Marshall's Thoughts

China’s Reopening: What are its Effects?

Thomas Wang

On January 8, 2023, China opened its borders for the first time in almost three years, marking an end to its zero-Covid policy. People rushed on the streets, flights were booked in a glitch, and stores were crowded with customers preparing their stock for the Chinese New Year. While it was a consensus that China is on its way to economic recovery and re-joining international commerce, such progress was not as straightforward as one might think, and the effects of China’s reopening on countries around the world were also mixed.

It is of no surprise to many that China would eventually loosen its zero-Covid policy. But few would anticipate a U-turn would happen with such speed and magnitude. Just a few days before the announcement, staff wearing white jackets tested citizens in every compound every two or three days. Now, even people who tested positive were encouraged to go to work. Not only were individuals not prepared for this massive policy shift, but so were China’s medical system.

During the period of zero-Covid, only about two-thirds of the elder people aged over 70 in China were vaccinated. This ratio was not a high number. Moreover, of the two-thirds who were vaccinated, many got the vaccine very early, which means that the vaccine would have long lost its effect after numerous Covid mutations and might even have adverse effects. Yet the elderly was the most vulnerable to the disease. Many elders who caught Covid developed severe symptoms, which, along with the fear of Covid penetrating the society as a result of zero-Covid propaganda, caused severe shortages in hospital beds. Many were left to take care of themselves, just like in 2020 Wuhan, when Covid first erupted. Meanwhile, death tolls were just calculated through hospital data, and deaths at home were not calculated. all data were included, estimates were that total death would exceed one million in one or two months.

This wave of Covid outbreak in China had not only brought tragedies to families and panic to others, it had also led to a possible period of stagnation of the Chinese economy. Experts from Goldman Sachs estimated that real recovery of the Chinese economy will happen after March, when this wave of Covid outbreak is over. Due to this wave of Covid outbreak, many factories could not find enough labour force and needed to shut down, and even Tesla halted its Shanghai factory production. Subways in Beijing were running at only ¼ capacity, revealing the magnitude of labour shortage brought by this wave of infection.

However, after this wave of infection has passed, experts forecast that China will experience many months of economic recovery. The most important field is the real estate market. Due to rising debt levels and long periods of weakened demand due to zero-Covid, countless firms in the property market, the most famous of which being Evergrande, are at the brink of bankruptcy. After reopening, consumer’s confidence will experience a rebound, as people expect a return to normal times. This will increase the demand for housing and other properties, providing the real estate developers with valuable cash that might be able to keep them from default. However, the deeper problems in the property sector, such as highly-overvalued houses and high leverage, have yet to be solved, and if these root problems prevail, China’s economic recovery will not be long-lasting, as the real estate industry and other related industries make up about 40% of China’s GDP.

Meanwhile, on an international level, China’s return to the stage of world trade is welcomed by some, but unwanted by others. To begin with, countries who are traditionally large exporters to China will benefit from China’s reopening, because China acts as a huge source of demand, especially during this period of recession with weakened demand from developed countries. Moreover, countries such as Thailand that relies on tourism from China will also benefit, because their traveling industry can now resume.

While the increased global demand brought by China is positive news for exporters, the importers share a much different story. The pressure put by the increased demand will push prices up, which means that importers now have to pay higher prices for their imports. To further complicate matters, inflation rates in traditional importing countries in the west, such as the United States and the United Kingdom, are already at very high levels, and a further increase in prices brought by the increased demand from China will make things worse. The central banks would need to use monetary policies to further contract the money supply to contain the inflation, which would lead to higher interest rates. Therefore, for importing countries the effect of China re-entering world trade could be a combination of high inflation and high interest rates, both of which will hinder economic growth.

China’s re-entering of world trade would also have implications on the Russia-Ukraine War. Before China reopened, when Russia decided to cut gas supplies to European countries, these countries bought gas at relatively low prices from other countries as substitutes for Russian gas. However, after China opens up and increases its demand for gas, the price of gas will face upward pressure, and it would be difficult for many European countries to afford the same level of gas as before. The IEA estimates that if Russia cuts off piped gas to Europe, Europe will experience a shortage equivalent to 7% of the continent’s total annual consumption, by then rationing would need to take place. Inward political pressures might cause some countries to reconsider fully supporting Ukraine and would instead aim to negotiate with Russia over natural resources.

Last but not least, in terms of China’s international position, the consensus is that it would be very difficult for the country to return to its pre-Covid norm. The biggest factor is the loss of confidence among both domestic and foreign parties. Many wealthy Chinese have left China for countries in which politics have less power, while foreign investors feared further unanticipated policies that would hurt economic activity. Many companies have moved their headquarters out of China – one such popular destination is Singapore. Meanwhile, countless manufacturing firms had moved their plants to countries in Southeast Asia, such as Malaysia and Vietnam, during the period of pandemic. Even after China reopens, firms will be hard-pressed to relocate factories that are already built in Southeast Asia competitor economies. Therefore, while China remains as one of the largest economies and the world and still has a large market, the heated optimism that encircled China for a decade before the pandemic is much-subdued.

This week's thought was by Thomas Wang

Thomas is an Economics undergraduate at King’s College, Cambridge. His research has a focus on Chinese markets.

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