China’s Back Open, Great! And…Maybe Not So Great.

PCR test requirements. What a difference a month or so makes. At the start of December, China was still in COVID zero lockdown, and as you heard there, people were fed up with being stuck indoors. Now, in part because of

those protests, the government has significantly eased COVID restrictions. China's people are going out and getting back to work, and that means It's economy is starting to rev back up to China's reopening will be felt around the world as travel picks up and the nation resumes buying products of all kinds. But that economic boost potentially also comes with a big catch. Bloomberg's chief economist, Tom Orlick in Washington and chief Asia economics correspondent in The Current in Hong Kong,

are here with me now to explain. Tom, you and Enda and several of our Bloomberg colleagues have written a story that explains how China's reopening will be felt around the world. Why was the COVID zero policy such a big deal for China is academy and really the global academy. So COVID zero is widely presented as a serious policy

error by Beijing. In fact, it's brought some pretty significant positives. Yes, the impact of COVID sweeping across the country was delayed, rather than entirely prevented, But that period where China was locked down, initially the entire country and then rolling lockdowns across cities to try and keep infections as close to zero as possible, it had an important benefit for public health.

It allowed time for vaccines to go into arms. Not as many vaccines as the epidemiologists would have liked, but certainly a lot of vaccines went into arms. And it also allowed time for COVID itself to diminish in lethality.

And what that hopefully means is that now China's opened up from COVID zero, the public health cost, the sicknesses, the debts are going to be less much less than they would have been if China had allowed COVID to sweep across the population right at the beginning of as occurred in the United States and lots of European countries. There were some public health benefits, there was some really serious economic costs. When you lock an economy down is

inevitable that you're going to suffer. Workers can't go to their factories or their offices, households can't go to the shops, and what that means is you have a big negative impact on growth. So a Chinese economy which went into COVID growing around six percent a year last year grew just three and end of that slow down in China's economy affected not just where Time is describing, which is domestic economy, but what China was buying and selling to

the rest of the world. Yeah, I would add to what Tom said there in that China's COVID zero also hugely benefited the nation's factories during twenty one, in that when the rest of the world was having problems keeping its supply lines running and keeping its factories and stores staffed. China was able to produce everything that the rest of the world wanted and cashed in on this extraordinary boom for buying merchandise goods around the rest of the world.

So if the COVID zero policy is credited with allowing China's manufacturing based to continue more or less uninterrupted, so that was another economic plus. But you know a Thoma was saying the ultimately it was unsustainable to spill over from that slowdown in China. Men there were no Chinese tourists going overseas, there were no Chinese students going overseas. The exchange of no how in two way people flow between China, the world's as second larges economy, and other

major trading partners wasn't happening. There was a whole series of hindrances whereby China went from being typically the global growth driver of the world economy to slipping down the ranks a little bit. And I think last year there's a lot of focus on the US picking up the growth mat on as China slipped back. So there were clear benefits early on, and I would say the merchandise trade boom was one of them. But then the benefits, the economic benefits became kind of diminishing returns as time

went on. You mentioned tourism and a couple of other things. What are other economic effects of China just not participating as vigorously in the world economy as they did before COVID. What was the As you mentioned, there's the basic services trade effect, the impact of those tourists rich economies, especially in Southeast Asia, the lives of Australian elsewhere, not just tourists but also students. They were losing out on the big China dollar spend that was a feature of pre

COVID China. But I think also there was a human side to it. By the way, in terms of business people in chambers of commerce in China itself, we're speaking out loud against COVID zero. That was something very unusual. Normally companies don't really speak out against a host government

per se. But they wore their critical overl just because they couldn't get stuff in, They couldn't have those exchanges with their colleagues, they couldn't do all the rudimentary kind of business travel that's needed to keep the flow of global commerce and trade ticking over. So as I say, there's the obvious spill over and industrial sectors like our insectors such as services and so on. But also there was a human sign to the impact of COVID zero.

And it wasn't just COVID zero. China's policymakers, because they were so successful in containing the virus in the first part of twenty succumbs to an unfortunate bout of hubris. They decided we contained COVID, we can do a bunch of other stuff as well. So in the second half of twenty you had a sweeping shift in policy on the property sector, something which is referred to as that three redlines policy, cutting off sources of finance for real

estate developers. That really hammered the investment, which the big

driver of China's growth. And you had the Common Prosperity Agenda, an attempt by Shi Jinping to engineer a more equitable Chinese economy by smacking down what he sees as the excess power of the tech monopolists Jack mar and Ali Baba, pony Maa at ten Cents and other similar entrepreneurs, and those forces together they really dealt a really serious blow to China's growth, and as Enter said, from the perspective of global businesses, they really changed the view on China

to pretty unbridled optimism to quite a lot of pessimism. Chinese economy seems about to open back up in a big way. So what does that look like for China's economy. So, in fact, whereas you're completely right, the COVID zero policy has shifted, but in fact all of the policy which

I just mentioned have shifted. So at the end of last year, we had an extraordinary wave of protests across major Chinese cities, frustration at years of lockdowns bubbling up, and that seems to have catalyzed a big move in Beijing, and they moved away from COVID zero a lot quicker than most people were expecting. At the same time, we've

had a wave of support for the property sector. The financing taps for developers have been turned on a little bit, Mortgages are now more available for home buyers, so prospects for property are a little bit stronger. And the Common Prosperity agenda that cracked down on entrepreneurs that isn't quite

so in evidence either. So there's been a big policy shift away from containing the virus and achieving desirable long term objectives like containing the property bubble and achieving more equity and income distribution towards all out support for growth. And what that means is that prospects for China this year are looking quite a lot stronger. I mentioned that

China's economy expanded just three this year. If you put together the exit from COVID zero, the shift on property, the shift on the policy on tech entrepreneurs, our forecast is that China this year will grow five point eight percent, and in an upside scenario where everything goes right for Beijing, they could do even better than that. Tom and and Uh please stick around. Our conversation will continue after the break.

And as we heard Tom say just a minute ago, COVID zero ending in China opening up means that it's economy could grow much more quickly this year. What are the industries that will open up first, and what kind of effect is this going to have on the rest of the world. So that I m F have said it's the single most important thing for the global economy this year. It has been seen as a game changer for the global session debate for example, ways the most

obvious areas are number one commodities. Like Tom said, if China's economy gets humming again, not just because of the COVID zero, but because of the housing sector picking up, look for imports of iron ore and copper to pick up. Copper prices already rallying back above nine thousand dollar a ton, the Chilean Paso rallying on one of the channery upening

bets because Chile is such a big producer of gaber. Indeed, so the whole commodities raw materials input story is there, and then of course we're back to the services story, which is well understood, but specifically there you're talking about demand for airline tickets, demand for hotel rooms around the world,

demand for tourism resorts. You have the Thai government senior officials greeting Chinese tourists with garlands when the first plane arrived in Shaman on January nine, and camera crews were actually there at the airport to capture the moment. The news network France twenty four talked to some Chinese tourists who are arriving on the flight. Yeah, I'm very excited to come back to Thailand well meeting for three years

already before well COVID. We come here every year and at this time I take my family to come here, So there's going to be a significant spillover. I think Asia will be on the front line of the tourism impact, but so will major developed economies like the UK and Japan. The US. I guess might be less clear given the political tensions, but I would say commodities will be channel number one for the spin over. Services will be channel

number two. And the other impact probably will be infinancial markets, just lifting global sentiment, and we're already seeing money or turned to China for the first time in a while. I think we're also going to see the Chinese shoppers hitting the high street again, right. I don't think there's quite the same pent up savings story in China that there was in the United States. In the back end of one. China didn't go quite so far in terms

of stimulus. There weren't checks going out and padding people's bank accounts um and I think Chinese households are also going to be kind of a bit cautious because they do see some headwinds still coming in the medium term, right. They see that there's still problems in the property sector.

For example, Still, if you've been stuck at home or fearing being stuck at home for the best part of three years, and you've got some extra funds in your bank account, when the economy reopens again, I think there's going to be a sort of a temptation to hit the shops. So that's going to be good news for the big Chinese brands. It's going to be big news for the big multinational brands that sell in China. Apple are going to be seeing more foot traffic at the stores.

McDonald's are going to be seeing more people popping in for a burger, And of course the fact that foreign business people can now travel in and out to see their staff and see their companies. That's an important part of the whole foreign investment framework because last year executives were at their wits end and we're looking for talking

about alternatives to channel. We should say, though, was at this point, let's not forget the public health crisis, because the lack of transparency around the total caseload and the total fatality rate means there's an unknown quantity with the COVID outbreaking China by extension, it's not yet known how to willfully impact consumer confidence or how long it might take consumer confidence to return from that. The whole kind

of bullish reopening Shina story is out there. It's probably the biggest talking point, certainly in this part of the world, but there is a caveat in terms of we don't yet know how this crisis will play out and what the long term lasting impact on consumer confidence might be. I'm curious and sitting in Hong Kong, How loan do you think this kind of painful period where the infections

are sweeping the country is going to last? How long do you think it's going to be before we're back to something which looks like a kind of post pandemic normal. End of the first quarter into the second quarter, Well, we'll have just have gotten over a lunar new year, and of course that will mean in all likelihood the infectionary will have spread across regional and rural China, so all of China will be feeling the brunt of this outbreak.

Hong Kong is interesting that we also had COVID zero up until maybe at some point last year, when the authorities then pivoted and money said Hong Kong was a was a guinea pig for broader China. It's taken Hong Kong some time to recover confidence from the draconian measures that we were under. Still isn't back to where it was. Retail spending still isn't back to where it was. Tours

or not yet turning the way they wore. And it's not a mirror image of what's happening Channa, but there might be some elements of caution there for the consumer rebound time is Anders said. The i m F, the International Military Funds says that China's reopening is the biggest story of the year, and how all of this money is going to be unleashed in China and around the world is their way of measuring what the economic impact

of that will be. So, China's the second biggest economy in the world, and if you take account of difference in purchasing power across economies, it's actually the biggest. So when an economy of that size goes from three percent growth to probably something close to six percent growth, that

has a big global impact. Now, as Ender mentioned, it's going to be most visible for China's neighbors in Asia, countries that are caught up in the same manufacturing supply chains, countries that benefit from the arrival of Chinese tourists Chinese business people. But it's going to be an impact which ripples around the world. Estimates suggest that the difference between a China growing at three and a China growing at six pc is around no point five percentage points of

global growth. A different way of thinking about it is the equivalent of adding an economy the size of Nigeria to the global economy. Our conversation continues after the break, tom as you and and in our colleagues right in your story. All of this money unleashed into the world economy, which is a good thing, also comes with a big catch. The last time we talked in November about the possibility of continued inflation around the world, you said, wait till

next year when China reopens. We could then really see what inflation can do. And here we are talking about that. What is the big catch? So it's funny, ways, um, if we spin the calendar all the way back to two thousand and eight, to the dark days of the global financial crisis, China played a really important role in

getting the global economy going again. China's four trillion yuan stimulus, launched at the end of two thousand and eight, unleashed a wave of demand, and exactly the moment the rest of the world was in a slump and needed that

kick to get going again. In China helped out the rest of the world again, but this time not by adding to global demand, but rather by taking away from it, by staying locked down, by taking a big hit to growth at home, China subtracted from global demand, and with the rest of the world grappling with really, really high inflation,

that was actually an important contribution. If China had been booming, in inflation in the United States and in Europe would have been even higher than it was, because China buys so much, and if it were sucking up so much of the world's resources at a time when everyone was looking for it, that prices would have been driven even higher.

Exactly now is meant to be the year where the US Federal Reserve and the European Central Bank and all the other big central banks start to get inflation under control. So inflation is probably going to fall from about ten percent in the third quarter of last year to about three at the end of this year. China's reopening has now introduced a wild card into that process. The Chinese

buyer is back. That's positive for oil prices, it's positive agricultural commodity prices, is positive for exports across all of China's trade partners. And the risk is that adds a new impulse to inflation just when the FED and others hope to be getting it back towards their target. And what are some examples of how China opening up and starting to buy by by again will have this inflationary effect and the global economy well, one area to keep

an eye on is the price of oil. China is the world's biggest importer of oil, and last year it's demand was the weakest sin according to the International Energy Agency, So there's a feeling that of China comes back in the oil market in a material way, that's an obvious channel where you can see China's returning. Interestingly, policy makers

are keeping an eye on that. For example, South Korea's Central Bank governor recently made the point that china Is reopening will be a good thing because it means they will buy more South Korean goods, But he also said he's worried about the impact it will have, for example, on the price of oil, which will of course ultimately mean higher inflation for South Korea, another one of the world's economies where interest rates are going up. So I

think that's one factor to keep an eye on. Now, within that there are variables, and of course the energy experts can drill into it further. But the role of Russia and supplying perhaps cheaper oil to China could take the edge of some of that story. But I would certainly in terms of when it comes to channels and when you want to look at charts and say, how do we gauge China's reopening impact on the rest of the world, keep an eye on the price of energy.

A couple of thoughts to add to that. Firstly, if you look at a chart of China's oil imports, it is on a very very steady rising trend for many many years up to the start of and at the beginning of twenty when COVID hits and China locks down, China's oil imports flatline, and for the last three as they have grown at all. So I think that the idea with the reopening one point four billion people getting back in their cars, getting back on their trains, getting

back on airplanes for international travel. Now the borders open is going to drive more demand for oil. I think that idea is pretty well founded in the data. And then the second thought, just to build on enders remarks, is it's not just the Korean Central Bank governor who's got his eyes on this. We had a speech by Lal Brainard, the Vice chair of the US Federal Reserve, in January, where she flagged China reopening and what that means for commodities as a risk that she's looking at.

We had the European Central Banks Christine Legarde in Davos, raising the same concerns. This is something which is a live issue, which is very much on the radar of the world's top monetary policymakers. Since this is such a pressing concern, have these leaders come up with ways to offer that the harmful inflationary effects that you're describing, I'm

afraid it's the blunt instrument of interest rates. Again, Whereas the hope for many in the financial markets, the hope for households looking to borrow money to buy a house, the hope for businesses that need to borrow to finance their operations. Is that the end of the rate hike cycle from the FED and other central banks is coming into sight, and that's the baseline forecast from most economists. Most economists think the FED and the ECB have got a couple more rate hikes to come, and then it's

going to be not quite mission accomplished. But we've done enough. Let's let these rate hikes do their work, and inflation is going to start coming back towards target. But if China reopening gives a big boost global growth pushes commodity prices onto a sharply rising trajectory, we could find that come the second quarter, the FED and the ECB need to do a little bit more and they're not on with rate hikes quite as soon as the markets and

businesses and home buyers hope they are. If I could extend that a little bit, we as It could also be that the moment when central banks start to bring down borrowing costs gets pushed out further. So, as Tom mentioned, this year is meant to be the year when central banks at least pause pushing up rate hikes because inflation is supposed to come under control. But the danger and the expectation then was that maybe later in the year some of these central banks could start to bring down

boring costs because they're comfortable inflations under control. Let's give the economy from support again. But the China factor means that the ability to bring down or to cut rates may not be there. It's just another complication in the inflation story. And it would be a big call for central banks to reach a point where they're comfortable that

inflation is back where they wanted to be. Given all that we've been talking about here, do you think then that China's reopening is a net negative or a net positive for the global economy. I mean, I think you've got to think, first of all, about the human story. Right, one point four billion people lockdown, fearing lockdowns that mercifully has now come to an end, right, And I think that's of the primary lens through which we think about

China exiting from lockdown. When it comes to the global economy, I think one way to think about it is who's going to benefit and who's going to lose out from the reopening. So if you're sitting in Saudi Arabia, remember President she of China just made a trip to Saudi Arabia to meet the leaders. There, you're looking at China's households getting back in their cars and on the bus and on the train, and you're looking at your oil

revenue and you're pretty happy about it. If you're in Brazil or Australia thinking about how much iron ore you're going to sell, you're pretty happy about it. If you're in Thailander's end of mentioned, you've gone to the airport with your Garlands to hang around the first Chinese visit. It is arriving right. So there are countries around the world that are really significant beneficiaries of China reopening. The

inflation cost that's going to be something that's bowed by everybody. Yeah, I would just add that it has added to a big shift in tone towards the world economy this year. Wise, only a few weeks ago, it was all about Western Europe's energy crisis. Jonas Covid zero risk of a global session, which is something very unusually in itself. And here we are now approaching February and that story has changed dramatically.

Nobody's calling a dramatic rebound, I think for global growth per se, but certainly the talk of a global session is much diminished, and so much of that is down to John's reopening and the current Tom Orleck, thanks so much for joining me today. Great to be here was thank you, as you can read more from Tom Orlick and and a current at Bloomberg dot com. Thanks for listening to us here at The Big Day. It's a

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