China’s reopening “excellent news” for progress – however might be inflationary, economists in Davos warn
China’s reopening was one of the most discussed topics at the World Economic Forum in Davos.
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DAVOS, Switzerland — China’s economic reopening could boost global growth, but business leaders and policymakers at this week’s World Economic Forum are also a little worried about the potential inflationary impact.
China’s decision to welcome tourists back and make it easier for locals to travel abroad was one of the most debated topics at the Davos gathering in the Swiss Alps.
Overall, this is viewed as one of the most important economic events of 2023 and the business community is noticeably excited to do new business with the world’s second largest economy.
On the downside, however, there are concerns about what this means for inflation and the cost of living.
“[If] Chinese demand for other goods starts to increase when that puts more pressure on commodity prices, for example natural gas, a big issue in Europe, when Chinese demand for natural gas increases because factories, their homes demand more electricity, then there is pressure Exercise Europe because natural gas, they compete [in] same markets for liquid natural gas,” Raghuram Rajan, former Reserve Bank of India central bank governor, told CNBC.
“So China’s opening up [is] Good news overall, but possibly the inflationary impact – there could be,” he said.
The International Energy Agency has warned that European companies could face higher costs when buying natural gas this year as there will be more competition for the raw material. Inflation has been one of the biggest challenges for European citizens over the last year, mainly caused by higher energy bills.
Satish Shankar, managing partner for APAC at consultancy Bain & Company, said in a panel moderated by CNBC: “I think China’s opening up will therefore increase global energy consumption, there may be some inflation.”
Felix Sutter, President of the Swiss-Chinese Chamber of Commerce, said on the same panel that “Chinese energy and commodity needs will compete with European needs, global needs, so right now I see inflation easing. [but] we will see more pressure on inflation in the third quarter.”
Some economists have warned that if that happens, the US Federal Reserve may have to raise rates further. “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 2023 outlook.
“With China, we need more of everything — if that drives enough demand to bring commodity prices back closer to where they were last spring, then the progress we’ve seen on inflation will be much more tenuous,” he said .
China recently reported a 3% growth rate for 2022, the second slowest growth rate since 1976. Nonetheless, shorter-term data have boosted expectations of a better-than-expected recovery, with December retail sales and industrial production beating consensus.
Standard Chartered chairman José Viñals told CNBC in Davos this week that China will have a very good year and surprise on the upside.
“The Chinese economy will be on fire and that will be very, very important to the rest of the world,” he said.
Rio Tinto CEO Jakob Stausholm was also positive about China’s economy and its natural impact on global growth, telling CNBC in Davos that he was “absolutely confident” that China’s reopening will help the global economy.
— CNBC’s Arjun Kharpal and Jihye Lee contributed to this article.