
China's ability to recover from nearly three years of self-imposed isolation "is very likely the single most important factor for global growth in 2023," Kristalina Georgieva, the managing director of the International Monetary Fund, told reporters last week. "It matters tremendously."
Indeed, the global economy's other main engines are far from firing on all cylinders. The U.S. economy, despite a strong end to 2022, will struggle this year as higher interest rates bite, according to the World Bank's latest forecast. Europe is in recession, and Japan is projected to eke out just a 1 percent growth rate.
As for China, the World Bank forecasts growth of 4.4 percent this year, and some private estimates are even higher. Goldman predicts a 5.2 percent gain. "Evidence of a rapid China reopening is accumulating," the investment bank said in a note to clients this week.
Still, it will take time for the Chinese to reestablish their pre-pandemic routines, including links to the outside world that the government severed in hopes of keeping the virus at bay. The next few months may bring a stop-and-go recovery before a more widespread resumption of activity in the spring, analysts said.
Even with a smooth Chinese reopening, the global economy faces a year of anemic growth, according to World Bank and IMF projections.
"It does provide a big impetus. But we're not expecting China to have this huge growth surge and ride to the rest of the world's rescue," said Ben May, the director of global macro research for Oxford Economics in London.
Chinese policymakers are doing what they can to help. With domestic inflation low, the People's Bank of China — unlike central banks elsewhere — cut rates last year and may cut them again. The government also has resumed lending to some major property developers, abandoning for now its efforts to trim the industry's overall debt.
Signs of China's awakening already are evident. After being largely confined to their homeland for the past three years by onerous quarantine and testing requirements, Chinese tourists are hitting the road.
Nearby destinations such as Thailand and Hong Kong are the immediate beneficiaries. But American tourist attractions also are anticipating the return of the Chinese.
"The booking inquiries are going through the roof. In the first days after the policy changed, there was a thousandfold increase on search engines in China," said Adam Burke, the president of the tourism and convention board in Los Angeles, one of the most popular destinations for Chinese tourists.
Two Chinese airlines — Air China and Hainan Airlines — plan to resume daily nonstop service between Beijing and Los Angeles this month, he added.
Almost 1 million Chinese visitors are expected in the United States this year, up from 359,000 last year, according to the U.S. Travel Association.
That's an impressive increase. But the total is still just a fraction of the more than 3 million who arrived annually in the pre-pandemic years. And the industry does not expect a recovery to that level until 2026, according to Geoff Freeman, USTA's president. Visa approvals and required coronavirus testing also will keep international travel from rebounding as quickly as domestic journeys.
Before the pandemic, China trailed only Britain and Japan as a source of international visitors for the United States. But the typical Chinese tourist stays 14 days — compared to the 10-day average — and spends freely. In 2019, China was worth more than $33 billion to U.S. airlines, hotels, entertainment venues and universities.
"Chinese travelers are absolutely critical to the travel economy in the United States," Freeman said.
How quickly Chinese consumers return to their customary spending habits will determine the economy's trajectory. Consumer confidence in China last year plunged to an all-time low amid the reimposition of lockdowns during the rise of the coronavirus's omicron variant.
But household bank balances are up 42 percent, or $4.8 trillion, since the start of 2020, according to Andy Rothman, an investment strategist at Matthews Asia in San Francisco. That suggests Chinese consumers could unleash an amount exceeding Britain's entire economy as they resume spending.
Some analysts worry that a resurgent China will consume more oil, driving up global prices, making inflation worse, and forcing the Federal Reserve and other central banks to keep raising interest rates.
Bank of America expects a barrel of Brent crude, the global benchmark, to reach $110 in the third quarter this year, up from around $80 today.
But even as Chinese oil demand increases, China is expected to resume exporting up to 1.5 million barrels-per-day of refined products, such as diesel fuel, which should take some pressure off retail prices, according to Citigroup. China had halted those exports in late 2021 to address domestic supply concerns.
Much of the increase in consumer spending also will be on domestic restaurant meals, movies, sporting events and other in-person activities that have been off-limits during the lockdowns rather than on products from other countries. U.S. brands such as Starbucks and Yum Brands, the owner of Kentucky Fried Chicken, could benefit.
Luxury retailers also expect to benefit from higher Chinese sales, within China and elsewhere. The stock of Louis Vuitton's owner, LVMH Moet Hennessy Louis Vuitton, has gained almost 13 percent since Beijing scrapped its COVID restrictions Dec. 7.
Still, China is emerging from a period of troubling weakness. Last year's 3.2 percent annual growth rate was the lowest in decades, excluding the pandemic year of 2020. Repeated lockdowns demoralized the population and put a chokehold on consumers, small businesses and factories.
An unprecedented flurry of anti-government protests occurred in Beijing and other cities late in the year.
"2022 was a really dismal year," said Mary Lovely, an economist with the Peterson Institute for International Economics.
Factories slumped in December for the third consecutive month, according to the official purchasing manager's index from the National Bureau of Statistics. Youth unemployment sits at a record 19.9 percent. And an overbuilt property sector drowning in debt acts as a drag on investment.
China's longer-term outlook is even more challenging. The nation's working-age population is shrinking. And the property sector, which makes up 15 percent of the economy, remains vulnerable to a price decline that could ignite broader financial problems, according to BNP Paribas.
Although China's economic growth this year is expected to outpace that of the United States, Europe and Japan, its performance also will fall short of its contribution to the global recovery from the 2008 financial crisis. Thanks to massive government spending on an infrastructure program, the Chinese economy grew in 2010 by more than 10 percent, roughly twice the pace that is considered likely this year.
"There will be a positive spillover from China. But it's not going to be as intense as in past Chinese recoveries," said Nathan Sheets, the global chief economist at Citigroup.